The most surprising part about the 30th anniversary of Emirates Airline on 25-Oct-2015 is that the carrier is, in fact, 30. There are those who might think Emirates is older: after all, it is now the world’s largest international airline. Surely such an achievement must be grounded in history, back in the days of flying boats, the League of Nations and colonial empires.
But many would be surprised Emirates is as old as it is. It is portrayed as the fighting upstart, an airline different from the legacy pack, and an operation where growth is still plentiful. Emirates’ youth means it is full service without legacy baggage, becoming a grave threat to the establishment. Competitors are starstruck; Air France-KLM CEO Alexandre de Juniac said in 2013 he flew Emirates and took 15 pages of notes.
That is a fitting anecdote to describe the inflexion point surrounding Emirates’ 30th anniversary. While competitors look at what Emirates has done, Emirates is looking towards the future. As with humans celebrating their 30th birthday, Emirates sees itself entering adulthood. It is time to implement those practices previously written off for another day, fine-tune goals and get in shape for the future.
Emirates has begun to take on legacy attributes; the tyranny of size threatens to compromise efficiency and agility. The next decade requires Emirates to show flexibility. Already Emirates has said it will break its 777/A380 model with medium-sized widebodies. Partnerships and closer collaboration with sister LCC flydubai may be necessary. Eventually Emirates must command greater yields for its brand and reputation. There will be a leadership change as Sir Tim Clark retires, and the challenge of shifting the operation to a new airport, which will unlock more growth.
Competitors channel their energy into worrying about the Emirates of today, but the future Emirates – should it bed-down agility – promises scale and power that is near unimaginable. Hello tomorrow, indeed.
Emirates’ origins are in expediency and crisis, rather than any deliberate attempt to re-shape aviation history. In 1984, Gulf Air – then owned by a collection of states – refused to increase flights to and from Dubai. The ruler of the emirate, Sheikh Mohammed bin Rashid al-Maktoum, decided that the future of aviation in his city state was too important to leave in the hands of others.
Air travel was seen as the key pillar to the city’s development. In the mid 1980s, petrochemicals had accounted for 50% of the tiny emirate’s GDP, but it lacked the large reserves of many of its neighbours in the UAE and elsewhere in the Gulf. With the oil certain to run out eventually, Sheik al-Maktoum sought to ensure a future for Dubai by developing it into a global hub for trade, travel and tourism.
To do this, Dubai needed its own airline. With a modest state investment of USD10 million and two leased aircraft, Emirates was born. The carrier was entrusted to a group of Gulf and British aviation veterans, led by the remarkable Sir Maurice Flanagan and more than ably followed by Tim, now Sir Tim, Clark. Emirates Airline launched on 25-Oct-1985 with a single route to Karachi.
When Emirates operated that first flight, Dubai International Airport had just 3 million passengers annually, almost all of it origin and destination traffic. By 2000, passenger numbers at Dubai had grown to 12.3 million, with better than 1.2 million transit passengers shuttling via the rapidly growing hub. In 2014 there were over 70 million passengers, half of them in transit and two-thirds flying Emirates.
Emirates has grown into the biggest airline in the Middle East and one of the most important airlines globally. With a fleet of 220 aircraft, all of them widebodies, its network covers more than 70 countries over six continents. Its order book stands at 270 aircraft and will grow with an expected A350/787 order, reportedly in 2016.
The airline is also an integral component of ‘Dubai Inc’, the state-owned businesses that are a major part of the emirate’s strategy for economic development and diversification. The Emirates Group is an integrated aviation ecosystem, embracing not only the airline business but also dnata, now the world’s fourth largest aviation services company and a major aviation company in its own right.
Aviation now forms the cornerstone of Dubai’s economy, with the sector contributing 27% of GDP in 2013, supporting 416,500 jobs. By 2020, Oxford Economics projects aviation will support over 750,000 jobs and contribute around 37.5% of GDP. In comparison, petrochemicals accounted for just 2% of GDP in 2014, and the proportion continues to diminish.
From the outset, Emirates behaved differently from traditional state-owned airlines. It adopted a flat management model, eschewed direct subsidies and embraced the competition forced on it by Dubai’s liberal aviation policies. Dubai is different from the rest of the Gulf: it is more westward and capitalist in its outlook. This saw it start hub development and vertical integration early, with resulting positive impacts on Emirates. Had Sir Maurice and Sir Tim plopped down in Abu Dhabi or Doha instead of Dubai, they would not have been able to create the Emirates of today. The airline’s fortunes are due to a combination of an early start, management and Dubai’s ethos.
The aim for Emirates was to compete, on a commercial basis, with the best airlines in the world. Commercial sustainability was a key element of its growth: in its 30 years of operations, Emirates has reported 28 years of profit (graph below in AED) and returned more than USD2.5 billion back to Dubai. Few, if any, other airlines can boast a similar record.
