2011-01-26 what would you do with 90 a380s

Equity | Europe

26 January 2011

Produced by: The Royal Bank of Scotland N.V.

AirlinesOverweight What would you do with 90 A380s?Gulf carrier growth is a key strategic issue for European network airlines. We model Emirates' fleet to 2020 and have developed hypothetical networks in 2015 and 2020, identifying markets, surprisingly easily, for 90 A380s. The implied interregional growth rates are broadly consistent with Airbus and Boeing forecasts.Key recommendations & forecastsReuters Year end Mar 2011 Dec 2010 Recom Buy Buy Price 13.65 15.83 Target price 17.50 19.00 EPS 1fcst -0.08 1.06 PE 1fcst n/a 14.90

Sector performance(1M) Absolute Absolute (%) Rel market (%) 6.7 4.0 3.7 (3M) 5.7 3.4 -2.2 (12M) 27.8 19.0 5.9

Air France-KLM Deutsche Lufthansa

AIRF.PA LHAG.DE

British Airways and Iberia have merged to form IAG. We do not yet have a recommendation on the merged company. Source: Company data, RBS forecasts

FTSE Eurotop 300 Index: 1151.18 Europe Transport: 174.30 Source: Bloomberg

The growth plans of Gulf carriers are a key strategic issue for European flag carriers The greatest medium-term strategic challenge facing incumbent network carriers, in our view, comes from the growth aspirations of the Gulf airlines Emirates, Etihad and Qatar Airways (all NR) as well as Turkish Airlines (NR), which is pursuing a growth strategy with some similar features. These carriers have been expanding rapidly over the past five years and have placed significant orders to maintain that growth over the coming decade. We do not think it is hard to find a set of viable routes to utilise 90 A380s Dubai is located at the intersection of traffic flows to and from developing markets, including India, Africa, Russia and China. Over the coming 10 years, we expect Emirates to retire a significant share of its existing fleet. The Emirates route system is predominantly long haul, and many of the routes use a large amount of aircraft time. The implied growth rates from our network are consistent with OEM forecasts Across most intra-regional markets, the growth rates implied by our hypothetical network are in line with the aircraft manufacturers growth rates, thus implying a generally stable market share development for Emirates in many route areas. There are four significant exceptions to this: South Asia to North America, North Asia to the Mid East, North Asia to Africa and Eastern Europe to the Mid East. These are all relatively high-growth developing market routes, which thus implies an increase in total global market share for Emirates. For these traffic flows, we think Dubai is optimally located as a hub. We think this geographic location conveys material competitive advantage to Emirates, meaning share gains in these specific markets are not implausible. So we see Gulf carriers only a moderate challenge to European flag carriers Gulf carriers remain a material strategic challenge to the European legacy industry. But we do not see their growth creating an inevitable structural crisis in the industry. We would expect European carriers to continue to lobby against the advantages of the Gulf carriers and to develop defensive strategies using alliances. The most successful strategy, however, in our view, will be to focus their development on routes where they have structural geographic advantage over Gulf carriers, rather than chasing those markets where Dubais location and Emirates strong network, notably to India, give it a major advantage.

AnalystsAndrew Lobbenberg+44 20 7678 1488 [email protected]

Julia Winarso+44 20 7678 1813

Joe Spooner+44 20 7678 0280

Sector salesMitesh Kotecha+44 20 7678 7752

250 Bishopsgate, London, EC2M 4AA, United Kingdom http://research.rbsm.com

Important disclosures can be found in the Disclosures Appendix.

ContentsExamining the scale of the Gulf threat We examine the challenge to European network airlines posed by the growth plans of Gulf carriers. Our conclusion is that this threat is surprisingly benign. Our Gulf growth forecasts are consistent with Airbus and Boeing global forecasts, in the relevant markets.We are Buyers of European network airlines There are significant medium term threats We think fears around Gulf carriers are overstated The Gulf threat examined Growth plans consistent with Boeing and Airbus estimates What confidence can we have in this benign conclusion? Where we might be wrong

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Consequences for European network airlines Some European carriers are seeking to flag the unfair advantages enjoyed by the Gulf carriers and limit the traffic rights available. Lobbying against export credit has been partly successful. Alliance and network planning can also offer some protection.How are European airlines threatened by Gulf carriers? European network airlines will keep up the pressure Current European strategies Future strategies

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A hypothetical fleet plan This section of the report presents a summary of Emirates current fleet and orders and our estimated fleet plan for Emirates to 2020.Key findings from fleet modelling Emirates 2010 fleet Our estimated fleet development plan

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A review of the 2010 network This section of the report reviews the Emirates network as it was in September 2010.Key network findings Emirates 2010 network

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A hypothetical network plan This section of the report uses our estimated fleet plan to develop hypothetical network model in 2015 and 2020.Key network findings Our estimated network development plan The hypothetical 2015 schedule The hypothetical 2020 schedule

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Origin and destination traffic analysis In this section of the report, we take our hypothetical networks in 2015 and 2020, and estimate how the traffic might divide between point-to-point and intra-regional connections. We can thus derive intra-regional traffic forecasts.Key conclusions of intra-regional traffic analysis Dubai is a hub estimating flows is important Estimated traffic allocation Origin and destination traffic estimates

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Airlines | Table of Contents | 26 January 2011

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Implied growth rates analysis This section of the report takes our hypothetical intra-regional traffic flows and compares the implied growth rates with Airbuss and Boeings regional growth estimates.Key conclusions of the implied growth rates analysis Implied growth rates Regional growth estimates in context

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Implied market share analysis This section of the report takes our hypothetical intra-regional traffic flows and estimates Emirates regional market shares in 2010 and then using the manufacturer forecasts for regional growth, estimates Emirates market shares in 2020.Key conclusions of the implied growth rates analysis Implied growth rates

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Appendix We present our detailed fleet plan and network plans.

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Airlines | Table of Contents | 26 January 2011

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Examining the scale of the Gulf threatWe examine the challenge to European network airlines posed by the growth plans of Gulf carriers. Our conclusion is that this threat is surprisingly benign. Our Gulf growth forecasts are consistent with Airbus and Boeing global forecasts, in the relevant markets.

We are Buyers of European network airlinesWe recommending Buying European network airlines

British Airways and Iberia have merged to form IAG. We do not yet have a recommendation on the merged entity. We have Buy recommendations on the other major European network airlines. This is principally based on our view of the cycle. European network airlines have rallied an average of 107% from their March 2009 trough (vs a FTSE increase of 69%), but we do not think the cyclical upswing is over. Airline cycles typically last six to eight years. The network carriers have been rising for 22 months. We recognise that there are material challenges for network airlines in the year ahead from rising fuel prices, increased capacity and macro economic uncertainty, notably in Europe. Our position remains that we think we can continue to see a decent revenue environment in the year ahead on key long-haul routes. Demand for long-haul travel, and particularly premium long-haul, is driven in our view by international trade flows and global economic growth, not on European consumer confidence. As such we are optimistic about the trading environment that European network airlines will face on key long-haul markets to developing regions of the world, including China, Africa and Latin America. On North Atlantic, we have some concerns over capacity growth, but think the introduction of the Joint Business Agreement between British Airways, Iberia and American Airlines will leave the market substantially in the hands of the three immunised alliances; this should provide some support for the revenue environment for all market participants, in our view. We also argue that the strategic position of the European major airlines is strengthening within the industry, as secondary network airlines reduce their exposure to long-haul operations and as consolidation and alliances create a more predictable environment. Tighter financial conditions are also making it tougher than in the past for new entrants to de-stabilise the industry.

We remain optimistic for long haul premium demand

Our recommendation is focussed on trading the cycle

We are keen to stress that we are not so optimistic as to predict the airline business becoming a consistently value creating industry. We think it is getting slightly better over time and that there is a cyclical trading opportunity for equity investors.

There are significant medium term threatsMedium term issues are not overly relevant to our investment thesis But if we can reassure on mid term threats it might help

In the context of recommending network airline stocks as a cyclical trade we argue that medium or long-term challenges to the European network airlines industry, such as the environment of Gulf carrier growth plans, are not necessarily material to our investment thesis. That does not stop them being interesting to explore and, to the extent that we can offer some reassurance about such threats, we think it might add some reassurance to investors willing to consider trading network airlines at this time. In this note we explore the challenge posed to European network airlines by the growth plans of the Gulf carriers Emirates, Etihad and Qatar. Emirates is the largest of the three Gulf carriers and we undertake a detailed study of its fleet plans and its potential route development, as a way of understanding the potential market impact of this growth.

