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A fine-tuned business model, improved processes, more mature internal structures and more efficient hub operations in Dubai could make Emirates an even greater threat to European and Asian legacy airlines.
Since it was set up by the government of Dubai in 1985, Emirates has grown into the world’s largest carrier on international routes in terms of revenue passenger miles. Its track record and its 2010 multibillion-dollar orders for another 32 Airbus A380s and 30 Boeing 777-300ERs announced at this year’s Berlin and Farnborough air shows have made it—and to a lesser extent its Persian Gulf region peers, Etihad Airways and Qatar Airways—the largest concern for its overseas rivals in the long-haul sector.
Carriers such as Qantas, Lufthansa, Air France and British Airways say Emirates benefits to a large extent from government support. “We have no level playing field; competition is severely distorted,” Lufthansa Deputy CEO Christoph Franz says. But many analysts, consultants and business partners are convinced that Emirates’ success cannot be explained by state subsidies. They say it is based on factors such as geography, globalization, low regulated costs (airport and air traffic control charges), cheap labor and efficiencies built into the business model. “Emirates is not a government company, it is a commercial company,” says EADS’s head of strategy, Marwan Lahoud. “Emirates is a cash machine, which drives its European competitors—which are not—nuts.”
In fact, many say that in spite of its impressive financial performance—achieving close to a $1-billion operating profit or a 9.1% operating margin in 2009 alone—and strong growth, Emirates could still improve the structure of its operations.
Unlike many of its competitors, Emirates enjoys almost unlimited political support from the local government. Dubai ’s ruling al-Makhtoum family wants to continue to turn the emirate into a major financial and trade center. Having been identified as an important tool for economic development, the airline in general gets the infrastructure it needs. A third giant concourse is being built at Dubai International Airport just across the road from the Emirates headquarters. The building, to be completed in 2012, will be the new home for the carrier’s growing fleet of Airbus A380s. The airport is estimated to be able to handle up to 100 million passengers toward the end of this decade, as operator Dubai Airports is looking at ways to further increase capacity.
The first stage of Dubai World Central Airport also opened this summer—the facility could handle up to 160 million passengers annually once fully developed. With no nightly curfew, it is often busier at night than during daylight hours. It is that support that sets the stage for the Emirates growth story.
A closer look at Emirates’ cost structure reveals that the company benefits mainly from lower fees and wages and operational efficiencies at the airport and in the network. The Arthur D. Little consultancy estimates that Emirates has a unit cost advantage of 30% compared to a European legacy airline, not quite as much as the 40-50% reached by European low-cost carriers. But, given that many of the LCC advantages cannot be brought to bear nearly as well on long-haul as on short-haul routes, the achievement is all the more substantial.
Because there is no income tax in Dubai, Arthur D. Little estimates that Emirates pays 48% less for labor than Air France, British Airways or Lufthansa do in their regulatory regimes. While Emirates President Tim Clark says the airline makes sure that it is always among the top eight carriers worldwide in terms of pilot pay, Emirates also takes advantage of the typically very low Dubai pay levels for less qualified workers. Consequently, labor accounts for just one-third of the carrier’s total costs.
Another factor working in Emirates’ favor is that Dubai Airport charges 78% lower fees for an Airbus A340-300 than an airline would have to pay in Frankfurt , Lufthansa’s main intercontinental hub, according to Arthur D. Little data. However, as Emirates pays the same as other airlines at the other ends of its routes, the actual benefit is calculated at 39%.
While some argue that the carrier also has access to cheaper fuel, Emirates categorically denies that. In fact, Clark points out that due to a lack of nearby refining capacity, fuel can actually be more expensive at its home base than abroad.
And geography benefits Emirates in that it does not need an expensive short-haul feeder network and it has almost no ultra-long-haul services, except some flights to the U.S. West Coast, South America and Australia ’s east coast. Its average stage length is 4,900 km. (2,640 nm.), compared to around 7,000 km. for the Lufthansa and Air France long-haul fleets. That allows Emirates aircraft to operate at the most efficient sector lengths—8-10 hr., depending on type—and land before the flights become really expensive.
All of Europe, Africa and Asia are within 10 hr. of Dubai . Even Perth , Australia , is only 11 hr. away. Four billion people live within eight flying hours from Dubai and, with the advent of ultra-long-haul aircraft such as the Boeing 777-200LR and the Airbus A340-500, Emirates can connect almost any two cities in the world with only one stop in Dubai .