Emirates prioritised not only expansion, but also innovation, product quality and service standards. The airline has been a relentless pioneer, being the first with in-seat IFE across all classes, the first with air to ground telecommunications and in-flight mobile calls, one of launch customers for the A380 the 777X and the first to offer non-stop flights from the Middle East to the US and to South America.
Emirates’ branding is omnipresent; it is hard to watch any sport without seeing the stylised typeface and classical red colour. Its interiors are bold and its fleet – the number of A380s alone – is staggering. Yet there is humility. Emirates likes to say it has not pioneered a new model; it has built on what others have done but with different – stronger – geography.
The Gulf region is a strategic crossroads for aviation, sitting at the intersection of the European, African and Asian continents. Nearly a third of the global population lives within a four-hour flight and another third within another five flying hours, bringing all of Africa, China and India within nine hours of the hub. This makes Dubai an ideal transit point to link the growing economies of the east with the developed west. Emirates' existing main markets will continue to grow, and be joined by fast growth out of Africa, a region many airlines have neglected.
In some ways, Emirates’ sixth freedom model follows the earlier pioneers of Icelandair, KLM, Lufthansa, Singapore Airlines and Cathay Pacific. These airlines linked long-haul markets with their nearby catchment areas as well as intra-regional traffic. The difference at Emirates is its long-haul to long-haul connections using high-density aircraft. This delivers scale advantages as it largely does away with the high cost, short-haul narrowbody flights European airlines are desperately trying to restructure, their American counterparts having effectively moved to a LCC model.
What allowed this focus was the introduction of long-range, high-efficiency aircraft such as 777s and A380s. Emirates is the biggest customer for both of these types, which allow it to link 90% of the globe with one stopover in Dubai. The new aircraft technology meant the airline could develop an end-to-end network of tremendous power, drawing traffic from one location and transiting passengers via Dubai to almost any other spot on the globe.
New network carriers have offered innovation to the passenger experience. European airlines fell afoul of IATA for their larger sandwiches while Singapore Airlines endured wrath for free headsets. Controversial at the time, they are quaint to Emirates’ moves: the first airline to place an entertainment screen at every seat, the first to offer suites. Legacy airlines admit with some reluctance that Gulf carriers have required them to improve their product, often investing to have more spacious seats but having fewer of them.
Emirates’ combination of a network model and focus on product and service follows past examples. But Emirates has developed this on a grander scale and at a greater speed than anyone else. And arguably Dubai has embraced aviation as a platform of national development faster than any other government.
Since its founding, Emirates has averaged double-digit annual traffic growth rates
The airline will handle better than 50 million passengers in 2015 and nearly 80 million passengers will pass through Dubai’s airport, many of which are drawn in by the strength of Emirates’ network making Dubai such a powerful hub for onward connections. According to Dubai Airports Corp, in 2013 there were flights from Dubai to countries with 88% of the world’s population and 93% of global GDP.
This sort of success has spawned variants, and several of Dubai’s neighbours have seized the opportunity, creating the ‘Big Three’ of aviation in the Middle East. In 1997, Qatar relaunched Qatar Airways, transforming its regional airline into a network airline. Dubai’s neighbouring emirate, Abu Dhabi, also saw an opportunity, founding Etihad Airways in 2003.
Both embrace a similar model to Emirates, albeit with their own tweaks. Qatar and Abu Dhabi, like Dubai before them, have withdrawn from Gulf Air in favour of concentrating on their own national airlines.
Success has also spawned criticism – and opposition – as the status quo was disrupted. Emirates’ initial expansion had gone largely unnoticed by the major European and American carriers that dominated commercial aviation.
Emirates attracted attention with its 2003 order for 71 widebodies, then the largest aircraft order in history. As Emirates and its neighbours grew in the early 2000s, their competitors began to push back against their expansion. But the genie was out of the bottle.
The third limb of Emirates’ success, along with geography and technology, is air service agreement liberalisation. The UAE pursued open skies, with many accomplishments but also countries still holding out. Emirates’ headstart over Qatar and Etihad often saw Dubai benefit from more liberal agreements.
Also a positive factor was Dubai’s standing as a trading post. That generated interest from other countries to use Dubai as a hub for the region; Singapore Airlines had a not insignificant network from Dubai to other Middle East points. With hindsight, perhaps Singapore regrets open skies with the UAE. At its peak, Singapore Airlines’ beyond network from Dubai was a fraction of the strategic significance Emirates now commands with its fifth freedom flights between Singapore and Australia, third country codesharing with Jetstar Asia, and Emirates’ local Dubai-Singapore network.
Complaints against Gulf carriers from Asian carriers are never as loud or direct as in other parts of the world. Venting through the press is not what local cultures dictate; significant grievances are aired behind closed doors. Some Asian countries such as China and Korea – are the greatest aeropolitical access challenge to Gulf carriers.
