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Sun 13 Nov 2011 08:51 AM

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Emirates has its eye on the long game

A slump in first-half profit doesn't mean anything for the world's fastest-growing airline, writes Ed Attwood

Emirates has its eye on the long game
Emirates has its eye on the long game
Emirates Airlines chairman Sheikh Ahmed bin Saeed Al Maktoum

If you look at the headlines covering the Emirates’ six-month results last week, you’d be forgiven for thinking that the carrier had had a disastrous half. The Dubai carrier’s profits ‘slumped’, ‘plunged’ or ‘nose-dived’, depending on which report you read. And, taken at face value, the 75 percent drop in profits year-on-year doesn’t look great.

But it’s here, as in other areas, that Emirates appears to have been a victim of its own past successes. Despite the drop, the carrier racked up $225m in profits, head and shoulders above most of its competitors. Singapore Airlines — a decent barometer of the health of the global aviation industry — reported its own results at the same time, with profits down by 62 percent to $188m. Over in Australia, Qantas CEO Alan Joyce pressed the self-destruct button on his own airline by opting to ground the entire fleet due to union demands — while at the same time pocketing a 71 percent pay rise.

Emirates’ rationale for the profits drop was simple; the high oil price and the global economy. That, if anything, should put a nail in the coffin of obsessive accusations from European carriers, which have continued to conflate the carrier’s exponential growth with its alleged access to subsidised fuel.

Let’s not forget that this has happened before. This time three years ago, Emirates reported an 88 percent drop in first-half profits to $77m. On that occasion, the price of a barrel of crude had briefly risen to almost $150. Around the same time, the carrier withdrew its A380 service to New York, with critics claiming that the results were the first sign of a wobble. Since then, however, Emirates has just grown stronger and stronger. It saw profits jump by 52 percent in the last full year to $1.5bn, a figure that is the envy of the global aviation industry. And even if its half-year results are replicated over the full year, it will still account for well over half of all the profits Middle Eastern airlines are expected to record this year, according to IATA. If Emirates hadn’t had to pay the extra $1bn for fuel in the first half, there’s no doubt that the Dubai carrier would have seen its best six-month reporting period in history.

So what do the results mean for Emirates’ expansion plans? Not much, according to company officials, with several hints being dropped that the carrier will add to the 188 wide-bodied aircraft already on order — that’s more than double its existing fleet — at this week’s Dubai Air Show.

In fact, it seems that there are few issues that could seriously affect Emirates’ top line growth long term. One, potentially, is the production of ultra-long-range aircraft that could fly point-to-point and sideline Dubai as a hub point. But that won’t be happening any time soon. Another is the lack of financing available from the airline’s usual source — European banks. Reuters reported last week that Emirates officials may have to think creatively about using Islamic products to secure the money it needs to buy its planes.

Destinations added recently give a healthy clue as to the airline’s future thinking. It will launch two South American routes in January, two African routes in February and two more US routes shortly after that, one of which — Seattle — sits extremely close to the coveted Canadian market. A recent study by RBS analyst Andrew Lobbenburg shows that Dubai is tailor-made to suit traffic between Eastern Europe to the Middle East, North Asia to Africa, and South Asia to North America — all potentially huge areas of growth.

While the other Gulf carriers will pursue similar strategies, Emirates already has the economies of scale to make good on its promises. One relatively slow half is not going to stop that.

(Ed Attwood is the deputy editor of Arabian Business. The opinions expressed are his own.)

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