Source, please! (Let us check out the "major business publication" ourselves.)

Did they teach you how to reference at your university?

We've asked this question (both directly and directly) many times and the usual response is along the lines of: anyone without a degree in aviation management is too stupid to understand the airline business...so, just trust me because I am an expert.

This is frustrating for those of us who attended universities that emphasized thinking, but it really is the nature of the beast.

It says no such thing. It says that airfares from the UAE are down. So, hub captives are seeing a reduction in fares. Woo hoo. I don't think that's any evidence that the ME3 are imploding. Sorry to disappoint.

Thanks again. Your posts are very detailed. Based on your explanation to an average person Emirates is a
A) Run of the mill airline (ie., has same issues other airlines face)
B) Badly managed state owned airline (profit is not the main goal)

I think Emirates created an image(intentionally or unintentionally) of being above all, now battling its own image.

Wow, there's a surprise...


Not!
It's not the first time the OP has posted an article and "accidentally" made an unsubstantiated claim regarding EK.

I bet that they now offer an entire module on the proper serving of nuts in the Aviation Management degree course!

Earlier this year, another website (I think it was airfarewatchdog) had a chart showing that the USA airfares down the most were to India.

You guys can "apologize" all you want, but there are rules of airline economics that don't change. Everyone knows that if you add capacity faster than demand (as usually measured by GDP) fares decline.

Candidly, if Emirates alone was adding this much capacity this quickly, fares would crater. But it has two other neighbors doing the exact same thing. I think I read that Eithad alone was growing about 30% a year. It's just nuts, and won't end well.

I am, unsurprisingly, in transit, but it is long enough for me to tap out a reply. Thank you for engaging with me directly on the issues raised.

If I understand correctly from your first sentence’s wry insinuation, you are positing that that it is unlikely that EK has good deals on A380s and therefore makes them unaffordable to be paid for by operations, and therefore both EKs published accounts are fraudulent and also that EKs owners, the government, find a way of hiding cash injections into the company on a regular basis to satisfy the liabilities as they come due.

(As an aside, I think it would probably be easier for all readers of this thread if you clearly stated the point you are trying to make without relying on readers to make inferences, given readers have come to the thread with all sorts of backgrounds: in the interests of generating a decent discussion, if the implicit assumptions that people are using to make their points are made explicit, we can more easily translate insinuations and make sure the points being made are heard clearly)

Back to the point about the discounts - as you mentioned a few posts ago, we must be very careful to use the correct facts when making statements and to back up and claims. Luckily there are very public statements, not press releases, but regulatory submissions to places such as the London Stock Exchange, about the recent financing of Emirates’ A380s via vehicles such as the EETC-backed investment trust issue organised by Nimrod Capital/Doric, now Amedeo. http://www.nimrodcapital.com.

It seems that EK does get very significant discounts for A380s - which does not seem anomalous, given Airbus’ problem in selling any of the type. Let us take LSE: DNA3, or in full, Doric Nimrod Air Three Limited http://www.bloomberg.com/research/st...ticker=DNA3:LN, which is traded on the London Stock Exchange. http://www.bloomberg.com/news/articl...emirates-lease. It is an investment vehicle structured as an investment trust that raised equity and debt in order to finance the purchase of 4 A380s that would be leased to Emirates for 12 years. http://www.amedeo.aero/portfolio/. On its admission to the London Stock Exchange in July 2013, the prospectus lists the total capital of the company: it raised 220 million GBP in equity on the market, and also issued 660 million USD in EETC-backed debt. http://www.dnairthree.com/investors/...tory-news.html,http://www.dnairthree.com/investors/2013%2010%2001%20%20DNA3%20Asset%20Man'%20report%2 0announcement.pdf.

