Hugely enjoying this thread, after a long time away from this forum. Thought I'd add my $0.02.

I worked at EK for a few years, and left last summer. Now, granted, I worked in the comms department, so I had no direct access to any hard financial figures. But everything else I saw - a fanatical focus on yields, desperate calls for last-minute marketing pushes on struggling routes, a very senior exec getting spanked for sacrificing yields too much in a major sales promo - suggested that EK is genuinely concerned about making money on all of its routes.

And I can tell you first hand, the airline was not above squeezing staff re pay rises, benefits, etc, when times got tough - and also running teams (ours, commercial, and lots of others) very lean. In almost all respects, it's an organisation that is very, very careful with money.

I have a friend who is similarly convinced EK is some kind of pyramid scheme - although not for the same reasons as the OP. However, like the OP, he's never been able to present any actual evidence for his assertions (this may have something to do with the amount of alcohol generally consumed when the subject comes up...).

iahphx - like others, I'd really like you to answer some of the detailed rebuttals from eternaltransit and edy4eva. There's hard numbers there on pax and load factors to DXB that really need answers. I would genuiney be extremely interested to hear any fact-based counter-arguments you have.

Welcome officially toi FT, ebeer!

What a thread to get your feet wet with. Appreciate the first hand insight to the inner workings of EK. Stick around. This is easily the thread of the year :)

If I first can address the issue about airport charges: I agree that low costs in a hub are disproportionately going to affect the main users of that hub but I don't think in the case of DXB the charges artificially low as the charges are transparent and comparable to other airports.

The only way you could argue that EK is benefitting from an unfair subsidy if Dubai Airports specifically giving them preferential rates above and beyond what you would except from the main user of one of their facilities.

Of course, it's difficult to come up with actual numbers without seeing confidential information but I looked through a few airline reports to try and get a proxy for aircraft/handling charges and compared Handling/Overflight/Airport Charge proportions of revenue for various airlines. It's difficult as airlines break the charge down differently, but some rough figures: EK runs at about 15.4%, SQ around 16-17%, IAG 18%, LH 20%, U2 33-34% - so, low, but I don't think anomalously low. IAG and LH just happened to be based in very popular locations, I think and so their operators can charge more money, whereas DXB doesn't have much O&D demand giving the operator less leverage to charge more $$$. U2 have a lot of high frequency short range operations, and so total movements - their charges make sense.

However, once again I think is down to the fact that they are lucky enough to be based in a location which offers competitive economic advantages rather than there being a conscious decision on the part of executives to favour EK.

If you do buy into the argument that Dubai Airports subsidises, as in, takes a potential loss on its balance sheet to the benefit of EK, the question would be - what is the point, if both are wholly owned by their governments? You would just be shifting losses between balance sheets. What for, a marginal reduction on interest rates on fleet financing? I would have thought after 2007/8 lenders are much, much more wary about regarding the government and its wholly owned commercial entities as one thing. The Dubai World fiasco put paid to that!

About airport construction - I don't think the idea that just because the government owns the airport, they don't want it to make any money. I mean, Fraport and Aeroports de Paris are both government controlled and profit-seeking enterprises. If I thought that the extension of DXB was completed and the new facilities were empty, then yes, I would agree that would be a cause for concern, but if you look at passenger growth through DXB there is a very easy commercial case for the extension of airport facilities based on future pax growth and projected increases in passenger service charges/landing fees (which are publicly available).

With regards to about labour costs, I don't see that as a subsidy for EK - if Dubai Airports are charging reasonable, profitable rates for their services, which based on their published rates, seem to be, then argument that can be made is that Dubai Airports is profiteering based on its low cost of construction and operations. EK itself doesn't run an airport. The low costs for Dubai Airport are passed onto all operators at the airport equally, in proportion to their use of the airport.

I think the point about labour conditions is more of a moral issue: whether a rich country should enforce its labour laws and offer a better quality of life for migrant workers - it's not an issue that I think is that relevant to the question about EK's competition proposition. Its skilled workforce (18k cabin crew, 3.5k pilots, 2.4k engineers) need to be paid at expat rates (crew get paid what, 25-40kUSD? Pilots 200-400kUSD?) and have a good quality of life - otherwise why would you even move there in the first place. I totally agree that there are really big moral questions over the treatment of migrant labour in the Middle East, but I'm not sure how economically different that is from say, Singapore's use of Malaysian and South Asian labourers, Burmese and Cambodian immigrants in Thailand reducing the overall cost of labour in those two countries. Or indeed, the production of smartphones in China, or the textile or ship breaking industry in Bangladesh. I think working conditions is more of moral judgement which although is important, doesn't immediately equate to an "unfair subsidy" to companies based in those areas. I'm not sure if exploitation of labour conditions amounts to a subsidy, no matter how distasteful it is. I don't want to diminish the issue of the really awful working conditions that many people in many countries face, but as long as a company isn't specifically taking advantage of forced labour, either through institutionally lax enforcement of existing laws or effectively enjoying targeted special privileges through legal or quasi-legal means - it becomes part of the economic fabric of the jurisdiction, not direct, specific aid to that company.

