Article on Emirates, the EU and A380
this is reasonably interesting
from the Times
A 550 seater Trojan horse set to fly
Carl Mortished
IT WAS as if Europe was launching a battleship, so many politicians tripping over each other in their rush to heap praise on the A380, an aircraft whose wings have yet to be tested in flight.
The puffery and self-congratulation in Toulouse (aimed squarely at Washington) completely misses the point. No one doubts (even in the absence of proof) that this bird will fly and it is selling well. When Gerhard Schröder, the German Chancellor, reminded his audience that “good old Europe has made this possible”, he might have saved his breath. Airbus is a success and Boeing’s bruised and battered visage is proof that European companies can create world-beaters if they join forces.
But old Europe is still with us and while the politicians preened in Toulouse, a oncefamous air transport business was packing its bags in Geneva. Swiss is not quite ending its operations in the francophone canton — it will continue to ferry passengers to Zurich — but it is in massive retreat. The biggest operator at Geneva Airport is no longer a Swiss firm but EasyJet.
The former Swissair built its business on high-cost short-haul traffic sold at high prices, a business swept away by the EasyJet and Ryanair squadrons. It is a minor national humiliation for Switzerland which saw its flag carrier, Swissair, trimmed to Swiss and perhaps soon to just “S”, but there is greater risk to come. The low-cost battalions of Asia are getting new weaponry — the 550-seater A380 could well be the Trojan horse that brings down the airlines of Europe.
The largest squadron is being assembled in the Gulf where Emirates is almost doubling its fleet. Emirates has ordered 100 aircraft over the past few years including 43 A380s, almost a third of the entire order book for the new aircraft. No other carrier has such a large stake in Airbus’s new flagship — Lufthansa has ordered 15, Virgin has requested five and BA has yet to place an order.
There is good reason for Emirates to make these investments. It can afford them. It is highly profitable — its operating margin is almost double that of BA. More important, the A380 is the ideal aircraft for its strategy of funnelling Asia-bound passengers from Europe through its hub in Dubai. It is stealing market share from every major European carrier and the A380, with its promise of 20 per cent cost reductions, will up the ante.
Analysts at UBS predict that Air France and Lufthansa are under the greatest threat. BA, having chosen to focus its investment on linking Britain with US cities rather than Asian traffic, is affected less.
The cost advantage enjoyed by Emirates is significant. So great is it that Jean-Cyril Spinetta, the Air France chief, has demanded that Emirates open its books. The French carrier accuses Emirates of unfair subsidies, pointing to a supposed sugar daddy in Sheikh Ahmed bin Saeed Al-Maktoum. Oil is lubricating Emirates, say the doubters, and heavy state investment in the vast shopping malls of Dubai’s airport complex.
The subsidy charge is denied but there is no doubt that Emirates benefits from Dubai’s ultra-efficient hub. Its location is perfect, both in time and space. With its glitzy home half-way from Western Europe to the Far East, Emirates is picking up passengers by adding flights to medium-sized European cities. Air France and Lufthansa play the hub and spoke game using their respective ports in Paris and Frankfurt but the stopover is often less efficient and less attractive.
Dubai is playing a different game — the Gulf state does everything possible to benefit Emirates, the traffic generated by the airline being a great boon to the city state. Rumours suggest that subsidised jet fuel and sovereign guarantees provided to Emirates debt. UBS reports no obvious signs of featherbedding for the airline and instead points to much lower operating expenses. BA’s staff costs represented 29 per cent of its revenue last year while at Singapore they were only 20 per cent. Emirates trumped them both with staff accounting for 17 per cent of revenue.
The horrible truth for European carriers is that Emirates is a young business with few legacy costs and a simple idea that works: pile ’em high in the sky. Its next step is to use the long-range A340-500 to pick up stray passengers on America’s West coast, fly them direct to Dubai and on to the Far East. BA has been warned.
Europe’s carriers have no real strategy to defend themselves, although France restricts Emirates to one Paris flight a day — odd behaviour given the airline’s support for French industry in Toulouse. What is really needed from the politicians in Toulouse is something called an air transport policy and it probably means less regulation, not more.
There are too many airlines in Europe. If they continue to fight each other for landing rights, burdened with high overheads, they will succeed in exporting the best of their business to an offshore hub in the Gulf. Emirates is making a huge gamble, an increase in passenger capacity that has never been seen before and it will succeed by cherry-picking traffic from a multitude of inefficient Europeans. Emirates has been able to pick up profitable routes, targeting second-tier cities, such as Manchester and Birmingham; it flies to Nice in France and has an open-skies arrangement with India. Instead of closing the door, let us have open skies and European airline mergers. In such a scenario, Emirates would have to compete even harder.