Xlr

American and United say they will also cut some international routes this year.

Probably music to EK's ears, as EK is happy with a 4% profit margin.

eternaltransit

OP, I think there is a lot of inaccurate information in your recent post 1346 - so for the benefit of other readers who may be inclined to take things here at face value, I would like to point them out as they are quite important distinctions.

Although I am not completely familiar with the state support the US Government gave to airlines post 9/11, America West Airlines did not receive a direct bailout - as in, cash injections - it received loan guarantees totalling 380 million USD with few strings attached (executive compensation limits, a nominal fee paid to the US Treasury). As you seem to hold the Wall Street Journal as a reputable source, here is an article about it: http://www.wsj.com/articles/SB1017873960889964960. The US Government didn't take an equity state in America West Airlines, it simply offered repayment guarantees that enabled normal commercial lending to take place which would not have been possible due to credit ratings downgrades for obvious reasons. This was done by the US Treasury after the passing of emergency legislation on September 22nd, 2001: https://web.archive.org/web/20050217...-finance/atsb/ establishing the Air Transportation Stabilization Board which had the authority to guarantee 10 billion dollars in lending to support a "viable commercial aviation industry in the United States". Unquote. That is as close to subsidy as you can get without using the word itself!

In 2004 there were doubts whether this was worth doing though:
http://www.nytimes.com/2004/05/14/bu...perts-say.html

Perhaps you were thinking of TARP (The Troubled Asset Relief Program http://en.wikipedia.org/wiki/Trouble...Relief_Program) or the US/Canadian Automaker bailout, where the US/Canadian Governments did indeed receive equity; on TARP , which was a financial industry bailout there was a profit of 15.3 billion USD (441.7 billion revenue on 426.4 billion invested), and on the US automaker bailout the US government lost 11.7 billion dollars. Seeing as TARP ran from 2008-2014 and it made a 3.59% Total Return over the entire period - not even annualised, in total, I don't think one can conclude it was established to make a profit.

---***
EDIT: I apologise, OP, I have done some further research into the issue about the support given to these airlines under the ATSS Act - provisions of the act did indeed allow for warrants to be issued to the US Treasury in any company that received support under the terms of the act. The warrants converted at below-market price as a way to try and compensate the federal government and taxpayers for the serious risks involved in guaranteeing loans to failing companies.

This however, is why we have to class this as a subsidy instead of a commercial transaction - the purpose of the program was to ensure that companies which had no recourse to markets on commercially viable terms could still get financing to continue operations. The warrants issue is not relevant as the point of the program was not to make money, it was to "stabilize" the US aviation system. Apparently reports range from profits of 141 million to 327 million - for a programme that gave direct compensation of 5 billion and guaranteed loans up to 10 billion, that represents a total return of 0.9-2.1% over the 5 years it operated. These are hardly commercial returns - especially over 2001-2006.

In the case of America West Airlines, the US received warrants to purchase 10% of outstanding stock in 2001: http://articles.latimes.com/2001/dec...iness/fi-13581,http://archive.fortune.com/2008/09/2...ion=2008092412, then after the bankruptcy proceedings it, still owned warrants in AWA which survived the proceedings: http://www.treasury.gov/press-center...es/js2942.aspx. In the end, the Treasury had warrants for 18.8 million shares (a third of the common equity), but it was all cleared up after the merger with US Airways and in the end the Treasury got 115.8 million USD for its trouble. http://www.bizjournals.com/phoenix/s...3/daily10.html

I think Flyertalk itself has some forum posts about it from then. In any case, in 4 years, the Treasury made 115 million USD whilst risking 440 million USD over 4 years. Annual returns of about 6% - not bad yield in 2015, until you realise 10 year Treasury yields at the time were 4.22%-5.04%. A 96-178bp premium on US Treasuries for guaranteeing exceptionally risky debt does not strike me as the most commercially minded decision ever made.
---***

As to whether the UAE wants to get its money back - the ultimate owners invested in aviation to put their country on the map, not to find the best possible yield for their money. Is it a subsidy, is it state capitalism, was it done with public policy objectives in mind - like governments have done all over the world. Most likely. But just in the way that the US government provided an environment for airlines to work well in - without writing them checks on a yearly basis, the DXB government has done the same for EK. In then end it turned out that AWA and US Airways ultimately paid the Treasury with interest - arguably a similar situation for any allegations of EKs owners temporarily assuming losses: EK has the future profits to pay it back. Except that EK hasn't required any below market rate loans.