It's actually the Chairman and Group CEO who is from the royal family. And to add to your scepticism he's also Chairman of Dubai Airports and on the board of UAE Civil Aviation Authority :D

Once again, I think one's position on whether they are "arms-length" really depends on your opinion of the trustworthiness of their representations.

I don't think being a publicly traded company automatically makes it more of a trustworthy operation: take Enron and Olympus - both large publicly traded companies with massive frauds. One can't argue that there wasn't "due diligence" and "full openness" (apparently!) on these companies. All we can really show is that their operations are feasible from publicly available information and there is logical rationale behind various decisions - and that the company seems to operate on a basis similar to other successful airline operations around the world. I think perhaps EK is a victim of its own PR success: it is seen as an unstoppable juggernaut expanding yet being absurdly successful - but if you drill down into the numbers it is really not that spectacularly profitable - as said before, its margins are half that of IAG, Easyjet and Ryanair.

Welcome to FT! (Or welcome back!)

Was that very senior exec spanked for that "fly First class for Business class prices" offer a couple of years ago? That was a very generous promotion :D

Thanks for the further clarifications eternaltransit ^

There's something missing from what everyone is saying, think it's assumed. This is particular to arguments about how EK have upper hand over competing airlines (competition is another point I'll discuss further below).

EK do not just fly in/out of DXB. There's a hundred plus airports they fly into/from, and in those ones EK pay top rates for everything from pricey slots, to parking, to services charges to fuel. The only exception is route launches where there's some sort of discount on some charges for a specific period.
One must also not forget that any route beyond 4.5 hours out of DXB (or was it 5?) necessitates a crew station (hotel/transport), so there EK must also pay for these things.

The claims that EK have advantage at home seem to ignore this fact, as if EK fly exclusively between DXB and DXB; or as if all staff in DXB are housed in a camp, fed boiled potatoes.

Now for the competition. The use of this term is quite elastic. Whereas EK use it to refer to their competition on the routes and market they serve, airlines critical of EK expansion use it when in fact EK are only partial competitors.

Example: LH have a strong EU/transat network, their Asian side of operations is no where near how comprehensive EK are. Yet they never cease to critique EK, based on the lack of air travel and corporate taxes in the UAE (of which LH partially benefits since they serve the UAE).
They regard themselves as stewards of the subsidy-free drive but receive millions in EU as subsidies (these are reported in their annual report). Furthermore, LH have their largest cargo hub after FRA in Yemelyanovo (KJA) which only came about after the airport authority spent millions on infrastructure (isn't that subsidy, according to LH standards?!).

The bottom line is, it's all smoke and mirrors. It's easier for an organization to point the finger at their competition, as scapegoat for their problems, than to admit that their internal decisions are the root cause.

That's oversimplifying things quite a bit..... it's quite clear that the ME airlines do have some competitive advantages over most legacy airlines. Most prominently lower labor costs as a result of either less taxation at their base or less severe labour laws. In combination with nearly unlimited expansion options at their primary hub (no pesky night flight restrictions like at FRA and a government/population that allows expansions) that does make it hard to compete with the likes of EK.

So while it's easy to blame the legacy carriers like LH for failing to compete, even if they had made all the right decisions (and which company does that all the time) it would have been nearly impossible to compete anyway. And they are under attack not only by the ME airlines for their long-haul routes but by the EU LLC's for their short-haul routes as well. Circumstances largely beyond their control simply prevent them from changing at the pace that is required by the market.

So it's rather easy to sit at a computer criticizing the legacy carriers, but a bit more difficult to actually run them in this competitive environment.
EK is to be applauded by using these opportunities, and it would be too easy to contribute their success to "unfair" advantages. But it does help.

I'm not entirely sure legacy carriers can complain too much about labor costs in 2014 now - low labor costs are not unique to ME airlines. You mentioned two factors such as less taxation at a base and labor laws, but these are not the only factors in labor costs - and it is not as if all other carriers in the world are based in high labor cost jurisdictions. What some airlines have not been able to do is persuade people to work for them for less money than they did before. They have also benefitted from employee and retirement bailouts (US carriers in particular).