We think fears around Gulf carriers are overstatedGulf carrier growth plans are widely seen as a major threat

Whilst there is a range of opinion, there is one view (certainly being pushed by Lufthansa amongst others publically at the moment) that the growth plans of Gulf carriers might be excessive. It is a common concern that the very substantial aircraft orders of the Gulf carriers will take significant market share from European, Asian and US network carriers and will threaten to upset the longhaul airline market in a way that low cost carriers have destabilised the short-haul markets. 4

Airlines | Executive Summary | 26 January 2011

We understand why incumbent flag carriers are lobbying against Gulf airlines given they have significant growth plans, benefit from lower costs and operate with very supportive governments and high quality infrastructure.We think Gulf growth capacity will be deployed to take advantage of the Gulf's position at the crossroads of key developing markets

However, on the basis of our fleet and network modelling, we think the growth plans of Emirates appear broadly consistent with our Airbus and Boeing forecasts for regional growth. We would expect the Gulf carriers to leverage their geographic advantage and focus their growth on traffic flows linking India, China, Africa and the Mid East. We would consequently expect Gulf carriers to gain material market share on traffic flows such as India-US and China-Africa, but we would not expect them to focus disproportionately on slower growth markets such as Europe-Australia or Europe-South East Asia. We would be surprised to see them launch fifth freedom services from Europe on the North or South Atlantic and we do not see Gulf carriers as well placed to compete in the China-Europe market. We do not think the Gulf carriers will necessarily destabilise the whole long-haul industry. From the perspective of European carriers, we think the major strategic issue will be that Gulf carriers are likely to gain very significant market share on traffic flows from India to the US and Canada. This is forecast by Boeing and Airbus to become a major growth market and it is a market that European carriers would like to take advantage of in the future. We would expect the Gulf carriers to also gain share, probably more modestly between India and Europe. We thus think the real price of Gulf growth will not be an industry meltdown, but will be a cap on European carriers ability to leverage the potential growth form the Indian market

We do not foresee industry destabilisation

Just growth opportunities to India constrained

The Gulf threat examinedGulf carrier growth plans are a major challenge to European carriers

The greatest medium-term strategic challenge facing incumbent network carriers, in our view, comes from the growth aspirations of the Gulf airlines Emirates, Etihad and Qatar Airways as well as Turkish Airlines, which is pursuing a growth strategy with some similar features. These carriers have been expanding rapidly over the past five years and have placed significant orders to maintain that growth over the coming decade. The largest aircraft orders have been made by Emirates, which has ordered 90 A380s (of which 75 remain to be delivered), the largest passenger aircraft ever built, as well as 70 A350s, some 50 B77s and 15 B747-800 freighters. Table 1 : Growth carrier passenger fleet and ordersEmirates Wide body current passenger fleet of which A380 Narrow body current fleet Wide body firm passenger orders of which A380 Narrow body firm orders Wide body passenger options of which A380 Narrow body optionsSource: ATI, January 2011

Etihad 36 0 15 82 10 20

Qatar 54 31 120 5 16 17 6

Turkish 31 99 14 40

148 15 0 193 75

117 10

12

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There is a wide range of views over the merits of Gulf carrier plans

Emirates, like the other Gulf carriers, is a private company. Consequently there is relatively limited information about the business in the public domain, notwithstanding the regular publication of a complete annual report. This partial information vacuum allows an extremely wide range of views to develop about the growth aspirations of the Gulf carriers, with some commentators suggesting the growth plans are excessive, while others argue that the Gulf growth plans are a rational exercise of geographic advantage that will have only a limited impact on other industry participants. Our interest in preparing this note is not to make judgement on the Gulf carriers themselves, but to understand how Emirates fleet and network might develop and thus judge the scale of the challenge posed by Emirates on the major European networkairlines. We have therefore not done any financial modelling of Emirates, but have prepared a model of the potential fleet and network development of Emirates. It would clearly be instructive to replicate the analysis on the fleet plans and network options for Qatar and Etihad, but doing this work on one airline alone was already a challenging task. We thus focus our attention on Emirates, as the largest Gulf carrier, as a proxy for the overall Gulf-based airline industry. 5

We model Emirates fleet and network plans in detail


We build a hypothetical fleet plan and route network

We have no non-public information about the company and have not discussed this report with the company. The hypothetical fleet plan is based on published aircraft orders, our assumptions over the timing of deliveries and an assumed continuation of the current practice of retiring aircraft at around 12 years. We have then constructed hypothetical network plans for the estimated fleet in 2015 and 2020. We then take the 2010 actual schedule together with our assumed schedules in 2015 and 2020 and estimate how the traffic flows on these services might be split between point-to-point traffic to Dubai and connecting flows to different regions. We thus develop snapshot estimates of Emirates intra-regional traffic flows in 2010, 2015 and 2020. We then compare the growth rates implied in this analysis with the intra-regional growth rates published by Airbus and Boeing in their most recent market outlooks. Using the aircraft manufacturers regional traffic forecasts, we can also then examine estimates of Emirates market shares within these regional over the period.

We derive intra-regional traffic forecasts from the hypothetical network

... and consider the implied growth rates to Airbus and Boeing estimates

Growth plans consistent with Boeing and Airbus estimatesThe key conclusion we draw from this analysis is that the Emirates fleet plan we have modelled does not look to add excess capacity to the markets in which we think it could be deployed.It is not hard to imagine viable routes for Emirates

In developing a hypothetical network, it was remarkably unchallenging to imagine potential routes to use up the growth capacity, notwithstanding the many A380s due for delivery. This reflects three factors. Dubai is located at the intersection of traffic flows to and from developing markets, including India, Africa, Russia and China. Over the coming 10 years, we expect Emirates to retire a significant share of its existing fleet. The Emirates route system is predominantly long haul, with quite a lot of multi-sector routes and a growing share of ultra-long-haul services. Many of the routes thus constitute very long round trips that use a large amount of aircraft time. Across most intra-regional markets, the implied Emirates growth rates are in line with the aircraft manufacturers growth rates, implying a generally stable market share development for Emirates. There are four significant exceptions to this, for which we model Emirates gaining material market share. These markets are between South Asia and North America, between North Asia and the Mid East, between North Asia and Africa, and finally, between Eastern Europe and the Mid East. These are all relatively high-growth developing market routes, where we judge Dubai to be optimally located as a hub. For these traffic flows we think the geographic location of Dubai conveys material competitive advantage to Emirates, which suggests market share gains are not implausible.

What confidence can we have in this benign conclusion?Our conclusion is clearly surprisingly benign for legacy carriers in Europe, North America and Asia. Overall, we expect Emirates to gain market share on growth markets to and from India, which will constrain the opportunities for incumbent legacy carriers, but we do not foresee very significant excess capacity for the industry. We suggest that Emirates existing fleet orders could be absorbed by a network plan that sees Emirates growing in line with the market across most route areas notably those to and from Western Europe and gaining material market share in route areas involving selected developing markets.

Might Emirates be tempted to dump capacity in Europe?This invites the question of how confident we can be that Emirates would not chose to deploy very significant capacity into the affluent markets of Europe if it could get traffic rights weakening European competitors and seeking to grow market share from Europe to the Mid East, South Asia, South East Asia and Australia. We think Emirates will seek market share gains in the markets we identify (India-US, China-Mid East, China-Africa) because we think it would be rational for Emirates to deploy its capacity in markets where it has the maximum competitive advantage. Airlines | Executive Summary | 26 January 2011 6

Emirates has significant competitive advantage in the growth markets we identify

In each of these markets, we think the Dubai hub is optimally located to offer connections. While it will face competition from Doha, Abu Dhabi and Istanbul, we think the larger scale of the hub will offer Emirates scale economies also. Dubai is optimally located to serve these markets. At present, the competitor carriers are financially weak (India), relatively small (Africa) or offer lower standards of service (Chinese carriers). Each of these markets is forecast by Airbus and Boeing to be high-growth market and is thus an attractive market per se, and Emirates has high competitive advantage. By contrast, if we consider traffic flows from Europe to South Asia or South East Asia, Europe is a developed market and as such, Boeing and Airbus forecast more modest growth trends from Europe. As the markets grow, however, we would expect to see new non-stop services overlying hubs. The network positions of the European majors are relatively strong and the networks, cost structures and services levels of the Asian operators are relatively good. Traffic flows to Australia are quite widely dispersed around multiple carriers, since this traffic flow can be served by a wide range of carriers.

European markets are lower growth and offer less competitive advantage

Should Emirates be tempted to chase fifth freedom routes from Europe?Our panglossian view of the future also invites the question of why Emirates again, if it can get traffic rights might not deploy material capacity into fifth freedom markets from Europe. It does, after all, have a track record of deploying significant capacity between Australia and New Zealand, where it has 14% capacity share (OAG Max, September 2010). It is possible that Emirates might look to add some fifth freedom operations through European points to North or South America. However, we would be surprised to see Emirates launch a major capacity expansion in these markets.The three global alliances are strong on the Atlantic, in our view Emirates aircraft have the range to overfly Europe

In the transatlantic market, the three major European airlines are entrenched in global alliances and have strong market positions and strong networks. They are strong competitors with highfrequency operations on trunk routes. Emirates does not need to operate with technical stops in Europe to reach the US or Latin America. With its Australian services, Emirates typically offers a mix of non-stops from Dubai to Australia and a one-stop service through Asia. We imagine Emirates can do reasonably well as a fifth freedom operator between South East Asian points and Australia. Clearly the carrier has toyed with a similar concept to the US, trying a Dubai-Hamburg-New York route alongside its direct Dubai-New York service. It has cancelled the Hamburg-New York sector.

Stopping in Europe offers poor service to high-growth India-US market

Where Emirates offers service to the Americas via points in Europe, it ends up offering a weak two-stop service proposition in the India-US market and non-Dubai Mid East markets. These are the attractive high-growth markets, where Emirates would be discarding a competitive advantage over competing airlines, for the benefit of a few fifth freedom passengers from Hamburg to New York. This does not look like an attractive proposition to us. We also note that any major fifth freedom expansion of service from Europe would see Emirates increasingly exposed to the costs and service levels associated with European infrastructure. This would be not taking advantage of one of its major competitive advantages high-quality, costefficient infrastructure. Were it to operate fifth freedom services from Europe, it could well have to employ more staff locally in Europe, which would expose Emirates to higher-cost labour. We therefore think the rational strategic plan for Emirates should be to maximise its use of its competitive advantages from the strategic location of Dubai, at the crossroads of several key developing markets, its high-quality infrastructure and flexible labour environment.

