ROYAL SUCCESS

Emirates rules the skies of profitability

BY MAUREEN JENKINS

Imagine building a world-class airline from the ground up, one that would grow at phenomenal rates each year. You’d carefully select your fleet, ensuring that it provided the best return on investment. Since you fly long-range routes, you’d emphasize top-flight passenger service that could hold its own with the world’s most admired carriers. You would base your airline in a combined hub of global commerce and tourism, operating from a state-of-the-art airport. You’d hire an international staff and crew equipped with the most in-demand skills.

And perhaps you would arrive at a model similar to Emirates.

Over the past year, this Dubai, United Arab Emirates–based airline has managed to do what almost no other carrier has: achieve record profitability despite Sept. 11th’s staggering blow to the global airline industry.

Consider this: Emirates continues to grow at an average annual rate of 20 percent. In one of the worst years the airline industry ever suffered, its profits rose 11 percent to $127 million. Both its passenger numbers and available seat kilometers swelled by nearly 20 percent. This sort of phenomenal growth demands more airplanes—and in Emirates’ case, it demands ones with large capacity.

His Highness Sheikh Ahmed bin Saeed Al-Maktoum, chairman of Emirates, visited Seattle last month to meet with top-level Boeing Commercial Airplanes executives about his airline’s expanding fleet requirements—and to review new 777 interiors Boeing is creating specifically for Emirates. The 777 is a staple of the airline’s service, as it currently operates nine of the airplanes and has entered into leasing contracts to operate twelve 777-300s, the last three of which deliver in 2003.

“The economics of that aircraft for the seat-mile costs have been fantastic for us,” said Sheikh Ahmed during an interview with Boeing Frontiers in Seattle. “We believe it’s an aircraft that will continue with Emirates for quite some time.”

Before arriving in Seattle, the sheikh had just flown in from Osaka, Japan, where Emirates had inaugurated service on Oct. 1. Three-class Boeing 777s will fly nonstop routes from Dubai to Osaka through a codeshare deal with Japan Airlines.

With 63 destinations in 45 countries, Emirates operates a fleet composed of 43 Boeing and Airbus airplanes. The 17-year-old airline operates one of the industry’s youngest fleets, with its airplanes having an average age of three years. And most amazingly, the carrier has been consistently profitable since its founding in 1985.

Those in the airline industry sometimes refer to Emirates as the “Singapore Airlines of the Middle East.” Like Singapore, the airline is a perennial winner of worldwide passenger and industry awards. It’s renowned for first-class service throughout all its commercial cabins. And it continues to set new standards in long-range service. But Sheikh Ahmed prefers the industry judge his airline on its own.

“A lot of people associate Emirates with Singapore, and [refer to] Dubai as if it’s the Hong Kong of the Gulf,” he said.

“We always take into account what our customers demand, regardless of how the [other airlines] are doing it.”

Emirates finds itself in a uniquely enviable situation. The government of Dubai, which the Al-Maktoum ruling family leads, owns the airline. But despite the government’s initial investment in the airline, the sheikh said, sound management has ensured that Emirates flies high on its own capital, without guarantees from the Dubai government.

The government also maintains an “open skies” policy, which permits unlimited competition among Emirates and foreign airlines in order to drive the Dubai economy. That means that Emirates must sink or swim on its own merits—yet, it’s still managed to sail to the head of the class.

Despite the events of Sept. 11, “Our market in the UAE and Dubai continued with all the growth because people were still traveling,” said Sheikh Ahmed, who reported a four- to six-week traffic slow-down right after the attacks, followed by a brisk rebound. “We managed through the crisis because we weren’t only concentrating on the first-class and business-class cabin.” Rather, he said, Emirates also marketed itself to economy flyers.

“Emirates continues to impress the world with its continued growth and unparalleled service,” said Doug Groseclose, senior vice president, International Sales for Boeing Commercial Airplanes. “We at Boeing only hope our 777s have helped play a role in their success.”

And, said Sheikh Ahmed, the twin-aisle airplane certainly has.

777s helps drive growth

At the Dubai Air Show last November, the airline signed a memorandum of understanding with Boeing for 25 777s. But, Sheikh Ahmed said, Emirates is “reviewing those numbers now, because of the way we see the growth this year … . Those numbers should be much higher.”

When considering initial orders of the Airbus A340, MD-11 or 777 last decade, after “looking at all the data we’d been given, we were very confident that the 777 would do the job for Emirates,” the sheikh said. “We were criticized at the time because it was a paper aircraft at that time, but we were confident.”

Since then, a mutually beneficial alliance has developed.

“The relationship Emirates and Boeing have shared over the years has helped Boeing build a better 777,” Groseclose said. “Together, we have taken the ‘Working Together’ concept to another level.”

Sheikh Ahmed said that Boeing 777s are “fitting very well” into Emirates’ longterm strategic goals.

“We see Emirates, the way we are heading, that within our fleet, the smallest aircraft would be in the range of a 300-seater,” he said. “Maybe over the next 10 or 12 years, somebody might see just operating 777s or (Airbus) A380s.”

The sheikh said that operating a mixed Boeing and Airbus fleet works.

