Questions surrounding the performance of the Emirates Group have intensified following a remarkable 82% fall in aviation profits for 2016-17, down to $340m. This unfortunate plunge comes in spite of a stellar 2016, in which the airline reported growth across the whole spectrum of its network while unveiling new routes to destinations in Africa and Central/South America. In the last few months, it has experienced regional political and economic headwinds which threaten its future revenue potential. It is, therefore, important to examine Emirates’ history and business model in more detail and determine whether the company is really ready to weather the storm ahead.
Creating a Global Footprint
Founded in 1985, Emirates Airline, the wholly-owned subsidiary of The Emirates Group, has served as the national carrier of the United Arab Emirates (UAE) and has widely been considered the world’s leading airline and long-haul travel specialist. It is a truly powerful force in global aviation and boasts a range of Awards for Excellence with its attention to detail, competitive pricing and range of onboard luxury amenities for Business and First Class travellers in particular. Emirates currently operates a fleet of 261 aircraft chiefly comprised of the Airbus A380, A320 and Boeing 777 models and has strived to create a truly global footprint, running and partnering flights to over 150 destinations across six continents from its hub in Dubai.
The airline offers a lucrative frequent flyer program, Emirates Skywards, and plays a major role as a corporate sponsor for major sporting events with the aim of exponentially enhancing its brand appeal and instilling customer loyalty. The company denies receiving reduced fuel rates or any other financial assistance from the Dubai Government; it attributes its high-flying reputation to its “consumer-centric approach” and positive impact on local jobs in Dubai, with more than 25% of the total workforce employed by both Emirates and related firms in the tourism industry. So what are the main issues that have plagued the aviation sector and how long are they expected to persist?
Navigating Political Turmoil and Increased Competition
Since the late 2000s, Emirates has had to fend off increased competition from rival Middle Eastern Gulf airlines, such as Etihad Airways (based in Abu Dhabi, UAE) and Qatar Airways (based in Doha, Qatar), which have amassed fleet sizes of 124 and 191 respectively. As such, they have directly encroached upon Emirates’ market share, offering equally competitive Economy prices to customers and luxury services for Premium travellers. Etihad, for instance, unveiled new luxury lounges and a First Class cabin known as “The Residence” – an onboard suite comprised of a living room, an en-suite bathroom and private bedroom to enhance the flying experience.
The downturn in commodity prices has given rise to a sluggish oil and gas industry, resulting in a dramatic economic slowdown in the GCC Region – a region that has historically had a high dependency on oil money. Lower economic growth in the UAE as a whole has fed through into Emirates’ operations inside the GCC, and the company has seen a rise in total fuel/operating costs. The strengthening of the US Dollar against a basket of currencies, coupled with the weakening of the British Pound in the aftermath of Brexit and the UK General Election, is also estimated to have negatively impacted on currency-adjusted revenues by up to AED 2.1bn.
The Gulf Crisis has further heightened tensions between Qatar and neighbouring countries such as the UAE, Saudi Arabia, Bahrain and Egypt, over claims that the former is supporting extremism and sponsoring terrorism. Consequently, these countries have temporarily severed diplomatic and economic ties with Qatar, with Emirates suspending flights between Dubai and Doha as of the 6th of June. Although the move is likely to hit Qatar Airways the hardest, Emirates is also experiencing a drop in demand as consumers become more wary of travelling through the GCC Region.
Perhaps the most significant headwind for Emirates is the impact of the laptop ban along with other policies on travel to the US, implemented by the Trump Administration. The “laptop ban” prevents laptops and other large electronic devices being carried in the main cabin on flights from several Middle Eastern and North African countries. Emirates announced in April that it would nearly halve the number of flights to and from the US in response to heightened security measures and lower demand for flights. The biggest concern for the Senior Management Team is the uncertainty over how long this ban is likely to be in place; the average passenger seat factor (proportion of full seats flown per flight) has fallen to 75.1%, indicating a mismatch between capacity and demand that puts a strain on the company’s overall earnings. This follows a decrease in passenger and cargo loads, initially highlighted as an area for improvement in FY 2015-16. Meanwhile, Etihad Airways claimed that there would be “no significant change” to demand and that it would continue to operate 45 flights per week to all destinations in North America.
An Accommodating Business Model
In spite of the number of destabilising events, most analysts agree that Emirates’ business model is fundamentally robust and can successfully withstand any short-term shocks. The airline is now engaged in cost-cutting measures in order to streamline its operations; this involves selling off older, less reliable craft to recoup a proportion of older investments and to make way for rapidly expanding newer fleets of A380s and 777s. Emirates is looking to pioneer a 3-5-3 seating formation for its Economy Class on the A380, as opposed to the traditional 3-4-3 arrangement, in order to economise on spacing and boost its passenger seat factor.
As an airline that encompasses the spirit of luxury travel, Emirates aims to further reinvent itself by charging more for full-service frills while maintaining a competitive margin with other major airlines such as Singapore Airlines, who are also renowned for impressive Business and First Class suite services. On A330s and A320s, the firm is likely to design a new Premium Economy Cabin, once again following in the footsteps of Singapore and British Airways as part of the reformed pricing strategy; with increased passenger loading and higher demand for luxury travel in First Class and Premium Economy, the airline can eventually pass on relatively lower prices and deals to Economy passengers.
There are rumours of a possible merger between Emirates and local low-cost carrier Flydubai, which could help the larger airline develop regional capabilities, gain control of a range of networks and more effectively match capacity to demand. Chairman Sheikh Ahmed bin Saeed Al Maktoum, who is also the Chairman of Flydubai, hinted at greater collaboration between the two companies by exploiting cost synergies and preventing them directly competing with each other on specific routes.
Still the World’s Leading Airline?
It is true that Emirates’ quest for prolonged aviation supremacy has suffered a few setbacks of late; although, the Centre for Aviation (CAPA) remarked that relative to their international peers, “Gulf airlines are more in control of their costs and sit in growth regions. They can reform and restructure.” We have already discussed some measures that are being taken by the firm to stay competitive amidst the turmoil in global markets, cost reductions and the removal of some service lines. Emirates should continue to offer world-class services on the ground and in the air, and alongside Singapore Airlines its prime geographical hub is considered to be particularly attractive for travellers flying between Western Europe and Australia/Oceania. After all, it takes a brave man to count out an international brand, an undeniable force of aviation, that has registered strong profits for 29 consecutive years.
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