March 22 (Bloomberg) -- Emirates, the biggest airline by international traffic, said more carriers will go bust this year as fuel costs and sluggish economies undermine profitability.
“We can reel off a whole load of airlines that are teetering on the brink or are really gone,” Tim Clark, the Dubai-based carrier’s president, said in an interview. “Roll this forward to Christmas, another eight or nine months, and we’re going to see this industry in serious trouble.”
Airline profits will plunge 62 percent in 2012 to $3 billion, equal to a 0.5 percent margin on sales, as oil prices rise, the International Air Transport Association said this week. Emirates’s fuel bill accounts for 45 percent of costs and may jump by an “incredibly challenging” $1.7 billion in the year ending March 31, according to Clark, who says he’s sticking with a no-hedging strategy rather than risking a losing bet.
“You think you’re going to win, but in the long term you always lose,” Clark said yesterday at the Gulf carrier’s head office near Dubai International Airport. “When we enter into derivatives, betting whatever it may be with counterparties who actually control the price of fuel in the first place, you have to ask yourself, ‘Is that smart?’”
AMR Corp.’s American Airlines is restructuring after filing for Chapter 11 bankruptcy and India’s Kingfisher Airlines Ltd. may lose its license as it struggles with cash shortages and losses. That’s after Barcelona-based Spanair SA collapsed Jan. 27, followed that week by Hungarian national carrier Malev Zrt.
Clark said some private airlines will need to be bailed out by governments in the countries where they’re based, though that will raise aid issues with the European Union and other parties.
In the U.S., more filings for Chapter 11 protection are likely, while smaller carriers operating in the Indian Ocean region and in Africa face “difficulties,” the executive said.
“This is what the fuel prices are doing,” he said. “It’s about time somebody sitting there, controlling the fuel prices, began to look a little bit more seriously at the devastation it’s causing, not only to airlines but to the global economy.”
The industry couldn’t survive a further 10 or 15 percent increase in fuel prices, especially with the EU’s carbon emissions trading system about to add to costs, he said.
Major carriers including Air France-KLM Group and Deutsche Lufthansa AG “won’t go bust” because they have the cash balances to survive while deepening cost-cutting measures, he said.
“Everybody is having extreme difficulty,” the executive said. “We are suffering from this so everybody else must be and there’s no point trying to deny it.”
While Clarks reckons dwindling earnings should also spur mergers, he says there’s little appetite for that in the Gulf.
“Consolidation is not something that sits well in the Arab world,” the executive said. “Kuwait Airways wants to do its thing, Saudi their own, and everybody else. The notion that we all start to get together, I don’t see that.”
At Emirates the fuel bill, while not over budget, has “zapped the bottom line,” and that will be evident in annual results scheduled to be published next month, Clark said, prompting establishment of a working group charged with “taking apart the company’s processes and costs” to find savings.
“We’ve been so focused on the front line that we’ve probably, as they say, acquired barnacles below the waterline that we haven’t seen and the ship may have been slowed or skewed as a result,” he said. “So we’re going after all that.”
Earnings at Emirates are also being hurt by the continued grounding of Airbus SAS A380 superjumbos, of which it’s the No. 1 operator, after the discovery of wing cracks. Six of the jets, which generate $50,000 an hour 15 hours a day, are currently out of action for repairs as part of a rolling program, idling 830 cabin crew and 160 pilots not qualified on other models, and the carrier is having to compensate people set on an A380 trip.
“That’s had a poleaxing affect in the last nearly three months,” Clark said, estimating the revenue loss so far at $90 million. “Those airplanes are always full, they’re always popular. We’ve had multiple cancellations. We’ve had people telling us ‘Well you sold me the A380’, so we had to throw in 5,000 or 10,000 miles or give money back. It’s a mess.”
Emirates operates 21 A380s, with 69 more on order as it seeks to establish Dubai as a global hub in competition with Abu Dhabi-based Etihad Airways, Qatar Airways Ltd. and European carriers including Air France and British Airways.
Five more A380s are due by September, and Clark will hold a “very high level meeting” with Airbus next week to find out if that could change and what the permanent fix for the wing cracks -- “basically a metallurgical solution” -- will entail, he said, adding that he’ll also take a tough stance on compensation.
“They may think they are not going to, or they may think they have views on what that may be,” he said. “I’m sure they’ll think otherwise in a couple of weeks. It’s quite serious.”
The superjumbo glitch may also force Emirates to revise its plans to retire 68 older “gas guzzling” planes, including Airbus A330s and A340s and older Boeing Co. 777s, Clark said.
“With the prognosis on the A380 looking a bit flaky at the moment we may have to revisit those requirements,” he said.
Clark said Emirates passed up on a chance to invest in Air Berlin Plc, Europe’s third-biggest discount carrier, which instead sold stock to Etihad: “We decided it wasn’t for us.”
Though Qatar Air is also buying 35 percent of cargo specialist Cargolux Airlines International SA, the chief said he’s not interested in purchases in Europe or elsewhere, having ended a decade-long management accord with SriLankan Airlines in 2008 after the Asian country’s government sought more control.
“We have enough to do without getting involved in the running of other businesses, even though they are related,” he said. “We had our fair share of that in Sri Lanka for 10 years.”
As part of a strategy of tapping demand in secondary cities such as Dusseldorf and Hamburg in Germany, Emirates will select a new French destination from Lyon, Nice, Marseille and Toulouse, operating five to seven flights a week, Clark said.
The policy of “going where the market is” has been well received, he said, particularly since smaller airports often offer “quite enjoyable experiences” compared with major hubs that can be “severely challenging mentally and physically.”
In the U.K., where Emirates serves London Heathrow, Birmingham, Manchester, Newcastle upon Tyne and Glasgow, there’s the possibility of it adding a further destination which “could be north of the border or further west,” he said.
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