By Anil Bhoyrul
At 7.10am on Tuesday morning, Virgin Atlantic’s first flight from London to Dubai will touch down. Sir Richard Branson’s public relations machine has been in full swing, and the airline has already slashed prices on the London to Dubai route. But can it really compete with Emirates Airline? Anil Bhoyrul and Tamara Walid find out.
|~|27-new-r4-200.jpg|~|ARRIVAL: Richard Branson has organised a spectacular welcome for himself in Dubai this week.|~|At 7.10am on Tuesday morning, Virgin Atlantic’s first flight from London to Dubai will touch down. Sir Richard Branson’s public relations machine has been in full swing, and the airline has already slashed prices on the London to Dubai route. But can it really compete with Emirates Airline? Anil Bhoyrul and Tamara Walid find out.
Twenty two years ago, Sir Richard Branson was sitting in the cockpit of the first ever Virgin Atlantic jumbo jet as it approached New York’s JFK Airport. The eight hour flight was packed with celebrities and journalists. It had been eventful to say the least. “Everyone was cheering as we landed. Everyone had a very good time, but I was a little worried,” Branson says.
That was an understatement. Unknown to his 350 guests on board, Virgin Atlantic hadn’t actually sold a single ticket yet for the London to New York route. With his entire Virgin Group showing profits of just US$4 million and total sales of US$50 million, launching an airline was the biggest gamble of his life.
This Tuesday, another Branson “gamble” gets underway as a Virgin Atlantic plane touches down at Dubai International Airport for the first time ever. Twenty two years on, Virgin Atlantic has 75 planes, and its annual profits have reached US$125 million — its highest in six years. Total sales have crossed the US$2 billion mark. The Virgin Group is a spiraling worldwide empire that employs over 8000 people across 30 divisions. It is headed by arguably the most famous businessman on the planet, who rarely encounters failure or disappointment. What Branson wants, Branson usually gets.
But will he succeed this time? The battle to enter the UAE airline market is not going to be easy. Up against him is Emirates Airline, led the formidable Sheikh Ahmed. Launched only a year after Virgin Atlantic in 1985, it’s fleet is now 90 strong and will grow to 200 by 2012.
Last year’s profits were US$708 million, the highest ever in the industry, and Emirates has also ordered 45 of the new Airbus A380 super jumbos, a third of the entire order book.
Four months ago, during a brief visit to Dubai, Branson officially announced the launch of the service between London and the emirate.
But when quizzed on whether he was ready to cut prices in order to take on Emirates, he replied: “Our pricing policy will be the same that it has always been. I am sure that there will be fierce competition in bucket shop travel agents over the price, but if I were to announce today that we are coming in at a lower fare, then Emirates and British Airways would do the same. There would then be a fierce price war which I do not think would be good for anyone.”
He was right — he waited until last week to announce that Virgin is coming in at a lower fare, and a much lower fare at that. During April, economy flights between London and Dubai are being sold for just US$400 — half the price of Emirates. The 50% discount is also available on business class flights, and so far Virgin has sold almost every seat available. Throw in limousine services and flat beds, and the big question is whether, come May, passengers will stick with Virgin rather than switch back to Emirates.
Branson himself explains: “It is an extremely popular and fast-growing route and so we expect to pick up our fair share of the market and do well on the route. There is still huge investment going into Dubai which is expected to continue for many more years so the market will undoubtedly grow further.”
He adds: “It will be a challenging route as we will be up against a number of carriers including Emirates, one of the best airlines in the world, but Virgin Atlantic has always thrived on competition and we believe our entry into the market is good news for passengers.”
With 50% discounts being offered on some fares, it clearly is good news for passengers. But the bigger issue is how long the airlines can stomach such subsidies for. Both Emirates and Virgin have big plans for the near future, which, in turn, involve big spending.
Branson says: “Rising oil prices undid some of our good work and regrettably we were left with no option but to introduce fuel surcharges from May 2004, although these only recovered around one third of the US$100 million extra costs we faced over the year. But despite the burden of fuel rises we remained committed to innovation, investment and growth.
“That strategy will continue with planned annual growth of over 10% through expanding our fleet. We added new routes like Mumbai, Cuba and the Bahamas in 2005, together with Dubai and Jamaica in 2006."
During the financial year, Virgin Atlantic added three new Airbus A340-600 aircraft, bringing the size of its fleet to 31 planes, with an average age of five and a half years. In August 2004, the airline announced an order for up to 26 more A340-600’s, worth US$5.5billion.
The figures are all the more impressive considering that during the financial year to February 25, 2005, Virgin Atlantic flew 4.4 million passengers, up from 3.4 million the previous reporting period. With such an upturn, and the fact that Virgin is now 49% owned by Singapore Airlines, Branson cannot afford to fail on this route. But he appears unconcerned, for now at least, with the competition, saying: “In this region we are primarily competing with Emirates, but the Dubai government has been encouraging us to come here for some time. They believe it will help the region and the industry. My view is we can compete very hard in the daytime, but can be friends in the evening and the weekends.”
However, some analysts point out that with a fuel cost rise of over US$100 million, even after introducing fuel surcharges on ticket prices, Virgin simply can’t afford to get into a price war. If Emirates did respond, Virgin would be in trouble.
