edy4eva

Ok we got something. Can you please be specific as to what will happen to EK in 5 years from now, based on your convictions and analysis?

Thank you.

Wan1dap

I know, but I feel better! Apologies for that part but not the rest.

Wan1dap

Earlier you stated that you would respond in "a few months", now it's five years. Unless you can provide the requested data, I wouldn't bother expending the energy. Here's a left-field thought - in the five years, why not try actually flying EK?

iahphx

They will likely over-expand and "run out of money." It would be sooner but, as you know, I'm skeptical that "true profitability" is of paramount concern for the airline today (if it were, they'd never due this crazy USA A380 expansion).

eightblack

Folks, while Zol and I are close to nominating this thread "thread of the year on the EK forum" lets maintain our civility towards each other. No personal attacks. Stick to the facts. Please.

I applaud the OP for taking a stand (no matter how much my opinion might differ) and I applaud many of the thoughtful and truly detailed responses. It would be such a shame to close this conversation.

Please continue...

subject2load

Well, there's your answer edy4eva ......"They will likely over-expand and run out of money"

How much more specific do you want than that .....??.

And I trust that you, too, are now thoroughly convinced Wan1dap .....

Wan1dap

"over-expand and run out of money" - that makes EK sound like me! I must be a financial scam!

Forrest Bump

YuropFlyer

I think one thing the OP doesn't get is that not everything has to be profitable in the ultra-short term, when one is running a solid long-term strategy. Same thing why western states&companies fail more and more behind: They only plan for the next quarter, while Asian companies (not all of course.. Air India and Thai certainly excluded) as well as some Asian states do plan for 20, 30, heck even 50 years ago. So, sometimes doing something unprofitable at the present will work out splendid 20 years ago. Like EK, which is turning in heavy net profits nowadays, and of course spending some of those to further increase it's long-term profits.

I assume OP is working in an industry where only the next quarter results are important - such "industries" & their behaviour are basically destroying western economies on the long term run.. which is way EK's long-term based development is probably seen as a "bad" thing by him (but, as it seems, no one else, as most other commenter here prefer a sound long-term strategy over a fast money-run quarter thinking..)

So OP, please open up your mind a bit. Realise you don't have to squeeze the orange even more, instead you could invest into buying some more orange trees.. (this doesn't just go to OP, but also to people like Spohr, Hohmeister, Franz..)

DYKWIA

Did you not see? He's an airline 'analyst'

YuropFlyer

I guess in the way we're all here on FT

Or he was lucky and got a Dilbert'eske company to hire him for real on "airline analysis"

TRAVELSIG

Just out of curiosity- what in the financial statements of Emirates would point us to the "run out of money" view? It is always great to learn from others which data enlightens the laser pinpointed outcomes.

eternaltransit

Hello again OP, welcome back to the thread!

Two points, firstly related to the frequent flier scheme/reward availability issue you raised and then a question about my math which in post 186 you said had many things wrong with it: I have some new figures which change the game slightly and wonder what your take is on it.

As edy4eva said in post 249, the Skywards programme is a bit of an unfamiliar beast when it comes to FFPs, especially to people who are familiar with US programs. The reward availability comes and goes but the major thing is that it is 1) not a big driver of business in their other markets (but something that their US customers like to play with) and 2) more importantly for the sake of our discussion, is really quite ungenerous. In my opinion, it's run as an unforgiving (for pax) way to remove these mileage balances from their liabilities, and as a revenue center which does not allow any redemption seat to cost the company money. In fact, I think that straight redemptions are actually profitable for EK on all their routes because, to put it simply, EK levy quite extortionate carrier surcharges for all redemptions.

EK have "saver" and "flex" redemptions - the only difference being the availability and mileage cost. Clearly savers are cheaper than flex in terms of miles spent, but availability is restricted. Luckily for the readers of this thread, I have an excessive number of Skywards miles which allowed me to make dummy bookings on the website which show the carrier surcharges - which are not displayed on the mileage calculators. Some might say this is an indication of how much EK cares about its customers who want to use mileage redemptions....but I digress...

On the ULH routes to the USA on A380s (IAH/DFW/SFO/LAX) to DXB:
J class redemptions are 165,000 miles round trip saver, 227,500 miles for flex
F class redemptions are 247,500 miles round trip saver, 310,000 miles for flex.

You can only redeem a one way in flex availability and it costs half the price.

However. All premium class redemptions, saver or flex, attract the same "carrier surcharge", aka, EK revenue management money. This is 1450USD or you can pay in miles, which is 131819 miles. This is on top of the taxes and airport fees (around 84USD). A one way is 725USD. I also looked at Y redemptions: the surcharge is 688USD, or 62546 miles.

If you extend the trip to BOM (I couldn't do BKK in F, I don't have that many miles ) it works out at 255500 miles in F, but the surcharge is 1480USD.