But that is not the question for this thread. The question for this thread is whether EK requires ongoing cash injections to continue operating as a going concern.

A similar question is whether all airlines in the US and indeed the EU, have ever been able to return enough money to shareholders to cover all the historical costs borne by taxpayers to promote the industry. Considering the number of bankruptcies and the capital required to invest...I think the argument about whether owners can IPO their airlines for a cash return is rather a red herring.

A quick visit to gcmap: http://www.gcmap.com/mapui?P=bos-dxb...&EV=410&EU=kts will show you that both BOS-HKG and BOS-DXB are polar routes (or, ask anyone who takes EK US-DXB: I believe there are some in the Trip Reports forums who have photographic evidence of the routes taken). Additionally, BOS-DXB is shorter than BOS-HKG.

However, I am indeed pleased to see that the basic thesis that if EK has a lower cost base it could make money has been acknowledged: that is precisely the point - EK operates in a lower-cost environment. To satisfy the other part of the P&L account, that means there needs to be enough revenue: which it is argued there is, through a combination of load factors and fare data - enough to pay for BOS-DXB and also DXB-XXX. I grant you the margins will be razor thin though, and not of interest to companies that are accustomed to margins in the double digits.

They already do - see this Unit Cost analysis for harder data:
http://centreforaviation.com/analysi...king-it-147262

Some conclusions:
That bolsters the argument that EK's cost base is significantly lower than legacy competitors - enough to offset your next point:

Two points here: yes, the revenue, or should I say, cost disadvantage is there because of the additional costs of extra sectors. However, if you have 2 6-hr flights on a 777 instead of one 12hr flight for say, a long haul EU-Asia - the 2 6-hr flights will have lower fuel costs than the 12hr because of the sweet spot of fuel efficiency. That is where DXBs positioning gives EK an advantage. There is no denying that EK (and EY, QR, TK etc) offer on average lower fares than direct non-stops: but the argument here is that even though the revenue may be lower, the cost-base difference is even more so: airlines don't run on revenue or yields or load factors, in the end they run on net margin. EK has a formula that is plausible and works.

In terms of revenue disadvantage - that is, EK having to offer lower fares: these fares are public and searchable. On high demand routes, such as EU-Asia, of course, they must be competitive with other offerings on the market. But there are many route pairs, due to their connectivity, where EK is the most direct option - and a premium is charged for that.

It does not necessarily follow that transfer passengers are low yield - or indeed lower than many operators on the same routes. Many people living in Asia/Australia complain fairly regularly on this forum about the fact that EKs product hasn't changed, but fares are up 50% in only a couple of years. And indeed, the 1-stop transit may in fact be the most direct way of getting from A-to-B on some high yield routings (Nigeria-Beijing, anyone?) and so EK charge a premium comparable to being non-stop.

Speaking of plausible, you state "which is, of course, the reason why low cost European airlines have been generally unsuccessful since the time of Freddie Laker)" - how many low-cost airlines in Europe have started then failed? I can think off the top of my head, two airlines that started...and then redefined the model of aviation so much in Europe (and other parts of the world), that legacy carriers rushed to change their models to compete - either through cutting their own products or establishing low cost subsidiaries to try and compete. The jury is still out as to whether they are successful in this though.

Those airlines are Ryanair and Easyjet. You can find them both traded on the London Stock Exchange. Ryanair is even more successful than any of the US carriers in terms of net margin and profitability. Michael O'Leary, the founder of Ryanair basically copied the Southwest model an applied it in an area of the world where no one thought it would work - and it couldn't really until EU open skies market liberalisation.

No one has any doubt whatsoever that consumers have benefitted hugely - as well as two hugely successful for-profit enterprises (and their supply chains) providing tens of thousands of jobs. All it took was pricking the bloated legacies and their lobbying machines.

