Not yet 20 years old, Dubai's flag carrier Emirates is still growing at a fierce pace. The carrier's leadership team believes that the growth of both Dubai and its flag carrier is far from over
While almost everywhere else in the industry airlines are preoccupied with cost-cutting and consolidation, there is at least one carrier for which the rule apparently does not apply. Emirates has continued to grow at breakneck pace despite the downturn - signing up for an astonishing $26 billion worth of new aircraft earlier this year, including $19 billion at the Paris air show alone. The question on many lips is just how much longer this remarkable and apparently profitable growth can keep rolling.
For its part, Emirates is used to confounding the sceptics. Having started from humble enough beginnings back in 1985, built on the base of the local Dnata travel management business in the tiny and relatively oil-poor emirate of Dubai, the carrier has in the space of less than 20 years emerged as a $3 billion aviation group. At its helm then, as now, was chairman Sheikh Ahmed bin Saeed Al-Maktoum, a member of Dubai's ruling family, together with managing director Maurice Flanagan, an experienced aviation hand and former British Airways executive, who was originally running Dnata. Neither seems to hold much doubt that the Emirates story is far from ended.
This year's massive aircraft order - the largest in the history of civil aviation - leaves little doubt about its future ambition. At Paris, Sheikh Ahmed put his signature to orders for 21 new Airbus A380s, adding to the 24 already Dubai-bound. He also tacked on 20 A340-600s, added two to its previous order of six ultra-long-range A340-500s and, perhaps to be even-handed, also took 26 Boeing 777-300ERs.
The order is all the more extraordinary for an airline based in as tiny a home market as Dubai, which counts only 1.2 million residents. The implication is that the bulk of the airline's traffic must be based on hub connections - a business model over which even key supplier Boeing has raised doubts, with its emphasis on the virtues of long-haul point-to-point.
But Flanagan plays down such concerns. To start, he argues that the portion of connecting passengers, while something of "a movable feast", is not as high as many believe, suggesting a figure somewhere around 40%. This may sound suspiciously low for a carrier which is likely to carry close to 10 million passengers this year. In any case, its ratio of connections is almost certain to rise as the new capacity comes on line. Yet the growth of Dubai as a destination is key and should not be underestimated. The city, like Emirates itself, has been growing with incredible pace, and to understand the carrier, it is first necessary to understand the dynamics of its home base.
The story dates back to the 1980s when Dubai, unlike many of its neighbours, was forced to face up to the fact that its petroleum reserves were in terminal decline and could not be relied upon indefinitely to fuel the country's economy. The ruling Al-Maktoum family instead set its sights on a strategy of growth through diversification. The plan, which meant exposing its population to Western lifestyles to a degree that most neighbouring states would never consider, centred on making Dubai a business and tourism centre. It is not unlike the model of Singapore, a city-state that has boomed despite a lack of natural resources. As Flanagan has been fond of stressing in the past, Dubai can be seen as the Singapore of West Asia rather than simply a hub for the Middle East.
The strategy appears to have worked. Most companies doing business in the petroleum-rich Gulf now as a matter of course establish their regional base in Dubai,
"Companies come to use the city as a base for Middle East operations because it's a good place to live - people can send their kids to school here, it's got good health care, their families will be happy," says Sheikh Ahmed. "The conditions for business are positive and it's easy to travel to and from".
Dubai's liberal tolerance has also played a role in its soaring tourism industry. In 1991, with only around 800,000 visitors staying in the city's hotels, the government made it a national priority to increase this figure. And it spent prodigiously to do so. This effort included building the Burj Al-Arab, the self-styled "world's first seven-star" hotel. Constructed in the form of a sail from one of Dubai's classic dhow sailing boats, the Burj has become the city's icon, even appearing on its car licence plates. It is also a symbol which crowns the success of the national tourism campaign, as last year Dubai's hotels hosted over 4 million foreign visitors, having averaged 22% annual growth during the previous five years.
It is no surprise, then, that Sheikh Ahmed should say: "It is a good time for an aviation company to be based in Dubai." With his carrier's growth mirroring that of the city, he would seem to be right. Emirates has posted 19% annual growth in passengers over the past five years, welcoming 8.5 million people aboard over the last 2002-3 financial year to March, up from 4.3 million five years ago.