The most publicly vocal against Gulf carriers have been the traditional European flag carriers. They were the most vulnerable as they feared the loss of valuable east-west sixth freedom flows over their hubs. This fear took time to matriculate. Lufthansa had a codeshare agreement with Qatar Airways. The love is now lost as Qatar Airways symbolically deploys the partially German-built A350 into Lufthansa’s hubs (and that of another Star Alliance and network carrier giant, Singapore Airlines).
Air France-KLM and Lufthansa in particular – but also, at first, British Airways – made various allegations, that Emirates and others benefited unfairly from fuel and infrastructure subsidies, lopsided financing and taxation arrangements and the luxury of operating outside of the boundaries imposed on commercial airlines, They were joined by European airline associations, unions and even civil aviation authorities, seeking to ensure that protectionist barriers remained raised.
There has however been an instructive divergence of approach among the European “Big Three”. While Air France and Lufthansa have remained largely opposed, IAG, now the parent of British Airways and headed by former BA CEO Willie Walsh, took a more pragmatic approach. Mr Walsh has remarked that Emirates’ accounts look normal. As Lufthansa and Air France-KLM step up their rhetoric, IAG has become a direct advocate for Gulf carriers. (Some of IAG’s actions – leaving AEA, writing to the US government – have occurred since Qatar Airways, which British Airways invited into oneworld, took a minority stake in IAG. But IAG was a friend of Qatar before the investment.)
Emirates meanwhile has separated itself from the other Gulf carriers. Emirates asserts its longstanding profitability and that it is not subsidised. Emirates has probably been more transparent than it would like. It foresaw clashes and published accounts early. It has been proactive in government affairs, although this has not stopped eruptions such as from the US carriers. Its Gulf competitors admire, as they see it, the foresight Emirates took to promoting liberalisation, even on small matters like naming its inflight magazine Open Skies.
The external threats – namely protectionism – are to some degree outside Emirates’ control. What is within Emirates’ control is itself. By no means is it being crippled with a high cost base or striking employees, but measured against what it could be, there is room for improvement.
One immediate example is with fleet. The 777-300ER has essentially become Emirates’ smallest aircraft, save for a handful of other aircraft types that are limited in number. Emirates is running out of markets that can take such a large aircraft. An order, as expected, for the A350 or 787 will grant flexibility with access to smaller markets and adding off-peak frequencies. Emirates has at times become too rigid with its approach of serving markets at least daily with the 777-300ER or A380. That has certainly worked well for it, but there is risk of complacency. Just as humans handle more complex matters as they age, Emirates needs to find the balance between greater flexibility and so much variation that it is unproductive. Emirates' success so far should not preclude experimentation to grow into the future.
Qatar Airways has rejuvenated its fleet and product with A350s, A380s and 787s. Etihad is starting with A380 but mostly 787 deliveries. From these developments, Emirates has lost its grip. Before taking medium-sized widebodies and 777Xs, a product update should allow it to follow Etihad and Qatar in having a design characterised by sophistication.
Unlike Etihad and Qatar Airways, Emirates has no narrowbody aircraft. This again impacts its ability to reach certain markets. There is, however, flydubai. The LCC has the same owner as Emirates but the two are not directly related. There is limited cooperation between them but plenty of opportunity for more. flydubai’s network contains many points Emirates does not serve but that Etihad and Qatar Airways do. It also offers greater frequency on many routes. Taking flydubai in as a substantial feeder/defeeder requires Emirates to break its focus on Emirates-operated flights.
Destinations from home hub(s) for Emirates, Etihad, flydubai, Qatar Airways and Turkish Airlines: 25-Oct-2015 to 31-Oct-2015
The next 10 years should see the formation of partnerships deeper than the landmark Qantas arrangement (whose scope is already extensive). There are some views that letting Qatar Airways join oneworld was a missed opportunity for Emirates; it needs more friends. Already Emirates will provide management to Angola’s TAAG, largely in exchange for securing access to the Angolan market.
There is no equity involved; Emirates still recalls its troubled deal with SriLankan Airlines. Africa may be the target market for more partnerships. South African Airways passed up Emirates in favour of Etihad for a deep arrangement, but Emirates may look at smaller carriers too, especially the growing number of LCCs that are privately owned. At the other end of the scale, partnerships account for about a quarter of Etihad’s passenger revenue.
Some competitors argue that Emirates is effectively an LCC, based on its yields. This is effectively a compliment since Emirates can still be profitable due to its lower cost base, but this also indicates a commercial opportunity: selling Emirates not based on price but choice – with a yield premium. Dubai can be sold as a destination, but Abu Dhabi and Doha do not yet achieve that. Dubai is also banking on Expo 2020 to accelerate interest.
