moondog

@op: using terms like "wacky" doesn't add much credence to your argument.

Xlr

If FlyDubai, Air Arabia etc are also exempt from customs duties then I do not see this ("all airlines in Dubai are exempt from customs duties") as being an issue at all. This is regardless of the fact that EK pays dividends to the government.

I would bet that other airlines are also exempt from customs duties, simply based on the fact that the report didn't mention whether it was specific to EK.

The income tax argument however, is complete bull. Unless you are a bank or an oil company, you do not pay corporate income taxes in Dubai. This is common knowledge.

The argument about a "16-year gap in financial records" is also bull. It is based on what's available on the current EK Group corporate website. It is bull for two reasons:
1. Delta's own website currently has fewer back-issues of their annual reports than Emirates does.
2. Old versions of Emirates websites (as captured by organizations like archive.org) did have older reports available.

While some corporations have extremely old reports available online (Berkshire comes to mind), most companies (US or otherwise) whose stocks I currently hold don't go back more than a single digit number of years - even though they were public before that.


The only thing that interests (actually, fascinates) me here is the the novation of the fuel hedging contract. How much was that actually worth?


Anyway, it seems like EK only just received a copy of the report (aka, they are reading about it the same time we are). More popcorn for when they respond

eternaltransit

Fuel Hedge
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The contract novation losses would have been entirely dependent on the specifics of the hedging derivatives, specifically the strike price and expiration and notional quantity of fuel cost to be hedged.

What it seems is that there was, at one point, a 4 billion dollar margin call, with EK only having 740 million cash on hand at that point. This is not the same as a loss of 4 billion dollars - because we don't know whether the hedge was taken to term, or unwound early. For all we know, after the contracts were novated to ICD, the fuel price rebounded to a certain point by the end of the term and losses were much lower than the 4 billion dollar amount.

What this means is that EK had to put up some collateral - usually this is in the form of cash, but perhaps the counter-parties accepted these letters of credit and/or other assets as acceptable collateral to continue the trade.

Essentially the argument relies on a big number (4 billion) and ignorance of readers as how fuel hedging and derivative contracts work: due to the opacity of the arrangements, we don't know the exact losses on those derivative contracts. What we do know is that EK took a massive hit on their accounts for that year - likely absorbed losses up to the point the contracts were novated away to ICD: analogous to selling the contract to ICD. This is where we can say that EK received rescue financing as it unclear how this effective loan was paid back to ICD (or perhaps they just took more dividends in a later year).
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In reply to 750 and the OP
No one is saying that EK doesn't have any advantages. What we are saying is that EK is not like QR and EY that need constant cash injected into them on an ongoing basis to continue operating. EK is like every single airline in the entire world: a recipient of historical support (usually in the form of cash and infrastructure projects that benefitted them disproportionately) and certain advantages, either regulatory or natural.

There is no such thing, if we broaden the definition of subsidy to unquantifiable advantages, as a non-subsidised airline, in the entire world. It just seems to outside observers that the US3 are throwing toys out of the pram when they can't compete in the aviation world they had a hand in creating. Take-backsies doesn't exist in global commerce.

You are correct in that EK has been taking market share on existing routes by competing on price - but we have shown that at current yields and load factors, those prices can still result in narrow sustainability. We even see other competitors doing the same thing to undercut EK on their established routes (see Europe-Asia) as EK put premium pricing on certain routes. But is important not to neglect the fact that entirely new markets have been opened: one-stop West Coast-India, for instance. Surely this is a good thing for consumer choice and the point of competition: for lower cost options to make some economically desirable activity (transportation) accessible to even more people at a lower price than before. The alternative is to travel on routes served by anti-trust immune, anti-competitive and profiteering cartels. I am not sure whether governments worldwide should stand for that...
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Customs and Import Taxes
The report does make it seem as if EK has a special customs duty exemption. However, if one looks closer at the customs and trade regime in Dubai, one finds that it is extremely easy for anyone, especially foreign companies of all sorts to take advantage of all of the same regulatory and tax advantages EK does: Dubai has economic free zones. Which brings me to my point about why another airline, somewhere, doesn't take advantage of their rights under Open Skies agreements to establish operations there. Well, I can think of all sorts of PR outcry why
http://www.dubaided.gov.ae/en/pages/...-in-dubai.aspx

Let's take a look, for example, at the Dubai Airport Free Zone. If you set up there you get:
- 100% foreign ownership
- 100% repatriation of capital and profits
- No corporate taxes for 50 years
- No currency restrictions
- No personal income tax
- No customs duty
- Streamlined, quick company set-up procedure

Or, for example, DIFC's free zone, where you get all of the above and:
- a legal system based on the Common Law of England and Wales
- access to UAE double taxation treaties

You get the picture. It's not a specific subsidy for EK - it's simply an advantage of doing business in Dubai. We covered the difference between a direct subsidy and government prerogatives to encourage business investment in a previous few posts.

edy4eva

So in your lexicon, subsidy is an evil that must be stopped, expansion is a brain disease that cannot be cured and competition is suddenly very unAmerican.

