Hvorfor Emirates gjør det så bra!

[LN-AFG]

http://nation.ittefaq.com/artman/publish/article_17721.shtml

Cost advantage of Emirates to be headache for European airlines
By Raquib Siddiqi
Apr 16, 2005, 13:01


Emirates plans to grow to the size of Lufthansa’s long-haul fleet over the next four years and European carriers are likely to face a competition hitherto unknown. Its geographical position means that it is focused on one of the few growth markets in the aviation industry: Asia. Some airlines would like to believe that the efficiency and profitability of Emirates is a function of subsidy. But a recent independent study provides little evidence of direct subsidy. The airline appears to be simply a network carrier without the burden of a short-haul fleet or legacy costs.

The market position of Emirates and its cost structure lead the study to believe that it will take market share in Europe. In the view of the study, Air France and Lufthansa have the most to fear, given growth plans, particularly in the transfer market. BA is also not immune.

The next low-cost threat

Amidst the challenges presented by geopolitical change and the insipid economic growth of recent years (not to mention recent high fuel prices), the major European airlines have struggled to adapt to the competitive threat of low-cost rivals, such as Ryanair and easyJet. The impact of these carriers has been limited to the short-haul market, meaning that the 50 per cent plus of revenue generated in long-haul markets has not been directly threatened. However, in many ways, Emirates now presents a similar threat to long-haul revenues because:

(1) It is lower cost and more profitable. KLM is roughly average from a European cost perspective and has a similar stage length to that of Emirates. However, unit costs at Emirates are 40 per cent lower. This advantage is augmented by the zero tax rate in Dubai.

(2) It does not have the legacy costs of legacy airlines. Emirates is less than 20 years old, so it does not have the long-standing working practices and pension arrangements that burden many airlines. Also, unions have little relevance and strikes are extremely unusual. (3) Its business model is not burdened with an expensive short-haul fleet.

Emirates operates only long-haul aircraft and over time it aims to connect any two points around the globe through its 24-hour hub in Dubai. (4) It is a dollar-based carrier. The UAE dirham is pegged to the US dollar.

The recent dollar weakness, therefore, is accentuating the cost advantage of Emirates.

In many ways Emirates is long haul, low cost lacks the burden of a short-haul fleet and can serve smaller markets profitability The key test of the A380 Emirates accounts for almost one-third of the firm orders for the Airbus ’Super- Jumbo’: the A380. The first will be delivered towards the end of next year and will build to a fleet of at least 45 by 2012. The cost advantage of the airline will be augmented by the A380 as is has no burden of a network of short-haul aircraft. In the past, lower costs in the airline industry have benefited customers.

Deregulation is a double-edged sword The global airline industry is governed by an anachronistic and complex web of bi-lateral agreements. Over the past 20 years there have been great strides in liberalising these agreements across the globe, and ‘open skies’ is prevalent in many market segments. However, many archaic restrictions still exist.

Dubai has actively sought to negotiate liberal bilateral agreements with as many countries as possible, in order to both support the growth of Emirates and stimulate access for tourists. This is because the small local catchment area (Dubai has only 1 million people) means that access to foreign markets is essential to underpin sustainable growth.

Background and strategy "Emirates receive not one iota of aero-political protection, which is, after all, the greatest form of government subsidy. No amount of cash or equity or cheap fuel can compare with the subsidy of aero-political protection, none of which Emirates receives or ever has" Tim Clark, Emirates President said Founded in May 1985, by the Government of Dubai Emirates started operations on 25 October 1985, using two leased aircraft. The first two destinations were Bombay (now Mumbai), and Karachi. Operations were rapidly expanded with the first European destinations - London, Frankfurt, and Istanbul - added in 1987. As of August 2004, Emirates serves 77 destinations in 54 countries, with a fleet of 70 wide-body aircraft.

The Government of Dubai is attempting to diversify its economy from traditional oil-related industries and the rapid development of Emirates is a key part of this strategy. It has a US$33 billion investment programme in infrastructure (including the airport), technology, tourism, and knowledge and health. Indeed, a measure of the scale of the commitment to tourism can be seen in the investment in ‘Dubailand’. This is a US$5 billion investment.

Slated as a ‘Disney in the Desert’, it will be double the size of Disneyworld in Orlando. To date, this investment programme has been successful, as between 1990 and 2003; Dubai’s economy grew at 8 per cent, driven by increases in trade, industrial output, shipping, and air transport.

Emirates is adamant that the group is run on a fully commercial basis, with the only government investment being the original US$10 million in 1985. An overview of the audited financial accounts contains no material surprises once one gets used to seeing consistent profits at an airline. The zero tax rate is also a clear advantage for a profitable company but, in our view, Emirate’s key competitive advantage is its relative youth, and in this context, it is similar to jetBlue, Ryanair and easyJet. The current expansion plans of Emirates would see the fleet size double to 150 aircraft by 2012. Indeed, Emirates is the single largest customer for the Airbus A380-800, with a total of 45 on order. To facilitate this future growth, Dubai Airport (DXB) is investing US$4 billion in expanding the airport’s capacity to 70 million passengers a year by 2006.

The airline also has various investments, including a 44 per cent equity stake in Sri Lankan Airlines.

Strategic direction

Emirates has a clearly defined strategy to create a long-haul transfer hub in Dubai, which is capable of connecting any two points on the globe.

Like

Swiss International and KLM, Emirates does not have a large natural catchment area to underpin traffic volumes. This means it needs to develop a network of connecting services to underpin growth. The key difference with its European peers is that the geographical position of Dubai means that it is ideally placed to serve much of the European, Asian and African market without an expensive short-haul network. In addition, the labour and taxation regimes in Dubai are more conducive to running a profitable airline.

