I thought we had adequately covered this part of the discussion, of what actually qualifies as a subsidy?

Discussion about whether a government sponsoring an airport means all the airlines operating there receive subsidies; whether a favourable economic and political climate for aviation businesses amounted to subsidies or legitimate economic development policy etc. etc.

I think the only point of agreement was that cash injections to cover operating losses/capital on non-commercial rates on a constant basis would be defined as subsidy.

If we broaden the term "subsidy" to include all the other ancillary things that are the prerogative of governments to do (like offer tax breaks, build highways and airports to try and stimulate an industrial sector, employment legislation that makes labour management easy) - then it both renders the term meaningless for the sake of discussion, and we'll be here for another 2000 posts before anything new comes up!

If the whole is so "intransparent", how has it been ascertained that subsidies are actually at play, at all?

This is the crucial question - why MUST it be that subsidies are at play, here? It seems merely to be a suspicion, or an assumption.

Surely the anti-ME3 coalition can at least prove that subsidies ARE at play, rather than merely allege that they "must be" at play, which seems to be the best that they can do at present?

Easy answer, consolidation and Chapter 11 or the Government taking over all the debt. Years ago, I explained to the folks on the Delta forum that Delta will file for bankruptcy eventually, they made fun of me, praised all the new international flights, Reorganisation, blabla etc. only to shut up later on, when they filed for Chapter 11. Remember that NW and DL filed on the same day and on that same day it was obvious for experts that AA has to file at a certain point as well, another tactical filing like CO and Lorenzo did in the 1980's.

For Etihad and Emirates, an airport right in the middle between DXB and Abu Dhabi and one joint operation (we are talking about four, maybe five waves in this case) would really scare the competition.

And at this point, I fear that the losses from the US operation of Emirates will erode the profitable parts of the network, the UK and most parts of the Europe-Asia network, simply because of overcapacity and eroding margins.

Eternal made a good point taking a look at the EK Annual Report and I mentioned the point for LH earlier this year, when they mentioned a yield erosion of nearly 3%.

This has been a major point for KLM&Schiphol, they always managed to curtail capacity to/from Schiphol enough to let KLM enjoy their yields and let Schiphol get enough income as well. Just brilliant.

Agreed.

We appear to have quietened down those absolutely ludicrous figures being bounced around, and made the "SUBSIDIES!" side more cautious in their allegations, given that practically everything they totted up to reach those ridiculous numbers are also provided by cities/governments/countries in their own countries.

It's sort of like pointing out the mote in Dubai's eye, while remaining oblivious to the beam in one's own.

So, pretty much - eliminate competition, and walk away from debt.

So, there is no profitable way of running an airline!

(Surely only a masochist would want to work in the field, then?)

But why would Emirates allow that to happen?

Look, for all the allegations of having a bad/stupid/irrational business model, why would an airline that had built itself up gradually over 30 years, suddenly - in a market that still accounts for less revenue and traffic than the island of 20 million that is Australia - lose the run of itself entirely?

Emirates has shown no hesitation at backing off markets that don't turn out to be as profitable (OK, for you, I'll write "profitable") as they may have originally thought. EK may be riled up now by these allegations from the US, but there is nothing to suggest that Emirates will run recklessly through the US market, opening routes and frequencies beyond a sustainable level - and worse, to sit idly buy as their tightly-balanced business starts to go under.

Like iah mentioned already, common sense.

If you find the time, fly to Durban and attend Routes 2015 in order to talk to people about what is possible and what is simple not possible.

I really do not find the time to read all the docs, but as far as I understood it, the $42 Billion are divided 17/17/8, the later number is for Emirates, 30% of it results from doing business with other Government owned entities.

I am really confident that most of the European and most of the Asian network is profitable now, but they lost billions from all the years starting up...and we have seen loads in the 30 and 40's for the low season for years.

Herb is probably the only person to disagree and he had a pretty clear idea what is profitable and what is simply not profitable...