For those who do not know what EETCs, enhanced equipment trust certificates, are, they are in a way, securitised debt secured on equipment, which has tranches of varying seniority). Collateralised and securitised leases. If that doesn’t clear it up, think of it like a mortgage on the assets but with multiple classes of creditors with different returns that, in the event EK can’t pay the leases, get to get varying amounts of money from back from the assets). http://www.corporatelivewire.com/top...ound-the-globe.

At July 2013, when the company was admitted to the LSE, the GBPUSD exchange rate, was 1.52, so the equity issue raised 334M USD, so total financing available to purchase the 4 aircraft owned by the company was 994 million USD. Let's call it 990M USD after various expenses related to the financing structure,such as placement fees, lawyers etc. etc. are deducted from the proceeds.

So, that means each A380 cost the company 247.5 million USD. Considering the list price in 2012 of an A380 was around 390 million USD http://www.wsj.com/articles/SB100014...22643299354320, you can see that they received a massive discount: 142.5 million USD, or 36.5%. Even with debt service costs to EK on the lease - on the order of 2-4%, given the equity portion is getting around 8% and that makes up a third of the capital, that's still a massive discount over the useful life of the plane, which for EK is 12 years. EK doesn't want to end up like the US3 or legacies still running 20-30 year old planes in the future. Not good for efficiency, they hope, as well as the poor image (and consequent inability to command premium pricing).

As you mentioned in a previous post, it’s not just the operating costs (i.e. fuel) that are expensive for A380s, but the financing costs as well. But clearly, EK is getting an exceptional deal here, on the order of 30% off list. This perhaps changes your calculus with regards to breakeven margin required to make A380 flights work. Or are the lessors deliberately inflating the purchase price to secretly lend some of that capital to EK as part of their deals? But why would they do that? Or are they deliberately understating the purchase price in order to skim money off the top of debt and equity investors as some sort of scam? That hypothesis is bordering on tin-foil hat conspiracy levels, considering the lessors are all external companies with a wide range of clients (well apart from Amedeo, but their problem is convincing people to buy A380s). Indeed, your point about “where Emirates gets the money to put down a deposit of 10-15%” is completely moot: Amedeo themselves offer solutions with no upfront payments!

So in this way, all the depreciation and amortisation costs as well as residual value risk is transferred to the lessors - in which EK does not have a stake (this becomes relevant later, when we discuss other airlines who also utilise off-balance sheet transactions such as this to finance aircraft). The trust structure is good for all involved: in case EK can’t keep up the payments, investors have guaranteed recourse to take possession of their secured assets (the planes), EK is insulated from further claims; after 12 years (as stated in the prospectus), EK can hand back the plane and get a new one and it’s up to the leasing company to deal with residuals etc. Debt and equity investors get to invest in the business of actually transporting passengers with more solid cash flows rather than investing in an airline (with all the associated volatilities and ancillary operations). All that is required is this additional risk premium, but given capital has been dirt cheap for the past 5 years and these coupons are locked in, this is an excellent time to be engaging in such transactions. LH, with a long-term debt rating of BBB-/Ba1, states that it cost of debt is 3.4% (page 29 of their 2014 Annual Report). For an airline that seems to have better free cash flow as a ratio of revenue such as EK, one would think their debt costs will be even lower.