Operating fifth freedom services would waste the competitive advantages of infrastructure and labour, in our view

Where we might be wrongThere are myriad risks to our somewhat benign conclusion. Our analysis is based on a traffic estimate built off estimated origin and destination breakdowns applied to a hypothetical network and schedule operated by an estimated fleet. It does not take a sleuth the calibre of Sherlock Holmes to spot a potential flaw in the modelling. In defence of the work, we would argue that at each stage we have put together a fleet, network and traffic allocation plan that seem sensible. The fleet and network plan is reasonably balanced


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and produces growth rates that are broadly consistent with the regional forecasts of Airbus and Boeing.

What could produce a less benign outcome for European carriers?Our analysis suggests that it is possible to see a scenario in which Emirates takes delivery of all its ordered aircraft without gravely damaging European carriers. How might this conclusion be wrong?Our fleet plan could be wrong

Our fleet plan could be wrong. Emirates might be planning a slower retirement programme for its older aircraft, it might have earlier delivery dates for its existing aircraft on order and it might make additional aircraft orders that grow its fleet more quickly than anticipated. We think that the recent operational challenges of the manufacturers mean that Emirates is unlikely to take faster delivery of aircraft than we model, but we do not have any great visibility on their delivery schedule. The growth plans of Middle Eastern and Indian low-cost carriers might take market share from Emirates in the India-Gulf market, weakening Emirates position on traffic flows from India to the world and leaving aircraft that we assume Emirates would deploy in the India-Dubai market to be deployed elsewhere. Our hypothetical network development assumes that the UAE is able to negotiate sufficient traffic rights to leverage the potential from the hub location. If traffic rights are restricted in certain key markets, then growth capacity might be redeployed, sub-optimally, into alternative markets, bringing greater competitive challenges on the carriers active in those markets. This could see greater capacity deployed into Europe or, indeed, capacity deployed into fifth freedom markets from Europe. Our hypothetical network development produces a benign outcome for European carriers, but we have not modelled the plans of the three other carriers, which are pursuing somewhat similar strategies, albeit on a slightly smaller scale: Turkish, Qatar and Etihad. The viability of Emirates expansion plans and the impact on legacy carriers outside the Gulf will also be significantly affected by how these carriers develop. Even if Emirates does maintain a policy of maximising competitive advantage, focusing on the developing markets we discuss, we cannot be certain that these other carriers do not destabilise the key markets for European airlines. Our analysis assumes that Emirates is able to gain very significant market share in the South Asia-North America market and also see solid growth from other traffic flows to and from South Asia, including to East and West Europe and the Mid East. Should we see a rapid and successful restructuring of the Indian airline industry and the emergence of one or more significant global players from India, then this outcome would be threatened. We take reassurance that the regional traffic flows we have developed are consistent with the regional traffic forecasts of Airbus and Boeing. The comparison with these data sources drives our conclusion that Emirates will not see significant market share gains in many markets. However, it needs to be recognised that Airbus and Boeing, in developing their traffic forecasts, are not disinterested parties: they are trying to sell aircraft. If their forecasts prove materially inaccurate, then our conclusion that Emirates can absorb its orders without materially damaging the interests of European carriers would no longer be valid.

India-Dubai could become predominantly a low-cost carrier market

Inability to gain traffic rights could drive more capacity to Europe

The Emirates copycats could destabilise the market

The development of a successful Indian airline industry would challenge our thesis

If Boeing and Airbus forecasts prove to be nonsense, then our market share projections will be, too

What could produce problems for Emirates?There are also several factors that could lead to material problems for Emirates, that mean it might be unable to develop its business or see the traffic growth that we envision. The two key risk areas we see in this context are based around geopolitical instability and the A380.A geopolitical crisis in Dubai would threaten the Emirates project ... as would problems with the A380

Should there be significant geopolitical instability in Dubai or the broader UAE, then the whole prospect of Dubais development as a tourist and business hub will fail. Origin and destination traffic will drop and we do not think the Emirates fleet plan could be absorbed purely with a connecting traffic model. Should there be technical or operational flaws with the A380, Emirates business plan would be materially challenged. If the Emirates vision were challenged in one of these two ways, this would be a long-term positive development for European carriers. The short-term consequences would be less predictable, as the Gulf carriers work through whatever shock event might have brought about such a material change in prospects.


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Consequences for European network airlinesSome European carriers are seeking to flag the unfair advantages enjoyed by the Gulf carriers and limit the traffic rights available. Lobbying against export credit has been partly successful. Alliance and network planning can also offer some protection.

How are European airlines threatened by Gulf carriers?Currently the growth plans of Gulf carriers are a potential challenge to all three of the European majors. However, since the European carriers are all exposed to this challenge in different ways, we are reluctant to spell out their relative exposures. Looked at geographically and we think that is the best way to think about airline networks, since neither unpredictable regulators nor aberrant managers can mess with it Gulf carriers are major competitors to European network carriers on traffic flows form Europe to the Mid East, India (and broader South Asia), South East Asia and Australia/New Zealand. They are also emerging challengers on traffic flows from North America to the Middle East and India. Chart 1 : Emirates share of seats deployed in European flag carrier home markets10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% BA/Iberia United Kingdom Source: OAG MAx Germany Lufthansa France Switzerland Austria AF-KLM Netherlands

Chart 2 : European carrier capacity by seat100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LH DOM Source: OAG Max BA EUR AFR SATL IB NATL ME ASIA AF-KL


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Chart 3 : European carrier exposure to Emirates relvant markets14% 12% 10% 8% 6% 4% 2% 0% LH BA ME Source: OAG Max ASIA IB AF-KL

If we consider the markets in which Emirates currently deploys its capacity, there is greater capacity deployed in BAs home market than Lufthansas, which in turn faces more Emirates capacity than Air France and KLM in their home markets.

BA/Iberia current key markets not threatenedIf we consider how much seat capacity of the European carriers is deployed into the Mid East and Asia, we find that the exposures of the three major flags are not significantly different BA has slightly higher exposure, but Iberia has very little, implying the three groups overall are similarly exposed.North and South Atalntic less threatened

For BA/Iberia, we note that India and Australia are important markets for BA and these are contested by Gulf carriers. Emirates also has a lot of capacity deployed in the UK. On the other hand, the most important market for BA is North Atlantic and the most important for Iberia is South Atlantic neither of these markets is relevant to Emirates and as such we think BA/Iberia have certain strategic advantages relative to their peers. However, India is a potential strategic growth market for BA and we think Gulf carrier plans will cap BAs ability to leverage historic and business links and the UKs decent geographic location midway between India and the US.

Indian growth aspirations challenged

Lufthansa suffers from a decentralised home marketLufthansa has quite a diversified network overall, with the notable weakness to Latin America. This is slightly unfortunate, since the Europe-Latin America market is not, in our view, threatened by the Gulf carrier growth plans.Decentralised home market is tough to defend

Lufthansa also faces a particular challenge in its home market of Germany, which as a decentralised market is particularly hard for Lufthansa to control. Lufthansa naturally offers the strongest network and frequencies out of its hubs in Frankfurt, Munich, Zurich and Vienna, but there is a swathe of significant German provincial cities, such as Hamburg, Dusseldorf, Stuttgart and Berlin, where it appears vulnerable to long-haul services by Gulf carriers.

Air France a balanced networkA well diversified network

Air France-KLM has the most balanced network of the European majors, with meaningful exposure on the North Atlantic and South Atlantic markets, which are not threatened by Gulf carriers. Air France-KLM has a very important network in terms of profitability (in our view) to Africa, which is only marginally threatened by Gulf carriers, since routings through the Gulf are circuitous. Air France-KLM is similarly growing aggressively to China and is very well placed with Chinese alliance partners. Again, Gulf carriers offer only a circuitous offering in the China-Europe market. The French air travel market is also highly centralised on Paris, which means that Air France is less threatened in our view by Gulf carrier growth in provincial France than Lufthansa is by growth in provincial Germany.

And a centralised home market


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Threats to both Air France and LufthansaMore broadly, we believe the hub functions of both Air France and Lufthansa are threatened by Gulf carrier growth into secondary cities throughout Europe. Gulf carriers can offer less circuitous routings to Asia from points in Europe to the south and east of the Lufthansa hubs. For example a Venice-Dubai-Bangkok would compare favourably against Venice-Munich-Bangkok. Lufthansa and Air France are also notably disadvantaged on routings linking secondary European points with secondary Asian points. Emirates can offer a one stop service from say Birmingham to Cochin India, whereas Lufthansa and Air France would offer a double connect through their European hub and Bombay or Delhi.

European network airlines will keep up the pressureOur analysis suggests that Emirates might not be a major destabilising force on the industry

We think the conclusion of our detailed network analysis is actually broadly positive for the European flags. We think the Emirates growth plan can be absorbed by the market, with Emirates gaining market share on selected developing market traffic flows for which Dubai is particularly well located. We thus think the Gulf carriers will not necessarily be the major destabilising force on the network carrier industry that some commentators fear. They could, however, have a good chance of taking a disproportionate share of selected high-growth traffic flows. That said, we would expect European and indeed US and Asian carriers to maintain their efforts to challenge the expansion plans of the Gulf carriers. The Gulf carriers are tough competitors. They offer highly regarded customer service that is generally a match for the European network carriers, and operate with lower costs than European network carriers, although Emirates long stage length is responsible, in our view, for a significant part of that difference.