For example, looking at staff costs as a percentage of revenue in 2013/14:

EK: 13.1%
SQ: 12.6%
QF: 24.2%
BA: 20.9%
IB: 27.1%
(IAG as a whole): 22.0%
(AF-KLM group as whole): 29.4%
LH: 17.9%
AA: 20.0%
DL: 19.8%

Some LCCs:
U2: 10.7%
FR: 9.2%
WN: 28.4%
AK: 11.9%

So whilst it's true that labor costs form a significant cost base for all carriers, it's unclear how much of an effect this has on performance.

Taking EU legacies, IAG has a bigger labor cost than LH and EK - yet currently generates higher profit margins than both EK and LH. SQ has really low labor costs yet makes an operating loss. WN has a massive labor cost, but still makes a better margin than LH. AA and DL have average labor costs (higher than LH) but make excellent profits. Airfrance-KLM Group's labor costs are massive and you could argue out of control: no wonder they lost 1.8billion EUR last year and this year so far to September have lost 511million EUR.

So yes, if you are competing against carriers with lower labor costs, you need to make sure your organisation is really efficient - but I think it's inaccurate to blame all your problems on specific competitors when other carriers in your peer group with similar competitors can still operate in relatively higher labor cost areas and still do better than you and these supposedly "unfair" competitors.

@RTW1, I agree that my statement oversimplifies the matter. The thing is, the language / the double standards used by several airlines, airline analysts and so forth against gulf carriers in general and EK in specific is over the top and unjustified.

Here's an example: EK has been campaigning for years to have the agreement with Canada changed for more flights. They've released numerous media statements and papers on the matter. None contained such an outlandish accusation of unfair advantage given to AC. That's despite the fact the Canadians were at many stages quite critical of EK/EY and defended their position as wanting to protect Canadian jobs and AC.

Here's an analogy of how ridiculous this issue of unfair advantage really is. Imagine airlines were competing sports: soccer, rugby, basketball, etc. Each have their own market. Dodgeball is the new kid in town and is attracting a lot of viewership. Their cost base is much lower, matches can be more frequent. Advertisers and fans are falling in, taking away revenue from other sports. Soccer co is outraged and claim dodgeball have an unfair advantage. In fact it's soccer co, their rigid rules, and the way they built their enterprise that made them what they are today. And the dip in their revenue is only expected as a long term consequence.

@eternaltansit, MH and TG also have lower workforce costs than EK.

Exactly - both basket cases of airlines, MH even before their tragedies this year!

Actually I just had a look at the last reports for 2013 and it's:

MH: 15.4%
TG: 16.0%

But I think this is due to a material weakness in their revenue rather than evidence of them being in a high cost labor environment.

I have confused labor cost as a percentage of operating costs with dollar cost per employee. Sorry.
But this actually suggests that other airlines are less efficient than EK.

Iahphx, I really have to thank good old Uri for making me aware of this thread.

The financial viability of carriers like Emirates and Etihad has been discussed ad nauseam in the massive LH Strategy thread:

http://www.flyertalk.com/forum/lufth...hair-ceos.html

To summarize the most important facts whether EK is a financial scam or not, you have to consider the following arguments.

First of all, aviation in its early stages has always been funded by the tax-payers, even in free market economies like the US. Setting tariffs in regulated markets was part of the game in the US beginning with postal service up until the late 1970’s when the airlines calculated what they needed per mile and pax on a PLF of 40-55%. The cost of ATC and who is paying for it should also not be underestimated

In Europe, the operating deficit of airlines during the first 15 years after WWII amounted to numbers as high as 17.8% of GDP (in the Netherlands for KLM), in other words Governments spent nearly 1/5 of their GDP to cover the losses of aviation (mostly airlines, in some countries incl. aviation infrastructure) The number in the Netherlands was the highest by far, but countries like Ireland or Belgium (up to 8.5%) came close.

So far, no Government was able to get aviation going without massive state aid, which brings us to Emirates and their way of running things. They always claim that they never lost any money, even with one or two 727 or A310 in the beginning…

As stated in the LH thread, the aviation community has gathered a pretty good understanding how the EK game works, mostly due to folks who worked for EK and returned to their native countries over the years.

It is a vast combination of old tricks from their European competitors like the airline/airport game developed by KLM and the Dutch Government to more recent tricks like affiliates running massive deficits (like Enron) but also transfer pricing games like we saw at airline conglomerates during the cost plus accounting days and even today.

Nothing really new or spectacular, but of course, lots of debt, which is not being served by anyone..., who cares as long as you own all the entities somehow. That is on top of certain location economies unique to the geographical area and local laws.

Just picture an affiliate buying two full flex F tickets on any service you fly and make your calculations with and without the additional bookings.

Just picture an affiliate providing airport handling and/or financial services for you

Off balance-sheet financing taken to the next level and the US has been already good at it.

