Hi All, Found this thread very interesting, read as much as possible and finally decided to join. I have one very curious question to OP. What made you start this thread in November, 2014 when no one else had any clue?

I'm not sure that the best approach to the discussion is to assume that everything that EK publishes is fraudulent - after all, if you already assume everything is a lie, you can come to any conclusion you want, by simply disregarding anything that fits a pre-conceived narrative on that basis that "it's a lie".

The intellectually rigorous method to disprove their claims is to assume they are telling the truth and then find a contradiction or inconsistency in the logical consequences of that assumption.

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In reply to FD1971 and post 1467 and his position that the US3 report is more reliable: we in fact did discuss this, and he commented at the time. This is on page 50 of this thread. http://www.flyertalk.com/forum/emira...l-scam-50.html

The conclusion was that there is precious little in terms of evidence pertaining to EK (but there was with regards to EY and QR - which has been released more recently). The only thing with regards to EK was the fuel hedge issue and unquantifiable allegations of unfair transfer pricing - all of which was replied to by EK in their future response. http://www.emirates.com/english/abou...rticle=2221286 Even adjusting EK's costs to give similar proportional cost bases to legacy carriers, however, still makes EK show a profit in the books. http://centreforaviation.com/analysi...king-it-147262

Given that the quotations from that EK presentation are from EK's commercial backers, one would think they would not want to put their reputations on the line too much, but I admit this is a rather weak argument if you are of the mind they are benefitting from government largesse.

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In more chronological order, the comparison with the Sochi Olympics is like many of the rather baseless claims being thrown about in this thread: perhaps convincing on first glance, but fall apart on closer inspection.

Firstly, the Sochi Olympics cost 51 billion USD. The Beijing Olympics cost 44 billion USD. There are many reasons that cities and countries bid for Olympics: making a profit through stimulating economic development is not one of them - so the comparison with Dubai putting money into EK for that falls at this hurdle (ha). Research shows that Olympics generally don't do much at all for economic development. http://www.nytimes.com/2014/08/10/ma...-off.html?_r=0 - so the return for dumping cash into EK is rather poor. Why would you even bother?

Perhaps the argument is that Dubai simply wants to pour billions into EK simply to look good though - I can certainly understand the vanity motivation for major flagship projects. After all, the Palm islands and the tallest tower etc. aren't exactly the most humble of achievements.

Olympics are definitely used a kind of debutante party on the world stage. There are major international and domestic factors that contribute to bids and hosting - and Olympics are very popular with the populations of host countries. But, here is the problem. They all cost a lot, lot, lot of money. No one expects them to ever make any money from operations - it is quite infeasible to do so. That is transparently obvious from the start. That is not like the airline industry, where that outcome is not pre-ordained - profitability is possible if you can satisfy the RASM > CASM rule in 1448.

There are accusations and insinuations that Dubai is an autocracy where the rulers can do what they want - so, why would they care about making their citizens happy with a subsidised airline? Surely a better coming out party is the Expo 2020 which is only costing 8.6 billion USD, instead of spending billions, year after year, on an airline - for no other reason than vanity, seeing as there are no economic benefits to supporting EK: GDP growth doesn't give the returns required to outpace borrowing costs (as Dubai doesn't really run big surpluses) and the Olympics/vanity project angle doesn't work. Billions of dollars year after year could be better spent on better vanity projects and bribes to the population.

Now Beijing and Sochi - we haven't even got to the most obvious part of why the Olympic vanity projects are inaccurate comparisons to make: how does Dubai even have the cash to fund EK, when their public debt is in the 100% of GDP range, they run a surplus for 2015 of only 1% of GDP and they have been previously running deficits - and to do this for decades? Beijing has the money to drop 44 billion on Olympics, as well as ordering industry in Tianjin to stop http://www.nytimes.com/2008/07/07/sp...s/07china.html, and go on environment cleanup campaigns. Clearly Russia had the funds to build Sochi - Russia is a petroleum state (unlike Dubai), which ran significant budget surpluses from 2001-2007 - between 2.5 and 10% of GDP! http://www.tradingeconomics.com/russ...ernment-budget, as well as having sovereign funds (the Stabilization Fund http://en.wikipedia.org/wiki/Stabili...ian_Federation) of 150 billion USD.

Dubai has no such savings or cash to do such a thing.

If you assume the subsidy route from the beginning - you run into this contradiction/impossibility which should negate your original assumption...