Arthur D. Little estimates that geography helps Emirates lower operational costs by 20%. But that is not always the case, warns a 2007 Boston Consulting Group (BCG) study. In a route-by-route analysis, BCG concludes that Emirates has a total cost advantage over its European rivals in more than 50% of the Europe-Asia city pairs. But in a considerable portion of the market, such as the Europe-Japan segment, Emirates’ operational costs are higher because routing through Dubai leads to longer absolute flight times. As a rule of thumb, however, one industry observer says that when European legacy carriers have to transfer passengers at one of their hubs—such as an Air France connection from Madrid through Paris to New Delhi—they are put at a cost disadvantage.
Emirates positions itself and its brand as the avant-garde of a globalized world that is defining a new way of doing things. Management likes to promote that brand externally to make Emirates look as global as possible, but it also uses it internally as a motivating tool.
“There is a big buzz about working for Emirates,” says Clark . “People are infected by the way we do things.” And anyone who has boarded an Emirates flight will have noticed the number of languages the crew speaks—almost never fewer than 10.
Clark says he tries to do things “a little different” at Emirates, using more “common sense and remaining focused on the plot.” He is an advocate of flat management structures and has 14 direct reports who can take on more responsibility than they would in other organizations. That leads to quick decision-making.
The nontraditional way of thinking is possibly Emirates’ biggest achievement. The airline has discovered markets that its competitors did not see or could not economically serve. As globalization unfolds, Emirates was the first to note the sizable air travel market between Nigeria and China , Eastern Europe and Southeast Asia, and Russia and South Africa . A good part of that traffic now flows through Dubai , which sits in the middle of these emerging passenger streams, and often no longer touches Europe or the U.S. , as new patterns of trade arise between different countries.
One key industry question about Emirates is where it will place the 90 Airbus A380s it has on order. A consultant who has analyzed the network concludes that Emirates would need a 100% market share on all of its current city pairs to fill the A380s—“and that would still probably not be enough,” he notes. Therefore, Emirates “must have another idea,” he speculates. Several industry observers think Emirates may at some point establish another hub in Asia to enable it to participate more directly in the growth of that region’s air transport market.
The A380 order is perceived as by far the biggest threat for Emirates’ competitors. They are concerned that the Dubai-based carrier will dump capacity on their most profitable business segment, the long-haul routes, and cause deep dents in profit margins at a time when they are being challenged by low-fare carriers. “Emirates is not only participating in growth but is taking traffic away from others. That is hampering our growth story,” says Franz.
Clark says he has plans for each A380. “The aircraft are well spoken for and frankly, the way things are going for us at the moment, the 90 certainly won’t be enough,” he predicts.
Arthur D. Little’s Nathan Zielke concurs. “The market is big enough for all of these A380s, and actually the order is still too small for what they have in mind,” he says.
There are some clear threats for the A380 route development, though. Perhaps the most obvious one is traffic rights. Countries such as Germany and France show no sign of willingness to open up their markets further to the Middle Eastern rival of Air France and Lufthansa.
“We strongly advocated a balanced air service agreement between the [ United Arab Emirates ] and Germany , but Emirates already is allowed to fly to four destinations in Germany ,” says Franz. Emirates has been lobbying hard to get access to more destinations in both countries, so far without success.
While Dubai is located in between growing traffic flows, having to connect through its hub often creates an elapsed time disadvantage for Emirates since flight distances are often longer. The connecting process takes more time than the industry standard. According to data collected during a representative week last May by the Frankfurt-based Airconomy consultancy, Emirates passengers spend an average 176 min. on the ground between two flights, compared to 134 min. on Singapore Airlines, 103 min. on Lufthansa and 129 min. on Cathay Pacific.
“Time-sensitive customers will tend not to fly via Dubai ,” says one industry executive. Emirates passengers must also wake up in the middle of the night to change aircraft, whereas on European and Asian airlines they have the benefit of a long rest.
Emirates will therefore have to buy itself into key business market segments by pricing its product lower.
Internally, the airline also has its struggles. “Many processes are not up to industry standards,” says an executive with an inside view of multiple airlines. “Structures have not kept pace with growth.” However, he sees much potential to stabilize operations and make the product more consistent.
The need for structure and streamlining has been recognized by the airline, too. Emirates implemented an internal efficiency program in 2009, under which it put a freeze on new hires in nonessential areas. Workers were transferred from overstaffed units and some accepted offers for unpaid leaves. But as the airline continues to grow, putting the right structures in place and maintaining efficiencies will remain a challenge.
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