Who are (you) to set the rules for this game? Who gave (you) the moral superiority or credibility to come and question any business or country? (You) have neither. So any rhetoric around these axes is just plain old gibberish.

I think what the US3 are doing is hurting their image (since it's so pivotal in this skirmish) in the short and long run. BA (plus EI, AY, IB), LH (LX, SK, OS) and AF (KL and AZ), all are the major partners of the US3 and they cover a ton of destinations in the US. The arguments raised about the ME3 can be extended to those in one way or another. The only evil is the twisted perception and flawed logic attempting to present 3 airlines from the Arabian Peninsula as Al Qaeda.

Kiwi Flyer

Likewise.

The media presentation has EK subsidies on page 7. Total claimed is $6.8 billion.

$2.3 billion is low airport charges and there is a graph of costs for 77W at various major airports. DXB is lower, but not excessively so, than other Asian airports and of course US airports are much higher. The unstated assumption is this can't be fair and must be a subsidy. Of course DXB has a much higher proportion of aircraft that are widebodies than the likes of ORD and is newer and more efficient, so would expect lower charges. There is no stated accusation that EK is charged any less than other airlines using DXB.

The endnotes on slide 18 clarify the statement on slide 7 that DXB has publicly said fees are too low to recoup costs actually refers to the DXB airport net cashflow being insufficient to fund capital expenditure. What a surprise that there is investment to grow the airport. Quite misleading to suggest this is automatically a subsidy.

So, doesn't seem to be convincing argument for a third of the supposed massive subsidy.

Another $1.9 billion is cheap labour. I thought US airlines wanted lower labour costs?

The end notes again clarify the more jobs with US3 airlines. Apparently for US jobs per flight they factor in 1.3 aircraft and add in jobs relating to all US domestic connecting flights. For ME3 airlines they use 1.0 aircraft and do not factor in US domestic connecting flights.

I haven't yet had a chance to read the paper, but if the slides are any indication of the quality of analysis I'm expecting a few good laughs and evidence the $40 billion figure is indeed puffery.

Kiwi Flyer

Page 45 of the report talks about EK expansion driving down yields and gives NZ to Europe as an example stating it is taking traffic over a shorter North American routing.

It is not longer via DXB to most of Europe (gcmap) and via DXB is shorter for eastern Europe. EK fares to Europe from NZ are high in all classes - it is not one of the cheaper airlines.

edy4eva

That's because according to the logic of the orchestra, no one in their right mind would pay extra to fly an extra stop, having to stop via somewhere, oh like the Budapest in the middle of the desert.

But wait, how large is NZ<->EU traffic is exactly? And why the US3 (non of which fly to NZ) are suddenly so reliant on that 'long and thin' route for their revenue?

And it's not like EK are the sole player to/from New Zealand, TG, SQ and CX (as well as CZ, CI, KE, MH and LA - and soon CA) do it too with onward connections to Europe bypassing the centre of the universe ATL.

edy4eva

LH+LX+OS+SK+DE+TP+TK+LO+SN+SQ (2 routes via Europe)


http://goo.gl/vuKJc8

edy4eva

BA+AY+IB+EI+AB (even though EY own a stake in AB but it's still OW)


http://goo.gl/4q89LW

edy4eva

AF+KL+AZ+UX+SU (again even though AZ is partly owned by EY).


http://goo.gl/4APmIT

edy4eva

All TA routes for OW/*A/ST carriers combined (there are plenty more from LCCs and AC but the routes below are more than enough).

http://goo.gl/5tef5l

Compare that with ME3

http://goo.gl/W4yiaW

None of the graphs include any US airline.

And it's easy to realise that the centre of the argument that the US3 are pitching is flawed. Whether it's overcapacity or eyeing the ME3 as major threats.

Catchment area for EU airlines within 5 hour radius from hub is probably under 700 mil, for ME3 it's almost 2 bil. Makes you wonder why the ME3 aren't deploying the A380 by the dozens to the US. Playing it safe? so they do worry about revenue.

Havoc10G

What the OP is basically saying is he accepts that ME3 offer superior service and product but that these businesses should all be loss making and in the case of EK it is not loss making according to the accounts. So if you accept EK has a location, transit, lower labour cost and better product advantage which the OP does seems to accept then the logical conclusion from his view point is that no airlines in the world can be profitable. Which makes about as much sense as voluntarily flying on a US airline!