I agree that Emirates has some way to go with total transparency of their accounts - mainly that it would be nice to see them release quarterly figures. However, they still release annual and audited reports - just the same as public (and private of a certain size) companies elsewhere in the world. Your accusation of questionable accounting and singling out Emirates has no merit - corporate scandals of false accounting have happened all over the world, in some of the most highly regulated and developed markets. The insinuation that their accounting is questionable because of the jurisdiction's opacity - whilst failing to also acknowledge that auditing is not a foolproof process anywhere in the world - seems like base mud-slinging.

Additionally - the US3 investigation: let's not conflate US3+4 (for the 4 unions) with the USA. If/When the US Federal Government investigates, then we can say USA investigation. What we have now is some research drafted by a lobbying group - and that is the context in which it should be read. Having read the report, it was interesting to note that EK was the airline which didn't have any billions being pumped into it whatsoever - the allegations were rather thin highlights of historical loss assumption (with few details) and allegations of unquantifiable transfer pricing with regards to dnata's ground handling and DXB fees. As noted by the CAPA report above, even if you were to normalise those costs to those of higher cost locations such as LHR or FRA, EKs cost base would still be lower than legacy competitors by 21%.

I believe irishguy28 succinctly quoted your own words back at you to illustrate the example of why a hub's capture radius does not have to be the entire city, but simply the region which it serves - the superhub model has passengers travel to the hub by air, instead of other means of transport.

Of course - some parts of the Middle East will feel the pinch, relatively speaking. However the "Middle East" is not a monolithic entity where everyone is dependent on oil - just looking at the news from the region will show you all of the various regional actors at play. However, this is mostly a red herring as well, when you see that 90% of EKs traffic is transfer traffic - and most major O&D demand to DXB is from the UK or GCC region. Let's take the UK - EK has 14 daily flights to the UK and there is very solid O&D demand to DXB, according to Mastercard http://newsroom.mastercard.com/wp-co...inal_70814.pdf - a million pax a year. They are all paying premium prices for O&D in Dubai.

EK doesn't depend on the oil & gas industry for its passengers - they travel on such flows like EU-Asia, EU-Australia/New Zealand, China-Africa, Africa-Asia, Americas-India, UK-India. As an investor, you should clearly know the benefits of diversification: in more familiar terms, EKs revenue mix and passenger mix is well diversified with respect to macro-economic conditions. It would take a worldwide, global economic malaise to dampen EKs demand across all route flows.

Here's another explanation - DL, along with the other US legacies international reputation is extremely poor, especially with regards to service. When you have the choice of a direct flight on DL, with premium fares, or the option of a better schedule (with more frequencies) at a slightly better price with much better hard and soft product on another carrier - it would be difficult to rationalise paying more for an inferior product, when the transit time is only a couple of hours.

So, DL suffers because it has a poor product and therefore can't charge the premium fares they require for their non-stop service - both to pay for the inefficiencies of ULH service and the margin that their investors demand.

So they cut flights. So now they become even more inconvenient a choice with fewer frequencies. And now the other carriers can charge more as DL has dropped out of routes. This is only predatory pricing if it can be proved that the competitors are deliberately selling below cost in order to drive someone out of a market. It is a very, very fine line between predatory pricing and giving consumers a better deal through increased efficiencies.

If I was Richard Anderson, of course I would cut international service - I'd deploy all of my capital into routes with the highest margin potential (like my protected domestic and TATL markets) instead of having to spend money competing - I would only invest in international services just so DLs reputation of being a network carrier is not laughable. It is the economically rational thing to do.

eternaltransit

A jaded cynic might argue that DL, AA and UAs international cutbacks could be spun into a narrative about predatory pricing by the ME3 and They Must Be Stopped before the US3 all go bankrupt and America no longer has a functioning aviation market!

cargueiro

Just thought I would chip in:

I will write specifically about EK in LAD...

Only a few airlines have scheduled international flights daily from LAD such as EK, SAA, DT, and possibly Air Namibia. All other carriers such as 5Y, BA, AF, KLM, LH, SN etc are limited to 2-3 flights a week...

Are EK the cheapest? No! Between them, ET, Royal Air Maroc and DT usually provide cheapest tickets to Europe, DXB, China and USA. Even LH is normally cheaper in T class in economy...

But are EKs costs similar? Probably less! EK sits on the ground for 3 hours. BA, 5Y, LH etc sit all day. Thus parking and security cost more than EK pays for its quick turnaround. EK brings its own catering from DXB, no doubt a saving there....

