STRATEGY SUPREMO

Emirates Airline spearheaded the relentless expansion of Gulf airlines across the world. And the the Dubai-based carrier will continue to expand its global footprint, the airline’s boss told Tom Ballantyne.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

July 1st 2014

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Not surprisingly, Sir Timothy Charles Clark, president and CEO of Emirates Airline, has a plan. He is not prepared to reveal the finer details to the world, but you can be sure it’s big. It will involve lots more big jets, dozens of new routes and, most importantly, increased profits. Read More »

Sir Timothy Clark President and CEO Emirates Airline

“We map out where we need to be and where we want to be in 2015, in 2020, in 2025 and beyond. That is all laid out,” he told Orient Aviation in Doha last month, where he was attending the 70th International Air Transport Association (IATA) annual general meeting.

“Obviously,” he added, “we don’t disclose what that is, but in terms of cities [destinations] we have 140 today. It will probably be a couple of hundred in the next few years. This might shock and stun everybody, but there is plenty of business out there.”

Clark, who was knighted in January for “services to British prosperity and to the aviation industry” makes it clear there will be no letup in Emirates’ expansion, whatever difficulties or industry crises occur along the way.

“We know what we would like the fleet to be. We know when we want the fleet to be at that size. We know what cities we want to bring on. Unfortunately, one or two might drop out if they don’t work. This is a continuum of the plan we have always had, but it’s become far bolder,” he explained.

The strategy has become “far more global in its aspirations” because the carrier has grown its business and follows its business model to the exclusion of anything else. “We are extremely focused. We don’t allow any dilution, such as alliances or whatever it might be, apart from the Qantas joint venture,” he said.

There is no doubt “the plan” is paying off. Clark, who joined Emirates in 1985 and became its president in 2003, arrived in Doha, home of close neighbor and rival, Qatar Airways, just after he announced his airline’s 26th consecutive annual profit. It was a good one.

Emirates turned in a 42.5% increase, or $887 million, for the year ended March 31. Revenue achieved a record high, despite a fuel bill increase of 10%, to $8.4 billion.

It also was a year of relentless fleet expansion. The airline took delivery of 24 new aircraft, adding 16 A380s, six B777-800ERs and two B777 freighters, bringing its fleet to 206 passenger jets, 12 freighters and one Executive jet, with more than 300 aircraft on order. At the Dubai Air Show last year, Emirates signed record orders worth US$90 billion for 150 B777s and 50 A380s.

A week after the IATA AGM in Doha, Clark surprised Airbus and the industry when he cancelled an order for 70 A350XWBs ordered in 2007 and estimated to be worth US$16 billion to Airbus. The decision, which Airbus’ chief operating office customers said “was not the world’s greatest news”, demonstrated that Clark is not slow to act when the landscape changes.

Clark said the decision followed a review of the airline’s requirements. “In the near term, we have sufficient aircraft with the right mix of range and capacity for our operating needs,” he said.

In fact, Clark has hinted very strongly that he would like more A380s with a neo option and he has been critical of the development of the -1000 version of the type after Airbus revised the engine specifications without, said Clark, involving Emirates in the changes.

So what is the secret of Emirates’s fiscal health?

“You have to look at some of the critical metrics, such as the cost of available tonne kilometres (ATKs) or the cost per seat kilometer,” Clarke told Orient Aviation. “Emirates still, apart from one or two others, leads the community in its cost structure. We can run at about 7 cents a seat kilometre while others are running at 16 cents.

'Rather than than throwing bricks at us all the time, they should be saying: what are they doing? How are they getting all this business? And hey ho, why can’t we? '

Sir Timothy Clark

“I like to think a large contributor to our success is our ability to create, manage and nurture the income streams into the company and we do that in a multitude of ways. We have a very diverse and large network, which provides opportunities to bring multiple segments into play, all of which generate income and shape the size of the business.”

Another factor, said Clark, is the capability of the commercial group, using the very complex IT systems that manage the inventory and optimize the yield. “We have spent a fortune on that because the human mind is incapable of dealing with the dynamic of any moment of time on our network.

“This investment is starting to bear very good results. As our seat factors rise they are not rising simply by offering cheaper fares. The science of the yield optimization is a combination of multiple forces at play and our ability to understand those forces.”