The strategy is being augmented by increased point-to-point demand to and from Dubai, which is being assisted by the development of tourism infrastructure. Emirates in conjunction with the government are promoting Dubai as a leisure destination. In 2003, there were 5 million hotel guests in Dubai compared with less than 1 million in 1992. The government is targeting 15 million by 2012.

Given the lack of legacy costs, an efficient 24-hour hub and a young fleet, the study believes that Emirates will have a sustainable cost advantage over its European peers.

The plans of Emirates for the future are ambitious, with it planning delivery of 80-plus aircraft. Of these aircraft, more than half are the very large Airbus A380. This suggests that future available seat kilometre (ASK)

growth will be faster than frequencies growth, as the average number of seats per aircraft will increase. By 2008, Emirates is expected to have a wide-body fleet the same size as Lufthansa currently operates and it would have more seats (2 per cent), given aircraft mix. During the past eight years, Emirates has taken delivery of more than 50 aircraft. The financing of Emirates aircraft (US$6.6 billion) has historically come from traditional sources, with 10 per cent being Islamic funding. Islamic finance is conducted in accordance with Sharia principles, which prohibits the payment of interest. The returns that the lender receives must encompass the lender sharing some of the risk. One of the more popular Islamic leases is based on the Ijara structure. These types of leases are very similar to regular operating leases although maintenance and other provisions are nuanced.

In 2004, Emirates issued the largest-ever unrated Eurobond by an airline, which raised US$500 million. This was not to fund specific expenditure but to be used for general corporate finance purposes. While Emirates has financed more than a third of its future fleet deliveries, the study did not rule out the possibility of an IPO over the next couple of years, given that Dubai is aiming to develop into a regional finance hub. Emirates is adamant that the group is run on a fully commercial basis, with the only government investment being the original equity invested (US$10 million) when the airline was formed in 1985. Other airlines dispute this claim, but the study has not found any evidence to the contrary. In fact, it has paid out more than US$190 million in dividends over the past four years.

Unlike most airlines in the western hemisphere, Emirates has consistently delivered profits over the last five years despite geopolitical and economic uncertainty. Capacity expansion has been rapid, with growth of 140 per cent between 2000 and 2004, illustrating that profitable growth is possible despite the industry backdrop.

With the exception of fiscal 2002 (and the impact of September 11), Emirates has continually improved its operating margin, reaching 13 per cent in fiscal 2004.

As Emirates remains government owned and is highly profitable, it is open to the criticism that it is government subsidised. However, review of the (PWC)

audited IFRS accounts does not provide any obvious evidence of government intervention. The primary driver of the current cost advantage appears to be impressive labour productivity and low average wage costs. The study found little direct evidence of any subsidy and believes that the competitive strengths of the group can be explained by the underlying business model rather than special treatment. Trade unions do not exist in Dubai and strikes are effectively forbidden, which is clearly an advantage for an airline, given the high structural leverage of labour. Emirates uses a high proportion of expatriate labour, which tends to be highly skilled and is increasingly mobile. The study is of the view that Emirates will almost certainly take market share in Europe. If underlying demand growth is not sufficient, it has the cost structure to cut prices and still remain reasonably profitable. Furthermore, as it has a US dollar-based currency, the recent dollar weakness magnifies the strong competitive position. The delivery profile for Emirates means that capacity growth from a larger base is forecast to be 20 per cent in calendar 2006, accelerating in 2007 to 30 per cent as the Airbus A380 starts to enter service (first delivery will actually be in late 2006). New destinations over the next couple of years are to be evenly spread between Asia, Europe and Africa. Additional capacity on existing routes is also expected. The sheer scale of this planned expansion, the study said, presents the greatest competitive challenge that the European airlines have collectively faced on long-haul routes. In many ways, it is similar to the growth of the low-cost carriers as a new business model, underpinned by modern technology, has arrived in the market without many of the legacy costs faced by the former flag carriers.

The study further said that there is a silver lining for the larger carriers—Lufthansa, British Airways and Air France. The growth of Emirates is likely to put the greatest pressure on the least efficient carriers, such as Swiss International, Alitalia and SAS, potentially accelerating their exit from the long-haul market.

None of the European airlines are immune from the growth of Emirates but, according to the study, the airlines with the most aggressive growth plans have the most to fear.

© Copyright 2003 by The New Nation

[DY]

Interessant lesning og virker som de tenker langsiktig, i motsetning til endel andre selskaper som er nevnt i artikkelen, og som sliter allerede.....

[Isbamse]

Greit nok at de ikke får direkte subsidier eller reguleringer, men hvis de er rimeligere fordi de slipper skatt og unngår fagforeninger og andre utgifter minner de meg om et visst irsk flyselskap ...selv om servicen visst nok er litt bedre

[DY]

Originally posted by Isbamse
Greit nok at de ikke får direkte subsidier eller reguleringer, men hvis de er rimeligere fordi de slipper skatt og unngår fagforeninger og andre utgifter minner de meg om et visst irsk flyselskap ...selv om servicen visst nok er litt bedre

Synes forskjellen mellom Rynair og Emirates er ganske stor....

[Superhai]

Emirates er jo bevis på at hub-spoke er løsningen for longhaul. Riktignok er de ikke subsidiert, men de kan ta sjanser fordi det ligger mye penger på lur. Lønninger er lavere, men siden man ikke betaler skatt så tjenere man likevel bedre. Til sist så flyr de i en region hvor kortrutene kan betjenes med store fly og hvor man gjerne betaler for å fly business.