CAPA Live. Emirates' Sir Tim Clark: "work going on with" Etihad
International recovery will take longer than Sir Tim Clark, president of Emirates Airline, first thought. With the focus now on controlling the spread, it’s not possible to think of operating fleets at the levels they had hoped.
Apart from the US, Sir Tim does not see the sector-specific aid that needs to go into the perfectly good businesses to help them survive. They have good business models – just no passengers.
Sir Tim believes it’s a good time to sort out a lot of the issues that have been niggling for a long time. There is an opportunity to think about how you would go about improving the way you manage those particular aspects of your business.
Sir Tim believes that if the business model was fit for purpose before the pandemic, then it's probably going to be fit for purpose after the pandemic. If there was a fundamental problem before that, then there's no point blaming the pandemic for the fact that you failed.
Talking at the CAPA Live on 10-Feb-2021, Emirates Airline’s president Sir Tim Clark spoke with CAPA’s chairman emeritus Peter Harbison.
Some of the key highlights can be found below.
Countries are taking different approaches, with some fairly draconian positions taken with regard to international travel. I had been optimistic, but my judgment now is that it's going to take longer than I would have hoped
“Well, of course we look at that every day by country, and different approaches, different imperatives with regard to how countries go about bringing this under control or balancing it with opening economies, etc. But by and large, I would say that looking at the United States, looking at Europe, looking at Oceania, looking at South America, Africa, the tendency is to control first, restrict for longer, and then open when the metrics suggest that things are going to get better."
"And over the last 48 hours, we've seen countries take fairly draconian positions with regard to access and international travel. Particularly yesterday was the United Kingdom, with the set rules that have been imposed with regard to quarantine. Scotland is going even further. We've seen Air Canada cancel operations into North America and other places. And it goes on."
“This is all driven by the fact that in the summer of last year we thought we were through it, we thought we had a handle on this virus, and then we got the mutations that came out of South Africa, or even the United Kingdom and Brazil. And they're proving more difficult to handle, but as they get an understanding through the genomic sequencing of how they're going to deal with these viruses, countries will continue to close their borders."
"It'll make life more difficult for international travel. Last December, I think I said I was fairly optimistic that by the summer of this year, 2021, given that the panacea seemed to be the vaccination programmes rolling out, all I was concerned about was that there was a fair and reasonable way of rolling out across all parts of the geography of the planet, and was that we would be able to get into some kind of meaningful restart on international travel by the summer of this year."
“My judgment now is that it's going to take longer than I would have hoped. And I think probably we're going to see some difficulties. We're not going to see capacity return to the levels I'd hoped in July and August. I think that may be in the last quarter of this year.”
The focus is to control the spread, so there’s no point trying to think that we are going to be operating our fleets at the levels we had hoped… and if we don’t fly airplanes we don’t get any cash
“The focus has returned to control of spread. Control of the virus getting into the countries at all. That is now returned as the imperative. Protect your – using the axioms of the British government – NHS, save lives, all the other things."
"Whereas before it was more about going on holiday in March, April, or whatever it was. That's clearly changed now. In fact, they've gone the other way. So the evidence is clear. There's no point trying to think that we are going to be operating our fleets to the levels that we had hoped. And goodness me, we're in the business of flying airplanes. If we don't fly airplanes we don't get any cash. A child of three can get to those sums fairly quickly.”
I don't see, apart from the US, the sector-specific aid that needs to go into the perfectly good businesses; nothing wrong with their models, nothing wrong with what they were doing in the past. Just that they have no passengers
“The problem is that the airline industry and all the associated aerospace sectors and whatever else have had a year of this now, and whereas last year people thought that, one, there would be an end in sight, two, that they would supplement the cash requirements of non-operating by debt provision or by state aid or whatever it was, to a point where they could get through, certainly for the first quarter of this year."
"Well, that hasn't happened. It looks as though it's going to go on for longer. And therefore you see the cries from the heart, from a number of entities within our industry, as well as the players in the industry saying, 'We're going to run short of cash very quickly'. You need to understand this."
“And I don't see, apart from the United States, the sector-specific aid, cash, that needs to go into the perfectly good businesses; nothing wrong with their models, nothing wrong with what they were doing in the past. Just they have no passengers."
"And I think we're going to have the governments, when they get through the shock of re-entering the 'protect and control', they're going to have to deal with this particular issue in this sector.”
You need to sort out a lot of the issues that have been niggling you for a long time. You've got an opportunity to think about how you would go about improving the way you manage those particular aspects of your business
“The question is – what is the industry, what is the global economy going to look like post the pandemic? And there are different schools of thoughts of that and each of those schools will shape what you think you should be doing now. If you're of the expansionist view, which is more in our neck of the woods, we take the view that you need to sort out a lot of the issues that have been niggling you for a long time."