For exactly the same reasons (better operating cash flow, better results that don’t have to take depreciation hits, the offset of residual value risk as well as safer access to capital markets), large operating lease liabilities are not uncommon for many airlines - LH for example, if you look at its annual accounts, does exactly the same thing, with off-balance sheet financing of some of its fleet: in the LH 2014 financial statements there are 100% equity holdings in companies all called: Lufthansa Leasing Austria GmbH & Co. OG Nr 1., Salzburg, Austria (32 entities), some of which LH holds significant equity stakes: 100% equity holding Lufthansa Leasing Austria GmbH & Co. OG Nr. 26, Salzburg, Austria with a value of 312M EUR and 100% equity holding in Lufthansa Malta Aircraft Leasing Ltd, St. Julian’s, Malta with a shareholder equity of 2528M EUR for example. Unless LH is also doing some kind of off balance sheet shenanigans, it is highly likely that LH is injecting equity into special purpose vehicles off-balance sheet to leverage external capital markets (aka, invite other investors to lend to them) to finance aircraft but without exposing the wider Lufthansa group to liabilities - the security is confined to the aircraft assets only. This is where you could allege an accounting fraud of course - LH lending money to these associated companies to purchase aircraft so the additional aircraft financing liability doesn’t appear on the balance sheet, but that would be highly unlikely, I think. After all, their management partner http://www.kgal-investment-management.com/aviation/references_aviation.html states “Cross-border structures via Lufthansa Leasing to finance five wide-body Airbus A380 aircraft for Deutsche Lufthansa AG. Transaction volume of approximately USD 200 million each.”

This is not confined to LH, but let’s take IAG: according to their 2014 report, 265 of their aircraft are on balance sheet and 194 are off-balance sheet, aka rented via an operating lease. In 2014, they spent 551M EUR on rent and 211M EUR on financing costs. That’s 762M EUR on revenue of 20,170M EUR, that is 3.78% of revenue. A further 223M EUR was spent on repaying borrowing and 786M EUR on the capital portions of the financial leases. So in total, we can say that IAG spent, in 2014, 1771M EUR on 20170M on debt service, principal and interest - 8.78%. By comparison, EK spent 6.5bn AED on rental costs, 1.179bn AED on interest payments on borrowings and financial lease repayments of 2.652bn AED - in total 10.3bn on financed aircraft costs. That works out at 12.88% of revenue. Given EKs reliance on leasing to fill out its fleet and for its growth, that does not look out of line with expectations.

A quick glance at SQ results in the following: rental costs of 649.5M SGD, financial lease charges of 259.3M SGD and repayments of lease liabilities and borrowings of 68.5M SGD - in total 987.3on revenue of 15,243M SGD - 6.48%. SQ is prudently run though - it has very little in the way of financial leases and borrowings: it prefers to use operating leases to acquire aircraft - and only in the cargo division. 43 of the passenger fleet are on operating leases, 3 freighters and 14 of the SilkAir fleet. In total SQ own 78 of their fleet and lease 64 additional. Thus the leasing costs are in line with a majority owned fleet. They also have 190 planes on order: 70 A350-900, 30 B787-10, 10 B787-8, 10 B787-9 amongst others (50 new 737s). They also have additional options. But I fail to see the same accusations being levelled against SQ - where does SQ get the money to pay for all of these future orders, considering they only have 4.8 billion cash on the balance sheet? Or is the same accusation going to be levelled at SQ - that its owners will somehow prop it up to fulfill all their debt obligations and future ones too?

To summarise: given EKs cash from operations of 12 bn AED - after operating lease rental payments - there is clearly enough money to pay the year's financial lease liabilities of 3.3bn; clearly no company sets aside cash from operations in a separate depreciation account).

The ratio of 12bn AED free cash from operations compared to 80bn revenue (of around 15%), is similar to a company like SQ which of had cash flow of 2bn SGD on 15bn SGD revenue (13.3%) http://www.singaporeair.com/pdf/Inve...report1314.pdf, or IAG's 2014 of 1.8bn EUR in cash on 20bn EUR on revenue (9%), although IAG has a 600mn EUR pension contribution to make, as well as the hangover from Vueling's historical losses.

If you take just BA, it's revenue of 14bn, profit from operations of 1.2 bn which includes depreciation of 1bn, so that' 2.2bn out of 14bn cash from operations with a more respectable ratio of 15%. Of course, BA also has pensions to cover, so let's call BAs contribution to pension expense 400mn out of 600mn, so that brings the cash from operations ratio of revenue down to 12.8%. http://www.iagshares.com/phoenix.zht...cle&ID=2020482.

