Limited access to aircraft financing and global economic turbulence are less than ideal conditions to undertake a major expansion push, but this is the reality has to accept as it embarks on a new period of growth.
For Emirates, the last few months have been relatively quiet, with the airline taking a pause in its fleet growth to reconcile its business and prepare booking systems, ground infrastructure and personnel for what is shaping up to be a growth spree that should run until 2018.
Under that fleet plan, Emirates expects to digest a massive influx of aircraft, at times absorbing two-300ERs and one in a single month.
Between September and March 2013, the airline expects to grow its A380 fleet to 44 units, says airline president Tim Clark, including the high-gross weight version Airbus is putting into market in 2013.
But fuel prices hovering around $100 per barrel have also highlighted that the carrier is not impervious to setbacks. In the first half of its 2011/12 financial year, the airline reported a sharp drop in net profits from $925 million to $225 million and pointed at “unstable global economic, geopolitical and environmental conditions.” In announcing the results, chairman Sheikh Ahmad bin Saeed al-Maktoum said “ever climbing fuel prices which resulted in Emirates paying $1 billion more in fuel costs over the same period last year and fluctuating exchange rates.”
Emirates’ traffic growth, at 5.7%, also slowed remarkably compared to the 19.4% increase recorded last year, although that was still in line with airlines from other regions of the world. Capacity growth also slowed, increasing 8.2% compared to the 13.9% posted last year, but it was not enough to keep the load factor from falling 1.9 percentage points to 79.3%.
On the positive side, though, Emirates’ cargo yields and passenger traffic improved, so revenues increased 15% to $8.3 billion.
Clark shrugs off the relatively modest results, saying the business plan will not change. “This is against the background of unprecedented economic conditions. Against all that we are still managing to grow our business,” says Emirates’ president, adding, “the comfort we take in a reduced level of profit is if we can do it in these conditions, when it comes good we’ll be blasting ahead.”
Despite the adverse effect of rising fuel costs, Clark continues to eschew hedging strategies arguing that they are risky bets. He projects that even if fuel increases to around $110 per barrel the airline can make a moderate profit.
But even though management remains committed to its growth path, the airline is ready to change course in other areas. Having initially signed up to take the-8F freighter on lease from Dubai Aerospace Enterprise, Emirates has now decided to switch those to 777Fs, and has already fielded two from the lessor. Clark says the decision has nothing to do with the missing some of its performance targets, but simply that the 777 fits better into its plan and has better economics.
Given its large involvement with the 777, Emirates also is keeping a close eye on’s plans to rejuvenate the widebody and has been urging the aircraft maker to make a decision on the proposed 777-8X and 777-9X.
The airline is looking to replace its -300ERs from 2017, so will want the new models ready by then. And according to Clark, Emirates will require about 8-10% better fuel consumption and improved aerodynamics from a new wing to deliver an aircraft that can transport around 360 passengers from Dubai to Los Angeles with some freight.
Also, Emirates is reassessing its position on the Airbus-1000 in light of the recent 18-month delay in its entry into service. Emirates, which once considered switching most of its A350-900s to the -1000s, is now debating if the higher-weight, longer-range version is still a good fit. Clark wants to see more data on the product before making a decision, but if the -1000 is an ill-fit he says the airline can purchase more A380s.
Given its large fleet plans, the lack of liquidity for aircraft financing in Europe also is an issue the airline has to face, particularly after rules for export credit agency lending were tightened after European and U.S. carriers accused Emirates and other Middle East airlines of receiving preferential terms.
Clark says the situation is forcing Emirates to look at some “quirky” financing approaches, but notes that aircraft deliveries should not be impeded especially as Islamic banks are in a good position to provide financing and are starting to look more closely at backing aircraft purchases.
The motivation behind tightened export credit agency rules also is driving European carriers to seek new fair competition rules in bilateral aviation agreements. What such a rule will encompass is unclear, but it echoes claims made by Emirates’ European rivals that the Middle East carrier has received unfair support. Clark shrugs off the latest maneuver, noting that “if anybody wants to introduce a fair competition clause. I say bring it on.” But he warns that such a rule would also look at the backing European and U.S. airlines have received over the years.