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In post 1464, there is mention of load factors in the low 60's. In fact, at no time since 1993 did EK ever have load factors in the low 60s on an annual basis. The yields are not "super low" (how is low defined?) - they are low perhaps, but their unit cost was even lower. That makes a break-even load factor of the low 60's plausible.

As I mentioned in post 1449 - low 60s BELF was not anomalously low, it was similar to other network carriers who were also successful at the time, like SQ, CO and LH. So clearly, having a breakeven load factor of low-mid 60's is not a matter of risible disbelief, but apparently standard industry performance (1997-2004) at least.

Of course, then various structural costs at various carriers started to make costs spiral out of control and yields drop, so clearly the BELF would have to increase - but even the much lauded LH was able to make things work with similar load factors and breakevens to EK, until their legacy costs started to bite.

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If you add up all the possible retained profits since 1993 and even allow for 100 million USD a year minimum to be distributed to the owner, as Sir Maurice Flanagan said in 2010, http://www.arabiansupplychain.com/ar...rline/1/print/, then yes, it seems plausible that EK either had cash on hand for a 1 billion USD or 2 billion USD margin call: in fact, in the 2008-9 accounts, there are short term deposits and cash equivalents of 7 billion AED - 1.9 billion USD, that could be used as fuel hedge margin collateral, loss crystallisation, or collateral to obtain further financing (and similar amounts the year before 2007-8) http://content.emirates.com/download...eport_2009.pdf

For a corporation that has revenues in the tens of billions of USD, how hard is it to believe that they might have a 1 billion USD cash on hand at various times? Not really that hard, I think: and with revenues and historical performance good, I think capital markets would be open for them for things like commercial paper at least, if it came to it.

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No wonder you're carrying his water, no matter what happens in the real world.
How much money have you received from the US3 throughout the years to support them?

The ME3 have been facing these allegations and all manner of accusations of "unfairness" for much of the last decade. Predominantly from the likes of Lufthansa, Air France and Air Canada up until very recently.

Perhaps the true financial scam was perpetrated by some of the West's flag carriers and other established carriers; extracting billions in subsidies from the taxpayer down the years; setting up "walled gardens" (such as the protected, and highly-consolidated US domestic market) and cosy cartels (such as the various immunised joint ventures across the Atlantic and Pacific oceans) which helps to extract even more from (at least the travelling) taxpayer.

As the US3 are so adamant a scam is being pulled, we can only conclude that the US3 just don't like scams that don't tap the US taxpayer but instead are funded, allegedly, by foreign governments....

Really, you couldn't make this stuff up!!!

He was doing his best to defend his beloved US3 carriers after their rhetoric was exposed in November: http://centreforaviation.com/analysi...olitics-192138
It can't possibly be that the OP has a lot of money invested in US3 stock, can it?

You know, I've been wondering just that about you.

For someone who claims to be familiar with academia, you have a strange reluctance to provide supporting data or evidence for your stated facts. You have claimed to have some sort of aviation degree, which apparently makes your statements beyond reproach; but we know neither your qualifications or your experience; therefore we must take you as, at best, an armchair expert. And one who doesn't back up his statements with anything like evidence or verifiable facts.

Perhaps you do have some type of degree with an aviation flavour; however, judging from your username, it was earned a generation ago when aviation was a totally different game. The German airline industry hasn't shown itself as being adept at coping with the new realities (many European countries are similarly at sea, if I may mix my metaphors) - perhaps your degree just hasn't prepared you for the realities of this exciting, dynamic (and customer-friendly) new aviation world? Lufthansa and Airberlin are, at best, struggling (the latter despite help from a global trailblazer); sorry if this seems harsh, but your experience may not be as helpful to you as you seem to think.

Oh, people in the industry knew. You couldn't know anything about the airline industry and not wonder what the heck was going on. It was their wild expansion to the USA where there is no logic whatsoever to this capacity that really made me take notice. Honestly, I'm no expert in understanding the markets between Europe and the Pacific and how economical ME3 connections could be. Doesn't seem like the greatest business plan in the world, but it would seem plausible -- at some scale without massive competition (3 airlines doing the exact same thing in the Middle East does seem completely bizarre). But when you keep buying A380s like they're toy airplanes and start flying them on crazy USA routes (where, from my investor experience, I do know what is possible), well, I got very interested in the topic.