Gulf carriers have high service levels and low costs

Table 2 : Airline quality rankings: Gulf carriers are a match for European flag carriersOverall Emirates Etihad Qatar Turkish British Airways Air France Lufthansa American Delta SIA CathaySource: Skytrax

Long-haul first class **** **** ***** **** **** **** *** ****

Long-haul business class **** **** ***** **** **** **** **** *** ****

Long-haul economy class *** **** ***** **** *** *** *** *** *** **** ****

**** **** ***** **** **** **** **** *** *** ***** *****

***** *****

***** ****

Chart 4 : Emirates has low unit costs, but long sector length10 LH YE Dec09 Passenger CASK (Euro cents) 8 AF YE Mar10 6 BA YE Mar09

4

EK YE Mar10

2

0 2,000

2,500

3,000

3,500 Passenger Length of Haul (km)

4,000

4,500

5,000

Note: Passenger division data for Lufthansa; non-passenger revenues excluded from cost base of other carriers Source: Company data


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Our network model shows Emirates making only moderate market share gains from Europe to South Asia and maintaining stable market share from Europe to the Mid East and Australia. We believe European carriers would sooner see themselves gain market share and Emirates lose share.On India-US, we model Emirates taking share in a market where European majors would like to grow

Our network model shows Emirates gaining material share on South Asia to North America routes. This will be a fast growth market, for which Europe is well located to function as a hub European carriers would like to take meaningful share in this market our modelling suggests they will lose out to Gulf carriers in this market.

Current European strategiesThe European major network airlines (Air France-KLM, Lufthansa and British Airways/Iberia) all seem to recognise the threat posed by the Gulf carriers expansion plans. The Gulf carriers benefit from lower unit costs, offer high service levels and competitive prices, and are growing faster than the European incumbents.European carriers are seeking, where possible, to reduce Gulf carrier cost advantages

The current strategic plans of European carriers focus on attacking certain aspects of the Gulf carriers cost advantages. A prime example is export credit agency financing, which provides advantageous financing to Gulf carriers, which at present is not available to US airlines or carriers from Airbus home countries. The US carriers and main European flag carriers have lobbied to change the rules governing Export Credit Agency financing and the issue was discussed before Christmas at an OECD meeting in Paris. European carriers have also questioned the costs of Gulf infrastructure, flagging that airport and handling costs are substantially lower in the Gulf than in Europe, despite the high investment undertaken at these airports. Some European carriers are also keen to restrict Gulf carriers access to markets: Lufthansa is currently lobbying to refuse Emirates access to a fifth German departure point. Emirates is keen to add service to Berlin in addition to its existing services to Frankfurt, Munich, Dusseldorf and Hamburg. This is a rational move by Lufthansa, in our view. A Gulf connection from Berlin would offer relatively attractive routings for long-haul traffic between Berlin and Asia compared with Lufthansas routings, which involve a circuitous backtrack to Frankfurt or Munich. However, it is indisputable that the strategic expansion plans of the European majors are highly reliant on increased airline liberalisation, both to facilitate their consolidation activities and to generate new long-haul service opportunities to expand their strong long-haul operations. As such, arguing for the restriction of route rights for other carriers is a delicate task. Politically, we judge the European carriers as being unsure of how to portray the Gulf carriers. The European majors do not know whether they should portray the Gulf carrier growth plans as excessive expansion that is doomed to failure. One argument is that the growth plans may even be illusory, and that the carriers will reduce the scale of A380 orders in due course after incremental traffic rights are earned. Alternatively, they might want to portray the Gulf carriers as having genuine business plans that threaten European businesses and jobs, and benefit from certain advantages that they would be seen to characterise as unfair. Meanwhile, the government relations teams of the Gulf carriers are becoming increasingly proactive, seeking to rebut accusations of subsidy and unfair advantage.

Some European carriers are trying to restrict access to markets

Seeking to limit liberalisation of the industry is a delicate matter

Future strategiesLooking to the future, we would expect the defence strategies to become somewhat more sophisticated than the accusations of unfair advantage and calls for protectionism that are dominating the debate over Gulf carrier growth. Although the lobbying will likely continue, too.

Secure partners in the hinterland of the hubsBuilding alliance partners in the hinterland of Gulf hubs seems sensible

European carriers are also building up alliance partnerships in the shadow of the Gulf hubs, in an effort to compete effectively on a network basis. From a network standpoint, we see good sense in European airlines seeking alliance partners in the hinterland of Gulf hubs, such as Kenya (Skyteam) and Ethiopia (Star). We also think it will be particularly important for each alliance to have an alliance partner in India to try to strengthen their network penetration in this fast-growing market, where the Gulf carriers


12

have such a strong position. Star already has an agreement in principle to welcome Air India, while Kingfisher is joining oneworld. It will thus be very important for Skyteam to win Jet Airways into the alliance. Conversely, it would strategically be very beneficial for Star or oneworld if they could secure the partnership of Jet Airways, thus leaving Skyteam in a very weak position in India. Securing alliance partners around the Gulf hubs should allow the European carriers to use these local carriers to access secondary points in the region that act as feeder points for the Gulf carriers. In selling in these markets, the network carriers would have home-country advantage, in contrast to the Gulf carriers, which have to sell on price and product, with less network advantage.

If you cant beat them?Drawing Qatar or Etihad into a global alliance could be useful

One option that might build on the hinterland alliance strategy could be to contemplate allying with either Etihad or Qatar. Emirates has publically stated it does not plan to join a global alliance, but Qatar and Etihad have been somewhat open to bilateral partnerships. Qatar currently has codeshare partnerships with predominantly Star alliance carriers including Lufthansa, United and Asiana. Etihad has codeshare partnerships with a range of carriers across all three global alliances, including American, Alitalia, Asiana, Malaysian and a significant strategic partnership with Virgin Blue. For European majors, partnering with Qatar or Etihad could bring similar network strengths to those enjoyed by Emirates; it could offer a particularly effective alliance strategy for India, which could be of particular interest to oneworld and Skyteam given that Star looks to have Air India on board. Partnering with Qatar or Etihad could however make it tougher to politically lobby against Emirates and seek to restrict route rights for Gulf carriers. That said, given the importance of the Indian market in the context of the global industry and the relative weakness of oneworlds Kingfisher and Skyteams potential Indian partner Jet, losing the right to politically challenge Emirates might be a price worth paying. After all, we believe the industry is on a clear path towards liberalisation. Efforts to limit traffic rights may have some effectiveness in the short term, but ultimately will only prove a delaying tactic.

The move would strengthen the alliance position in India

This would make it tricky to lobby against Emirates But perhaps a price worth paying

Understand which traffic flows are defensibleWe think it is important for European flag carriers to look to defend and grow their strategic positions in markets where they have natural competitive advantage over other carriers generally and over Gulf carriers in particular.The Atlantic looks relatively unthreatened

We thus see good strategic logic in BA/Iberia seeking to build on its transatlantic fortress through partnerships with American and potentially LAN/TAM. The Atlantic is not contested by Gulf carriers today and we would be surprised to see material fifth freedom operations developed even if traffic rights become available. On the flip side, we imagine BA might be looking to build capacity to and from India, given business and cultural links between India and the UK and given Londons position as a decent transit point between India and North America. We think BA will find Gulf carriers very challenging in this context. We see sense in Air France-KLM looking to build a strength market to China, particularly to offset the increasing competition it faces in Africa. Gulf carriers offer a circuitous routing between Europe and China. Lufthansa has already secured its position in Eastern Europe through its partnership with Austrian.

... as does Europe-China

Lobbying efforts will also continueWe would expect European carriers to continue to devote considerable political energies towards the Gulf carriers.Protectionism is a short-term beggar thy neighbour strategy

We do not think efforts to limit Gulf carriers traffic rights will prove successful on a long-term basis the industry trend has been one of consistent gradual liberalisation. However, efforts to delay the granting of traffic rights will delay the impact of incremental competition in specific markets, which can be to the advantage of the home carriers in markets where market access is delayed. Protectionism can be a viable short-term beggar thy neighbour strategy.


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This being the case, we would expect European network carriers to continue to highlight advantages enjoyed by Gulf carriers, in an effort to both even out those disadvantages and delay the granting of traffic rights. Lobbying by European and US network carriers looks to have achieved moderate changes in the OECD agreement covering EXIM financing, which will make export credit funding of new aircraft less advantageous. The European and US carriers are continuing their efforts to further balance this playing field, arguing that airlines based in countries where aircraft are built should also have access to this financing. We would expect European carriers to continue to campaign about the user charges associated with the new infrastructure being developed in the Gulf. We would expect European carriers to emphasise competition against Gulf carriers in their lobbying efforts regarding national aviation taxation and the imposition of the forthcoming emissions trading scheme.


14

A hypothetical fleet planThis section of the report presents a summary of Emirates current fleet and orders and our estimated fleet plan for Emirates to 2020.

Key findings from fleet modellingThe existing Emirates fleet is all wide-bodied, reflecting the predominantly long-haul nature of the network. Among the shorter sectors, many are very high-density routes, such as to India. We would expect the A330s, A340s and older B777s to be replaced by the A380s, A350s and B777s on order. As such, we would expect the average aircraft size to continue to grow. Large aircraft deliver low unit costs. On Emirates long-haul routes, frequency is a less critical factor than it is on high-density, short-haul sectors. Our fleet model assumes the aircraft numbers record a 4.9% CAGR to 2020, growing 6.1% pa to 2015 and 3.7% pa from 2015 to 2020. Taking into account the increasing average aircraft size, our fleet model assumes the seat capacity of the Emirates fleet records a 6.6% CAGR to 2020, growing 9.4% pa to 2015 and 3.9% pa from 2015 to 2020. Our model foresees the Emirates fleet growing from 155 aircraft in 2010 to 249 aircraft in 2020. This is notably more modest than one might expect, given the media discussion around Emirates high-growth plans. This fleet of 249 aircraft in 2020 compares with the current fleet at the Lufthansa Group of 722, Air France-KLM of 593, United Continental of 1,261 and Delta of 821. These figures are boosted by large portfolios of regional aircraft, but the scale of the Emirates fleet, on our modelling, would be modest. We would not be surprised to see the company announce further orders for the second half of the decade and into the next decade. Our fleet model has Emirates ending 2020 with no replacement or growth aircraft on order.