Just take a look at the interest Delta had to pay during their dire years, Air Berlin is another example, we are talking about interest rates of 12, 13, 14%

Just take a look at the savings of bankrupt Swiss after being taken over by Lufthansa, just the savings from lower interest rates are amazing.

Why is it stupid?

You are a small country in the middle of nowehere and you will eventually fall anyway after running out of oil and gas and you do not have a lot of it anyway.

So it is your choice of falling anyway or putting up a big fight, financed by hundreds of billions of debt...

Again, as long as the losses from running 'Aviation Dubai' are offset by the gains from having people come to Dubai it looks allright to me.

The R8 is transporting the Image, the R8 itself is losing tons of money, but Audi as a whole benefits from the image the R8 created.

Most of LH's feeding network loses money, but as long as the feeding makes other parts profitable, it looks allright to me, at least if you do not expect common sense when it comes to iternal pricing.

On the other hand, just by changing internal pricing from a model that is accepted and makes sense to another model that is accepted and makes sense, LSG or Technik start losing money and LH Passage will become the most profitable airline on the planet.

Yes, I certainly agree that the transparency factor with EK could be improved. But I don't think the opacity of EK's affiliates and the corresponding allegations levelled because of that opacity is really at all justified - corporate fraud and scandals occur all over the world: there's just no correlation between opacity and corporate misbehaviour. In the US we recently had Enron, WorldCom; Italy with Parmalat; the UK with Polly Peck, BCCI, Shell overstating its reserves;Olympus in Japan;Qintex in Australia, even in Germany you had the Flowtex scandal, the Siemens cartel and bribery scandals, various other German corporate spying scandals.

To accuse EK of running a scam solely on the basis that its a state-owned company and that it may do business with rather opaque entities is I think really quite unfair and unjustified, considering that the same accusations don't get levelled at other companies elsewhere in the world, especially where's there's a documented history of fraud.

If the revenue is stated improperly - that is, EK books revenue deliberately that they know will not materialise into a sale because it's going to be refunded 100%, it's pretty much an interest-free loan, not revenue and I think would qualify as accounting fraud as well as a subsidy. However, the fact remains - if your company still has access to capital markets at excellent rates, why would you use an opaque, backhanded way like this to fund operations, given that you clearly don't care about net debt ratios on your public "clean" company, and you have to borrow to fund the operations of all your transparent and opaque companies as well. It really seems extremely inefficient.

The reason I then say this whole method of hidden financing is not really likely, is because of the existence of a more credible and higher probability scenario, which is that it can actually fund itself from operations. It doesn't require any hand-waving arguments or insinuations of conspiracy lasting decades. If there was no way that EK could make money from operations, using available data, then that would of course a different matter - the next more complex explanation would be the cash injection route, if you could find a way of doing it.

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Word on the street notwithstanding , do you not feel that the impending Schadenfreude at seeing companies you on a moral level disagree with about to run into problems - especially EK who have been mouthing off for years and finally their egos might be about to get popped, if only they can be forced to eat humble pie if the allegations are all true and wouldn't we all enjoy that justice-porn - is affecting any chance of an impartial evaluation of their position and in fact that bias based on moral and ethical dislike is creeping into the discussions causing facts to be distorted unfairly? Perhaps the idea of ends justifies the means is infecting the discussions flying around which I think is really unhelpful, especially to consumers who, after all, have been elevated to the primary concern of regulators these days?

The question here then now becomes - was EK lying in its previous reports, but now it's ok, given their claim they have never had an unprofitable year?

Without that historical data it is of course hard to say, but I also think it's inaccurate to say that just because there were 30/40 loads in low season, that automatically creates such a loss that the rest of the year can't recover.

For example, if you had 40% loads for one quarter - and as you have stated before, most airlines have one quarter of losses depending on their seasonality profile - but still had 80% in the others, you'd still end up with an annual load of 70%. As well as this, your fuel costs will decrease correspondingly, although other operational costs would stay the same, mitigating some of the impact.