Without hard data, it's hard to put a real number on the loss-making nature of this flying. I would urge anyone interested in the topic to observe how the USA airlines operate, though. Like look at this quarter's just released results. Thanks to lower fuel costs, these airlines are wildly profitable. But they also run scared -- especially about capacity. They're all suffering about 5% reductions in RASM, and that's with extremely tight capacity controls and miniscule growth. They're deferring aircraft deliveries, even though those deliveries are extremely modest compared to the ME3. And that's with the USA economy doing great! This is how "real" profit-making airlines operate. That's why the activity of the ME3 is so bizarre. It has no grounding whatsoever in traditional airline economics. The sky is definitely not the limit when it comes to adding capacity. You have to do it carefully and slowly, and react to ever changing market conditions. It isn't a game of "buy, buy, buy -- fly, fly, fly." That's a recipe for utter financial disaster. At least you have to if you're actually paying your own bills.

EDIT: BTW, the RASM declines of the USA airlines are exclusively on int'l flying -- the flying that the ME3 are pouring capacity into (as well as other weak regions, like USA to Latin America). I guess the ME3 never experience RASM issues that would suggest the need to slow growth, right?

Far more likely is they never experience the need to make a profit.

Some investors used their "experience" to decide that it was a great idea to invest in WorldCom and CyberNET. Much good it did them...

Of course. You're not really interested in hard data, and you never were. It's all about bashing EK and assuming that they must be losing money. How much money do you have invested in US3 stock?

I think a lot of what you've written does contain some valid points. You can't understand how it's feasible for Gulf based carriers to expand at the rates they do, when US based airlines aren't showing much expansion themselves.

It made me laugh the other day when people got so excited that UA was finally ordering the 77W. The end result of this isn't actually any large scale expansion, but rather replacement of 10 77Es, which will then serve to replace smaller aircraft on domestic routes. Meanwhile, another 500+ 77Ws are currently being flown outside of the US by very successful airlines. I really don't understand why US airlines don't have a more aggressive expansion strategy.

Just look at American Airlines expansion. Besides the smaller route network adjustments, like new destinations in Central America, or frequency upgrades, or aircraft upguages, they've announced (thus far for 2015) only PEK from DFW, BHX form JFK, EDI from JFK (seasonal) and FRA from LAX. This is the only 'long-haul' expansion that is occurring from what is supposed to be the largest airline group in the world.

Meanwhile, EK is launching MCO, doubling frequency into SEA and BOS, upguaging JFK, and ORD. CX launching BOS, and SFO frequency increases. HU launching SEA from PVG, BOS from PVG, SJC from PEK, as well as BOS from PEK and SEA from PEK frequency increases. MU launching LAX from CTU/NKG. PR with SFO frequency increases. CZ increasing frequency on LAX and JFK (albeit seasonal). Just a snapshot of some of the expansion from the Asian continent to the US.

Maybe the question that should be asked is why aren't the US airlines expanding more aggressively or as rapidly on long-hual flying, as other airlines? While as you said, we don't have any hard data to analyze, some of EK's routes to North American may be making a loss, but with the world population growing as it is, and income inequality decreasing, it's likely that some of the expansion is to cater for demand that does not exist at the present moment.

Can you point to a source that proves this?

I decided to quote you in full and place bolding to highlight points to reply to rather than select quotes individually in order to preserve the original context of the post.
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I am very pleased to see that you now acknowledge that there may be other markets with different economic dynamics that EK operate, especially on the major European-Asia.

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However, saying that is there is no "hard data" is an equivocation and it is inaccurate, for any reader of the entirety of this thread. There certainly is hard data available for many parts of the jigsaw. In fact, I think it is useful to recap that data here and the conclusions made from it, for the benefit of any new readers to the thread, who I can understand might be reluctant to go back through the now 99(!) pages of this thread to pull that out.

Because the most contentious issue seems to be the operating costs of A380s flying to the US, let's see what parts of the information jigsaw we have available that doesn't need us to rely on EK.