"The supply chain. The relationship with lessors, with banks, with the entities that buy into our business, which perhaps are extracting more value in the past than we would have liked. And you've got an opportunity to sit back and think about how you would go about improving the way you manage those particular aspects of your business, but not necessarily doing your business any differently in terms of the fundamental business model."
“There is an opportunity there. But at the end of the day, my view is that once we are through this, demand for air travel will return, consumer confidence will return."
"It may be slightly more finessed in the sense that people may be smarter about what they actually want. Their aspirations will be the same, but how they get the aspirations may be slightly different. They've had more time to think. They realise that life can go on in a different manner, and that may affect demand. I don't quite know about that. Only time will tell."
If the business model was fit for purpose prior to the pandemic then it's probably going to be fit for purpose post pandemic. If there was a fundamental problem prior to that, then there's no point blaming the pandemic for the fact that you failed
“But I'm not sure it's the right time to start thinking about whether your business model is fit for purpose. If it was fit for purpose prior to the pandemic, then it's probably going to be fit for purpose post pandemic. If there was a fundamental problem prior to that, then there's no point blaming the pandemic for the fact that you failed. It was going to happen anyway, perhaps now sooner rather than later."
“So those businesses that had very good, cash rich, profitable business models prior to the pandemic, I don't see why they would be any different in terms of how their products are perceived in the market. They could be smarter. They could be more cost effective in how they do it. They could have applied digital technologies a little bit more to the fore than perhaps they had. That'll be able to identify those areas of value that they can enhance in the business."
"We've all had time to sit around and do that. And there's a lot of work going on in Emirates about what we can do in terms of the BTC relationships and how we manage the supply chain into the company. That doesn't concern me. What concerns me more is that the ability of those industries in the same situation as we are, whether it be low cost or medium or long haul or full service, that just haven't got the cash resource to deal with no income coming in."
There’s no point worrying about state aid or who gets what. First thing is to get it going. Keep it healthy and active. It's so important to the global economy, and deal with the rest afterwards
“And there is an obligation to ensure that this sector survives, and it's no point to worry about state aid or who gets what. First thing, get it going. Keep it healthy and active. It's so important to the global economy, and deal with the rest afterwards."
“Also, one worries a little bit about the supply, the aerospace sectors, whether it be propulsion, whether it be manufacturing."
"We've seen some terrible situations, for instance, in Boeing recently, added to the  MAX issues that they've had. It's certainly been a bad year, but it's not so much the Boeings of the world we need to worry about, or the Airbuses, it's the supply chain into them. The seat vendor, belly manufacturers, the small industries that provide components, conduits, whatever it is. As you construct the airplanes."
"If they haven't got the cash, then you're going to have a problem with building airplanes, even though demand may return. So it's a question of managing this desperately difficult situation, driven by cash more than anything else, and trying to get through that."
There is likely to be a shortage of capacity, principally in the medium long haul markets. I think it may be that demand will be very strong in multiple segments, so there could be a supply/demand issue. It's far better to have healthy competition. It serves no purpose for one carrier to dominate and price gouge
“From a competitive point of view, we have a very large fleet, which unlike others who have discarded or retired or put into moth balls, we haven't done that. The airplanes are being kept in an advanced state of readiness for operations as soon as we need it. There is a view that there will be a stripping out of capacity over the next two or three years. Capacity has been taken out and will not be replaced.
"There was also a view that the number of aircraft that will be supplied by both Boeing and Airbus will diminish against their original contract. We know that for certain now, because of what Boeing has said recently.
"So if you take this all together, there is likely to be a shortage of capacity, principally in the medium long haul markets. And given what that capacity will be, as I think it may be, and that demand, if I am right, will be very strong in multiple segments, not all, there could be a supply/demand issue.
"That's for everybody to take a view. My view is that the most important thing is, and I say this with a kind of industry hat on – rather than the Emirates Airline situation, which is a dominant carrier on the international scene – it's far better to have healthy competition, and that the carriers that are doing a good job in all the geographical sectors of the world can continue to operate. It serves no purpose for one carrier to dominate and price gouge or whatever. That is short-term thinking. It's not healthy thinking, and it doesn't do anybody any favours."
Many companies are taking on an enormous amount of debt. I hope there will be an adjustment, and I think it's more on the supply side that will be a problem, not the demand side. My instinct is telling me that this is going to come good, and it'll come back at a pace. So be prepared.