EK does not receive inad fines in dxb... BA etc pay hefty fines for inads! Again less profilers needed by EK as all is done in dxb...

Finally as a pax, why fly AF's twice weekly schedule? EK flies daily to loads of places. Miss an EK flight and you go the next day. Miss an AF flight and you wait half a week or connect via AMS.

EK ex LAD is full of oil men in J, rich Angolans in F and normal people in Y from African traders to European school teachers to Chinese construction workers...

lokijuh

CX do know what they are doing I think. It would be a calculated risk. Operationally almost the same as their JFK (3xdaily non-stop) and EWR (5x weekly) services which are actually 100 miles further than BOS from HKG.

But here you go again "Dubai is obviously not a short cut to anywhere from BOS" ..... are you deliberately being provocative, or have you never heard of India (pop > 1 billion, with a middle class > 150 million)? I actually think this belief that Dubai in not a short cut to anywhere fundamentally underpins this whole thread, and your belief that EK is a massive scam. If Dubai was genuinely nowhere, or enroute to nowhere, then other airlines wouldn't fly there at all. As pointed out above, many do.

Furthermore, looking at great circle mapper, DXB-HKG is a short cut only to the eastern half of Asia (anywhere to the east of Bangladesh). To the western half of Asia (India, Pakistan, even parts of western China), travel via DXB is much more of a short cut. [BOS-BOM via DXB 7860 miles, via HKG 10868 miles]. This is a fact.

Edit: Even to my home port of SIN, whilst SIN-HKG-BOS is 2:15 quicker in flying time than SIN-DXB-BOS, in the other direction (BOS-SIN) travelling via DXB is 20 mins shorter. When you're talking 19+ hours flying time + connections, the difference between the two (from a customer perspective) is not that significant.

edy4eva

ADL and PER are both CX and EK destinations that also benefit from their US/CA presence.

lokijuh

Yes, true, as well. Although CX not so much of an option from ADL/PER to BOS due to timetabling not matching, but works better for JFK and west coast.

You seem to think that they do so much ultra long haul flying. Out of 140 destinations, EK has 17 that fit into the ULH category (>12 hrs). Proportionally I bet is similar to the amount of ULH flying that CX and QF's international arm both do.

In fact if you want to really look at ULH businesses, and a comparison for EK, look at CX. CX is to China/SE Asia what EK is to India/ME. In terms of flying distance HKG- East coast is similar distance to DXB-west coast, whilst HKG-west coast is similar to DXB-east coast.

edy4eva

Since the OP wealth is comfortable to say the least, why not invest into EK's heavily subsidised F airfares of ~40k for a return to DXB?

Not only does it constitute a great deal but you will also get to experience their top notch service upfront, on the aircraft you love the most the A380, at below cost!

And while at it, you'll get to see how deserted Dubai really is.

Not joking. Serious talk.

GUWonder

Since who votes in the poll most probably won't be shared with the FT public, that kind of vote may be subject to shenanigans encouraged by US3 and EU3 lobbyists and their favorite harpies.

moondog

It may well be necessary to have a stomach for long term losses in order to compete against AA/DL/UA.

I applaud any suitors who possess such will/stamina, and don't give a rat's behind about whether or not they are:

1) pulling their own weight
2) if not, #1 from where their investment funds originate

Think about it, if you wanted to start a new airline in Chicago, you'd probably be looking at 30 years of losses because AA and UA would attempt to bleed you dry. In such a situation, would it be a bad thing if Softbank gave you a lifeline to endure the storm? How about the Government of Singapore?

irishguy28

Well, EK is not in direct competition with the US3, and "starting a new airline in Chicago" is of no relevance to the present subject.

The US airlines would do better to cooperate with the Gulf carriers rather than complaining. Read this article from CAPA

Enzokk

If the OP and FD1971 cannot acknowledge that the reason the ME4 can have a strategy that is different from the US3 and the EU airlines and still have it work, then the discussion, as good as it has been mostly, will end. The reason that EK is able to provide their services to consumers is their superior location to most other airlines. Coupled with a lower cost base (tax regimes) this is why their business model will work, even if it differs from the "normal" one used by the established airlines.