The auditing companies certainly only look at what they have been shown, they do not really care who is making the bookings or how the financial entity is performing, which is leasing several hundred aircraft to you.

And why should they as long as you do not own the entity.

Well, you kinda do, because everything is somehow owned by the Government, but that is another story.

It took the European Government decades to force airports to allow other service providers to offer alternative services, so Dubai Airport is just copying the efforts by Vienna or Schiphol (charging foreign airlines insane amounts to use the profits to off-set the losses of the national airlines’ lower handling charges) Officially, of course, everybody pays the same…

And how you make your calculations is also up to you. In Dortmund, Germany, we always have nice discussions. The airport is owned by the City and its utility provider and the airport is losing close to € 20 million a year, which is cross-subsidized by the citizens and their charges for water (monopoly) energy and waste removal (still a monopoly, IIRC)

If you ask some folks running the show, they will look at you in utter disbelief pointing out that the losses from operating the airport will easily be off-set by the tax income due to passengers staying in the area, so actually the airport is responsible for a surplus of roughly € 150 million per year…and only a fool would look at the cash flows from operations. :D

The same argument is valid for Dubai; cost of building the airport € XX billion, tax income from all workers spending while being in Dubai etc. € XX billion, so under the bottom line, the airport made money…beautiful calculation.

If you just take a look at the ops of Emirates, it is close to impossible to make money, also because the debt from previous years would have been impossible to service (you have Chapter 11 in the US for that) All legacy carriers, except Southwest, were bankrupt at least once, mostly due to the accumulated debt and not so much because the cash flows from ops. during the filing were negative

During the early years, EK flew PLF’s out of DUS in the 30 and 40’s during the summer and charged amazingly low fares on top of that. Even if you earn a margin of 7 or 8 % in winter, the losses from summer kill you, easy to calculate without a Wharton EMBA or ETH degree in Math, which brings us back to Uri.

Under the bottom line, if you start calculating now, EK might have a size that could run an operation resulting in a black zero, maybe even a profit (but of course that is a stupid calculation per se, kind of ignoring the costs of a child before he/she started to earn his/her own salary…) but players like Etihad or Qatar simply do not have this critical size and sub-fleets of 6 or 7 wide-bodies, especially Europe’s finest like the 345 or 346, do not really define the term efficiency.

But if an affiliate provides pilot services or maintenance on a different P&L account, you might not really care, as long as the original account of your airline is not harmed and the guys from PWC or KPMG do not ask too many questions...

But again, do not underestimate that all other Governments in the world also supported their airlines to a massive degree, before they could stand on their own landing gear, so it is part of game that started in the US and Europe decades before the NE3 threw the first dice…

And it is very likely that the best of the best, carriers like LH or BA will also need a hand again, when it comes to certain obligations, like pension funds. Not today, not tomorrow, but in 20-30 years...pension funds in Dubai are not really a concern for EK, but somehow somebody has to pay for those individuals, if they run out of money in retirement...maybe another cost factor one has to consider.

@FD1971
Financial schemes whereby enterprises are formed with sacrifice in mind flourish in jurisdictions where taxes are prohibitive, less likely the other way around.

In a fairy country* it is relatively easy** to go from zero to being a lessor of an A380 or any aircraft type to an airline#. 250 mil credit isn't too difficult to arrange especially if the collateral is the airframe itself, and the whole thing is underwritten by an insurer for the business, and by another insurance on the frame paid for by the lessee. The only costs to this enterprise are minor administrative costs and interest. Heck profits could be made from this. Simply because there's no taxation advantage from creating a middle man, there's no need to double up on insurance/unnecessary charges and have this makeshift business in place.

In a scenario where taxation is high, it would make sense to utilise this entity as a tax sponge since it's a negatively geared operation. (lookup VBNC1 - VBNC5 Pty Ltds -that's 1 to 5 // VB LH No. 2 Pty Ltd among several others and what they mean to VA ;) )

The thing is, aircraft leases are lucrative mechanisms for banks/funds wanting to bolster their credit rating (takes few strokes of pen to sell a 100mil loan out of the window, something that requires an army of personnel/marketing to sell as consumer or even commercial loans). So this company would have been financed, not just by the bank controlled by its owner, but by many other blue chip banks, including those that have a stake in competing airlines. Back to VA, some of their airframes are actually leased from an entity co-owned by a bank in Singapore, and... (drums please), an entity part of the group on which this discussion is centred.

There's nothing fishy about this process. Some self-made millionaires follow a similar process in acquiring land and building projects through different entities that apply for loans from different banks.

*anywhere in the world, minus some troubled countries
**degree of difficulty largely depends on who your connections are, and knowing beforehand where that 'money' is going to.
#the airline itself could have created this entity as a subsidary.