“We have to recognise that many companies are taking on an enormous amount of debt. Their balance sheets are fairly stricken. They have to deal with the impairment of those balance sheets over time to get them off their balance sheet so they can function as fully commercial operations again. And I, with an industry view, I sympathise with that imperative. It's not what they want to do, but they have to do it."
“So I'm hoping that there will be an adjustment. There will be an adjustment, and I think it's more on the supply side that will be a problem, not the demand side."
"So if people believe as I do, I would suggest that what they should be thinking about is the upside, not the downside, and that demand will drive to the upside and that will cause you to think about capacity. Probably heresy in many areas of the world today, or in head offices, but my instinct is telling me that this is going to come good, and it'll come back at a pace. So be prepared.”
We will use the A380s on the trunk routes with the 777X gradually slipping in to replace the A380s that eventually retire, so we will have a leaner, very fuel efficient, environmentally friendly fleet
“This disturbance that the virus has caused, let's say it's not so transformational that it's caused us to challenge what we were doing and had planned to do."
"We had already ordered A350s, we had already ordered 787s. We were the driving force behind the ER transformation into the 777X, and we sat with Boeing a long time ago defining what the airplane had to do – the crossover of 787 technologies into the airplane. So we were very interested in that airplane."
"The problem, of course, is, as we know, there are issues with it in terms of certification and getting out the door. Does that change what we were planning to do? No, it doesn't. The A380, of which we have 118 at the moment and five more on delivery, will continue in the plan until the mid 30s; the 777X was due to come in June of last year, now it's unlikely to be I think before the first quarter of 2024."
“Both the 787s and the A350s, of which I think we had 50 A350s and a similar number of 787s, we're just looking at how we can bring these into the fleet and when. Obviously, to the point we made about what demand is going to look like, etcetera."
"Is the fundamental business model changing? Are we going to see the super hub that we created diminish? No, we won't. Do we probably need more aircraft post pandemic to do the job? Yes, we do. There are many cities and markets that we haven't served, for very good reasons; sometimes it is because even with intelligent misuse of the aircraft, it still doesn't stack up on the economics, and that's when we back flydubai into the programme, with their 737s. Of course, that's been retarded with the 737MAX order, but that's now going to kick in again fairly soon."
“So taken together, using the new twins, fuel efficient twins, using the A380s on the trunk routes barrelling through from east to west and north to south, etc., with the 777X gradually slipping in to replace the A380s that eventually go retire – we will have a leaner, very fuel efficient, environmentally friendly fleet, not that it isn't at the moment, but a network that will probably be 30% larger in terms of cities served than it is today."
"So prior to the pandemic we had rolled this forward to 2035, where we saw the airline being - and believe me, there was never any suggestion that the business model and the centrality of the super hub that we created would alter in any way. In many respects, it got larger, more focused, and as we grew the hub, the unit cost of operating the hub fell, and so it became a far more...let's say, it got the benefits of scale to a level that we have at the moment, but that much more later on."
Sir Tim Clark, president of Emirates, speaking at CAPA Live, 10-Feb-2021
So long as others are copying our inflight product, then I continue to enjoy the benefits of knowing that we're doing the right thing. We didn’t think premium economy added value, but we’ve been absolutely shocked at the demand for the seats
“And of course, part of that was that our inflight product would continue to excel. So long as others are copying us around, then I continue to enjoy the benefits of knowing that we're doing the right thing. We will continue to innovate, we will continue to make sure that we are aligned with the aspirations of the sectors.
"And the other thing is that post-pandemic, I talked about it earlier, could there be new sectors coming to market? Could there be new segments within the existing markets that we're already dealing with?
"Yes, I think there could. I think there could be a change in the way people think about travel in the future, on the upside, not on the downside. So we continue to be convinced that that's the way we're going to go. How and when these airplanes come in will be a question of managing where we think demand is likely to be in the countries, and whether the manufacturers are in a position to deliver at the pace and numbers that we want.
“Quite honestly, we wouldn't be in the premium economy market. We're just going into it; we didn't think it added value. And our maths suggest that if we've got our demand forecast right then it's going to be really, really important to us. We are in the process of trying to establish just how many of the existing fleet we can put through conversion. We're going to do that at pace. That's a mega million dollar expenditure, but we're going to do that."