Even the vaunted LH (group not airline) generated 1.9bn EUR in free cash from operations, on revenue of 32bn EUR, a respectable 5.9% - well, until you have to factor in 700M for liability repayments. That said, I fully expect LH, after sorting out its labour troubles and costs, will bounce back to generating more free cash in the main passenger division, especially as depreciation in the division was only 383M EUR and net interest was 503M EUR, and the loss there from operations was 1bn EUR; additionally out of the 615 planes in the fleet, only 55 are leased - ample opportunity for sale and leaseback. So just about a breakeven from operations. Still. This is not the LH thread. It is simply an illustration that amongst profitable airlines, cash from operations is possible - and even loss making airlines can generate cash from operations.

So, the insinuations that it is somehow out of the ordinary to lease so many aircraft is clearly not borne out by the facts. Additionally, the ratios of cash from operations to revenue are also in line with other global network carriers (who have additional expenses like pensions) who are in a sustainable position.

As to you points to me - I’m not sure I follow about the “direction” which you are referring to - clearly the debt levels are high but sustainable currently, from published results. The method in which they finance their planes seems to be industry “best practice” - operating leases - and the terms are commercialy available for many of the transactions. With regard to your comment about “confession”, I’m really at a loss as to what you could mean - I don't think any of this information about EKs financing structure and leases etc. is inconsistent with my earlier posts. I think that EK can make enough money from operations to pay for its planes, if the macroeconomic environment holds up, fares stay at the published levels and load factors stay the way they are. I don't think they have been fraudulently presenting accounts and covering up massive cash injections.

A question for you though, as we are now addressing each other directly:

Given that:
- EK’s financing is plausible given their accounts without external secret cash injections, using standard mechanisms that major global airlines use (debt capital markets)
- Dubai doesn’t have the money to continually pump into EK without accessing capital markets (but is already highly leveraged itself)
- The GDP growth of Dubai and Dubai’s tax take as a percentage of GDP isn’t enough to sustain any subsidies from any perceived economic boost motivation from propping up the airline
- Public load factors, fare information and fuel costs indicate that long-haul/ultra long-haul flying is plausibly sustainably profitable, especially given current fuel prices
- Debt, operating expenses etc. are in line with publicly traded airlines that have similar models
- Its owners are happy with mediocre, low margin performance and amount of leverage
- Covering up any secret losses would require the conspiracy of a wide range of actors, not just in Dubai, but global oil majors, global banks and supply chain, all the way down from the manufacturers down to catering.

isn’t your entire argument and post history in this thread based on the opinion that the accounts are fraudulent a priori, which is the same as saying: “I don’t trust the Arabs to tell the truth?”

To put it another way - where’s the evidence to back up such a massive generalisation, or is it based on simple disbelief at best, or prejudice at worst?

Thank you for admitting that you have been wrong over and over in this thread.

Oh, wait...

At this point, your "facts" are as valuable as an ad for Nebraska oceanfront property.
The only questions that remain are:
* How many accounts did you create to vote "yes" in the poll?
* For how long have you been working for US3 carriers?
* How much money do you have invested in US3 stock?

No problem - like you, I am only going by what's out there and verifiable and try to come up with some consistent explanations that don't rely on hand-waving: there's enough misinformation and hidden agendas out there, and FT should be a place where things can be discussed in a neutral setting. I am very open to incorporating new information if and when it comes to light - I am not dogmatic about this issue!

I tend to agree with you - EK's marketing juggernaut (which is understandable, given the position in the market it occupies, and its role in promotion Dubai) creates this image of being unstoppable and a new way of doing things, but I think it masks quite a risky business model. Still, I think they have enough of a cost base cushion to survive a bit of a downturn, and given their track record, could likely persuade lenders to give it direct funding if it ever came to that.