We know, without referring to anything EK has to say, so, independent data:
- the technical specifications of an A380 (from Airbus), specifically, the fuel capacity (although I'll link to Wikipedia as that's a faster website: http://en.wikipedia.org/wiki/Airbus_A380)
- load factors to/from the US, from the US Department of Transport: http://www.dot.gov/policy/aviation-p...tistics-report
- year on year passenger growth to/from the US, from the same agency
- fare data, available from various CRS/Global Distribution Systems, which you can access with something like KVS or Expertflyer, or the EK website if you want to do it manually. I personally use Expertflyer.
- historical fuel costs, for Jet-A on the Gulf Coast (the benchmark for fuelling in the US): http://www.eia.gov/dnav/pet/hist/Lea...F4_RGC_DPG&f=D
- future fuel costs for the same benchmark: http://www.cmegroup.com/trading/ener...ndar-swap.html

Now let's create our costs model:
- we know that an A380 flying DXB-USA on ULH routes will be the most expensive sector to run on the entire route network, given the poor fuel efficiency of such a long sector. In effect, we are going to create a worst case costs model.
- we know that an A380 flying DXB-USA on ULH routes operate at around the maximum range for an A380, which is 9755mi. DXB-LAX/IAH are 8300/8100mi respectively
- this implies, in the worst case (the plane is totally full) we need maximum fuel load to actually fly the sector, as we know the plane operate the sector non-stop.
- this means we need to fuel the plane with 85,472 US gallons of fuel. Shall we call it 85,000 to make the calculations easier?

Now, we can split the costs like this: the entire company's expenditure can be split into fuel and non-fuel expenses. That means we can allocate to each plane/sector a proportion of the company's total costs - not just operating costs for the sector but also all the financing costs, back office etc. etc. - by using the same proportion at the company level. This will actually put our plane's cost base at a disadvantage as not all the revenue EK has comes from flying - there's also things like catering and on board sales, but that is miniscule. After all, we're trying to create a worst case costs model, so that's not a problem.

So, now we need to use a baseline proportion of fuel to other expenditure to calculate the allocated costs of running this ULH sector. Because we have 2013/14 accounts, we'll take the fuel cost for that year to base things on. In fact, I could point you to our discussions back on page 4 of this thread where this example is worked out. http://www.flyertalk.com/forum/emira...al-scam-4.html

Now we have to use some EK data: in 2013/14, EK stated that fuel was 39.2% of expenses. Fuel was around 2.7-3.0USD/gal that year. That gives a maximum fuel cost of 229,500 - 255,000 USD on the ULH USA sectors. If that is 39.2% of expenses, then this sector's allocated share of the company's entire expenditure is going to be 229500/0.392 = 585460 rising to 650,510 USD per sector. That means non-fuel operating expenses will be 356,000- 395,000 USD. If you want to use a proportion of fuel to revenue based on some airline you trust, that is no problem, but you need to be sure to adjust the proportion for the lower cost base given EK is based in DXB. Mostly the proportions come to around the 35-40% mark.

To make our calculations easier, I think we should give it a range of 350-400k USD for non-fuel costs.

Now, in 2014/15, fuel costs have dropped - looking at futures EK will not be paying more than 2 USD/US gal for the next year at least. So, fuel costs are now going to be no more than 170,000 USD per sector.

That means operating costs are now in the 525k-570k range, for the worst case, most expensive flights to run.

Now let's build the half of the equation: revenue.
Instead of repeating the process of going to Expertflyer, pulling out fare data, I'm going to point you instead to post 204 where I already did this: http://www.flyertalk.com/forum/emira...l-scam-14.html

Given the distribution of fares ex-USA, ex-BOM, taking into account the vast majority of EKs traffic is connecting, and on USA routes most likely going to the Indian subcontinent and beyond, properly allocating the total fare revenue proportionally to the USA sector and the onward/initial connecting sector, we see that EK are running a very, dangerous game.

If EKs entire traffic to the USA is based on pax not originating in the USA, or DXB, given the fares and allocation to initial sector, then there are revenue gaps of around 100-200k per sector. That of course is going to work out at, given 5 of these a day, 730 million USD a year of losses - not the "billions" claimed.

In reality though, there are mitigating factors: planes that aren't full don't get fuelled to the max, and have space for cargo. Not everyone on the plane is flying ultra cheap fares ex-BOM - ex-USA and ex-DXB fares are extremely expensive in premium cabins. Not every person in Y is flying on a cheap promotional fare (such as the 2-for-1s advertised this year). If the flight has good loads, given real world variables such as a good range of yields, then there is a plausible chance for profits - or that losses are sustainable while the routes build up.

So now, the question becomes - are these planes flying empty, or full? Luckily that's an easy question to answer, the Department of Transport answers it for us and a poster in 1173 helpfully extracted it for us: http://www.flyertalk.com/forum/emira...l-scam-79.html. Loads to the US are in the high 80s, sometimes the 90s. That means two things: not everyone on the plane is flying in Y, as there are only 399 seats in Y, which represents 81% of capacity - that is, there are premium pax on these flights and two, given high loads and non-stupid revenue managers, clearly not everyone on these planes are flying on discount fares.