More importantly is the how yields start to change as load factors increase. It's not the case that, given a breakeven of 80%, that a load of 60% will be offset by a load of 100%. It is much more likely that loads of 90% means that the fares for the 85-90 percentile of seats are going to be so much more expensive - and we can see this in EKs fare structure- that they would be able to offset losses on loads down to the 40%-50%. If the loads you refer to are passenger loads only, we also don't know much cargo revenue was there to mitigate low season pax loads losses, if indeed they were losses. And if loads are 100% - well, the only additional costs are fuel and throw in 1-2k USD of F&B. The extra revenue from the top fare classes is clearly going to be able to offset any losses that might have occurred from being many more percentage points under breakeven at other times of the year.

(As an aside, if EK published quarterly results, then I think more people would give their results more credibility if they don't already)

So, losing billions while starting up - how do you derive that number, if we exclude things like the airport and infrastructure construction from EKs accounts, which I think is reasonable.

Reading from eternaltransit's calculations. With EK's leverage so high and a margin of only 5~7%, it seems to be an extremely dangerous way to do business. In the event of a major downturn, who will bail them out? The Dubai gov don't have the cash to assist, unless they go hat in hand to others for possible M&A.

As stated earlier I'm on the fence, so I'm very interested to see the math.

I would expect EK to have made sure that the their operating leases at the very least (and perhaps some of their financial leases) have been negotiated to be non-recourse (given the trust-backed structure to many of the deals, that seems likely) and so in the event of a downturn and they need to cut capacity quickly, it is easy just to hand back the planes and carry on. Staff restructuring costs - well, I think we know that it is easy for them to fire staff if required :D

Operating lease rentals are at 6.9bn AED a year, on 134 a/c, so hand back/stop delivery of 10-30 planes and you could save on the order of 700m AED, or 1% operating margin. If we look at the make up of the debt load on EK, it's 35bn AED in secured financial leases, and little else ( Don't forget of course there's the depreciation element of the operating result - free cash flow is higher and can be used to pay those liabilities.

If you want to do even more legal shenanigans to your financials you can do what many airlines do and extend the depreciation terms to give a one off boost, for example.

After that, then it is a matter of anyone wanting to fund them - bond issues etc. term loans from banks.

If the economic situation is so bad that the airline is still struggling after this well I think Dubai will also have too many problems as well...!

And Boeing have approx 44 and I forget how many noughts of deferred costs on the dreamliner and are still losing $26 million on each aeroplane so not every USA company is so great at costing either.
read Leehman news

Sorry to ask this if you have already posted. But do you know what's the loan-to-value ratio? I would assume it would be between 50~55%?

I think EK only uses term loans to finance general corporate purposes or as refinancing for maturing loans/bonds - as evidenced by the fact there's only 2.8bn AED in loans outstanding (1bn current).

If you mean how much EK borrows through the leasing system? Given what we know from the prospectus for the publicly traded investment trusts that pre-finance the acquisition of aircraft, for example: Doric Nimrod Air 1,2,3, http://www.dnairone.com, they raised approximately 250M USD per Airbus A380 which represented a c. 35% discount on list price.

Given that the financial lease effective coupon stated by EK is 2.9% - and note that was an increase on last year from 2.8%, so clearly rising interest rates and borrowing costs I think will be more dangerous for EK than I think the competitive pressures they will face, considering the growth in source markets - as well as the targeted dividends to equity holders / coupons on bond issues to fund the operating leases (5-6%) that should give an idea of the sorts of liabilities EK takes on with new aircraft deliveries - although of course, equity investors in the investment vehicle are the ones taking the first losses, not EK, if EK returns the aircraft.

If you mean the current debt to equity ratio? According to EK it's 212% excluding operating lease capitalisation, or 296% including operating lease values/future rentals.

What are your thoughts on recent Airbus comments about finance boom by gulf banks. Do they charge interest or minimal debt service fee?

http://www.reuters.com/article/2015/...0uy26b20150203

Also do you think number of aircraft on operating lease will increase in future.