That though, is unlikely to happen. Emirates' chairman Sheikh Ahmed has steered his group to record breaking profits and isn’t about to start jeopardising them. He tells Arabian Business: “At the end of the day, whichever type of business you run, you have costs and you have profit margins.
“It’s always the way. You have to keep your profit margin. And this is not something that is happening on a temporary basis. Okay, if fuel prices were only going to rise for one or two months then I would pay for it. But this is something that has been going on for sometime. Nobody can tell you today where oil prices are going. All we have seen is the prices go up. And I’m not going to pay for that. When it comes to costs, somebody’s got to pay. I mean, no airline can escape this problem.”
For now, it is very unlikely that either Emirates or Virgin will drop the fuel surcharges on tickets, leaving only price and quality on which to compete. While Virgin rightly boasts about the quality of its Upper Class service for business class fare, it would be wrong to assume that Emirates will not hit back in some way. Given the fact that it is already the world’s 10th biggest airline, Emirates has considerable clout with plane makers such as Airbus and Boeing. The former has already changed the wing design on its new A350 purely in the hope of winning 60 orders from Emirates, despite the modifications costing around US$1 billion.
Boeing is considering doing the same with its Boeing 777 Dreamliner, again just to impress Emirates. And given the fact that Emirates operates out of Dubai with a population of just one million, and that its own planes are on average at least 70% full, it needs to be dominant in almost every market.
Regional aviation analyst Rajindra Prakash says: “So far, we have heard nothing from Emirates, and Branson has stolen all the limelight. Everyone has been talking about Virgin for the past six months and the first plane hasn’t even landed here yet. That means he has a great public relations team, but doesn’t necessarily mean the business model will definitely work. This isn’t the same as launching to the Bahamas. You are taking on Emirates Airline, and I don’t think Emirates Airline would have been so welcoming if it didn’t have something up its own sleeve.”
So what does Emirates have planned? “All competition is a threat — how you cope with such competition determines whether you make a profit at the end of the day — and your customers keep coming back,” Mike Simon, senior vice president of corporate communications at Emirates Airline says. “There are many airlines already serving this route and we do not expect a price-war [with Virgin]. Competition is also good for the consumer, and another airline will help to develop the market even further,” he adds. “There are more than 10 airlines serving the UK from Dubai and we believe there is a big cake, big enough for all of us.”
The experts, though, are convinced it will come down to fuel prices, not ticket prices.According to Prakash: “If you look at airlines like Qantas, which are in profit, fuel now accounts for 30% of their operating costs. It used to account for 19%. In other words, there is very little room to start price cuts, or price wars. And nobody can really afford to sit by and watch another airline come in and take their market share.
“That is what Virgin is planning to do, and Emirates will have to do something about it. The bottom line for everyone is neither passenger numbers nor PR stunts, it is oil prices. And that affects Virgin as much as it affects Emirates.”
It also affects the entire airline industry. Data released by International Air Travel Association boss Giovanni Bisignani claims the industry would make an average of US$3 billion a year in profits, based on oil prices being US$30 a barrel. But at US$33 a barrel, the figure turns to break even, and at US$36 a barrel, losses average US$3 billion.
“You can do the sums for yourself based on the current high prices of oil. It also explains why, even at Qantas and Singapore Airlines, where profits are still high, earnings are falling,” says Prakash.
Cynics would also argue that Virgin cannot get into a price war with Emirates given the latter is state-owned. Many rivals, including Qantas and Air France, have long claimed that Emirates receives special treatment for this, in the way of huge government subsidies. The company’s accounts show nearly US$2 billion in cash reserves.
It is a claim that Sheikh Ahmed is quick to deny, saying: “I think Emirates is very transparent. We publish our annual results. We have international auditors. We have been borrowing money from financial institutions and banks.
“All these people will not lend you money without knowing that you can pay them back. And we work with no guarantees from the Dubai government. It’s always based on our financial results.”
None of this is likely to deter Branson from putting on the biggest show Dubai has seen for some time. His first flight to Dubai will be packed with over 150 journalists from around the world, all being treated to a three day jaunt in the Emirate. Virgin’s marketing budget for the launch runs into several million dollars. In 1998, when Virgin Atlantic launched its first flight to Shanghai, Branson appeared on the streets on the city dressed in red and riding a bicycle surrounded by hundreds on Chinese, also dressed in red. The arrival was so spectacular, it was instantly beamed to billions of Chinese on television.
Two years later, to announce the arrival of the first Virgin Atlantic flight to Las Vegas, Branson parachuted out of a helicopter onto the Nevada desert, this time dressed as Elvis Presley. His PR operation is being discreet about exactly what stunt is planned next week, although it will certainly be huge. A lavish party for nearly 400 VIPs is being held at the Jumeirah Beach Hotel on Wednesday. Just hours earlier, Branson is expected to confirm the name of the first ever UAE national to take part in a space flight, when its Virgin Galactic venture launches in 2008. “We have a lot planned. You will know we are in town," says a Virgin source.
Recent history suggests Branson will not take long to make himself the best known face in town, and Virgin the best known airline. At least for a week.||**||