Greg Lindsay's Blog

June 24, 2010  |  permalink

The World Declares War on Emirates

“First they ignore you, then they laugh at you, then they fight you, then you win.”—Mohandas Gandhi

First, Europe’s governments ignored Emirates Airlines, happily signing agreements twenty-five years ago with a fledgling carrier that would later storm the UK and Germany, putting incredible pressure on British Airways and Lufthansa in the lucrative long-haul market to Asia. Then, they laughed last year when Dubai Inc. nearly capsized under its debt load, and rumors swirled the airline would be ransomed to Abu Dhabi. Now they’ve begun to fight, judging by the comments of KLM chief Peter Hartman, who swore Emirates can expect “more and more reluctance [by governments] to grant traffic rights” going forward.

Emirates is already in the midst of regulatory battles with Canada and Germany for increased access to their markets. Hartman’s comments follow those of BA’s CEO Willie Walsh, who has described Emirates as an existential threat to European carriers’ existence, and Lufthansa’s CEO Wolfgang Mayrhuber, who told Bloomberg: “It’s a miracle that Emirates already has more inter-continental seats than Air France and British Airways combined. It took us 40 years to get 30 B747s in the air in one of the biggest global economies, so one must assume that this is an investment for the world.”

But does Emirates’ plans make sense? The Financial Times seems to think so, writing approvingly in yesterday’s Lex column:

But there is method to this madness. Dubai is turning itself into a central hub for air transfer traffic between west and east. New planes fly far enough to give Emirates, which flew 27m passengers last year compared with British Airways’ 31m, a global reach. They are also more efficient, allowing the airline to undercut European flag carriers such as British Airways and Air France-KLM on price. Passengers will always pay more for direct flights but many are willing to transfer if the ticket is cheaper and the wait is not too long. As for profitability, Emirates lacks the legacy costs and rebellious workforces that plague the older flag carriers. And when the oil price goes up, its owners’ pockets just get deeper. Emirates made about $1bn in net profit last year and had an operating margin near 10 per cent.

All that adds up to a potentially disruptive force in the long-haul market, though Emirates will first have to deploy its new planes profitably and secure more slots at major airports. That could lead to cheaper long-haul flights in bigger and greener planes. Airline investors should be worried; consumers might well shrug and grin.

Emirates’ strategy to break into the German market was to order another 32 A380s at the Berlin Air Show a few weeks ago, forcing Merkel’s government to choose between protecting Lufthansa or creating highly-skilled manufacturing jobs. In the long run, Germany will likely opt for the latter. Emirates may repeat this strategy at the upcoming Farnborough air show, Sheikh Mo having already told CNN he expects the airline to announce yet another order there.

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Greg Lindsay is a journalist, urbanist, futurist, and speaker. He is the director of applied research at NewCities and director of strategy at its mobility offshoot CoMotion.  He is also a partner at FutureMap, a geo-strategic advisory firm based in Singapore, a non-resident senior fellow of The Atlantic Council’s Foresight, Strategy, and Risks Initiative, and co-author of Aerotropolis: The Way We’ll Live Next.

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