And the aim is to accelerate the growth of both the city and its airline. The plan is for the number of hotel visitors to increase to 15 million by 2010, and business and residential growth to keep pace. Sheikh Ahmed highlights the developments of the past three years, created by a $28 billion investment programme. These include the construction of facilities to promote regional expertise in the areas of health and knowledge, technology, and of course tourism, as well as endless new property developments. Among them is the construction of a skyscraper that will take aim on the mantle of the world's tallest. A $4.1 billion expansion of the airport is also a critical part of these plans. It forecasts that the number of passengers using the 24-hour hub will increase from 18 million this year to 70 million by 2015, which, if realised, would take it towards the top of the world ranking.
The transfer equation
But origin and destination traffic is indeed only part of the picture. The carrier plans to use Dubai's geographic location at the centre of global flows from both east-to-west and north-to-south to make it one of the world's pre-eminent long-haul hubs. Here the A340-500 is key. With the 16,000km (8,650nm)-capable, 258-seat aircraft in its fleet, Emirates will be able to deliver on its service goal of: "from anywhere in the world to anywhere else, with a stop in Dubai".
Flanagan jokingly admits that the slogan is not quite true, since the Galapagos Islands will fall outside the aircraft's range. But he point out that Emirates would be able to connect Dubai with both Australia and the USA. Indeed, those nations are likely, he says, to be the first destinations of the new type. Sydney services are scheduled to be launched on 1 December, with New York Kennedy in June and Los Angeles or San Francisco to follow.
Emirates also contends that the nature of its connecting traffic is different. Typically, airlines carry sixth-freedom traffic to make up volume at prices that often barely cover marginal cost. However, in its case, argues Emirates, the futuristic airport with its famous duty-free has itself become a magnet of sorts, with travellers from all over making it their transfer location of choice. Also, Sheikh Ahmed says, passengers within the region use Dubai as their preferred intercontinental gateway. Flanagan stresses that the airline is not simply about volume. "We're not a low-cost provider, we provide a high-value service," he says, pointing to the fact that Emirates is one of the few carriers to post a yield rise, even with the additional long-haul capacity it continues to introduce.
Aircraft range also plays into the carrier's other fleet acquisitions, including the move to take eight A340-300s on 9-10-year lease from Boeing Capital. These were the aircraft that Boeing originally bought back from Singapore Airlines to make way for a major 777 order. With all the aircraft coming on line in the near future, the announced deal raised eyebrows throughout the industry, but Flanagan says simply: "We need the capacity, we don't have enough to satisfy present demand." He adds that the 267-seat A340s will serve missions which the other in its fleet at present cannot. "We'll use them to serve Vienna, Lagos, Accra and a few other African cities. The 777-300 is a great eight-hour aircraft, but we needed a 10-hour aircraft," he says.
There have been rumours that Emirates would be adding narrowbody aircraft to its fleet, which would seem to make sense for its network of 13 intra-regional destinations. Flanagan, however, spikes this idea, on grounds of additional cost and lack of room for cargo, which accounts for almost 20% of airline revenues. "In net terms, it works out better for us to have an all widebody fleet. It cuts down on costs for spares and training and so on. Plus the additional cargo capacity makes a big difference for us," he says. "We call it the intentional misapplication of capacity," he laughs. "Except it turns out to not be misapplied."
The aircraft generating the most interest, however, is the A380, which the carrier is ordering in three configurations: normal, long range and high density. The last of these would seat around 650 passengers. Overall, Emirates estimates will feature 12% unit cost savings on the 777-300, its next-biggest model.
Sheikh Ahmed says the ultra-jumbos will provide lift to such capacity constrained airports as London Heathrow where, Flanagan adds, Emirates would put two of the type today if it had them. Also on the list are Sydney and Tokyo, where Emirates has, in fact, yet to obtain slots. "This situation will only get worse with time," Sheikh Ahmed says. "We need bigger aircraft."
Perhaps the biggest natural market for the aircraft, is that to the Indian subcontinent. Not only does Dubai have massive numbers of guest workers from India, Pakistan and Bangladesh - as do neighbouring emirates Abu Dhabi and Sharjah - but immense numbers also transit through Dubai to those countries from the UK and elsewhere in Europe.
Sheikh Ahmed is quick to point to the importance of the link with India. "There are Indian families who have been doing business in Dubai for over 100 years. The trade links between the two are well established," he says. "Go to the Creek," he adds, alluding to the waterway running through Dubai on which dhow merchants, largely from India, have for centuries conducting a thriving trade. It is perhaps the one constant in a city that has made change its mantra. "It's not the most organised shipping line, but they're carrying everything through there, from computers to tires to cars to PVC. It's a big business," says Sheik Ahmed. "People may not know what's happening there, but we don't operate in isolation of that spirit."
