The Sky’s the Limit
A replica British Airways Concorde has long greeted motorists on the approach roads to Heathrow airport. No longer. The space has been emptied to make way for a double-decker Airbus A380 flying the colours of Emirates, the Dubai-based airline.
It says much about Emirates and its mission to conquer the world. Concorde represents aviation’s past hopelessly fuel-hungry, carrying a maximum of 100 passengers, a state-sponsored, commercially doomed Franco-British dream of the 1960s and 1970s. The A380 is the future, transporting more than 600 passengers over vast distances with greatly reduced fuel and maintenance costs.
Grabbing Heathrow’s prime advertising site was a typical Emirates stunt. The airline allocates huge sums to marketing $300m (Pounds 150m, e220m) in 2006 alone in a none-too-subtle bid to make its name stand out in its target markets. The airline’s name formerly graced the Chelsea football strip; now Arsenal battles it out in the Emirates Stadium. The carrier also sponsors the Melbourne Cup, Australia’s premier horse race; Emirates Team New Zealand is defending the title in this year’s America’s Cup yachting contest in Valencia, Spain; and the Emirates-backed Australian cricket team has recently retained the Cricket World Cup in the Caribbean.
Rivals grudgingly concede that Emirates is a remarkable success story. Created just 22 years ago with $10m in start-up capital from the Dubai royal family, Emirates is already the world’s eighth largest carrier, with 102 aircraft, and has a further 107 planes worth $30bn on order, including 45 Airbus A380s, the biggest single order for the much-delayed airliner.
Emirates’ 2006 financial results, released last week, show that net profits soared 23.5% year-on-year to $942m, in spite of sharply- higher oil prices, on revenues of $8.5bn. That already makes it half as big as BA, which has a fleet of 236 aircraft, carried 36m passengers last year and made a pre-tax profit of Pounds 620m in the year to March 2006 on sales of Pounds 8.5bn. Emirates will be taking delivery of a new airliner a month for the next eight years, inexorably closing the gap with BA and other long-established national carriers.
The airline carried 17.5m passengers last year, 3m more than in 2005, and is already reaching the limits of capacity at Dubai airport. Its growth strategy is heavily reliant on a second airport under construction at Jebel Ali, a district of Dubai 40km from the existing airport. It will have six parallel runways and is due to open in phases between 2008 and 2017. Between them, the airports will be able to handle 140m passengers a year, double the number at Heathrow.
Emirates’ rampant growth has brought cries of “foul” from competitors, not least Qantas, the Australian carrier, which has not taken kindly to the Middle Eastern airline’s encroachment on its territory. Emirates operates 49 daily flights between Dubai and key Australian cities largely for British travellers and has just won clearance to increase services to 84 daily flights. Qantas has accused Emirates of dumping capacity to destroy competition and is fond of alleging that the carrier is buoyed by secret subsidies from its royal owners.
It is fair to say that Emirates is not like other airlines. It is 100% owned by the Dubai royal family, led by the crown prince, whose uncle, Sheikh Ahmed bin Saeed Al Maktoum, is chairman and chief executive of Emirates and president of Dubai Civil Aviation. Emirates’ subsidiary, Dnata, runs all the ground-handling, freight and catering at Dubai airport, down to the local Costa Coffee franchise.
Margaret Jackson, chairman of Qantas, caustically remarked: “Life must be wonderfully simple when the airline, government and airport interests are all controlled and run by the same people.” For good measure, no corporation tax is payable in the United Arab Emirates and strikes are banned.
The Dubai carrier insists that it is run on commercial lines with no government help. It receives no fuel discounts (another common jibe); indeed, fuel, at 29% of revenues ($2bn a year) is far and away the biggest drag on profits. Profits from non-airline activities are a useful sweetener, but not make-or-break: of Emirates group profits of $942m in 2006, Dnata contributed about $98m.
As a relatively new airline, Emirates is free to grow and to run at maximum efficiency without the legacy costs and unionised mentality of quasi-state (though nominally private) carriers such as Qantas and BA.
But it undoubtedly helps to have the Dubai royal family in the background when tapping the markets for credit (it helps explain how a company with $8.5bn revenues can secure credit facilities of $30bn). It is also undeniable that Emirates is a key part of the masterplan that is turning Dubai into a commercial and tourism powerhouse. Yet in other respects, Emirates is simply a very efficient, ruthlessly focused business.
In turning out record growth, Emirates is setting itself up for a fall. Setbacks in production of the A380 the first Emirates delivery was put back 22 months to August 2008 have impacted on the carrier’s strategy of shifting its fleet mix towards bigger, more fuel-efficient aircraft. It benefits at present from having one of the youngest fleets of any airline an average age of five years three months compared with about 16 years for the industry. Newer aircraft mean greater reliability and lower maintenance. As the age creeps up, expenses will rise and cabin interiors will grow tatty.
The biggest threat to Emirates lies in its own backyard. In Abu Dhabi, two hours’ drive down the coast, a new carrier, Etihad Airways, is playing Emirates at its own game. Set up three years ago, Etihad the name is Arabic for United has an even younger fleet, equally deep pockets and a similarly aggressive marketing strategy. Etihad and another regional rival, Qatar Airways, are spending millions of pounds promoting similar “one-stop” services between Britain and Australia.
Tim Clark, Emirates’ British-born president and operations frontman, claims to be relaxed about the local turf war. Abu Dhabi, like Dubai, is in the grip of a vast construction programme involving a new airport along with the obligatory skyscrapers and port facilities. Abu Dhabi has committed to infrastructure projects worth $236bn; Dubai, a traffic-clogged construction site, is sinking another $200bn into the desert sands. Transporting the thousands of workers sucked in by this construction maelstrom will keep regional carriers busy for years, Clark believes.
He claims that what keeps him awake at night is not Etihad or attacks by rivals, but the logistics of trying to juggle so many aircraft at Dubai’s near-saturated airport. There are also fresh cities to conquer: while BA, Virgin and the US carriers battle it out on the transatlantic, the Dubai carrier is actively targeting the world’s two great boom economies, China and India. It is about to launch its second daily service between Dubai and Beijing the inaugural service was full from day one and has already built a substantial feeder system into India.
From Dubai, connecting passengers can fly non-stop to New York, bypassing Europe. This summer, the airline is launching its second US service to Houston, Texas; at 17 hours, one of the longest non- stop legs flown by any airline. Etihad and Qatar are launching similar US non-stop services.
Future orders will almost certainly include the Boeing 787 Dreamliner, an aircraft with 40% lower maintenance costs and up to 30% greater fuel efficiency than existing airliners. Airbus is rushing to catch up with its own product, the A350; Emirates is playing each side off against the other.
The battlelines for the next big aviation clash have already been drawn. Those in the winning cockpit will be a band of new, ruthlessly efficient Middle Eastern airlines, with none of the problems that plague the West’s ageing and troubled carriers. For airlines such as BA and the US carriers, the writing is all too visibly on the wall.
(c) 2007 Sunday Business; London (UK). Provided by ProQuest Information and Learning. All rights Reserved.