Clark said constant change means every time there is a small change or even a big change, there are new segments coming to market. “I suspect - and I don’t mean to be disingenuous to the (rest of the airline) community - they are chasing the old way and not recognizing there is a lot more people out there who want to travel,” he said.

“These segments need to be brought to the business with a value proposition I believe Emirates offers one and they like us. It’s not just about price, it’s about the quality of the product, the brand itself and how we promulgate that brand across the board.”

As for his fleet, Clark has never wavered from the view that big planes are the answer to tomorrow’s growth, made clear by his almost evangelical attitude to the A380. Airbus must view him as their number one advertiser.

Emirates operates 50 of the super large planes and owns more than half of the European planemaker’s’ order book. And it wants more. It has ordered another 140 and is pressing Airbus to go ahead with a more efficient A380neo (new engine option) by the end of the decade.

Clark said if Airbus can deliver that plane by 2019 or 2020, he would be interested in up to 100 of the type over 10 years to meet Emirates’ fleet replacement and expansion targets.

“Anybody who comes up with an improvement on the aircraft we have, which would be 8%-10% improvement in economics we would like to know them. That’s a large amount of money to put in the bank if you can get it to work for you. We want them to take it on. I think it is only a question of time and others will look at it a bit more seriously.”

“If you do the maths on global demand for air transport, IATA will give you a conservative figure, let’s say it’s 5%, 6% or 7% annually. You’re working on 3.3 billion (passengers) now, so at 7% it will double in 10 years.

“In 2024, you’re at six to eight billion people travelling and that is only who you know about from the current statistics. If you are trying to deliver those passengers into existing airports, at some point it won’t work. The solution is to gauge change. If you can’t get the slots at an airport you put in a bigger airplane.”

“It’s a great aeroplane to work with. We are flying it for 16 hours – 16 hours 10 minutes to Los Angeles – it’s becoming lighter, it’s a very fuel efficient aircraft, it’s an aerodynamic dream.

As for network, Clark told Orient Aviation there are no pressures to find new routes and destinations for all these new aircraft. “We go to countries, cities and towns that others shy away from because they haven’t done that research or they’re not looking in the right places. If you don’t have a network in place that allows traffic to flow over potential city pairs, passengers won’t fly with you, will they?

“So, for example, if we put Dar es Salaam on to Moscow (over Dubai), Brisbane on to Algiers, or Perth on to Conakry in Guinea in Africa, we know there is business flowing there, but it doesn’t flow in a manner that would attract the attention of airlines today,” he said. “They just wouldn’t fly to Conakry. Lufthansa wouldn’t go Conakry to Frankfurt or Munich to Brisbane or Perth. We do because are prepared to take a global view. This is the new business and a lot of carriers don’t recognize the scale of what that is. They tend to confine themselves to traditional thinking and planning so they will not go to these places.”

At the heart of Clark’s strategy is growing the number of city pairs Emirates can serve. “We create new business and part of the risk taking is the belief that you will create new business,” he said. “What we have learnt after 29 years is that if we do open up city pairs, not necessarily on line, you create that new business. At the moment, we have about 75,000 city pair combinations in our network.

“They will more than double in the next 10 years. So, if your hub grows at the pace you need it to grow to meet this kind of metric, the mass starts to become almost geometric in terms of incremental income as flights are layered on and cities are opened and the flow moves. The Dubai hub, and I guess the others round here, will have a huge gravitational pull for those reasons.”

He points to Australia as an example of where many international airlines missed an opportunity.

In the late eighties and early nineties Clark watched European carriers such as Lufthansa, Alitalia, Olympic and others progressively pull out of the market.

“They all withdrew as if to say there’s no business in Australia whatsoever. So we entered it and now look at the scale of what we are doing in Australia and how we are connecting Australia and Europe and business in Africa to multiple cities in all these areas.”

“Australasia became one of the biggest growth markets at Dubai International Airport in 2013, increasing 33.4% last year. Emirates has overtaken Singapore Airlines and become the second biggest international operator in passenger numbers flying to and from Australia. It recorded a 16.7% increase in passengers last year against SIA’s more modest 3.3% gain. Qantas has remained in the lead, with 17% of the market for international air travel, which is a welcome increase of of 1.4%.