Emirates 2010 fleetAn all-wide-bodied fleet

At September 2010, the Emirates fleet comprised 151 aircraft in service, of which 143 were passenger aircraft. All aircraft are relatively large-capacity, wide-bodied aircraft. The passenger fleet was dominated by 777s, which, in various guises, accounted for 86 aircraft, nearly 60% of the passenger fleet. The Emirates 777 is far from homogeneous. It includes 10 777200LR aircraft, which are the ultra-long-haul aircraft with low seating capacity. It contains a growing fleet of modern 777-300ER aircraft, which are modern high-capacity aircraft, which we see being used by European flag carriers such as BA and Air France to replace aging 747s. The fleet also contains some older 777-200s and 777-300s. The 777s come in a wide variety of two and three class configurations, ranging from the sparse 176 seats on the ultra-long-haul 777LR to 442 seats on the 777-300 in a two-class, high-capacity configuration. The second major type was the smaller A330, of which Emirates has 37 in service. These aircraft operate in both two- and three-class configuration, with capacity ranging from 237 to 278 seats. The third mainstream fleet at Emirates is the A340, with eight of the relatively old A340-300s operated in three-class, 267-seat configuration, and 10 younger ultra-long-haul A340-500s that are configured with 258 seats. This types function overlaps with the 777LR and at the moment the 340-500 does not seem to be typically used on sectors that maximise its range capability.

Currently dominated by the B777

12 A380s in operation at the end of 2010

In September 2010, Emirates had 12 A380s, which are configured in three classes with 489 seats. The aircraft are configured with Engine Alliance engines, so the fleet has not suffered from the recent operational disruption that RollsRoyce*-powered aircraft suffered following the incident with the failure of an engine on a Qantas A380 in late 2010. *RBS Hoare Govett Ltd is broker to this company.

Airlines | Industry Dynamics | 26 January 2011

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Table 3 : Emirates September 2010 fleetManufacturer Airbus Airbus Airbus Airbus Airbus Airbus Boeing Boeing Boeing Boeing Boeing Total passenger Boeing Boeing Boeing Boeing Total cargo TotalSource: ATI, Airbus, Boeing, JPFleets

Model A330-200 A340-300 A340-500 A350-1000 A350-900 A380-800 777-200 777-200ER 777-200LR 777-300 777-300ER

Average age 8 13 6.5 N/A N/A 1 14 13 2 9 3

Seats 237-278 267 258 350 314 489 346 290 176 374-380 358-442

Range 5930 13700 16700 14800 15000 15200 9700 14300 17400 11100 14700

Emirates configurations C27Y251, F12C42Y183 F12 C42Y213 F12C42Y204 N/A N/A F14C76Y399 C42Y304 F12C42Y236 F8C42Y126 F18C42Y320 F12C42Y310 C42Y400, C42Y386, F12C42Y304 F12C42Y310

In service 29 8 10 12 3 6 10 12 53 143

On order 20 50 78 48 196 6 15 21 217

On option 3 10 50 10 5 39 117 0 117

747-400ERF 747-400F 777-200LRF 747-8F

3 10 1 N/A

N/A N/A N/A N/A

9200 8200 9100 14800

N/A N/A N/A N/A

3 3 2 8 151

Our estimated fleet development planWe work using the published orders We assume old planes are retired at 12 years

Our forecast for Emirates fleet is based on the existing published orders for 90 A380s in total, for 70 A350s and for a further 48 B777s. In terms of retirements, we have broadly assumed that Emirates retires aircraft after around roughly 12 years, which appears to be the current Emirates policy. We have assumed that the A380 fleet is phased in relatively evenly over the period to 2020. We assume that A350 deliveries start in 2014, are somewhat heavy in 2015 with 18 deliveries as the last A330s and A340s exit the fleet and then are relatively stable to 2020. We assume that 777 deliveries are weighted to 2013 and 2014, backfilling the retirement of old 777s and A330s. On the cargo side, we assume the 777 freighter aircraft are phased in to 2013, with the 747-800 freighter aircraft being phased in from 2013. However, the cargo aircraft do not form an integral part of the modelling elsewhere in this note, which focuses purely on the passenger business. Overall, this fleet development plan delivers only a 4.9% CAGR in the number of aircraft in the fleet over the 10-year period 6.1% pa from 2010 to 2015 and 3.7% pa from 2015 to 2020. We recognise that Emirates may well buy more aircraft to maintain a higher growth rate in the second part of the current decade and to position itself with orders into the next decade. The current fleet model leaves Emirates with no aircraft on order at 2020, which is likely to be unrealistic. The complete fleet plan is illustrated fully in the Appendix.

Table 4 : Estimated fleet plan summary2010F Passenger total Cargo total TotalSource: RBS forecasts

2011F 155 10 165

2012F 164 11 175

2013F 171 13 184

2014F 182 14 196

2015F 192 16 208

2016F 201 19 220

2017F 208 22 230

2018F 216 23 239

2019F 222 23 245

2020F 226 23 249

146 9 155


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Chart 5 : Estimated year-end fleet plan by aircraft type250 19 16 200 9 150 109 86 88 93 100 113 84 78 72 50 17 29 0 2010F 2011F 2012F 14 66 24 14 29 27 34 10 17 2013F A330 2014F A340 44 10 60 52 5 5 7 23 2015F A350 A380 33 2016F B777 42 55 66 70 90 10 11 14 13 83 94 102 72 66 22 23 23 23

100

2017F Cargo

2018F

2019F

2020F

Source: RBS forecasts


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A review of the 2010 networkThis section of the report reviews the Emirates network as it was in September 2010.

Key network findingsWestern Europe and Southern Asia are the key regions for Emirates at the moment. The most significant countries in terms of capacity allocation are India, the UK and Australia. Emirates operates quite a lot of fifth freedom services, some of which are a function of immature routes (eg Africa), some of which optimise aircraft utilisation (eg Trans Tasman) and some of which appear excessively complex to us (eg Sri Lankan operating patterns). The Emirates network is almost entirely operated on a daily or multiple of daily basis. This would be positive for operational simplicity and marketing connections. Many Emirates routes are operated by a mix of aircraft through the week. This would be suboptimal operationally and from a marketing perspective.

Emirates 2010 networkFigure 1 : 2010 Emirates network

Toronto New York JFK San Francisco Los Angeles Houston

Paris CDG London Gatwick Manchester Newcastle Amsterdam Moscow Domodedovo Glasgow Dusseldorf Birmingham Hamburg London Heathrow Frankfurt Malta Prague Vienna Athens Islamabad Venice Lahore Zurich Delhi Beijing Rome Karachi Nice Ahmedabad Istanbul Madrid Munich Seoul Kolkata Milan Malpensa Damascus Tokyo Larnaca Dhaka Tunis Casablanca Beirut Kuwait Osaka Tripoli Cairo Amman Dammam Guangzhou Shanghai Riyadh Hong Kong Jeddah Peshawar Muscat Sanaa Tehran Manila Dakar Chennai Dubai Bangkok Lagos Khartoum Bahrain Kochi Doha Mumbai Colombo Kuala Lumpur Addis Ababa Hyderabad Abidjan Singapore Entebbe Bengaluru Accra Nairobi Kozhikode Luanda Dar es Salaam Male Jakarta Mahe Island Thiruvananthapuram Johannesburg Mauritius Durban Cape Town Brisbane Perth Melbourne Sydney Auckland Christchurch

Sao Paulo

Source: OAG Max

Network analysis by regionExisting network weighted to Western Europe and South Asia

The Emirates network in September 2010 was weighted towards Western Europe and South Asia. We see this reflecting the current network flows being dominated by leisure and business flows between Europe and Dubai, immigrant worker flows between South Asia and Dubai, and strong visiting friend and relations (VFR) traffic flows between Europe and both South Asia and Australia. 18


Table 5 : Seat departures by regionDeparture region Europe : Western Europe Asia : South Asia Middle East Asia : South East Asia Southwest Pacific Asia : North East Asia Africa : Eastern Africa North America Africa : Southern Africa Africa : North Africa Africa : Central/Western Africa Europe : Eastern/Central Europe Latin America : Lower South America Daily Ssats 12,838 11,635 7,652 5,221 4,832 3,494 2,160 1,834 1,795 1,551 1,356 859 266 Share 23.1% 21.0% 13.8% 9.4% 8.7% 6.3% 3.9% 3.3% 3.2% 2.8% 2.4% 1.5% 0.5%

Note: This segmentation divides Emirates departures by region, excluding Dubai departures. The Southwest Pacific seat departures include Trans-Tasman routes. Source: Seat departure by region, excluding Dubai departures, OAG Max, September 2010

