Emirates Sales Decline Reveals Challenges to Mega-Carrier Model

  • Gulf giant's revenue slips for first time in at least 10 years
  • President Clark says airline won't waver from growth ambitions

Emirates Group reported its first annual sales decline in a decade, highlighting the strains on the world’s largest international carrier as it continues the breakneck expansion of its Dubai hub.

While much of the 3 percent drop in full-year revenue to 93 billion dirhams ($25 billion) was attributable to a stronger dollar, Emirates said it’s under pressure from falling fares, lower bookings from the oil industry and an uncertain global economic environment.

At the same time, the Gulf carrier is turning to relatively unproven routes to sustain growth, faces resistance to its expansion planes in Europe and the U.S., and is struggling to secure an upgraded version of the Airbus Group SE A380 jet that’s been key to building Dubai into the industry’s top long-haul transfer hub.

To be sure, net income at Emirates rose 50 percent to 8.2 billion dirhams in the year through March as it reaped the full benefit of a 28 percent oil-price drop after opting not to hedge against crude. Passenger numbers also rose 8 percent to almost 52 million and the company plans to add 36 wide-body planes in fiscal 2017, seven more than in the previous 12 months.

‘Global Headwinds’

The decline in revenue tells of tougher times. Emirates jets flew less full, the load factor slipping 3.1 points to 76.5 percent, and the yield -- a measure of fares -- slid 10 percent. Even in Europe, the biggest market for Emirates, sales slipped 5 percent to 24 billion dirhams.

Tim Clark, Emirates’s president, told Bloomberg TV that pressures on yields are “strong” across several regions, while saying the scope of its network means he doesn’t share concerns about overcapacity recently expressed by Air France-KLM Group and Deutsche Lufthansa AG.

Emirates, though, has been hit harder than most by a decline in travel demand from the “very high-yielding” oil sector, he said, presenting the “paradox” of margins being hurt even as fuel expenses decline.

Campaigns for protectionism among European and U.S. carriers that claim Gulf operators have had unfair subsidies are likely to fall short, Clark said, adding that the issue isn’t holding back growth. The Americas lifted revenue 9 percent in fiscal 2016 as Emirates increased frequencies to cities including Orlando.

Asia Optimism

Emirates’s push into more distant locations has seen it struggle to establish a base in Panama that would open up travel across Central America and into northern South America, delaying the start of flights there several times.

The carrier is still far from saturation point though, after expanding its network to 153 cities in more than 80 countries, Clark said. While the most viable routes within eight hours of Dubai have been exhausted, the growth of the hub makes new destinations possible all the time.

Emirates remains particularly optimistic about Asia, where yields tend to be firmer, regardless of the Chinese slowdown, Clark said. “We’re seeing a lot of business moving out of China into places like Vietnam,” he said, with the airline soon to add Hanoi and Myanmar to its route map. High-yield leisure markets such as Phuket and Bali are also “growing quickly.”

A380 Ambitions

Emirates remains at loggerheads with Airbus over the viability of an upgrade to the A380 superjumbo. The airline operates the world’s biggest wide-body fleet, including 140 A380s in service or on order, with the lure of 200 more orders should the manufacturer offer a “new engine option” or Neo version.

Airbus says it needs more customer commitments and can’t embark on such a project with the backing of only one airline. Clark said that the solution may simply be to order 60 extra current-version A380s.

Emirates is continuing to evaluate the Airbus A350 and Boeing Co.’s 787, with an order for somewhere above 50 planes “up for grabs,” the executive said. The planes would be delivered after a move from crowded Dubai International Airport to the new Al Maktoum International airport between 2023 to 2025.

Clark said the fleet plans signal that there’ll be no retreat from a business model that has transformed a minor Mideast airline into a heavyweight ranked alongside Delta Air Lines Inc., British Airways and Singapore Airlines Ltd.

“Dubai is a super-connector hub,” he said. “We can move business around from one city pair to another. That’s the beauty of it. We’re not concentrated in North Atlantic or South America or the Middle East and Africa. We’re a very diverse and well-spread operation.”

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