Business | Aviation

How does Emirates remain profitable?

Airline keeps overheads low, utilises its aircraft well and keeps employees happy

  • By Saifur rahman, Business Editor
  • Published: 00:00 May 13, 2010
  • Gulf News

  • Image Credit: Megan Hirons Mahon/Gulf News
  • Dubai International Airport. Emirates has capitalised on significant cost reductions combined with impressive increases in staff productivity.

Dubai: Emirates, the biggest Arab carrier, has a habit of bucking trends. It has continued to remain on a growth path, delivering increased profits year after year in volatile situations.

During a decade marred by multiple challenges, the airline cruised through regional conflicts, September 11, SARS and the global financial crisis, making it an interesting case study for airline managers and observers.

The question is, how does the airline deliver profit growth consistently year after year?

Last year, the airline's revenue remained almost flat but profits jumped 415.7 per cent.

How do you earn more than a four-fold increase in profit on the same revenue base?

"By cutting costs," Shaikh Ahmad Bin Saeed Al Maktoum, President of Dubai Civil Aviation and Chairman and Chief Executive of Emirates Airline and Group, said. The airline business is not simple, it's rather complex. But the way Emirates operates makes it look simple.

"Across the board, we managed to improve productivity. These are excellent results and they did not happen by chance," Shaikh Ahmad said. "It has been an exceptional year of continued profitability against a backdrop of the worst global recession in generations.

"The first half of the financial year, however, was extremely challenging as the world continued to grapple with the economic crisis.

"Our pioneering spirit and ability to adapt to adverse conditions helped us to push through this harsh economic climate with an extremely strong performance in the latter part of the year."

Aircraft utilisation

How did Emirates manage such huge profits?

It is generally accepted that if an airline can keep its aircraft flying more than 12 hours a day with decent seat load factors an airline can not make losses — depending on other factors such as employee per aircraft, yield, taxes, and fuel costs for example.

Emirates' aircraft utilisation is one of the best in the industry.

A look at its financial results point to one thing: efficient management.

First, the airline managed cost savings of Dh2.5 billion in fuel alone, falling from Dh14.44 billion to Dh11.9 billion.

Of the airline's total costs of Dh39.89 billion, fuel topped the list with Dh11.9 billion, or 29.9 per cent, followed by staff salaries, which with Dh6.3 billion, represents 15.9 per cent. Sales and marketing costs were reduced to Dh3.03 billion, which is about 10.3 per cent. Also, it cut corporate overheads by 24.4 per cent to Dh2.5 billion.

"Although we went into a major cost-cutting exercise, we did not compromise on quality," Gary Chapman, President of Group Services and Dnata, told Gulf News, explaining how his company managed its bottom line.

"In the face of a 17 per cent drop in yields, we have managed to keep revenues flat while keeping costs under control.

"We contained costs also on capital expenditure. For example, our efficient management helped us to save Dh600 million in the IT division alone."

Despite a 16.9 per cent capacity increase in 2009-10 to 28,526 million ATKM (available tonne kilometres), Emirates' operating costs decreased by 2.7 per cent from the previous year.

"This results in a significant unit cost improvement of 16.6 per cent and impressive productivity gain per employee, as the average airline employee strength has only increased by 2.3 per cent," the airline said.

Yields declined by 16.9 per cent to Dh0.211 (57.5 US cents) per RTKM (Revenue Tonne Kilometre), down from Dh0.254 (69.2 US cents) in 2008-09. This decline in yield was countered by the increase in the passenger seat factor.

Additionally, the number of passengers carried rose 20.8 per cent to 27.5 million from 22.7 million, raising the passenger seat load factor to 78.1 per cent - one of the highest.

If the declining fuel price is factored against this — with fuel's component of operating costs cut to 29.9 per cent, down from 35.5 per cent the previous year — the airline's operation remains in a very comfortable position.

Load factors

This reduces the break-even seat load factor to a more comfortable level to within the 55-60 per cent bracket — much below the 78.1 per cent recorded by the airline.

In layman's terms, if the airline operates above the break-even seat load factor — which is presumably within the 55-60 per cent bracket, then at 78.1 per cent the airline simply can not suffer a loss.

"Although Emirate's results reflect a very efficient and intelligent management of the airline business, it does benefit from the tax breaks and the absence of labour unions, among other hassles that other airlines have to go through," an aviation analyst said, requesting anonymity.

"Although the airline is not subsidised, it enjoys certain benefits that other international airlines [outside the UAE] do not, such as facilities to issue visit or transit visas."

Gary Chapman said, "Although we do not pay taxes, we incur a lot of other social costs, such as medical, education and family accommodation for our large employee base that has a direct contribution to the economy.

"However, as others benefit from the tax-free environment, so does Emirates... it's not unique to our company."

On the labour union, he said, Emirates hires the best talent in the market.

"We have a less than 5 per cent attrition rate. We offer the best packages to our employees and at the end of the day, they are the driver of growth.

"Therefore if the employee satisfaction level remains high, that reflects in their productivity. We do not need a labour union to tell us how to carry out our business."

Adversity

However, Shaikh Ahmad said: "Time and time again Emirates has weathered adversity. We have operated through regional conflict, SARS, the Asian economic collapse and most recently the global recession.

"Our 21 per cent increase in passenger numbers from last year is an incredible result and has helped to cushion us from the effects of lower yields.

"This increase in passenger numbers is attributable not only to our position at the centre of the new Silk Road between East and West, but also to our commitment to increasing our network and service standards."

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