While the last five years have been grueling for much of the airline industry, Dubai-based Emirates has prospered, becoming one of the top three international carriers. Now, the 25-year-old government-owned airline is on the offensive. To bolster its all-widebody fleet, it's adding 90 Airbus A380 superjumbo jets with 45,000 seats and operating costs 12 percent lower than rival Boeing's (BA) latest 747. That huge fleet of double-decker widebodies poses a threat to big European carriers that, like Emirates, specialize in flying passengers long distances through giant transfer hubs, says British Airways CEO Willie Walsh.
Emirates' latest order for 32 A380s valued at $11 billion, announced in June, will give it 70 more superjumbos than any other airline. "It's a miracle that Emirates already has more intercontinental seats than Air France and British Airways combined," says Wolfgang Mayrhuber, CEO of Lufthansa. "It took us 40 years to get 30 747s in the air in one of the biggest global economies, so one must assume that this is an investment for the world."
Emirates ranked only 24th among international airlines as recently as 2000. Since then it's achieved a sixfold increase in traffic—defined as passengers carried multiplied by the distance flown. The Dubai carrier zoomed ahead last year to join Lufthansa and Air France-KLM Group as the biggest operators of international flights. "We always planned to grow, we were just never able to put our finger on how quickly," says Maurice Flanagan, founding CEO at Emirates and currently executive vice-chairman. "Now we're short of capacity all the time."
Key to Emirates' success: flying super-sized planes—one of its A380s carries about 500 passengers—to reduce expenses per head. The savings help it undercut fares of established rivals like Lufthansa, Air France-KLM, and Singapore Airlines while still making money. Emirates reported net income of $964 million for the year through Mar. 31.
"I can't understand why other airlines have been slow to pick up on the A380," Flanagan says. "The economics are fantastic. It has given us a huge advantage because the seat-mile costs are much lower than on any other aircraft."
Chris Tarry, an independent airline analyst, says Emirates' business model is largely the result of improved jetliner range and Dubai's location midway between Europe and Asia. "First, there's now the technological capability to join any two places on the globe with just one stop," Tarry says. "Second, Dubai is well placed to capture intercontinental traffic flows from North America to Asia, and Europe to Asia and Australia."
Emirates' moves could slam competitors. "It's challenging a segment of the market that is important for BA," says BA's Walsh. "But there are other European hubs where the reliance on transfers is bigger," such as Lufthansa's in Frankfurt and Air France-KLM's in Paris and Amsterdam, he says.
The Emirates model relies on treaties that permit flights between two nations by an airline from a third via its home country. The model works best on long-haul routes requiring refueling, where Emirates doesn't lose out to competitors by stopping in Dubai.
As the Emirates fleet has grown, so has opposition from European carriers, which say the company benefits either directly from funding by Dubai or indirectly through less-costly access to state-owned airport and air-traffic services.
Dubai airport's passenger total rose 9.2 percent, to 41 million, in 2009. The terminal ranked fourth on international flights in March, behind London Heathrow, Paris-Charles de Gaulle, and Hong Kong International. Flanagan says Emirates has gained no unfair advantage and that any government assistance received since the company's founding is dwarfed by past government payments to formerly state-owned BA and Air France.
Lufthansa says Emirates will be further aided by German Chancellor Angela Merkel's plans to introduce a tax on passengers departing from German airports in an effort to raise 1 billion ($1.22 billion) euros a year for the federal government. By contrast, says Lufthansa's Mayrhuber, "the words 'ticket tax' haven't been translated into the Arabic language yet."
Still, the chances of European countries blocking route applications from lower-cost Gulf carriers like Emirates are slim because of the impact that would have on Airbus, says Richard Aboulafia of consultant Teal Group. (Airbus has received support from European governments in the past.) The planemaker, which has plants in France, Germany, Spain, and the U.K., has 280 orders for its A380 and A350 models from Emirates, Qatar Airways, and Etihad Airways of Abu Dhabi. "The Middle East is grabbing market share from legacy airlines, and European governments seem willing to make that sacrifice," Aboulafia says.
The bottom line: Emirates all-widebody fleet cuts costs. It's adding 40,000 new seats that will need to be filled to keep capitalizing on those efficiencies.
With Cornelius Rahn