Interview with Emirates, President, Sir Tim Clark

Transcript

Peter HarbisonWelcome to CAPALive. Sir Tim Clark, president CEO of Emirates Airline, great to have you with us, Sir Tim, and looking forward to an interesting discussion. It always is interesting with you, but these are very interesting times. Welcome. 

Tim ClarkThank you. Good to be here. 

Peter HarbisonSir Tim, let's kick off with the big picture, where we stand at the moment through your eyes. Before we started, I was making... Before we came on, I was making the observation that there seems to be a very big difference in the risk profile, the risk tolerance that some countries are able to make in terms of, for example, the US accepting, seemingly without too much of a problem, 4,000 deaths a day, yet the industry is going ahead with 50% capacity. Contrasted with China, which very much got it under control, things under control, but during this Chinese lunar new year, the lunar new year, they've actually been very, very restrictive, even though there's only been a handful of cases in China because they want to keep it under control. So there's this sort of tandem issue of do you proceed with growth and keep the economy going, or do you actually get the pandemic under control? And that's obviously not a simple yes/no answer. But how do you see this panning out as it affects you at Emirates, particularly as a purely international carrier with literally hundreds of governments to deal with? 

Tim ClarkWell, of course we look at it that every day by country, and we can see as you rightly alluded to, different approaches, different imperatives with regard to how countries go about bringing this under control or balancing [inaudible 00:02:33] with opening economies, et cetera. But by and large, I would say that looking at... You mentioned 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 going even further. We've seen Canada cancel operations into North America and other places. And it goes on. 

Tim ClarkThis 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, [inaudible 00:03:41] 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. And when we last spoke in December, I think I'd said I was fairly optimistic that by the summer of this year, '21, given that the panacea seemed to be the vaccination programs rolling out, all I was concerned about, there was a fair and reasonable way of rolling out across all parts of the geography of the planet, was that we would be able to get into some kind of meaningful restart on international travel by the summer of this year. 

Tim ClarkAgain, what you've observed and the views that countries are taking with regard to what is the imperative, 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. 

Peter HarbisonThat's a challenging thought. I mean, from an airline's point of view, obviously it's really instinctive to want to get back flying, particularly when you're hemorrhaging cash, and that's been the situation with large parts of the industry. I mean, just talking to some of the Europeans last month, that was still the attitude there. We need to get flying again. We need to get through this. Whereas what you're, I think, agreeing with me on, it's a little bit like putting the cart before the horse. You've got to get things under control before you can reasonably anticipate that governments will start to take a standardized position to it. So we're really at least half a year, probably three quarters of a year away from that, as you see it. 

Tim ClarkWell, I think as you rightly say, 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 into... I as Boris Johnson said, we'll be getting 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. 

Tim ClarkThe problem is that the airline industry and all the associated aerospace sectors and whatever else have had a year of this now, and whereas before they... 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." 

Tim ClarkAnd 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, so goodness me, how can you... 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. 

Peter HarbisonWhat you're talking about there, Sir Tim, actually goes obviously a lot deeper than the airlines, doesn't it? I guess the thing that troubles me a little bit, particularly with some of the US carriers, the big US carriers, is that, as you say, until now, we've been anticipating that if we held our breaths for long enough, we'll resurface and things can start to get back to normal, particularly with the vaccine coming through. That patently isn't the issue. This isn't going to occur. I think you've just agreed with that. And as a result, rather than just trying to emerge into fresh air again with the same model you had before, is there a need to be really looking very fundamental, not just at your airline... I'm talking about you, I'm talking about the airline industry generally, the airline model itself and the whole supply chain, the interaction with lessors, the OEMs themselves, is it something that we really need, as an industry, to be talking about now? How do we adjust to a future that's obviously not going to be the same as it was? 

Tim ClarkTo your last point first, it does beg the question, 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, Peter, and each of those schools will shape what you think you should be doing now. If you're of the expansionist view- 

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Tim ClarkYou are 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 problems that happen, problems, issues that have been niggling you for a long time. You talked about the supply chain. You talked about 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. 

Tim ClarkAnd yes, you're absolutely right, 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 realize 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. 

Tim ClarkBut 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. 

Tim ClarkSo 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, as we speak, 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. 

Tim ClarkAnd 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. 

Tim ClarkAlso, 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, [inaudible 00:12:25] manufacturers, the small industries that provide components, conduits, whatever it is. As you construct the airplanes, they rely on a huge ... If they haven't got the cash, then you're going to have a problem with building airplanes, even though demand may return. 

