Paul Phelan/Dubai
Since its inception in 1985, Dubai-based Emirates Airlines has, on average, doubled in size every three and half years and made a profit in all but its second year of operation. The government-owned airline operates in a market where a high proportion of passengers demand premium-class travel, the industrial environment is trade-union-free, and there has been phenomenal growth in the United Arab Emirates' national economy. These factors have all helped Emirates, while the fortunes of several neighbouring carriers, including Gulf Air, are notably less buoyant.
Despite the success, however, the airline's critics query why a carrier enjoying that enviable business environment, has not fared even better. Yield in the last reporting period dropped by 3.4%, from 8.46ó to 8.17ó per revenue passenger kilometre, as rising costs forced break-even load factors upwards to 66.2%, edging them closer to the carrier's achieved load factor of 68.6%. That outcome was largely offset by a 13.8% growth in passenger numbers, to 2.56 million, and a 20.1% rise in cargo volume, to 130,000t, providing a modest $39 million group profit, of which the airline provided $22 million. Dnata, the group's airport-handling and travel-agency operation, contributed the remaining $17 million.
"They're not large profits, but they're reasonable," asserts the airline's head of corporate communications, Mike Simon. "At a time when airlines all over the world were losing money, we managed to make some - but it's tough in a place like Dubai, which has an open-skies policy, allowing all airlines to fly here, many with fifth- and sixth-freedom rights," he says. The company also cites civil disturbance in some primary markets, and currency movements in India, South Africa and the USA, as well as competition from an unusually large number of competing carriers, as factors holding down its results.
Rate Of Growth
Another factor, admits chief executive Maurice Flanagan, is its rate of growth: "With each phase of our continuing expansion, we have unproductive crew, engineering and other staff under training, which works counter to holding down unit costs. It's been a constant battle, and we've not yet reached a plateau," he says. He believes that the first "plateau" may be reached in three to four years time, when the outstanding Boeing 777s and recently ordered Airbus A330s have been absorbed.
When Emirates was launched in 1985, some 55 airlines were already flying into Dubai, a figure which has now risen to 92. "We came into a crowded market, and we had to be good just to survive - but, while growth within the Middle East airline industry is reckoned at about 7-8%, we're growing at the moment at almost 20% a year, and all our long-term plans show we have a need for all this capacity," says Simon.
Size is not a corporate goal in itself, says chairman Sheikh Ahmed Bin Saeed Al Maktoum. He adds: "It has been suggested that, in the present state of the airline world, with two of the world's biggest carriers recently announcing an alliance to create one of the largest-ever route networks, there is not much room for smaller airlines like Emirates. We have never accepted this policy of survival of the biggest as a criterion for our future in commercial aviation. On the contrary, it has always been our belief that our size enables us to offer a more personal, higher-quality, product to our customers."
While Flanagan believes that some further expansion can still provide economies of scale, he is undaunted by globalisation trends, being convinced that there is a turning point beyond which costs are increased by growth."I think globalisation, the way it's developing and the way that it's usually understood - that is, involving equity and cross-integration across international boundaries - is just a euphemism for cartels. They've been with us since Roman days; they don't really compete, they carve the market up between themselves, and you can see that happening," he says.
"I don't blame the airlines involved; it's the responsibility of the management of British Airways [for example] to go to the extent that the regulations permit, and they're doing that. The argument raised in favour of globalisation is that it gives the market a better deal because the bigger the organisation, the lower its unit costs will be on account of economies of scale. That's baloney; there are almost no economies of scale in the airline business. The bigger the airline grows beyond a certain size, the higher its costs and, therefore, the higher its prices, because administrative complexity increases exponentially beyond a certain point. The only way that position can be sustained is by putting small, efficient, airlines out of business."
Flanagan adds that Emirates is so convinced of this philosophy that it now has an economist, John Stone, studying the phenomenon at Cranfield College of Aeronautics in the UK.