Much of Emirates’ growing market share is a result of its alliance with Qantas Airways, which Clark describes as a “win-win” for both carriers. It’s a view hardly shared by some of his rivals, particularly in Asia. They have accused Qantas of “selling the farm” by giving Emirates unprecedented access to their markets.

“Naturally it amuses me to read all of this,” said Clark. “I think it’s good for Australia, good for Qantas and certainly good for us.” He does, however, concede that the first year of the alliance has been tough as the two carriers worked to bed in, assimilate and mesh systems, particularly as Emirates’ own IT systems have been developed in isolation.

“They’ve (Qantas) been very patient. The alignment of the Frequent Flyer programs, the alignment of the pricing regime we are allowed to do within the law, the product mesh, the schedule mesh etc has not been easy. Now it’s starting to come good,” he said.

Unfortunately, Clark added, these achievements have been masked by the difficulties Qantas chief executive, Alan Joyce, has faced, such as Qantas’ financial problems on long-haul international flying, criticism of its deep cost cutting and claims it is being taken to the cleaners in the Emirates deal.

“That’s kind of endemic to the business. We are used to that. I don’t pay any attention to it. At the end of the day, if Alan puts his hand up one day and says this isn’t working Tim, then I’ll say OK, fine and we’ll have to end it,” Clark said.

Australia isn’t the only opportunity Clark is embracing. During the IATA AGM, a speaker on one panel pointed out that according to population forecasts, China’s population will decline decline by 200 million in the next three decades, while the population of India would rise by 300 million and the population of Africa would surge by more than two billion.

“This is why we’re there,” Clark said. “We have 23 points in Africa, soon to become 24. We have been pushing Africa capacity. The guys (other airlines) are missing a trick here. A bit like Oceania, Africa was there for the European carriers post the Colonial days, but they all pulled out,” he said.

“You saw this continent being ignored. Yet while it’s tarnished with AIDS and tribalism, genocide and air safety issues, there is real money in Africa. Serious money. The Chinese have been very quick to recognize that.”

Emirates sent its planners into Africa in pretty difficult conditions to determine how business done there.

“There’s no point in saying I’m going to do it this way. You do it their way. A lot of the Europeans said if you don’t do it our way we’re not going to do it at all. So part of that research and exploration in places like Africa allows us to recognize its potential and how it would integrate into the global economy. It’s huge, but unless you investigate you simply won’t know.”

But Clark is far from being blind to challenges. “That’s why I try and articulate why the A380 has a place. A slot that is operated by a 150-seater, well you can’t do that anymore when you’ve got a 500-seater opportunity to put in it.

“Its not just a question of benefit for the airline, but for the airport which sees 500 people emptying their pockets in merchandizing, fast food, concessions and shopping.

“Those are the kind of issues that we should be talking about here (in Doha). What are the airports doing about investment? Don’t keep banging on about State aid. If the U.S. decides that they’re going to spend money on building a new airport, get on with it.

“If you say: ‘Oh, it’s not fair because the State is paying for it and its subsidizing it’, you’re never going to get anywhere. You are going to put yourself into a corner. Allow money and the economic forces to drive what has to happen in the business otherwise you will be at a dead stop.”

“We’ll run into infrastructure and air traffic management issues. We’ll run into huge slot congestion problems at major airports. People are putting their heads in the sand about this, particularly in the U.S.

China too has issues, said Clark. “China is attractive to everybody. Is it coming off the boil a little bit? Perhaps. But it is still way ahead of anybody else in growth.

“I mean, you go from 16% GDP to 8% and everybody thinks the world is going to fall apart. It’s still an enormous market. However, the country has enormous infrastructure issues. As the wealth creation works its way through the economy and demand for travel from the hundreds of millions of people elevated to the middle class grows, just meeting the domestic demand is going to be difficult.”

But in the end, Clark said there will be plenty of business for everyone. “It’s not competition from the guys around me. It’s the wake-up call that needs to go out to the other carriers. Rather than than throwing bricks at us all the time, they should be saying: what are they doing? How are they getting all this business? And hey ho, why can’t we?

“It’s there for everybody and it’s ready to grow. And as soon as we get through all the problems of the recessionary era and things start to move ahead again, then we’re all going to be up and running.”