Tim ClarkSo it's a question of managing this desperately difficult situation, driven by cash more than anything else, and trying to get through that. 

Peter HarbisonYeah. And as you go down the supply chain to the smaller companies, there's been a lot of pressure on them even before COVID, which has forced consolidation, less competition in those suppliers and therefore probably a more fragile position as well. So yeah, that's something that once we've stopped the need to hold our breaths, we're going to have to start readapting to that. 

Peter HarbisonBut so Tim, can I take it ... Let's look at Emirates versus the rest of the world, if I could have you stand back from the whole industry, which I'm sure you do from time to time. Rolls Royce, for example, just downgraded its projection of the number of wide bodies that are going to be flying this year. Last October, they talked about something like 70%. Now they're talking about 50, 55%. So if they're correct, and I think a lot of people would more or less agree with those numbers, you're talking about a much smaller industry next year in long haul flying. Is that a good thing for you? Are you the ones who are in the best position to increase your relative market share in that half a size market? 

Tim ClarkWell, I suppose from a predatorial point of view, competitive point of view, we have a very- 

Peter HarbisonCompetitive, yeah. 

Tim ClarkYeah, [inaudible 00:14:12] we have a very large fleet, which unlike others 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, because of what I just said. 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. 

Tim ClarkSo if you take this all together, there is likely to be a shortage of capacity principally in the medium long haul markets. And given that the 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 Emeritus 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 favors. 

Tim ClarkWe have to recognize that many companies are taking on 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 sympathize with that imperative. It's not what they want to do, but they have to do it. 

Tim ClarkSo 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 [inaudible 00:16:56] or 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. 

Peter HarbisonI guess the important thing in the meantime is that you're still there when it does. And I guess that's an issue for a number of airlines, as they look down the next six months or so. So Tim, you talk in terms of medium to long haul coming back. In terms of market demand, if we do have an industry that's pretty much half the size both on the demand and supply side, and probably that's more or less where we're looking at for the next year or so or even longer than the next year if we don't get back into business till September. You've always sworn by the triple seven in the past, the large aircraft. You've taken it into some very big regional market or some relatively small regional markets that you made big. Is that for you going to be the aircraft of the future, the 787s is something that you've been- 

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Peter Harbison... the future, the 787s is something that you've been looking at, or the 777X. Where is your general direction heading as a major international long haul carrier? Sorry, if I could just add one thing to that too, given there's a lot of low cost short haul, medium haul, and long haul operation now coming through with the Neo-LRs and so forth that the market was shifting anyway, wasn't it? So where do you stand in terms of say the 787 versus the 777X? 

Tim ClarkWell, I think you just got to roll the clock back to prior pandemic. So this disruption, this disturbance that the virus has caused, I'm not going to be ... 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 350s, 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 87 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 380, 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 '24. 

Tim ClarkBoth the 87s and the 350s, of which I think we had 50 350s and a similar number of 87s, we're just looking at how we can bring these into the fleet and when. Obviously, to the point we made about what demand going to look like, et cetera. Is the fundamental business model changing? Are we going to see the super hub that we created diminish? No, it doesn'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 fly Dubai into the program with their 737s. Of course, that's been retarded with the max order, but that's now going to kick in again fairly soon. 

Tim ClarkSo taken together, using the new twins, fuel efficient twins, using the 380s on the trunk routes barreling through from East to West and North to South, et cetera, with the X gradually slipping in to replace the 380s that eventually go retire, we will have a leaner, very fuel efficient, environmentally friendly, 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. 

Tim ClarkAnd of course, part of that was that our in-flight 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 changer 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. 

Peter HarbisonRight. So there are obviously some shifts in geographical markets as you presumably go to smaller cities, but also, I mean I think it's uncontroversial really that there is going to be a significant reduction, certainly in the short term, to business travel. You've got a premium economy product now in your 380s, 777s coming through. Do you see that as being because of the circumstances now becoming a more valuable product? Your next door neighbor doesn't think so, but is premium economy probably a more valuable product as you go ahead now? 

Tim ClarkQuite honestly, Peter, we wouldn't be in the premium economy market. We're just going go it, we didn't think it added value. And our maths suggest that if we've got our demand forecast right and let's say the no dilution of the business with regard to who actually sits in this cabin, if we've got that 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. And if the current creative, we've only got one of our airplanes with the 380 onboard, to be quite honest, we have been absolutely shocked at the demand for the seats. People have been clamoring 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. 