Network analysis by countryBy country, the most important destination is India, followed by the UK and Australia. The network is diversified, covering 60 different destination countries. The importance of India in the network reflects the immigrant worker flow to Dubai and the Mid East as well as VFR flows to Europe. The UKs importance to the network reflects the attraction of Dubais tourist product to UK consumers and Dubais position as a transit point to India and Australia, both important markets for the UK. Table 6 : Seat departures by countryDeparture country India UK Australia Germany Thailand China South Africa Pakistan US New Zealand Italy Qatar Saudi Arabia Sri Lanka Malaysia France Kuwait Maldives Iran, Islamic Republic of Bangladesh Indonesia Philippines Singapore Bahrain Lebanon Nigeria Hong Kong (sar) China Japan Russian Federation Switzerland Jordan Other Daily seats 6,917 5,246 3,357 2,294 1,945 1,751 1,693 1,650 1,624 1,475 1,372 1,240 1,238 1,196 1,092 1,076 1,050 988 972 884 728 728 728 715 647 631 630 624 622 607 581 9192 Share 12.5% 9.5% 6.0% 4.1% 3.5% 3.2% 3.1% 3.0% 2.9% 2.7% 2.5% 2.2% 2.2% 2.2% 2.0% 1.9% 1.9% 1.8% 1.8% 1.6% 1.3% 1.3% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% 16.6%

Note: This segmentation divides Emirates departures by country, excluding Dubai departures. The Australian seat departures include Trans-Tasman routes, as well as services to Asia and Dubai. Source: Seat departure by region, excluding Dubai departures, OAG Max, September 2010


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Network analysis by airportThe leading destination airport in 2010, outside of Dubai, was Heathrow, followed by Bangkok, Mumbai and Doha. Table 7 : Seat departures by airportDeparture airport LHR BKK BOM DOH CMB KHI SYD DEL AKL JNB KUL MEL KWI LGW Name London Heathrow Apt Bangkok Mumbai Doha Colombo Bandaranaike Apt Karachi Sydney Kingsford Smith Apt Delhi Auckland International Apt Johannesburg O.r. Tambo International Kuala Lumpur International Airport Melbourne Airport Kuwait London Gatwick Apt Daily seats 2,070 1,945 1,482 1,240 1,196 1,142 1,119 1,118 1,111 1,092 1,092 1,092 1,050 994 Share of total 3.7% 3.5% 2.7% 2.2% 2.2% 2.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 1.9% 1.8%

Note: This segmentation divides Emirates departures by country, excluding Dubai departures. The Bangkok, Colombo, Sydney and Male seat departures include fifth freedom routes as well as services to Asia and Dubai. Source: Seat departure by region, excluding Dubai departures, OAG Max, September 2010

Fifth freedom operations add complexityA notable feature of the current Emirates network is that there are quite a lot of multi-sector routes, with Emirates selling fifth freedom services between two non-home countries.Multi sector routes are common where routes are developing

It is common for airlines to operate multi-sector services in particularly thin routes, which require a combination of destinations to generate sufficient volume. Emirates operates a couple of typical tag services in Africa (Abidjan/Accra and Addis Ababa./ Entebbe), as well as one in Europe combining Malta and Cyprus. On Australian routes, Emirates typically operates a mix of non-stop flights to Australian destinations and a service operating via points in South East Asia, including Singapore, Kuala Lumpur and Bangkok. Emirates operates a similar combination of direct flights to Hong Kong in combination with a stopping service via Bangkok.

Emirates is a major player in the trans-Tasman market

Emirates also operates very significant capacity between Australia and New Zealand, with daily services between Auckland and Sydney, Brisbane and Melbourne, as well as between Christchurch and Sydney. Finally, Emirates has a mesmerisingly complex operating pattern serving Colombo Sri Lanka, which we suspect is a legacy of the companys past stake in Sri Lankan Airways. Emirates serves Colombo non-stop from Dubai, as a tag beyond Male, as a triangle routing with Male and as an intermediate point on the way to Singapore.

Frequencies consistent; aircraft allocation less soMost routes flown daily or multiples of daily

Across the system, most operations are flown daily or multiples of daily, thus offering consistent connections through the week. There are some rare exceptions that are flown less than daily, including Lahore (four/week) and Dakar (five/week). From a marketing perspective, this is a positive feature of the network. Looking around the network, the allocation of aircraft types to routes is notably less consistent. Many routes are serviced by a mix of aircraft types, with Zurich, for example, being served by A330, A340 and B777 aircraft across its double-daily schedule. Obviously the A330 and A340 aircraft have common cockpits, but mixing 777 and 330/340 operations would be inefficient for crew scheduling, and would add operational complexity at the station. It will likely also be suboptimal for marketing, given the differing aircraft types will have varying product specifications.

Aircraft allocation is far less tidy


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A hypothetical network planThis section of the report uses our estimated fleet plan to develop hypothetical network model in 2015 and 2020.

Key network findingsOur hypothetical 2015 schedule adds 21 new destinations to the Emirates network relative to 2010, with the new points weighted towards China, Japan and Europe. Our 2015 schedule for 60 A380s is weighted towards truck routes to Australia, Europe, the US, China and Japan. We assume a small high-density subfleet deployed to India, Jeddah and Nairobi. Our hypothetical 2020 schedule adds a further 25 new destinations, weighted rather more towards Africa, with a buildout of service in North America and Latin America, provincial India and China, as well as Eastern Europe. Our 2020 schedule for 90 A380s deployed the A380s more intensively to North America and deploys them to Latin America (which would depend on range enhancement relative to early models). The deployment is increased on Western European and Australian routes. The deployment of the high-density version is extended to some major South East Asian points and additional Indian services.

Our estimated network development planAlways wanted to be a network planner

Colleagues who worked with me when I was in the industry will know very well that I always was a frustrated network planner. Lacking both the attention to detail and the political skills to ever acquire a proper job in network planning, it is with great pleasure that in preparing this note I am using the key economists skill, simply assuming that I am head of network planning at Emirates. We do not have access to the detailed databases that proper network managers have and have not developed traffic and financial estimates for each and every route. What we have done is put together a set of routes that seem plausible developments of the Emirates network today. These are our hypotheses Emirates does not disclose publically what its 10-year network development strategy is, which would be politically and commercially unwise. But Emiratess public comments do emphasise the companys plan to leverage the position of Dubai and its proximity to developing markets. We think our hypothetical network is consistent with this. We have looked to simplify the network, reducing the multi-sector operations and have maintained single aircraft types on each route. We have added some incremental destinations in Western Europe and Australia, but most come in the developing worlds of Africa, China and India. We have also grown the companys ultra-long-haul services to the US and Latin America. We have modelled the rotation times for each of the routes, assuming a four-hour layover in Dubai at the end of each rotation. We have not scheduled the fleet to operate, but have allowed a 12% margin to account for heavy maintenance a figure consistent with the 2010 schedule and fleet.

Not all traffic rights may be obtainable

Our network modelling assumes that Emirates is able to negotiate additional traffic rights. We appreciate very well that these negotiations will in many cases prove challenging and that the rights to deliver our assumed network may not be available in the appropriate time. However, should certain routes be unavailable due to traffic rights issues, we would expect Emirates to able to open alternatives. Moreover, we note that the aviation industry has made massive strides towards liberalisation over the past 10 years. While there may be occasions when the liberalisation process takes a step backwards, we are firmly of the conviction that the industry will continue to liberalise over the coming 10 years.

Progress will not be linear, but we expect the industry to liberalise


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The hypothetical 2015 scheduleOur hypothetical 2015 schedule is fully illustrated in the appendix. Figure 2 : New route additions in our hypothetical 2015 network

S t Pete rsbu rg Ed inbu rgh Be rlin Gen eva Ch ica go Bosto n Barce lona Ba ku B agh dad Katm an du M exico C ity D UB AI Goa Ad dis Aba ba Abidja n A ccra En tebb e M ale C olom bo H o C hi M in h T aipe i Na go ya C he ngd u Alma ty S app oro To kyo Ha ned a

D enp assar

W ellin gton Ne w N on -sto p de stin ation Fo rm er tag f ligh t replaced by n on-stop


For 2015, our fleet plan assumes 23 A350s (20 scheduled, after taking into account maintenance needs), 109 B777s (97 operating) and 60 A380s (53 operating). In our modelling, we assume seven A380s are configured in a high-density configuration service predominantly India. The growth to 2015 is weighted towards South Asia and the Middle East, followed by Europe, North Asia and East Africa. Chart 6 : 2015 schedule by region

S AFR NA 3% 5% E AFR 4%

W AFR E EURO LATAM N AFR 2% 3% 2% 2%

W EUR 19%

N ASIA 9% AUS/NZ 4% SE ASIA 6% ME 15% S ASIA 26%



22

What can you do with 60 A380s in 2015?Our modelling of the A380 fleet allocation in 2015 is shown in the following table. At present, some airports listed may not have the capability to handle A380s (eg Lagos, Nairobi), but we do not consider it unreasonable that they might become ready by 2015. Some of the routes shown are beyond the operational commercial range of the early A380s (Los Angeles, Houston). This modelling assumes that improvements to later models will increase the range for these routes. For 2015, we have generally allocated the A380s to trunk European, US, Australian, Chinese and Japanese routes, as well as deploying a high-density version on key Indian, Saudi and East African routes. Table 8 : A380 network allocation in 2015Route Kuala Lumpur-Melbourne Sydney Sydney-Auckland Moscow Cairo Guangzhou Tokyo Haneda Hong Kong Osaka Seoul Shanghai Tokyo Narita Houston Los Angeles New York JFK Johannesburg Bangkok Singapore Lagos Frankfurt Gatwick Heathrow Madrid Manchester Munich Paris Bombay Delhi Jeddah Nairobi Total scheduled Total fleetSource: Company data, RBS forecasts