So, even if EK has wide open availability in premium classes - although for the purposes of this experiment, I found it quite difficult to find F availability, but very good J availability - EK are getting at least 1450USD in revenue (or 130k miles off their books, which give you an idea of how much they internally value their miles) plus between 165-227.5k in J and 247.5k-310k miles off the books in F. So, on a one sector basis to USA-DXB, EK are getting 725USD (or miles equivalent) plus the redemption mileage off their liabilities book. Now, 725USD covers the cost of fuel for that pax - we've shown that in many previous posts. Does the mileage cost cover expenses?

If we take the miles/surcharge conversion as a measure of how EK itself values the revenue equivalent of one mile (note not their internal cost metrics), we can show that 131819 miles is eqvuialent to 1450.00USD or 145,000 US cents, so roughly 1.099 US cents per mile. I know this is quite rough but suits our purposes. So, for an F ticket, the implied revenue from mileage is 2720.03+1450 = 4170.03 for a saver F, or 3406.90+1450=4856.90 for a flex (round trip). Not stellar profits by any means, but definitely above breakeven. You can do the same calculations for J: 3263 or 3950.

So, straight redemptions doesn't mean losses for EK - actually they look like pretty good yields. As an aside to EK fliers - I think that is why the upgrade/upgrade on board perk is the best value for redemptions and why EK doesn't mind it - they already have some cash revenue from you to pay for your costs, so they don't really mind where you sit, the incremental costs of J/F service aren't that much, no matter how much Dom you drink. Well. Within reason

Now, we also have to remove the idea that redemption availability means empty cabins. Typically EK only have 1/2 out of 14 seats available in F for redemption. Wide-open when it comes to redemption availability typically means availability across a date range. When it comes to EK it doesn't mean that 14/14 of the cabin is available for redemption and unsold. Even if redemption availability is "wide open" across a large range of dates, EK can still sell 12/14 seats and still have a redemption. 12/14 is 85% load factor - in line with Department of Transport load factor stats for EK ex-USA (which show loads ranging from 80-95%). We've shown that 12/14 in F makes cash, haven't we? The same principle applies to J - wide open doesn't mean low load factors. It means constantly not 100%, but then, which airline is? We've shown these flights are profitable at lower load factors than 80% in previous posts.

Bottom line: redemption availability doesn't mean empty flights. Also, redemptions make EK money.

My second point about my math. You believed there were many things wrong with it, but as yet you haven't raised anything about that apart from the fuel burn issue which I think I replied to you adequately. Anyway, as an airline analyst and I assume an investor, I take it you have been following recent economic developments with interest - specifically the current price of crude oil. West Texas Intermediate is currently 67.9 dollars a barrel and Brent is 71.56. Jet-A fuel on the Gulf Coast - which is what carriers fueling in the USA will be paying is currently 2.097 USD/US Gal, down from our assumption of 3 or even 2.7 in previous posts. The futures price all the way out to 2017 doesn't go above 2.3USD/US Gal. If we say that the price carriers are paying has gone from 3.00USD/USgal to 2.4USD/USgal or even 2.2USD/USgal, that's a drop of 20-26%. Based on the size of an A380s fuel tanks, that's a saving of 50-68k USD a sector - equivalent to at least a few percentage points of margin. in DXB, the price has dropped down to 9 AED a USgal, which is 2.4USD/USgal. This is more than the gulf coast due to the lack of refining capacity.

I would like to hear your comment on the viability of these routes now that jet fuel costs have dropped so significantly - do you think this means that these routes can now be quite acceptably profitable, even if you think before they weren't?

As an aside, DL have their own refining division to take advantage of what at the time was cheaper shale oil derived jet fuel. Now it might be cheaper to import refined product from abroad... I wonder what an impact that will have on their results...or maybe DL will turn into an oil company!

Onwards to 20,000 views!

YuropFlyer

That's a lot of calculations eternaltransit, but you forget the single most important part: Most people (at least here on FT) would not use EK miles to buy flights, but rather to upgrade existing bookings, as you get "more bang for the bucks (or better said miles)" that way..

Some programs are better for direct bookings (like M&M and imho most US based programs), some others (like EK) are better for upgrades imho.

edy4eva

@eternaltransit good points raised there. Must not forget that EK sell award inventory to their partners, invoicing them at a rate that we don't know, but it's safe to assume their bases are covered.

EK also treat their markets differently. AU/NZ have different earn/burn levels (I believe Dave Noble ran some numbers a long while ago, and shown that the earn/burn rates are roughly the same) and redemptions ex-US attract steep carrier-imposed fees.

The point I'm trying to make here is that their FF strategy is segmented per regional market which further suggests a well thought out scheme -though not without its loopholes that seeks to maximise revenue at every opportunity. So to the outsider award availability might look as being too generous, but in reality it's not.