ABU DHABI // The headwinds that have slowed the Western airline industry have finally reached the Gulf. Until now, Emirates airline's dramatic growth had appeared to be unstoppable. As American, European and Asian airlines reported a long list of woes - losses, job cuts, fleet groundings and slower ticket sales - the Dubai carrier seemed to glide through the troubles with record profits and new plane orders.
But the fairy tale success story may get a hard dose of reality this year as Tim Clark, the president, has slashed his profit forecast due to the record-breaking rise in oil prices. Emirates had expected to make US$1.5 billion (Dh5.5bn) in net profit, up from $1.36bn last year. Now, Mr Clark said he would be content to make several hundred million dollars, a drop of up to 75 per cent. Lorne Riley, a spokesman for the International Air Transport Association (IATA), said fuel costs were now offsetting revenue growth among Middle East airlines, even as passenger demand had risen.
"The Middle East has the advantage of robust traffic growth and oil-based economies that have thrived, but at the same point the airlines have seen their operating costs go sky high because of the unprecedented hike in oil," he said. "As a result, some airlines are already changing profits forecasts." Mr Clark said the airline was "totally exposed" when oil broke through the $100 barrier and then climbed up to its peak of $147 last month.
The revelation should silence critics who have long complained that Emirates received unfair support from its stakeholder, the Dubai Government. The principal complaint from rivals, which has been so far unsubstantiated, is that the carrier receives cheap fuel from its owner. Emirates has consistently denied it received any subsidy, and said it bought fuel from a variety of non-governmental sources in the UAE including Air BP, Shell, Chevron and Exxon. The forecast slump in profits may well finally put an end to the unfounded claims.
Emirates has some distinct advantages over its European rivals - no taxes, low labour costs, the absence of labour unions and cheaper landing fees at its base airport - but subsidised oil is unlikely to be one of them. More importantly, the changed forecast reveals that Emirates is not immune to the ills that first infected US carriers and have slowly spread around the world. More than two dozen airlines have gone bust this year, and Airbus and Boeing have begun to see their orders dwindle as customers defer, delay and in some cases cancel expansion plans.
JetBlue, the US budget carrier, has this year twice pushed back plans to buy more jets from Embraer of Brazil. Overall it has delayed deliveries of 31 aircraft, including orders from Airbus. India's biggest airline by market share, Jet Airways, had planned to receive two twin-aisle Boeing 777s in October, but now it is reportedly negotiating to defer the delivery date to next year. In the past few years, one of the most important stories in aviation has been how Gulf carriers have begun to win over passengers that traditionally flew European and Asian carriers on long-haul, transcontinental flights.
In May, the IATA said European and Asian airlines had suffered some of their worst declines in ticket sales in five years. In the same period, first-class ticket sales for flights between the Middle East and East Asia surged by 17.3 per cent. The rising passenger numbers and bullish aircraft orders gave the Gulf carriers an air of invincibility amid the deteriorating environment around them. But Emirates's latest announcement appears to be a decisive acknowledgement that in the Middle East, record oil carries quite a sting, too.
Labour used to be the single highest cost for Emirates, with oil a relatively small piece of the overall pie. Now fuel is a staggering 45 per cent of costs, forcing the carrier to rethink its operating model. Recently it raised its ticket prices by five to 10 per cent and moved to cut the overall weight of aircraft by ditching inflight magazines and possibly even footrests. Only first-class passengers, which account for a significant proportion of revenues despite their small overall passenger numbers, have seen their amenities increase with features like the new showers on the Emirates A380.
Its younger rivals, Qatar Airways and Etihad, have also been hit. The Doha carrier had to shelve plans for a lavish, first-class-only service due to open by the end of this year, citing fuel costs. Etihad, meanwhile, has acknowledged that its break-even target of 2010 could be compromised, because its fuel hedging contract is smaller next year, leaving it more exposed to current prices. Ironically, though, Emirates could emerge even stronger than before. When European airlines eliminated their routes during the Gulf War, it kept its planes in the air.
Although Emirates took a hit with passenger numbers, it increased its market share, and when the market rebounded it held onto its gains. The airline now sits on a formidable war chest of some $4bn in cash reserves, and Mr Clark vows to once again keep its aircraft in the air despite the challenging environment, even if it means compromising profits. This tactic may work out quite well. As the airline takes delivery of the quieter, fuel-efficient A380, customers that once flew with European carriers may decide to make the switch permanent.
@Email:igale@thenational.ae