You can replicate this kind of model construction in various markets where national statistics agencies publish load factor data, such as I linked in post 1014 on page 68 http://www.flyertalk.com/forum/emira...l-scam-68.html, and so do similar calculations given the stage length and probable fuel load for EU-DXB flights.

Thus, for the worst case, most expensive flights on the network, it is still plausible that money can be made, given the loads. If you don't make the loads of the pax are entirely composed of low yield source markets, then you could be in trouble, of course - but everyone on this thread accepts that, I think.

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Now the question of added capacity - you may not see this, given the United States is a vast location, but there seems to be lots and lots of demand for travellers going there. In fact, there is some hard data about it, which I talked about on page 20, in post 298: http://www.flyertalk.com/forum/emira...l-scam-20.html and again on page 54 in post 809: http://www.flyertalk.com/forum/emira...l-scam-54.html

If I may quote myself:
Far be it from acting slowly to react to market conditions - the market conditions are clearly shouting from the rooftops to add more capacity.

I can only hazard a guess that this demand is not mirrored or picked up by US airlines, because the source markets for all this new growth to the US serviced by EK simply doesn't want to travel on the US3 carriers (especially given their "frequency" and "route network") for various reason, although I suspect the main one is their poor international reputation.

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To requote your question:
Clearly RASM on international flying will drop - USA airlines have a protected domestic market with which they can inflate fares. Few protections exist outside the US - except of course on the golden goose of TATL. Unfortunately for the US3, new passenger flows are increasing where they have to keep a presence if they want to keep up the pretence of being global airlines instead of US domestic carriers. The ME3, or at least EK, are experiencing RASM issues - just look at the history of net margin that I posted on page 97 in 1449: http://www.flyertalk.com/forum/emira...l-scam-97.html, from the 10s in early 2000s to the 2-3% in the last couple of years.

Lots of additional capacity and the global penchant for discount flying now have clearly pressured US airlines used to flying high margin routes. They face a choice of cutback because they can't compete with the cost structure, protectionism, or gamble on investment into their product to attract new fliers willing to pay the premium for a better service or connectivity as the only real valid choices. They can't go for cutback of course, given the pressure their unions are going to have on them - and of course, their focus on high margin markets. Simpler really to preserve artificial high margin markets and not let anyone else play in their pool - shareholders seem to be unhappy when money is spent on product investment instead of dividends...

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In reply to AA_EXP09 - I think it's probably more accurate to say that globally, there are more people in more places in the world with the income to afford intercontinental air travel as well as the cultural demand for it (either VFR or aspirational tourism). I think the underlying point is that, there are now more source markets for international long haul air travel, which are out of reach of US carriers, but definitely in reach of a lot more other carriers.

Actually, it is the other way around.

The fact that the ME3 received massive subsidies is as obvious as the economics on ultra long-haul flights, well, at least for people who deal with it on a daily basis.

We have a pretty good understanding which routes have potential and which do not have any potential, hence, the comments by certain people.

We also have a pretty good understanding how the EK Group operates and about their various (highly profitable) activities on the side founded on monopolies, which are considered illegal in the US or the EU.

But once again, most of the activities are a copy of Schiphol and how the NL cross-subsidized KLM with earnings from Schiphol a long time ago.

The most important point, and I repeat myself for the 136 time now, all state-owned airlines received subsidies throughout their existence, some more some less.

The second most important point, a BELF of 59.9% is...well, I pointed it out too many times already. :D

Expansion in the industry follows a very simple logic.

You start with the routes which have the most potential (if you have the traffic rights...)

It is always the same pattern of new entrants (which is not really surprising, isn't it?)

Hence, we saw the ME3 trying to connect Europe and Asia (and they offer a very nice price value ratio for the average backpacker aka price-sensitive customer willing to connect...)

Later on, depending on your ambition (;)) you might start adding spoke after spoke (and I do not know any airline network without unprofitable spokes...)

You just have to be careful that all the unprofitable spokes do not decrease the stability of your wheel too much, otherwise Abu Dhabi has to offer some additional lines of credit.

I am too lazy to find data to support the "rising incomes" theory, but I am happy to explain my own take on things:

-in order to find a remotely competent person in China, it is necessary to provide a take home pay of $1,000 per month (plus a nice working environment)
-the $1,000/month employee almost surely lives with her parents, so expenses are $250/month
-she has no problem at all spending $7k/year on vacation trips