But whatever the historic ties between India and Dubai, their current air service agreement restricts the number of seats flown between the two, rendering the A380 an inviable option for now. This is plainly a sore spot for Flanagan, not only for the impact it has on Emirates, but also for India, where he spent three "very happy" years earlier in his career. "The suppressed demand for traffic to and from India is enormous, but they are restricting the number of seats we can fly," he says. "It isn't helpful to their economy, nor their fabulous tourism potential. With liberalisation, Air-India would be a huge airline - they would need 400 widebody aircraft. As it is, they're a small airline."
The industry has noted that signs of reform are beginning to emanate from Indi's civil aviation department. It has initiated a review of the sector and recently begun to discuss liberalising its air service agreements with countries of the Asia Pacific Economic Cooperation grouping. So perhaps Emirates' high-density A380s will yet serve this high volume, low-yield market for which they would appear ideal.
Subsidy allegations
Emirates itself is no stranger to accusations of unfair government aid. Rival carriers, especially within the Arab world, have long grumbled about the Dubai carrier benefiting from government largesse.
Sheikh Ahmed shrugs off such allegations. "To us, it's something that airline chief executives bring up to make them look good in front of their governments or boards of directors. They cannot compete and they blame subsidies for their failures," he says, adding that the charge is groundless. "Look at our fleet. The Dubai government couldn't cover our cost of developing it, even if all our oil revenues went to pay for it. Or look at our financing: ask any of the banks that we deal with, they can tell you that the government not only puts forward no money, they don't even guarantee any of our purchases."
Flanagan adds that the subsidies enjoyed by the carrier began and ended with its formation. "In 1985 the government gave us $10 million, two Boeing 727s and the building that now houses our training centre, and told us not to come back for more," he says. The government did, however, endow its new national carrier with a gift too often lacking in other countries, especially those in the Arab world. "What it gave us," says Sheikh Ahmed, "was the freedom to operate as we wanted and to grow as much as we wanted."
This freedom, both agree, has allowed the airline to operate profitably and fund its own expansion. "Our last losing year was in 1986, and our return on capital employed is over 30%," Flanagan says, adding that the figures should not be in dispute. "We were the first airline in the region and first company in the United Arab Emirates to publish audited annual reports."
For the 2002-3 fiscal year, the figures show a group net profit of $285 million, up 74% on the previous year. The first half of the latest year shows continued improvement. Even with the effects of the war in Iraq and SARS, the carrier logged a half-yearly profit of $167 million, up 51% on a year earlier.
Most of the time, the talk of subsidy matters little, with the airline's management putting it down to sour grapes. "There are many carriers in the region that are subsidised, including many that complain about us being subsidised," says Flanagan. "But we don't care. Airlines that are subsidised are always less efficient."
There are times, however, when such talk does matter, specifically when it is used as justification to deny the carrier access to key markets, especially within its home region. This is particularly galling to Emirates, as it reports that Dubai has never offered its flag carrier protection on the competition front. As a result, says Sheikh Ahmed, who also serves as president of the Dubai civil aviation department, Emirates must operate in among the most open regimes in the world. The airport has 104 scheduled carriers, serving 174 international destinations.
The irony of the subsidy charge by carriers whose governments deny access to Emirates is not lost on Flanagan. "The biggest single subsidy," he states, "is protection against competition."
Sheikh Ahmed
HH Sheikh Ahmed bin Saeed Al Maktoum is the younger brother of the late ruler of Dubai. His career in the aviation industry began in 1985, when he was appointed president of the emirate's civil aviation authority and chairman of its then-nascent flag carrier, Emirates.
Under his command, the airline has grown from a three-destination, two-aircraft entity to one that serves 64 markets with a fleet of 51 aircraft, and recently placed the largest set of orders for new aircraft in the history of civil aviation.
Sheikh Ahmed, who is not married, was born in a traditional Arab fort, but was educated in England and received his graduate education in the USA at the University of Denver.
Flanagan
Maurice Flanagan has been with Emirates since its inception in 1985. He has been based in Dubai since 1978, when he took up the reins at Dnata, the local travel services management company, which is still part of the Emirates group.
Flanagan's career in the airline industry began in 1953, when he started at British Airways predecessor BOAC as a trainee. In 1974, he advanced to take up a position in BA's senior management circle, where he remained until his departure for Dnata.
Flanagan, who turned 75 in November, says of his age: "In Europe, I would be regarded as well past my sell-by date, but happily Arabs take a different view of these things."
Source: Airline Business