Tim ClarkAnd only time will tell when we've got the full 380 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 or et cetera, et cetera, 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. 

Tim ClarkAnd I honestly believe it'll enhance the income per seat mile, seat kilometer over time, allow our inventory management, [RO 00:25:41] people, to do a better job with regards to the [inaudible 00:25:44] 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 delivering and excelling at. 

Peter HarbisonRight. Well, of course, one of the early movers with premium economy was your good partner Qantas. How do you see that partnership evolving now? Is everything rock solid as it was before, or are there changes likely as we move ahead? Given Australia probably isn't going to be flying internationally for at least another year. 

Tim ClarkWell, the partnership, I suppose, if you can call- 

PART 3 OF 4 ENDS [00:27:04] 

Tim ClarkThe partnership of those, if you could call it ... deep freeze situation. We're not into Australia or anything like that, but that was what we were, [inaudible 00:27:12] Qantas is not flying internationally. You've got enough problems trying to fight domestically with your borders opening and closing every other day. Goodness me, that must be a tough one to run. 

Tim ClarkDoes that change what happened prior to the pandemic? No, it doesn't. Is [inaudible 00:27:28] Australia, New Zealand important to us? Yes, it is. Is the European [inaudible 00:27:33] police pockets important to Quantas? Obviously yes. Yes it is. They're just using smaller aircraft now because they believe that's probably the way to go. 

Tim ClarkBut 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 they now won't be traveling due to traffic there 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 co-chair the commercial arrangement. 

Tim ClarkSo I would think that Qantas would be, I hope, Quantas 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. Yes, you're right. It seems that the Australian government has view with regard to access during the whole of this year, so do the New Zealanders. So when that ... we're all said and done, we're all back up and running, it'd be good for both carriers. 

Peter HarbisonGood. That's good to hear. And more broadly on alliances, we're looking at, obviously, an industry that's going to be very different as we talked about before. Does that impliedly mean that alliances are going to be more important for all airlines and for Emirates in terms of being able to service all the various markets? And for example- 

Tim ClarkI think it's an ... 

Peter HarbisonGo on. 

Tim ClarkIt's an interesting question because obviously in times of distress and difficulty, the NI community has had a habit of forming clusters to protect, if you like, themselves from the trading conditions across the global economy. So we've seen that in the past. And one could imagine then consolidation to alliance being strengthened and strengthen in numbers, et cetera. 

Tim ClarkOn 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 320, and the 737 max, eight, nine, 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. 

Tim ClarkAnd do I see a little bit more of that? Yes. Prior to the pandemic, it was already been 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, Quantas is a OneWorld member, they work with us. 

Tim ClarkBut I can see that the airline managements in the future we'll be looking at this as, is this not legacy think? Is this perhaps ... do we get more value by taking smaller units, twins, flying more often, higher frequency, inter-city 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? 

Peter HarbisonProbably, yeah. Probably all of the above, given the uncertainty that we're going through. And obviously it's not going to be just one decision, it's going to evolve as you watch things go along. I'd have to ask you too in that context, so Tim, about Etihad, they've obviously had their struggles. And I think you've talked about them recently in terms of perhaps some sort of relationship. Do you see that as a standoff still that never the twins shall meet? Or is there some improving relationship in future? 

Tim ClarkNo, I've always said that there is plenty of [inaudible 00:31:56] to work together, providing we don't cross over into the sort of anti-competition situation. And there is work going on there. I don't know what it is, but basically as they continue to downside to a level where Tony Douglas is thinking it's a manageable proposition, that it's cash proposition [inaudible 00:32:13], 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. 

Tim ClarkThere could be synergies in cargo operations. I don't know. I think the smart thinking suggests that it doesn't matter of convergence in what we together would bring value to both businesses, but keeping the brand separate, letting ... 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. 

Peter HarbisonBecause there are some, obviously, some massive infrastructure investments involved in both of the Emirates in that case, which presumably come into the story a little bit as well as very important economic issues. So Tim, we always are attacked not only by the virus but that age-old virus of time unfortunately. It's always a pleasure to talk to you because you get into this industry so deeply, you understand things so instinctively. Thanks for sharing a few of them with us again here on CAPALive. We must get you back again soon. It's just too good to talk to you, but thanks for being with us today. 

Tim ClarkThanks Pete. 

Peter HarbisonThank you. 

Tim ClarkYou're welcome. 

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