This is the same reason why we see 2 other airlines that are competing with EK in the same region. Both airlines offer connections, but are trying to go at it a little differently (alliances and different aircraft usage). Which one is best will be seen in a few years after EY and QR have either established themselves and are self sufficient, or bleeding money for their owners. I do doubt though that their owners will allow their airlines to keep losing billions in the long run.

iahphx

Tim Clark said yesterday that the DOT is free to come to Dubai and look at his books. I believe this is, more likely than not, bluster (Emirates' is great at that). But, if it's true, it's the perfect solution. The DOT should send a team of forensic accountants to Dubai and determine, once and for all, how Emirates manages to do what they do.


But nobody actually claims it's the citizens (or foreign residents) of Dubai that account for the majority of Emirates' revenue. The undisputed traffic stats show, for example, that there has been basically no increase in O/D traffic from the USA to Dubai despite the mind-boggling increase in capacity. It's all connecting traffic, most of it to the Indian Subcontinent. Nobody is going to claim that these pax are richer than the citizens of the Detroit SMSA.

Turkish Airlines IS an interesting case. They're a publicly-traded company that seems to bop between profit and loss. They now seem to be profitable. The airline does seem to be over-sized. If you've ever flown around Turkey, you'll know there's cut-throat domestic competition, and fares are low (aka, unlikely to be profitable). Fares from Europe to IST also seem to be below average. Meanwhile, they've been rapidly expanding, and seem to be following a strategy not all that different from the ME3. Logic would suggest there's too much capacity in that region chasing the same strategy. There are also some real disadvantages right now for Westerners connecting at IST. I just did it in December and it put me on the TSA's terrorist watch list. (see the Flyertalk thread: it wasn't Turkish's fault, but let's just say I'm not looking for another IST stopover). I've not seen any deep analysis of how Turkish funds their operations, so I'm agnostic about the issue, but curious. Istanbul is an enormous and fast growing city, though (15 million maybe?) -- way bigger than anything else in the region.

The idea that the US airlines make lots of money from flying the US gov't around are as spurious as the idea that they're subsidized. The reality is that the gov't buys its airfare from the US3 for less than private companies pay. Take a look at the GSA contracts and see. I wouldn't be surprised is some smaller charter operatorseek out an existence on gov't flying, but the US3 certainly do not.

As far as starting an airline, good luck with that. There have been a handful of successful new USA entrants (JetBlue is one of them, and it hasn't been very profitable), but it isn't easy. I wouldn't be surprised to see somebody else start an airline in the current oligopolistic environment, but you need billions, not millions to do it. The USA could currently use a low fare airline that isn't terrible (we really only have Spirit, which is unpleasant like Ryanair). If anyone decides they want to try this, let me know, and I'd consider investing.

I'm surprised there are any votes here against Emirates. The environment feels like a North Korean election.

eternaltransit

I agree with you here - and I think it's actually likely, if investigations get to a stage where the DoT feel they need to act, will be provided with confidential yield information they can use in conjunction with their own information on load factors and comparable maintenance requirements/costs to come to their own conclusion. I think the US DoT is credible enough to put the matter to bed.

I believe you yourself in post 296 (http://www.flyertalk.com/forum/emira...l-scam-20.html) intimated that you believe that the EK business model is flawed because "few Americans travel to the Middle East" and that there is therefore massive overcapacity on USA routes - which are run on high running cost planes with few passengers. As you now know with DoT stats, these planes are of course very full indeed and I am pleased to see that you acknowledge the point that the majority of EKs revenue comes from transfer passengers and not residents of Dubai/O&D traffic from/to Dubai.

Now, it is a bit of a fallacy to equate the wealth of an average citizen of say, the Indian subcontinent and therefore conclude that fares are unsustainably low. What matters is that all passengers pay the fares they set - the proportion of disposable income this uses is completely irrelevant to EK. As noted in this thread, it is believed that a lot of Indian subcontinent passengers are once a year visiting-friends-relatives passengers, who save up all year to buy a ticket to visit their family somewhere (or once a year trips from a wealthier country to India). India has a population of a billion, with 150 million in the middle class - aka, able to afford a ticket once a year. That is half the population of the United States - and India is not the only convenient market that can be accessed via DXB: thus all the points in this thread about the new realities of wealth distribution and demographics.

