Business | Aviation
Flying in the face of a trend
Emirates has raised eyebrows with its new A380 order, but its growth model has given it a solid base of business and leisure travellers globally
- By Saifur Rahman, Business Editor
- Published: 00:00 June 10, 2010
- Image Credit: NINO JOSE HEREDIA/Gulf News
- With the latest orders, Emirates will become by far the biggest A380 operator in the world. Its orders represent nearly 39 per cent of the 234 A380s sold so far.
Dubai: Emirates' latest confirmed order for an additional 32 A380s, valued at $11.5 billion (Dh42.5 billion), may have caught aviation observers by surprise, since they might be wondering: "What will the airline do with so many double-deckers? Is this growth pattern sustainable? And for how long?"
In a volatile global economic environment where air travel — be it business or leisure — is severely affected by short-term geo-political challenges, could Emirates continue to buck the trend?
Let's take a look at the facts and see if Emirates' current business model supports its future growth.
Emirates, which completes 25 years in business this year, has a fleet of 147 wide-bodied aircraft and, until Tuesday, had an order backlog of 143 aircraft worth $48 billion.
The latest announcement takes the total order to 175 worth $59.5 billion. By value, this is the single largest confirmed order for Airbus.
With the latest orders, Emirates will become by far the biggest A380 operator in the world. Its orders represent nearly 39 per cent of the 234 A380s sold so far. The second biggest A380 customer, Qantas, has only 20 on confirmed order.
Needless to say, Emirates has secured a hefty discount on these bulk orders. Emirates has a habit of placing orders in a depressed market that helps it extract bigger discounts, especially on the A380, which has not been making much headway in sales in recent years.
Emirates has a cashflow of Dh12.5 billion. Its healthy balance sheet helps to get easy finance from banks and most of the fleet has been financed by the banks.
So, paying for the expansion is not an issue for Emirates.
There are a number of reasons the aviation pundits are surprised. First, there is no domestic aviation market in the UAE that could support the expansion of an airline on this scale. The Emirates base, Dubai, is a city of 1.6 to 1.8 million people, so where would the passengers come from?
In the Gulf, other fast-growing airlines such as Etihad Airways and Qatar Airways are also expanding their fleets to increase their share of the pie. They will be serving the same markets in which Emirates operates.
For a good number of years, Emirates did not face strong competition on many of its routes. However, regional rivals could give Emirates a run for its money in the years to come.
Besides, a number of global carriers have refrained from serving the Dubai market. It would be foolish to think that they won't ever enter Dubai.
So, the question remains, will Emirates be able to fill these high-volume aircraft with enough passengers to be able to remain profitable?
It's not impossible. The reason for Emirates' success — and its meteoric rise — is firmly rooted in its business model, which is aligned with Dubai's growth.
When Dubai opened its airport in 1960, the government adopted an open-sky policy which gave airlines relatively free access. This brought in more traders and helped Dubai connect with the major business hubs of Asia, Europe and Africa. This has also helped the merchandise, hotels and tourism sectors to grow.
So when Emirates was launched in 1985, it did not have a problem attracting passengers. All it needed was to put the plane on the right routes.
High-volume routes to Karachi, Mumbai, Cairo, New Delhi and Dhaka provided it the necessary traffic of workers, that was complemented by people flying in from London, Frankfurt and later Sydney, for business and leisure.
In the 1990s, Dubai launched its vision 2010 to transform its economy from being based on trade, to one based on knowledge. This attracted a host of professionals to work in neighbourhoods such as Dubai Internet City.
Emirates continued to take advantage of this growth by putting more planes in the market and efficiently managing the seat occupancies.
Emirates currently serves 102 destinations in 62 countries on six continents. In its last financial year ending March 31, the airline carried 27.45 million passengers, generating revenues of Dh43.45 billion and with a bit of financial re-engineering, managed to deliver net profits of Dh3.53 billion.
This was a 416 per cent increase over the previous year. In laymen's terms, this was a "financial coup" from which the airline emerged stronger.
Nearly 28 per cent of Emirates' revenues come from East Asia and Australasia, followed by 27.3 per cent from Europe. A total of 12.6 per cent originates from West Asia and Indian Ocean. The Middle East and Iran contribute only 11.6 per cent. A further 11.2 per cent of revenue comes from Africa, and the remaining 9.4 per cent of the Dh43.45 billion in revenue comes from the Americas.
Emirates is no longer dependent on its domestic or regional base. Its current business model, built on carrying passengers from across the world via Dubai, is expected to help the airline rise above the competition in the coming years and help it play a greater role in ‘connecting people' and ‘bridging cultures' across the globe.
Editorial comment — Page 10
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