Flying High in Dubai: Emirates†Leaves†Rivals in Slipstream

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The Dubai-based airline Emirates is considered the world's most successful and has ambitious plans to expand. Its European rivals such as Lufthansa and British Airways accuse the airline of benefitting from massive state subsidies. But the reality is more complicated.

Emirates cabin crew board an Emirates Airbus A380-800 at Manchester Airport in England Zoom
REUTERS

Emirates cabin crew board an Emirates Airbus A380-800 at Manchester Airport in England

There are only a few top executives who can gaze out on the future of their own company from the comfort of their own desk. But Tim Clark, the 63-year-old British president of the Dubai-based airline Emirates, is one of them.

Clark's office with its large windows sits on the top floor of the company's headquarters at Dubai International Airport. Right in front of his building, a glimmering gray-blue colossus of steel is shooting up. In late 2012, when the new terminal building for Airbus A380s is completed, up to 20 of the massive jets should be able to dock there at the same time. Emirates already has 15 of the world's largest passenger jets in service. It has another 75 on order. And it plans on buying more.

If Clark takes a subway from the station conveniently located in his building to its last station and then hops in a cab for another couple of minutes, he can already survey what will be the home of his airline's future headquarters building: Dubai World Central, a new, massive airport. Although Emirates won't be able to move into its facilities there until 2022, there are already eight-lane palm-lined streets leading to the airport's 140-square-kilometer (54-square-mile) desert plot.

Dreams into Reality

The airport will be the world's largest -- which at first sounds like an echo of those old delusions of grandeur that first made Dubai famous. During the crisis of the last two years, the little emirate only narrowly succeeded in averting national bankruptcy. The reward for its monstrous real-estate plans was billions in debt. The emirate is now having to sell off some of its assets as a result.

The most valuable pearl that could possibly be sold off in Dubai is a stake in Emirates, which long ago joined the ranks of the world's largest and most lucrative airlines -- and which still wants more.

At the massive airport, there are huge billboards declaring "Welcome to Dubai's Aerotropolis for the World." The airport should eventually handle 160 million passengers each year, or three times as much as Frankfurt Airport currently does. Images of Dubai ruler Sheikh Mohammed bin Rashid al Maktoum on gigantic banners proclaim: "We are transforming our dreams into tangible reality."

But, in the eyes of its European competitors -- such as Lufthansa, British Airways and Air France/KLM -- what's happening in Dubai and its neighboring emirates is much more of a nightmare. Between now and 2020, Emirates alone wants to increase its fleet of long-haul aircraft from 155 to roughly 400. What's more, taken together, the heads of its neighboring airlines, Abu Dhabi's Etihad and Qatar Airways, have ordered almost just as many planes.

"That goes completely beyond their needs," warns Wolfgang Mayrhuber, who was CEO of Lufthansa until Dec. 31, 2010, adding that it is becoming "a very serious threat to the aviation industry in Germany and all of Europe." Another corporate executive, who would prefer to remain anonymous, sees things in even more dire terms. "These are monster airlines that have almost unlimited financial means at their disposal thanks to their governments," he angrily says, referring to alleged cross-subsidies from the oil trade.

Shifting Traffic Flows

Nevertheless, Mayrhuber and his colleague are simultaneously both witness to, and victim of, a revolution in the global aviation industry that they themselves underestimated for far too long. Up to now, Europe and North America have still accounted for roughly 60 percent of the world's air traffic. In the past, the industry's self-appointed top dogs on both sides of the Atlantic made a good living off the situation -- one that was even perhaps a bit too good.

Indeed, since globalization has massively increased the significance of India and China, having connections to those countries has become all the more important. "Where 10 years ago only one person wanted to travel," Clark says, "now you have 10,000." And, for all of these new clients, Dubai enjoys a very central position. For example, Nigerian traders take flights connecting through Dubai to reach Shanghai or Hong Kong, where they purchase low-cost goods that they then resell at a profit in their home countries. And, for their part, the Chinese are extremely interested in making business contacts in Africa because they want to benefit from the continent's wealth of raw materials. Indeed, even Brazilian companies would like to see more and better flight connections.

"In the 21st century," Clark predicts, "the epicenter of global traffic flows will shift -- completely and forever."

While large industrial corporations recognized the effects of globalization early on and established a foothold for themselves in the emerging economies, Europe's formerly state-owned airlines were initially slow to react. Until recently, they preferred to focus on taking over troubled competitors or forging alliances with their competitors.

The rigid legal system also blocked airline efforts to expand internationally. Indeed, even today, bilateral agreements between countries stipulate in painstaking detail which airline can fly where, how often and with which aircraft.

Ideal Location

For a number of years, more generous provisions have been in force in a number of places, including within the European Union and in regard to trans-Atlantic traffic between Europe and the United States. There, the airlines can more or less decide for themselves which cities they will fly to in their partner countries or within the continental United States.

In the past, airlines such as Lufthansa, British Airways and Air France used a backdoor method, known as the "sixth freedom" of international air transport, to continue growing despite these restrictions, as well as to offer their domestic populations attractive connections to destinations around the world. The sixth freedom allows airlines such as Lufthansa to transport, for example, passengers from Cairo to Warsaw as long as there is a stopover in Germany, say in Frankfurt or Munich.

Twenty years ago, Clark already recognized the opportunities that this so-called "hub-and-spoke system" presented for his employer. Although the airline was already called Emirates at the time, it was still tiny. Clark realized that -- unlike Frankfurt, Paris or Amsterdam -- Dubai occupied an almost ideal location on the world map. Indeed, almost all of the major flight destinations can be reached from Dubai in roughly 10 hours.

In order to stretch his company's flight radius even further, Clark ordered custom-made versions of airplane models from Boeing that could handle so-called ultra-long-haul routes in flights of up to 18 hours without a stopover.

Securing Traffic Rights

At this point, the only thing Clark lacked was the necessary traffic rights. Initially, the British, German and Italian governments, in particular, were relatively generous in granting these rights to Emirates, because, in its first years, the up-and-coming airline enjoyed a kind of special status merely for being exotic.

As a result, India and a number of African countries followed suit in granting the Gulf-based airline extensive takeoff and landing rights. In any case, their own airlines were far too small to handle growing global demand.

Along with his boss, Sheikh Ahmed Bin Saeed Al Maktoum, the uncle of Dubai's ruler Mohammed, Clark knew how to put the new air rights to good use. With its 155 jets, the company today serves over 100 destinations all around the world. It's true that Emirates has until now only had limited flights to the United States and South America. But that's one of the reasons why the company is expanding its fleet with A380s and other models.

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1.
sunnfun 01/05/2011
Mayrhubers and others argument regarding the state subsidies and lower costs are just a red herring; and that's why Clark can so easily disprove those. The main reason for Emirates success is their cost advantage because of (near) slave labour and complete absence of protection and work rules. The euro carriers can't really criticise that because they desperately try to find a way to do the same.
2.
BTraven 01/05/2011
There will always be enough demand for direct flights from Europe to the booming Asian centres therefore I canít understand the fuss. Europe is so densely populated that is not possibly to set up mega hubs like the one in Dubai. Maybe Emirates attracts a lot of people from the third world, however, the more their developments progress the higher the likelihood that there will be direct connections to commercial centres.
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