By Massoud A. Derhally
Emirates president Tim Clark says the carrier’s success is due to its completely different business model
Some airlines have gone bankrupt. Others are licking their wounds from a depressed global economy and a recovery that is taking longer than expected. But not Emirates. The Dubai-based carrier has faced its challenges — be they environmental, energy-related, or stiffer competition — head on. In many ways it has been a visionary in the way it has ploughed ahead in a $600bn aviation industry that has seen profits plunge in the past two years.
“We have a plan, which is driven by a business model which was cast in concrete in July 2000, nearly thirteen years ago. We’re tracking that and that did see major expansion into the US, Africa, Asia into Europe and we’re following that,” Clark says. “We will continue to do that and there will be others who will follow and try to emulate what we are trying to do but they need to do it profitably as we do.”
Not many airlines can boast about profitability at the moment. The airline industry, which has been in a downward spiral since its peak in 2010, is forecast to earn $4.1bn in profits this year, according to the International Air Transport Association (IATA). That’s slightly up from the organisation’s original estimate of $3bn in net profit, yet still 78.6 percent lower than the high of $19.2bn earned by air carriers two years ago.
With that backdrop one can’t but be impressed at the performance of Emirates, which, in spite of unstable global economic and regional geopolitical conditions, more than doubled its profits in the first half of its fiscal year ending in September, posting a net profit of $464m. The airline also recorded an average passenger seat factor of 80 percent in the same period.
The key to the success of Emirates, and what sets it apart from the competition, rests on a matrix of elements starting with the breadth of the carrier’s network.
“We have a completely different business model which relies on now a varied 126 destination network spanning the globe to feed our business across our hub from all sorts of places that people in the past thought we were nuts to go to,” Clark says.
But now of course they’re paying dividends because the global economy is in a pacing mode; having the European economies in a deep dive at the moment, the American economy has been in limbo for some time and it looks that it might be revitalising, the Asian economies despite being down on GDP still remain very robust. We have spread into all those countries, into Africa, Australia, New Zealand, South America and therefore where there have been less effect of global economic depression, recession, we have been able to get the benefits of that.”
By next March Emirates will have initiated flights to 23 new destinations in two years. Emirates’ continued growth, while other carriers took on cut backs, coupled with a diversified expansion strategy is at the crux of the company’s success, Clark says.
“We are able to keep our head above water, keep on growing our business, relying on a revenue stream that come from fairly geographic distant and somewhat regarded as remote to the airline world,” Clark says.
“We do not put all our eggs in the same basket with regards to the north Atlantic or south Atlantic. We try and balance the production so that we can take any knocks in the system that come from anywhere.”
That strategy has actually worked very well. It has seen the airline through Gulf wars, SARS, the Arab Spring, the tsunami in Japan, floods in Queensland and years of ups and downs in the aviation industry.
“We are fairly adaptable and adaptive of getting the business model to work for us, being fairly quick to react to changes not just of trauma but in changing economic circumstances,” Clark says. “When we see opportunities we move quickly and we react to it. We have a lean management structure. We don’t have the institutionalised structures that some of the carriers that we compete with do. Decisions are made quickly, they’re executed quickly, implementation is quick and we are able to move at a pace that others cannot do.”
The airline industry, which has seen its profits dwindle over the past two years in the wake of a slowing global economy, would be in a much stronger position if the price of oil was much lower than it is now, Clark says.
“The primary driver in all of this is the cost of fuel, if that was down where it should be which is about $80 a barrel and the fuel into plane was about 250 cents instead of 340 cents as it is for Emirates today, you would be looking at a different complexion on international aviation,” Clark says. “It would be far more profitable, it would be far more expansive, it would be far more upbeat. At the moment it is contractionary, it is depressed. The mindset of the management of these companies are fairly negative and concerned more about trying to keep their heads above water than growth.”
The industry’s performance is expected to improve with airline profits surging 83 percent from this year to $7.5bn in 2013, according to IATA’s forecasts, so long as the debt crisis in Europe does not worsen, the US does not hit its fiscal cliff, China’s economy does not continue to slow and oil prices are somewhat lower than 2012.
That improvement only represents a profit margin of 1.1 percent for an industry that is expected to see revenues of $660bn in 2013.
“We (Emirates) are subjected to the same adverse trading conditions as everybody else, be that depressed economies in Europe, high fuel prices, difficulties in government punitive taxation, environmental taxes, we face that just the same as everybody else does,” Clark says.
Richard Aboulafia, vice president of Fairfax, Virginia-based Teal Group, an aviation consulting firm, says Emirates, and to a lesser extent Qatar Airways and Etihad Airways, “have done well attacking traffic carried by European and Asian legacy carriers.”
“Given superb geography, strong funding from home governments, and smart brand creation efforts, it’s difficult to see what will disrupt this process,” he adds.
With the conviction that the global economy will eventually come around, Clark is bullish on the future of Emirates and the airline industry.
“We run our business differently. We are opportunist. Our strategies seem to be paying off,” Clark says.
“We are positioning ourselves for when things get better. That may take a bit longer. But I wonder. The global economy is remarkably resilient and I think the cork is way down in the water but watch out when it comes back up again and it will come back up again and I think it will surprise all of us.”For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
isnt this type of story getting repetitive? We know EK is making billions a day, without subsidy of course. We know they have a business model that no one on earth thought about before. We know it is the only airline to survive wars, SARS, economic depression and falling margins. Heck, it may even be the only airline that has solved wars, SARS and picked up the world economy.
Enough of this palava as 90% of the readers know how EK is kept flying!
RAH good to see you do not pull your punches . Let all Government supported business know they fool only the simple minded. I would like to say up front ,Canada is selectively protectionist. That's right protectionist, yes we are not perfect, but we can be as we are not a one trick pony. Keep up the bold and interesting comments.
Emirates does have a unique business model, so good that their poor sister Etihad will never catch up, no matter how much they ape their rival. The best thing Emirates doesn't have is a union. They would be out of business if they did.
why hating on emirates ?? hate the game not the player ;)
Ronald, Etihad has three mandates which it is on track to continue fulfilling them.
Being as big as Emirates is NOT one of them, so no need to fear Etihad catching up with Emirates in all of your comments :)
Even Emirates has an advantage in terms of fuel costs they appear arrogant enough - at least to their business class flying gold members - and do not forward this advatage to their premium clients! What a shame, Mr Tim Clark! The service of Emirates is declining year by year since 2004. If nothing cjhanges Emirates will be flying the big mass of low-revenue Middle East guest workersin 20 years.The Premium segment will be be taken over by other airlines.Even Emirates has an advantage in terms of fuel costs they appear arrogant enough - at least to their business class flying gold members - and do not forward this advatage to their premium clients! What a shame, Mr Tim Clark! EmiratesÂ´service is declines permanently! If this continues in 20 years only South Asian labourers will using Emirates form their vacation onve every two years. All profitable routes will be taken over by other airlines because of EmiratesÂ´ greedy, staingy and rassist behaviour.