Indeed, TK is interesting and it will be especially interesting to see how they manage to fare - a superconnecting carrier with lower costs than legacies, part of a global alliance. We'll see how QR and TK leverage their alliances and see if there are any strains amongst their legacy alliance partners.

As to your statement "logic would suggest there's too much capacity in that region" - could you run us through your line of thought here: what is the baseline maximum capacity that you think is required in the region, and how does that projected capacity line up with projected demographic and economic growth, as well as Istanbul becoming one of the world's most visited international destinations?

Once again - low fares do not equate to low profits: Ryanair, Easyjet, Southwest, JetBlue, AirAsia are all testament to the idea that low fares and lower costs means more margin. TK has arguably a lower unit cost than the ME3. As you say though, I also am not familiar with the history of TK apart from what I assume was historically a rather close relationship with the state.

We're looking at the ATL-DXB and IAD-DXB routes in particular. It is not unheard of for a major travel buyer to underwrite certain routes: it is also debateable whether to call it a subsidy. However, let's put aside the Fly America Act for a moment, because you seem to have two conflicting theses here:
1 - "few Americans travel to the Middle East" (post 269): so why are there two long-haul money losing flights when you could just dump them on your JV partners
2 - there are enough Americans who want to travel to the Middle East - enough to sustain daily flights at good loads (consistent 85% last I checked)

Now given the choice between a direct flight out say, LAX, SEA, SFO, ORD, BOS, JFK, MCO, IAD, IAH or DFW - on an arguably superior product and sometimes cheaper fare all-in (but not always), why would anyone choose the ATL-DXB or IAD-DXB flights (after an internal connection to the DL/UA hub) apart from die-hard loyalty fanatics like we find on FT - although increasingly fewer now, given devaluations. You yourself in the early stages of the flight always said that travellers prefer non-stop flights rather than connecting flights, so are you saying the only demand to DXB exists in ATL and IAD - or is it perhaps, that people who fly DL and UA also take a connecting flight to the hub?

Given the existence of the Fly America Act, and the fact that IAD is the UA departing port to DXB, not somewhere more logical like NYC, and ATL (the major hub) for DL, one could reasonably conclude that many of the people on those flights are forced to fly them. As it's legally mandated, one could argue not unspuriously, that this represents a form of subsidy, even though the fares may be discounted as any major travel buyer would receive.

Whilst I understand you want to use hyperbole to make a rhetorical point, the best uses of it contain some kernel of truth - comparing a Flyertalk poll to a NK election is rather inaccurate, considering the main objectionable issue of a NK election is not the result, but the implicit understanding that those who do not vote for the preferred candidate will be punished by being sent to a labor camp or executed (or their families).

On Flyertalk, no one is forced to vote, and there is no consequence to the voting decision - especially as it is anonymous. There is no effective intimidation of people daring to express a different view: clearly, as Flyertalk and this sub0forum and thread would be a rather dull and inaccurate place without it (other subforums may vary ). Looking at the other threads in the sub-forums and especially how frequent travellers here are quite open with the flaws and problems with EK makes me think that this forum is filled with rather fair minded individuals who aren't loyal fliers at all, but they vote for their own self-interests and take a relatively objective of view facts and arguments they have to evaluate and the products and services they pay for and receive.

Just because many people disagree with you, doesn't mean they were all coerced into it - it is plausible that they were persuaded by the arguments within, especially considering it is a free and fair vote.

adambisi

My theory on CX HKG-BOS is that they have studied the flows from AA BOS-JFK/LAX/ORD to CX JFK/LAX/ORD-HKG-XXX and liked what they saw yield wise and decided to strike before KE got a 789 and started ICN-BOS

Boston-China traffic is growing (look at HU's success on BOS-PEK) and this flight will only help it. Also BOS-HKG creates a few new 1-stop markets that will help fill the plane: PNH is a big VFR route for Greater Boston that does not currently have a 1-stop from BOS and I believe people were schleping to JFK for. It won't yield well but it will fill the plane after the HKG/SIN traffic takes its place upfront.



Its also schedule in the face of IRROPS as well especially with the future double daily service to BOS. You have a better chance of getting stuck in IST and other airports than DXB that's for sure.