“It does seem to me that interestingly, some of the most profitable airlines—namely Emirates and Cathay Pacific—have doubled up 777s and (Airbus) 330s, and 747s and 340s,” said Daniel Solon, a Barcelona, Spain–based senior consultant for Avmark, a global aviation consulting firm. He also is associate editor of the Avmark Aviation Economist. “I would have thought it would create more complexity operationally than one would want to be saddled with, but it works for them.”

As the launch customer for Airbus’ largest-ever airplane—Emirates has ordered 22 A380-800s and holds options for another 10—Sheikh Ahmed said the airline hopes to gain access to all-important slots at some of the largest airports in the Far East and Europe.“

To overcome this problem, the only way is to enlarge the size of the aircraft,” he said. “This would give us the number of slots we want with [lower] numbers of frequency. Also, the A380 is a good aircraft with good size.”

Industry analyst Solon says that “In flying an A380 rather than a couple of 777s, they get everyone to the gate at one time, sort of the Noah’s Ark approach. I’ve always bought very strongly the Boeing argument on the fragmentation of routes, in that people want to get the closest thing to a nonstop to where they want to be. That’s whether on a 767, an A330, a 777, or whatever.”

Still, if there were an airplane with 1,200 seats, Sheikh Ahmed said, Emirates probably would want to fly it.

Stirring the cultural melting pot

Emirates’ staff and flight crews are as diverse as the regions it serves. Between 60 and 80 nationalities are represented in the airline’s employee ranks.“

A lot of people think a modern culture doesn’t work, and that we’d have a problem managing these resources,” said Sheikh Ahmed, who said his staff hails “from South America all the way to the Arctic.”

“It’s based on people and merits, and how good they are. Immediately when you come in, we forget where you came from.

“If we [are] talking about the in-flight service and having more nationalities, I see it as a plus, because taking any flight within Emirates, you will [hear] a minimum of six to 12 languages spoken.”

Despite the multinational makeup of the Emirates staff—as well as Dubai itself, which the Dubai Development and Investment Authority reports has an 80-percent expatriate population—there is an emphasis on developing native talent. The sheikh—who also runs Dubai’s aviation college and serves as president of Dubai’s Department of Civil Aviation—said the airline has a program in place to groom nationals across fields including information technology and finance.

But it’s not just in the very important commercial airplane arena that the United Arab Emirates and Boeing have joined forces.

“As a Boeing customer, they’re strategically important for a whole lot of reasons,” said Tom Pickering, Boeing senior vice president of International Relations. “They are an oil-rich country and as a result play an important role in world energy security.”

For centuries, the nation’s location on the Arabian, or Persian, Gulf has made it a natural trading port. And the country’s relationship to the United States, Pickering said, has made it “an important customer for U.S. defense products,” such as the Boeing-built AH-64 Apache helicopter and Harpoon Weapon System. Boeing Satellite Systems has built and launched products for the Abu Dhabi–based Thuraya Satellite Telecommunications Company. And Dubai is home to Commercial Aviation Services’ regional spares distribution center.

It’s this receptivity that has made the United Arab Emirates in general, and Dubai specifically, a critical center for global commercial trade.

“It’s a liberal and open culture,” Pickering said, “and it caters to tourism—especially winter tourism for Europe. It has some of the most interesting and duty-free shopping in the world at Dubai. People come from all over the world to shop at the airport.

“Across the country, it runs the gamut from the traditional desert Bedouin life to modern life.”

Pickering mentions the architecturally groundbreaking “Burj al Arab,” or Arabian Tower, the world’s tallest hotel at 52 stories. Rising above the Arabian Gulf from a man-made island, the triangular hotel structure is shaped like a sail from a “dhow,” the traditional wooden ship commercial traders used for centuries on the Indian Ocean, Red Sea and Arabian Gulf.

At the crossroads of trade

In keeping with that centuries-old tradition, Emirates has carved out a profitable niche as a Middle Eastern cargo carrier. In the last financial year, the carrier shipped more than 400,000 tons of cargo, a 19.5 percent increase from the previous year.

“It’s a big market for us,” Sheikh Ahmed said. “Operating big aircraft, that helps.”

And besides shipping commercially, Emirates finds that much of its cargo carriage comes from its flyer base.

“Our passengers are completely different than in Europe, or here [in the United States],” the sheikh said. “The people who travel on our planes carry excess baggage and cargo. You go to Dubai [International Airport], you will see someone with a refrigerator or an oven. Our [baggage] scales are designed completely different.”

Currently, he said, Emirates is “talking to Boeing about maybe converting some of the existing 777-200s into freighters and seeing what is the possibility there.” He said the airline also is committed to purchasing two A380 Freighters.

Within east Asia and the Middle East, analyst Daniel Solon said, carriers such as Emirates—as well as Hong Kong–based Cathay Pacific Airways and Singapore Airlines—manage to carry both passengers and cargo profitably. He said the Gulf region, which imports large volumes of high-value cargo, “lends itself to the attractions of air freight.”

At Emirates, as in the emirate of Dubai, there are no small plans. The airline management plans to have a 100-airplane fleet by 2010—which, not coincidentally, is the year that the Dubai government expects its tourism numbers to quadruple. The futures of Emirates and global tourism, of aviation infrastructure and international commerce, are all melded together—and that’s just fine with the sheikh.

The Dubai government “wants to see in the next 10 years [that] there will be between 10 and 15 million total guests. That’s a big goal,” said Sheikh Ahmed, “and we as an airline can contribute.”

maureen.l.jenkins@boeing.com