Region AUS/NZ AUS/NZ AUS/NZ E EUR N AFR N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA NA NA NA S AFR SE ASIA SE ASIA W AFR W EUR W EUR W EUR W EUR W EUR W EUR W EUR S ASIA S ASIA ME E AFR

Aircraft 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 38H 38H 38H 38H

Weekly frequency 7 7 7 21 14 14 7 14 7 7 14 7 7 7 14 21 14 7 14 14 21 35 7 14 14 14 35 35 14 7

Rotation time 01 10 00 01 11 50 01 20 15 00 13 20 00 08 40 00 17 15 01 01 35 00 18 55 01 01 35 01 01 25 01 01 30 01 00 55 01 09 40 01 11 15 01 04 05 00 18 50 00 14 50 00 22 15 00 18 40 00 15 10 00 16 05 00 16 20 00 16 40 00 16 20 00 15 05 00 15 55 00 07 20 00 08 10 00 07 55 00 14 10

Including DXB ground time 01 14 00 01 15 50 02 00 15 00 17 20 00 12 40 00 21 15 01 05 35 00 22 55 01 05 35 01 05 25 01 05 30 01 04 55 01 13 40 01 15 15 01 08 05 00 22 50 00 18 50 01 02 15 00 22 40 00 19 10 00 20 05 00 20 20 00 20 40 00 20 20 00 19 05 00 19 55 00 11 20 00 12 10 00 11 55 00 18 10 54

Aircraft days used 1.58 1.66 2.01 2.17 1.06 1.77 1.23 1.91 1.23 1.23 2.46 1.20 1.57 1.64 2.67 2.85 1.57 1.09 1.89 1.60 2.51 4.24 0.86 1.69 1.59 1.66 2.36 2.53 0.99 0.76

60


23

Key network developments from 2010 to 2015The new routes, frequency upgrades and aircraft size upgrades are summarised in the following table. Table 9 : 2015 network developments over 2010New routes W EUR Barcelona, Edinburgh, Geneva, Berlin Frequency increase Athens, Birmingham, Istanbul Aircraft size increase Paris CDG, Dusseldorf, Rome, Frankfurt, Gatwick, Heathrow, Madrid, Manchester, Munich, Milan, Nice, Newcastle, Venice, Zurich Unchanged Amsterdam, Glasgow, Larnaca/Malta, Vienna

S ASIA

Goa, Katmandu, Colombo and Male delinked

Ahmedabad, Bangalore, Mumbai, Hyderabad, Karachi Kozhikode, Kolkata, Cochin, Dhaka, Delhi, Islamabad, Lahore, Madras, Peshawar, Thiruvananthapuram Amman, Bahrain, Beirut, Damman, Damascus, Tehran, Jeddah, Muscat, Medina, Riyadh, Sanaa Brisbane Hong Kong, Guangzhou, Beijing Mauritius Toronto Cape Town Luanda Cairo Kuwait

ME

Baghdad

SE ASIA AUS/NZ N ASIA E AFR NA S AFR N AFR W AFR E EURO LATAM

Denpassar, Ho Chi Minh Wellington Sapporo, Chengdu, Tokyo Haneda, Nagoya, Taipei Addis Ababa and Entebbe delinked Boston, Chicago

Bangkok, Singapore Sydney, Melbourne, Perth Osaka, Tokyo Narita, Shanghai Dar es Salaam, Khartoum Houston, JFK, Los Angeles Durban, Johannesburg Casablanca, Tripoli, Tunis Lagos Prague

Jakarta, Kual Lumpur, Manila Seoul

Abidjan and Accra delinked Almaty, Baku, St Petersburg Mexico City

Dakar Moscow

Sao Paulo


New destinations for 2015Our network model assumes 21 new destinations over the five-year period to 2015, with five in North Asia, four in Europe, three in Eastern Europe, two each in South Asia, South East Asia and North America, and single destinations in South Asia, Australasia and Latin America. Without looking to justify each route development, we offer a brief comment on each of the new destinations we have used in our hypothetical network: Barcelona: is relatively underserved by network carriers and the local government has stated that expanding long-haul operations is a strategic goal. Qatar currently services Barcelona from Doha. Edinburgh: Emirates currently serves Glasgow, which has a stronger South Asian community than Edinburgh, but Edinburgh is wealthier. We would expect Emirates to increase capacity to Scotland by adding Edinburgh rather than expanding Glasgow. Geneva: Emirates has already announced plans to open Geneva in 2011. As home to several multinational organisations and a financial services hub, it should generate decent inbound flows from the Mid East. Berlin: Emirates has been campaigning with the German government for several years to get traffic rights to Berlin. Goa: is currently served by Qatar from Doha and Air Arabia from Sharjah. Katmandu: is currently served by both Qatar and Etihad, but not Emirates. There is no European flag carrier service into Kathmandu. Baghdad: If the geopolitical situation improves, then Iraq could offer several potential destinations. Emirates has recently announced low-frequency service to Basra for 2011, which is not factored into our network plan. Denpassar: We think leisure traffic flows from Europe and the Mid East should sustain a route to Bali. Ho Chi Minh: We think leisure traffic flows from Europe and the Mid East and business traffic from this fast-growing economy should sustain a route to the commercial capital of Vietnam.


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Wellington: We think Emirates might be interested in diversifying its New Zealand network with a third destination tagged from Australia. Sapporo and Nagoya: We model two new Japanese cities joining the network. Tokyo Haneda: Now that this airport closer to downtown Tokyo is open to international traffic, we anticipate that growth capacity to Tokyo would be deployed here, rather than at Narita. Slots are tough to obtain, but patience and cheque books seem a remarkably successful combination to build slot portfolios around the world. Taipei: Currently cargo services are the main links to the Mid East from Taipei. Boston and Chicago: both have significant populations of South Asian origin. Almaty and Baku: could generate business traffic associated with resources traffic. Mexico City: This would seem to be the second obvious destination in Latin America.

The hypothetical 2020 scheduleOur hypothetical 2015 schedule is also fully illustrated in the appendix. Figure 3 : New route additions in our hypothetical 2020 network

Stockholm Dublin Stansted Brussels Warsaw Kiev Budapest Urumqi Amritsar DUBAI Abuja Phuket Nanjing Xiamen Hanoi

Newark

Washington

Pune

Lusaka Rio de Janeiro Harare

Antananarivo Reunion

Cairns

Santiago

Buenos Aires

New Non-stop destination New destination served by tag flight


For 2020, our fleet plan assumes 70 A350s (63 scheduled, after taking into account maintenance needs), 67 B777s (60 operating) and 90 A380s (80 operating). In our modelling, we assume 10 A380s are configured in a high-density configuration service, predominantly India. The growth to 2020 is weighted towards South Asia and North America, followed by North Asia Europe and South East Asia.


25

Chart 7 : 2020 Schedule by region

S AFR NA 3% 5% E AFR 4%

W AFR E EURO LATAM N AFR 2% 3% 2% 2%

W EUR 19%

N ASIA 9% AUS/NZ 4% SE ASIA 6% ME 15% S ASIA 26%


What can you do with 90 A380s in 2020?And so to the headline question of this note what could an airline do with 90 A380s? Our modelling of the A380 fleet allocation in 2020 is shown in the following table. Again, some airports listed may not have the capability to handle A380s (eg Lagos, Nairobi), but we do not consider it unreasonable that they might become ready by 2020. Further routes shown in the 2020 network model are beyond the operational commercial range of the early A380s (US West Coast, Latin America). This modelling assumes that improvements to later models will increase the range for these routes. For 2020, we have more aggressively deployed the A380s onto long-haul sectors to the US, as well as Latin America. They are more broadly deployed in China, to which we have also added a handful of new European, Australian and South East Asian routes. We have added a further Indian destination to the network for the high-density 380s and added some South East Asian routes to the high-density version.


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Table 10 : What to do with 90 A380s?Route Melbourne-Auckland Singapore-Melbourne Sydney Sydney-Auckland Moscow Mexico City Sao Paulo Riyadh Cairo Bangkok Hong Kong Beijing Guangzhou Tokyo Haneda Hong Kong Osaka Seoul Shanghai Tokyo Narita Chicago Houston Los Angeles New York JFK San Francisco Toronto Johannesburg Hyderabad Singapore Lagos Dusseldorf Frankfurt Gatwick Heathrow Istanbul Manchester Munich Paris Rome Zurich Nairobi Jeddah Bombay Delhi Bangkok Hong Kong Kuala Lumpur Total scheduled Total fleetSource: Company data, RBS forecasts

Region AUS/NZ AUS/NZ AUS/NZ AUS/NZ E EUR LATAM LATAM ME N AFR N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA N ASIA NA NA NA NA NA NA S AFR S ASIA SE ASIA W AFR W EUR W EUR W EUR W EUR W EUR W EUR W EUR W EUR W EUR W EUR E AFR ME S ASIA S ASIA SE ASIA SE ASIA

Aircraft 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 380 38H 38H 38H 38H 38H 38H

Weekly frequency 7 7 14 7 14 7 7 14 14 7 28 14 7 14 7 7 14 7 7 7 14 21 7 7 21 14 7 14 14 14 21 35 14 14 14 14 14 7 7 14 35 35 14 7