As to whether it's a badly managed airline, I think that is certainly a relative term. Whilst they can't achieve the margins that major network carriers can elsewhere in the world, I think that reflects more on the fact that it is both highly leveraged to race ahead of its deep-pocketed close competitors in establishing their USP, which is the network (not the bling!) as well as having the legacy of being at the whims of developing markets and demographics, rather than being in established markets already with quite known economic models. I actually rather think they have been managed quite well - starting up in a location with little in the way of travel demand or infrastructure, larger regional rivals trying to shut them out (Gulf Air!) - with no wealthy backers to bail them out if it all goes wrong, I think they have been properly incentivised to be as efficient as they can, especially with national pride at stake. It's just that the economic flows that they cover aren't quite there yet - and the days of fat margins are over, what with all the other competitors copying them.

Given that capacity increases (to the USA) have been rather high (although demand is also increasing at the rate of 10% a year, from the DoT stats), and fares, whilst decreasing, haven't decreased in a linear fashion - the price elasticity I think that implies that there is an implicit floor to the fares that are being offered. One assumes that this floor is just about the operating costs of the flights. Hence the predatory pricing argument is undercut.

However, I tend to agree with the idea it might not end well - for some airlines, who can't be the lowest cost provider if they lose pricing power, or to put it another way, if no one wants to pay a premium for their service because the value for money is poor.

For consumers? Not so much, unless the paranoia case is that the ME3 want to bankrupt global airlines by bleeding them dry, and then jack up the prices to profiteer once they are the sole intercontinental air carriers. I think the likelihood of this is close to zero, given the amount of nationalism that aviation seems to inspire...

The OP has maintained a solid position since the beginning of this thread. His convictions sit beyond any counter evidence or argument offered. It is futile to try changing his perceptions. He will read any piece of news searching for pointers that support his claims, and if he doesn't find them he'll just ridicule or bend the information then present it as proof reinforcing his convictions.

If the OP was serious about investment he'd look elsewhere instead of bragging about the rhetoric of 3 hypocrite CEOs.

Airlines and logistics are only blue chip investments if their operations are underwritten by public money/contracts. And even then, they do not present any special value. They are service-based industries that have significantly higher cost base than say ICT companies. And a major chunk of their costs is dictated by a volatile commodity - fuel.

And we don't know what sort of investor he really is. Is he the type that daily churns tons of shares guided by the misinformation and rumours in the news or the hen type who sits his shares awaiting pennies to hatch? 2-3 percent returns aren't exactly stellar profits when taking into account the CPI and the fact that there's a whole lot more to be made in other markets/industries.

I saw an article today, that reminded me of a post a few months ago by the OP in this very thread, post number 93 (http://www.flyertalk.com/forum/emira...al-scam-7.html), which stated:

What do we have here though?
http://www.bloomberg.com/news/articl...wide-body-jets

UA redeploying 10 777s domestically, and flying a 777-200 on SFO-ORD, a distance of 1846mi, for, I quote "more cost-efficient flying":
So, given present demand, there seems to be a business case to fly wide-bodies for the efficiencies involved, even on a short hop of only 1800mi which on the fuel-efficiency curve of a 777 https://www.gov.uk/government/upload...efficiency.pdf, is about 3% more inefficient than EK style stage lengths (although the 777 is a very fuel efficient plane). Add in 3-4-3 seating and I think UA might be very happy to do it.

UAs strategy here clearly puts the lie to the idea that bigger planes make fares drop: as long as you can fill them up, then the additional capacity does not imply depressed yields or lower margins, because I hesitate to think that UA would sacrifice margin for anything: 777s are replacing more frequent smaller aircraft so margins can increase!

UA's move is controversial in the airline industry -- even though, unlike the ME3, they are not increasing capacity. They are replacing narrow body flights with fewer widebody flights. Scott Kirby at AA says this is dumb because, he claims, it's actually cheaper to fly 2 narrow body aircraft than 1 widebody aircraft when the total number of seats are the same.

An interesting issue, but it has nothing to do with what the ME3 are doing.