It is an accomplishment that Emirates’ home airport, Dubai International, has managed to become a global hub. The airport has had to contend with limited real estate and old infrastructure. Its two runways are too close together to permit efficient operations. The terminal design – a long pier without any spokes – lacks the centralisation of modern terminals that reduces the maximum distance between any two points. That in turn impacts minimum connection times, critical for hub carriers. Emirates’ minimum connection time of about 75 minutes is easily beaten by a number of other hubs.
As with Emirates, Dubai International is feared by other hubs and seen as a bastion of connectivity and power. But internally, its weaknesses are acknowledged and planned to be overturned with the new Dubai World Al Maktoum facility. Just as competitors tend to focus on what Emirates has done rather than what it will do, there is under-appreciation for Dubai’s future airport infrastructure. The ability to lower minimum connection times and grow flights at peak hours is critical; Emirates has largely maxed out its two existing scheduling banks. It is building up a third bank but its placement in the middle of the day – when Dubai’s heat is at its strongest – limits aircraft payload.
Major airlines capacity share at their hub airport: Week commencing 19-Oct-2015
The Gulf’s airlines and airports are impacted by dated and fragmented air traffic management infrastructure. The issue has even been taken up by IATA. Governments need to come together but also show willingness to spend on technology to improve how their hubs flow. Using the latest technology would unlock growth without adding runways or terminals (although the latter is increasingly an issue for Emirates). Resistance so far to spend on this area is surprising given the vertical integration governments have taken to aviation.
Emirates alone cannot invest in air traffic management, but it is flagging smart use of data as a growth driver. It is reinforcing this view with capital expenditure. Data and more general IT projects can fuel future growth but also allow Emirates to catch-up: its heaviest growth has been over the past decade. The focus on operational expansion has precluded strategic growth of upgrading processes and systems.
The switch from Dubai International to Dubai World will probably occur after another change: the retirement of president Sir Tim Clark. The story of Emirates is inextricably tied to Sir Tim and his late predecessor, Sir Maurice Flanagan. Emirates has been their life achievement, and the airline would have been different without them. Achieving Emirates’ growth meant putting aside other interests. Sir Maurice took up poetry, but he never strayed far from his old stomping group. A collection of his poems includes verses on Dubai duty free, airport waiting areas and landing in Colombo.
When asked about retirement, Sir Tim said, “I will go to all the places I've been to but never seen.” His list of such places will probably grow; no date has been set but it seems a few years away and in his own timeframe, before the airport switch next decade.
The immediate challenge of a handover is to find someone to replace Sir Tim, although some are quick to point to CCO Thierry Antinori. flydubai CEO Ghaith Al Ghaith is suggested to be very capable of running the airline he used to work for, but is content with his quiet achiever of a LCC. The next challenge is to smooth the inevitable management change and build leadership cultivation and succession planning. Emirates has been centralised under Sir Tim. He has been stretched, and Emirates’ future size necessitates spreading the workload and external relations; it is mostly Sir Tim who appears in the press. After operating under the same leadership team for 30 years, changes are inevitable.
Led by Emirates, the Gulf region ‘Big Three’ have transformed aviation in the Middle East and around the world. Collectively, the Gulf hubs at Dubai, Abu Dhabi and Doha will handle better than 90 million passengers in 2015, with a combined resident population of no more than 7 million. Aviation has anchored these cities’ place on global maps, and governments – in a stark contrast to most others – have re-invested.
This traffic, investment and integration is only going to continue to grow for the foreseeable future. The expansive networks, one stop to anywhere connectivity, price competitiveness and focus on product and service have made the Gulf airlines the choice of flyers globally.
That many of the world’s biggest – and profitable – airlines are mounting campaigns to stop Emirates’ growth is a testament to Emirates’ success. Although they often cite the number of aircraft Emirates has on order, few of them have probably worked through exactly what Emirates is capable of. They have focused on the past rather than Emirates’ foundation that powers growth. Rather than learn from Emirates, they seek to handicap it.
Aside from the negativity of protectionist moves there are new forces emerging to keep Emirates on its toes. The rise and rise of the Chinese airline industry will increasingly mean steeply added competition for much of the Gulf focussed sixth freedom operations. Even many points in Southeast Asia and Southwest Pacific can be well served over Chinese hubs, both into Europe and North America. Within the next two decades this will have a major impact on global long haul service. Closer to home, Gulf competition is growing with Kuwait Airways, Oman Air and Saudia looking to expand and increase their connecting traffic. Then there is the possibility that a geographically well positioned country like Iran can rejoin the mainstream. Emirates’ next 30 years will be no less eventful.
Major hub airports passenger traffic: 2004 to 2014
(This report first appeared in CAPA's Airline Leader, Issue #30 (see: AirlineLeader.com). It is formatted for that publication.)