Rotation time 01 19 00 01 19 15 01 11 50 01 20 15 00 13 20 01 05 00 01 11 00 00 05 10 00 08 40 01 01 15 01 00 10 00 17 15 01 01 35 00 18 55 01 01 35 01 01 25 01 01 30 01 00 55 01 08 40 01 09 40 01 11 15 01 04 05 01 10 25 01 08 40 00 18 50 00 08 45 00 22 15 00 18 40 00 15 15 00 15 10 00 16 05 00 16 20 00 10 25 00 16 20 00 15 05 00 15 55 00 13 50 00 14 15 00 14 10 00 07 55 00 07 20 00 08 10 00 14 50 00 17 05

Including DXB ground time 01 23 00 01 23 15 01 15 50 02 00 15 00 17 20 01 09 00 01 15 00 00 09 10 00 12 40 01 05 15 01 04 10 00 21 15 01 05 35 00 22 55 01 05 35 01 05 25 01 05 30 01 04 55 01 12 40 01 13 40 01 15 15 01 08 05 01 14 25 01 12 40 00 22 50 00 12 45 01 02 15 00 22 40 00 19 15 00 19 10 00 20 05 00 20 20 00 14 25 00 20 20 00 19 05 00 19 55 00 17 50 00 18 15 00 18 10 00 11 55 00 11 20 00 12 10 00 18 50 00 21 05

Aircraft days used 1.96 1.97 3.32 2.01 1.44 1.38 1.63 0.76 1.06 1.22 4.69 1.77 1.23 1.91 1.23 1.23 2.46 1.20 1.53 1.57 3.27 4.01 1.60 1.53 2.85 1.06 1.09 1.89 1.60 1.60 2.51 4.24 1.20 1.69 1.59 1.66 1.49 0.76 0.76 0.99 2.36 2.53 1.57 0.88 80 90


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Key network developments from 2015 to 2020The new routes, frequency upgrades and aircraft size upgrades are summarised in the following table. Table 11 : Network summary, 2015 to 2020New routes W EUR Stockholm, Dublin, Brussels, Stansted Frequency increase Aircraft size increase Amsterdam, Dusseldorf, Rome, Zurich Unchanged Athens, Barcelona, Birmingham, Paris, Edinburgh, Frankfurt, Glasgow, Geneva, Hamburg, Istanbul, Larnaca/Malta, Gatwick, Heathrow, Madid, Manchester, Munich, Milan, Nice, Newcastle, Berlin, Venice, Vienna Ahmedabad, Bangalore, Mumbai, Dhaka, Goa, Hyderabad, Islamabad, Karachi, Katmandu, Madras, Lahore, Peshewar, Trivandurum Riyadh Bangkok, Kuala Lumpur, Singapore Melbourne Hong Kong, Beijing Guangzhou, Sapporo, Chengdu, Haneda, Seoul, Osaka, Nagoya, Narita, Shanghai, Taipei Addis Ababa, Dar es Salaam, Entebbe, Khartoum, Mauritius, Nairobi, Mahe New York, Los Angeles Chicago, San Francisco, Toronto Boston, Houston Cape Town, Durban. Luanda, Johannesburg Cairo, Tripoli, Tunis, Casablanca Abuja Kiev, Warsaw, Budapest Buenos Aires, Rio de Janeiro/Santiago Moscow, Prague, Ste Petersburg, Baku, Almaty Mexico City, Sao Paulo Abidjan, Accra, Dakar,Lagos Amman, Bahrain, Beirut, Damascus, Damman, Tehran, Jeddah, Kuwait, Muscat, Medina, Sanaa Denpassar, Jakarta. Manila, Ho Chi Minh Sydney, Brisbane, Perth

S ASIA

Amritsar, Pune

Cochin, Colombo, Calcutta, Kozhikode. Male Baghdad

ME SE ASIA AUS/NZ N ASIA Hanoi, Phuket Cairns Nanjing, Urumqi, Xiamen Reunion, Antananarivo Newark, Washington Harare/Lusaka

E AFR NA S AFR N AFR W AFR E EURO LATAM


New destinations for 2020Our network model assumes 25 new destinations over 2016-20, with four in Europe, three in North Asia, Eastern Europe and Latin America, two each in East Africa, South Asia, South East Asia, Southern Africa and North America, and single destinations in Australasia and East Africa. Without looking to justify each route development, we offer a brief comment on each of the new destinations we have used in our hypothetical network: Stockholm: Emirates currently does not serve Scandinavia and this is the first market we model it entering. Norwegian and SAS both serve Dubai, and Qatar serves Doha from Stockholm. Dublin: Aer Lingus served Dubai previously, but has since withdrawn. Etihad currently serves Abu Dhabi, but Dublin is poorly served by long-haul with the exception of the North Atlantic. Brussels: currently served by Etihad, but not Emirates. Stansted: the South Asian community is widely spread across the UK. A third departure point in the London catchment area would not seem unreasonable in this timeframe. Amritsar: currently served by Qatar but not Etihad or Emirates. Pune: Air India serves Dubai but no Gulf carriers operate. Hanoi: Emirates has no destinations in Indo-China at the moment, but we model the addition of Ho Chi Minh by 2015 and Hanoi by 2020. Given the strong economic growth of Vietnam and growing tourist inflows, these assumptions may be conservative. Phuket: This is primarily an inbound leisure destination. Dubai looks well placed to funnel traffic from the Mid East and Europe. Phuket is currently served by Qatar Airways from Doha. Cairns: This is principally an inbound tourist market; currently tourist inflows are weighted towards the Japanese market, but by 2020 it would not seem unreasonable to think the market could sustain service from Dubai, with European and Middle Eastern tourist flows.


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Nanjing: Nanjing is not served by any Gulf carrier, but does have non-stop service to Frankfurt with Lufthansa. Nanjing has an urban population of over 5m and is the second-largest commercial center in the East China region, after Shanghai. Urumqi: Urumqi has an urban population of over 2.5m and is the largest city in China's western interior. Since the 1990s, the city has developed economically and now serves as a regional transport node and commercial centre. Xiamen: Xiamen is not served by any Gulf carrier, but KLM is launching non-stop service to Amsterdam. Xiamen has a population of 3.6m. Reunion: The Gulf looks well located as a hub for traffic from West Europe, East Europe and the Mid East to the islands of the Indian Ocean. At present, tourism to Reunion is very heavily concentrated from France. Should the island diversify its tourism base, looking towards Russia, for example, we believe Dubai would be the ideal transit point. Antananarivo: The capital of Madagascar is poorly served today, with international links principally through Kenya and Paris. Tourism and potential resources could see increasing travel demand. Newark: This could offer an alternative service into the New York catchment area. Washington: It does not seem impossible to us that the US FlyAmerica legislation, which restricts US government travel to US airlines, might be repealed by 2020. There is a strong South Asian community in the Washington area as well. Harare/Lusaka: We think service from Dubai to Zimbabwe and Zambia might serve resources and tourist interest from the Mid East, eastern Europe and China. Abuja: We see potential for an additional Nigerian destination in addition to Lagos, given resources links and the high population of Nigeria. Kiev, Warsaw, Budapest: We see potential for further growth by Emirates into Eastern Europe markets, and by 2020 we imagine the economic environments should be strong enough to support incremental services. Dubai should serve as an attractive hub from these destinations to points in East and South Africa, South Asia, South East Asia, Australia and the Indian Ocean. Routings via Western European hubs would involve significantly more circuitous routes.

There is no shortage of additional potential routesSome of our hypothetical routes will face operational, regulatory or economic challenges But we see a range of potential alternatives

It is clearly plausible that some of the routes we have suggested in our draft network will be unsuitable, due to adverse economic developments, competitor activity or regulatory limitations. We can, however, think of a wide range of alternative routes that might be served by Emirates and would benefit from the connecting opportunities in Dubai. We would suggest that it is even easier to have confidence in the companies ability to deploy its draft 2020 fleet, if we can find a range of alternative destinations to those proposed here. In Canada, we can imagine more than one daily flight to Toronto being supported by the Dubai hub. In the US, the oil industry might support further capacity to Texas, with Dallas a possible destination. The strong economy of the Southeast and considerable South Asian population might make Atlanta a possibility. Miami could also be a possible destination. Latin America might support more service than the four daily flights we have modelled by 2020. Service might initially be developed with an intermediate stop in Africa or Europe.

There are several alternative North American destinations

More African growth could be plausible

In sub-Saharan Africa, our model does add incremental destinations, but if Africas political and commercial environment strengthens and links with the resources hungry economies of China and India develop, then we see considerable potential for further growth destinations in countries such as Malawi, Mozambique, Botswana, Namibia and the Congo. In North Africa, we do not model any new destinations, but we can easily imagine service to Algiers and to secondary points in Egypt. In Western Europe, a single destination in Scandinavia by 2020 looks conservative. We could imagine additional service to provincial UK (eg Bristol, Leeds), France (eg Lyon, Bordeaux, Toulouse) or Spain (eg Malaga, Valencia). In Eastern Europe, we could imagine service being launched into the Balkans (Zagreb or Belgrade), possibly tagged with secondary points in Greece (Thessaloniki) or Turkey (Ankara). We could foresee more service into Russia above and beyond our assumed Moscow and St Petersburg routes (eg Novosibirsk, Yekaterinburg, Nizhny Novgorod).

No shortage of alternative West and East Europe points


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Favourable geopolitical outcomes could open up more points

In the Mid East, we could see further route development into Iran or Iraq, should political conditions normalise. Similarly, under benign geopolitical conditions, there could be potential for greater capacity to Pakistan and new services to Afghanistan. In both India and China, by 2020 we can imagine further provincial cities than those identified here being able to support service. Again, depending on political developments, Burma, Laos and Cambodia could all be potential destinations. In Australia, we could imagine service to Adelaid

2011-01-26 what would you do with 90 a380s

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