TopGunner

Could only get through so much of the thread, read the first few and last pages of this thread. Easy conclusion is that OP clings onto their US-centric view, any other model or approach cannot surely work since it wasn't cooked in the good 'ol US of A.

It's clear the US3 are fighting a battle on behalf of their TATL JV partners who stand to lose the most from the ME3. The dominance of the European majors on routes to their former colonies and the world not within 5hrs of the US is now being undermined by the ME3 leveraging their geographic proximity and socioeconomic models. This talk of subsidies is like hearing a legacy admission complain about the kid admitted because they can play a sport, completely oblivious to their own helping hand and advantage because it happened before. The ME is a better connecting point traveling across the world than Europe, full stop.

Let's total up all the government support, including direct subsidies, infrastructure concessions, competitive protection, government-purchase requirements, protected contracts, off loaded liabilities, etc., received by all the US3 and the TATL and TPAC JV partners since their respective establishment, including all predecessor companies, against those received by their ME3 inflation-adjusted and all.

At the end of the day, if the ME3 are vehicles for the Emirati states to redistribute their wealth to the traveling public through aviation subsidization, then more power to them because I suffered enough paying BA, LH, AA, DL, UA small fortunes for the honor of being allowed to travel on their aircraft. Eventually they will run out of money to throw at it and the pax will have benefitted from it, which should be a net positive for the pax respective economies.

Part of the problem I see for the US3 is that TATL travel premium (save for the recent history ex-Europe due to their economic malaise) brought about by government sanctioned monopolies has been the tit upon which the US3 and their partners have sustained their mostly crap operations and shielded them from real competition, operational discipline and more innovative thinking around the aviation business. I sincerely hope that by stirring the open skies pot trying to help their European brethren, the US3 will actually bring about more challenges to the TATL and TPAC JVs that are sustaining poor operations on the pocket of the traveling public.

Another point missed by the OP and the US3, the rise of the ME3 is also fueled in equal parts by their clear focus on transiting passengers through the design of their facilities and their immigration policy towards transiting passengers, this is in sharp contrast to so many EU airports these days, you practically have to provide DNA of your unborn child to transit. For many, including the almost 3bil Chinese and Indian, who do not have the "right" passports, the ME is a much more humane transit experience when trying to get around the world, including to the US. I won't even address the US insistence on not facilitating for transiting passengers.

As a shareholder of some of the US3, this whole war on the ME3 and their supposed unfair subsidies just reminds me not to invest in such companies for too long. I've enjoyed the AA bankruptcy dividend and am focused on an exit. Companies with leadership that would rather cry about the competition instead of building on their strengths and finding ways to create their own opportunities are doomed to find disaster sooner or later. The millions spent on their report and on lobbyist in Washington could have been better spent improving pax or trying to find ways to tap into the same markets EK has. Still to this day, there are only 2 US airline routes into Africa (US-Africa traffic is mostly offloaded to EU partners which adds over 12-16 hour layovers plus subjects pax to the arduous transit requirements), meanwhile EK is doing a good job serving 24 destinations (not all daily) with a decent Dubai experience and sometimes short connections.

sc82491

http://www.economist.com/blogs/gulli...subsidies-gulf

Interesting reading, it appears Emirates has less to hide than its rivals, which is what I expected all along.

irishguy28

Why is it "wacky"?

The infographic provided on fairskies.org says 11,000 passengers a day travel between the US and the Gulf. This works out at a little over 4 million a year. For arguments's sake, let's assume EK takes more than half of these, so over 2million pax per annum.

Why is this figure strange? Aer Lingus, a tiny, regional airline, carried 1.32 million passengers between North America and Dublin in 2014, with somewhat limited opportunities for connecting these passengers to other (European-only) destinations, and without the help of being an alliance member or having a decent FFP. Why is it "wacky" that one of the world's largest international airlines, operating from a hub that is now the world's busiest international airport, managed to carry a figure less than twice this number, despite being able to offer one-stop connections to a range of destinations on all continents, in many cases with no availability whatsoever offered by any of the US airlines!

The 3 airlines in question offer fewer seats to the US than would most random combinations of 3 European airlines. You seem to think that they each offer multiple daily frequencies to many tens of destinations in the US. That simply is not the case! There are not as many seats on offer as you seem to think!

Why do you think it so difficult to fill seats to the US, anyway? It's not as if the US is a minor, unimportant business or leisure destination.

I fail to see what is bizarre about 3 Gulf airlines offering 11,000 seats a day, between them, to the US. This is not a figure that looks unusual in the context of the number of seats available from other regions to the US. There are not *that* many more people flying from the US to Dubai than there are flying from the US to Dublin. I don't find that bizarre at all. Why do you?