How the UAE left legacy carriers in the dust

At no point during the slow decline of legacy carriers and the swift rise of Gulf airlines has the gap in bottom line been more evident than today

The future for the airline industry has rarely looker glummer.

The future for the airline industry has rarely looker glummer.

The future for the airline industry has rarely looker glummer. While the world’s carriers are expected to see revenues amounting to $603bn this year, profits are expected to come in at only $4.1bn, according to the International Air Transport Association (IATA). To say that margins are wafer-thin is something of an understatement.

Next year, IATA says, the industry is likely to perform slightly better, with profits coming in at around $7.5bn. But even these projections make the assumption that the eurozone will continue to dither without quite collapsing, that the Americans will scale the fiscal cliff and that the price of oil, helped by extra supply from Saudi Arabia and the US, will stay relatively stable.

In Europe, where the economic crunch is hitting legacy carriers hardest, the prognosis looks most dire. Carriers there are expected to lose $1.2bn a month, rising to a $200m loss next year. Lufthansa, perhaps the continent’s stand-out performer, may have reported a strong last quarter — up 30 percent in profits — but it is facing a hefty series of challenges, including restructuring, strikes, and vicious competition from low-cost carriers.

British Airways’ parent, International Airlines Group, posted a 96 percent drop in its nine-month results, pulled down by the performance of Iberia and the worsening economic crisis in Spain.

At no point during the slow decline of the legacy carriers and the swift rise of the Gulf airlines has the gap in the bottom line been more evident than it is today. That fact alone signals exactly why the last quarter has seen more alliances, partnerships and stake sales between ‘old world’ aviation and ‘new world’ aviation than ever before.

In this week’s issue we interview two of the biggest names in global aviation. Separated by just over 100km, Emirates president Tim Clark and Etihad Airways CEO James Hogan have taken different paths to push their airlines to the top.

Last week, Emirates posted its latest set of results. For the half-year, the airline doubled its profits, while the full group saw profits rise to $575m. To put that into perspective, IATA is projecting that the Middle East as a whole will make only $700m in profits in the full year. And if Emirates replicates those figures in the last half of the year, its annual net income would equate to more than half of profits that are expected to be posted by all North American carriers this year. Not to be outdone, Etihad Airways turned over its first profit last year, and has seen its half-year revenues come in at $2.24bn.

The question that airline CEOs the world over will be asking themselves is: how have they done it? The answer, I think, is not to do with cheaper fuel, no unions, lower wage bills, cheaper financing opportunities or any of the other accusations that legacy carriers like to throw to make excuses for the Gulf’s aviation boom. Instead, Clark puts the reason quite succinctly.

“At the moment, it [the industry] is depressed,” he told us. “The mindset of the management of these companies is fairly negative and concerned more and more about trying to keep their heads above water than growth.”

Whatever the circumstances, and no matter how bad the industry projections are, Emirates and Etihad have not taken their respective feet off the accelerator. There are more destinations being rolled out, almost on a monthly basis. There are more planes arriving by the bucket-load. And yes, if you are a regular flier, you will also have noticed that the price might be creeping up as well — but customers seem prepared to pay a bit more for a service that has clearly seen some investment.

If you look around the world, you won’t see many airlines that have been willing or able to take the kind of chances that Emirates and Etihad have grabbed with both hands. The results speak for themselves.

Ed Attwood is the Editor Arabian Business.

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Posted by: Ronald

The brilliance of Emirates and its clone Etihad is that the management saw the opportunity, took it with both hands and exploited all the perks offered them, subsidies, opaque accounting, cheap staff, no taxes and an excellent geographic location. Knocking the legacy carriers is a worthless exercise, as theirs are entirely different businesses. They have shareholders who want dividends, trade unions, anti-monopoly legislation and no sugar daddies. You are comparing apples with pears, and yes, legacy aviation is looking awfully like a pear these days.

Posted by: procan

Wow, you go Ronald tell it like is . Dream will end and another will start its all part of the cycle .

Posted by: Khawar

Call that an economic advantage of doing business in the middle east. Well the same taxes collected by the governments are not used to help their businesses including airlines. The middle east businesses facilitate more business and UAE has more expats than locals. So indirectly they are facilitating more external businesses by being magnanimous.

Posted by: Feroze

The main advantage most fail to see that the gulf carriers enjoy over others is the cost of doing business. They have access to a huge pool of talented people from the Asian sub continent and the CIS which allows them to keep the HR costs much lower then Euro/US or even some far east carriers. Nor do they have unions to deal with. They also have the advantage of being better located geographically where they have access to large markets close to home to feed into their hubs. Also one must not forget that while they may be on a level playing field in terms of fuel etc the gulf carriers pay no taxes at home or abroad where the concerned gulf carriers government had a Avoidance of double taxation in place!!

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