The airline has already taken delivery of three of a new order of seven Boeing 777s and holds a further seven options before 2000. Despite a low average-fleet-age of around five years, it has now ordered 16 Airbus A330-200s as replacements for its fleet of ten Airbus A310s and six Airbus A300-600s, which are being returned to the manufacturer as part of the deal.
Route Expansion
The $1 billion 777 order, committing funding drawn from a wide spread of institutions in Asia, Europe, the Middle East and the USA, is aimed at expected route expansion, while the A330s it has selected to replace its A310s and A300s will boost capacity on existing routes, which are still showing strong growth. Flanagan indicates firmly that, contrary to persistent speculation, the airline is not in the market for narrowbody jet airliners.
Highlighting its focus on customer service, Emirates says that it is now the only carrier in the world to have installed personal videos in every seat, in all three classes, on every aircraft in its fleet. It also offers on-board telephone and facsimile services. On the 777s alone, the company spent $2.5 million per aircraft on in-flight entertainment systems, a process which has not been trouble-free, notes Simon, referring to a series of breakdowns which has dogged the introduction of the GEC-Marconi Inflight Systems equipment with Emirates and other carriers. "Like other people, we've had a few snags during the introduction. Even today, we have an engineer on board making sure that if we have any problems we solve them on the spot, but the product support has been excellent."
Although it is not mandatory in the UAE, the group began publishing audited annual reports in 1995, both to counter public comment on its results and to provide information for financial institutions.
"Many people think that, because we're owned by the Dubai Government, we have a non-stop flow of money to keep us going. On the contrary, we're expected to be good, to look good, to make a profit, and to run as a commercial concern, which is as it should be," says Simon. "We don't expect or receive any support from the Government. We believe in the open-skies policy, and we wish that other countries would also believe in it. In the Singapore case, open skies means that, if the country they're dealing with restricts Singapore Airlines, then Singapore will equally restrict that Government's airline. Here, open skies means that, even if we're restricted in another country, that country's airline is not restricted here. That's how it should always be."
In the past 12 months Emirates has opened routes to Johannesburg, South Africa; the Coromos Islands; Nairobi, Kenya; Ho Chi Minh, Vietnam; Melbourne, Australia; Kuala Lumpur, Malaysia; and Yemeni capital Sanaa. African growth since has already prompted a fourth service to Johannesburg and a fourth to Nairobi, says Simon. He adds: "We've found enormous potential in Africa from the Middle East. Besides the expatriate population aspect, there is a growing business link; South Africa has opened its doors to everybody, and there's considerable interest from South African businessmen in the Gulf, and also there's the natural holiday traffic between the two centres. Dubai is also becoming a significant tourism destination in its own right."
Emirates Initiative
A relatively young airline, Emirates claims that one of the advantages it enjoys is that of having started from scratch and without the pre-conceptions which may stifle initiative. "I think when you compare airlines, you have to recognise that, in 1985, we were able to buy in quite experienced management people. They didn't try to re-invent the wheel, but, because we were starting with a blank sheet, they also didn't fall into traditional ways. Instead, they were able to do things the way they'd always wanted to do them," he says.
For example, Emirates carefully studied the possible advantages of contracting out heavy maintenance, but decided against it, says Flanagan. He explains: "There are two sides to that. You might secure a saving in cost if you get somebody else to do it, but your lack of control can then mean the fleet utilisation you achieve might be gained at the cost of dispatch reliability, so we've invested a lot in maintenance facilities. We get the highest possible utilisation and dispatch reliability as a result of investing in our own capability instead of having someone else do it. We've been achieving 13-14h [daily utilisation per aircraft] on the A310s, and we've had the 777 at over 15h [per day]. If you can get another 20min utilisation a day out of the aircraft, you have swept aside any cost savings you might achieve through outsourcing."
Sheikh Maktoum says that Emirates' long-term plans include "…our objective to be a medium-sized airline with a global network by the turn of the century".
Source: Flight International