“We've only got one of our airplanes, an A380, onboard [with premium economy], and to be quite honest we have been absolutely shocked at the demand for the seats. People have been clamouring to get into them. They have been paying whatever we've asked them to pay to get into the cabin because it is a delightful cabin – I say it myself – but it is a beautiful cabin to be in. And only time will tell when we've got the full A380 operation and some of the 777s already with that, will we see benefit to us; but for the first couple of months, this cabin has been completely booked, and it's been a good test for us to see how we can deliver. But even though we haven't been delivering the full premium economy, we haven't changed the menus out, we haven't changed the wines etc., we just provided the seats and – goodness me, it's been very popular.
“Other carriers that have introduced it, many of our competitors in the European and Asian fields, they swear by it. And I honestly believe it'll enhance the income per seat mile, seat kilometre over time, allow our inventory management, RO people, to do a better job with regards to the product that we offer."
"And I think, because it is an astonishingly good product, it will be attractive to higher price points of the economy segments rather than in business. There will be some downgrading, I suppose, for some. And to the point about the business market, the segments that are driving so much of what goes on, it is in that area that we could well excel because there may be businesses that want to travel but they don't want to pay the 'Full Monty'. So the premium economy may be one worth doing."
"So we're offering four primary classes: first, business, premium economy and economy. I think that's well within our capability for delivering and excelling at.”
The partnership with Qantas is in a deep freeze situation, but we are keen to restore the relationship and take it out of the deep freeze when we are all back up and running
“The partnership with Qantas is in a deep freeze situation. We're not into Australia at anything like the levels that we were. Qantas is not flying internationally. They’ve got enough problems trying to fly domestically, with the borders opening and closing every other day. Goodness me, that must be a tough one to run."
“Does that change what happened prior to the pandemic? No, it doesn't. Is Oceania, Australia, New Zealand, important to us? Yes, it is. Is the European market important to Qantas? I would suggest yes it is. They're just using smaller aircraft now because they believe that's probably the way to go."
"But the relationship, I hope, will not change. It's always been a very good one, hopefully profitable for both sides. And the Qantas team can rely on us to provide quality lift for the consumers that now won't be travelling so often, because they've got smaller aircraft on a jointly coded Emirates aircraft, which I know a lot of the Qantas flyers really value and enjoy judging by the number of people we carry under the codeshare, the commercial arrangement.
“So I hope, Qantas would be equally keen as we are to restore the relationship, take it out of the deep freeze when we're through all of this. It seems that the Australian government has a view with regard to access during the whole of this year, so do the New Zealanders. So when we're all said and done, we're all back up and running, it'd be good for both carriers.
"It's an interesting question, because obviously in times of distress and difficulty the airline community has had a habit of forming clusters to protect themselves from the trading conditions across the global economy. So we've seen that in the past. And one could imagine then consolidation to alliances being strengthened, and strengthen in numbers, etc.
The dominance of the way the alliances work may not be fit for purpose in the new way of doing things
“On the other hand, there may be a view that perhaps the dominance of the way the alliances work may not be fit for purpose in the new way of doing things. We have multiple white body twins coming out. You've mentioned the 321XLR, the A320, and the 737 MAX, 8, 9 and 10. These change out the need for carriers who hitherto had allowed their geographical markets to be controlled by others. They now have the ability to move to the city pairs that they originally shared value with."
“And do I see a little bit more of that? Yes."
"Prior to the pandemic it was already being talked about. And that's not to say that there won't be groupings, but I would suggest that those groupings may span alliances, that they may involve players in other parts. I mean, Qantas is a oneworld member, they work with us. But I can see that the airline managements in the future will be looking at this as, 'Is this not legacy think'?"
"Do we get more value by taking smaller units, twins, flying more often, higher frequency, intercity pairs that we've already always allowed others to do for us as part of the alliance business model?"
"I don't know, but there could be a change there. So you've got this sort of dichotomy there. You've got the view that: plunge into alliance, protect yourself against the horrible things going on; or take the opportunity to do things slightly differently with partners who may be part of another marriage. Who's to say?"
There is plenty of opportunity to work together with Etihad, providing we don’t cross over into an anti-competition situation. I think the smart thinking suggests that it’s a matter of convergence, in what we do together would bring value to both businesses
“I've always said that there is plenty of opportunity to work together with Etihad, providing we don't cross over into the sort of anti-competition situation. And there is work going on there. Basically as they continue to downside to a level where Tony Douglas thinks it's a manageable proposition, that it's a cash proposition which I think he's getting there, how we can work together with regard of the partnership and deal with all the back of house stuff. There could be synergies in cargo operations. I don't know.
"I think the smart thinking suggests that it’s a matter of convergence in what we do together would bring value to both businesses, but keeping the brand separate, and being competitors as we are, but doing things slightly differently. And I still think going forward that that's the way to go. I think Tony shares that view as well.”
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