Emirates Leaves Rivals in Slipstream

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By Dinah Deckstein  www.spiegel.de

The Dubai-based airline Emirates is considered the world’s most successful and has ambitious plans to expand. Its European rivals such as Lufthansa and British Airways accuse the airline of benefitting from massive state subsidies. But the reality is more complicated.

There are only a few top executives who can gaze out on the future of their own company from the comfort of their own desk. But Tim Clark, the 63-year-old British president of the Dubai-based airline Emirates, is one of them.

Clark’s office with its large windows sits on the top floor of the company’s headquarters at Dubai International Airport. Right in front of his building, a glimmering gray-blue colossus of steel is shooting up. In late 2012, when the new terminal building for Airbus A380s is completed, up to 20 of the massive jets should be able to dock there at the same time. Emirates already has 15 of the world’s largest passenger jets in service. It has another 75 on order. And it plans on buying more.

If Clark takes a subway from the station conveniently located in his building to its last station and then hops in a cab for another couple of minutes, he can already survey what will be the home of his airline’s future headquarters building: Dubai World Central, a new, massive airport. Although Emirates won’t be able to move into its facilities there until 2022, there are already eight-lane palm-lined streets leading to the airport’s 140-square-kilometer (54-square-mile) desert plot.

Dreams into Reality

The airport will be the world’s largest — which at first sounds like an echo of those old delusions of grandeur that first made Dubai famous. During the crisis of the last two years, the little emirate only narrowly succeeded in averting national bankruptcy. The reward for its monstrous real-estate plans was billions in debt. The emirate is now having to sell off some of its assets as a result.

The most valuable pearl that could possibly be sold off in Dubai is a stake in Emirates, which long ago joined the ranks of the world’s largest and most lucrative airlines — and which still wants more.

At the massive airport, there are huge billboards declaring “Welcome to Dubai’s Aerotropolis for the World.” The airport should eventually handle 160 million passengers each year, or three times as much as Frankfurt Airport currently does. Images of Dubai ruler Sheikh Mohammed bin Rashid al Maktoum on gigantic banners proclaim: “We are transforming our dreams into tangible reality.”

But, in the eyes of its European competitors — such as Lufthansa, British Airways and Air France/KLM — what’s happening in Dubai and its neighboring emirates is much more of a nightmare. Between now and 2020, Emirates alone wants to increase its fleet of long-haul aircraft from 155 to roughly 400. What’s more, taken together, the heads of its neighboring airlines, Abu Dhabi’s Etihad and Qatar Airways, have ordered almost just as many planes.

“That goes completely beyond their needs,” warns Wolfgang Mayrhuber, who was CEO of Lufthansa until Dec. 31, 2010, adding that it is becoming “a very serious threat to the aviation industry in Germany and all of Europe.” Another corporate executive, who would prefer to remain anonymous, sees things in even more dire terms. “These are monster airlines that have almost unlimited financial means at their disposal thanks to their governments,” he angrily says, referring to alleged cross-subsidies from the oil trade.

Shifting Traffic Flows

Nevertheless, Mayrhuber and his colleague are simultaneously both witness to, and victim of, a revolution in the global aviation industry that they themselves underestimated for far too long. Up to now, Europe and North America have still accounted for roughly 60 percent of the world’s air traffic. In the past, the industry’s self-appointed top dogs on both sides of the Atlantic made a good living off the situation — one that was even perhaps a bit too good.

Indeed, since globalization has massively increased the significance of India and China, having connections to those countries has become all the more important. “Where 10 years ago only one person wanted to travel,” Clark says, “now you have 10,000.” And, for all of these new clients, Dubai enjoys a very central position. For example, Nigerian traders take flights connecting through Dubai to reach Shanghai or Hong Kong, where they purchase low-cost goods that they then resell at a profit in their home countries. And, for their part, the Chinese are extremely interested in making business contacts in Africa because they want to benefit from the continent’s wealth of raw materials. Indeed, even Brazilian companies would like to see more and better flight connections.

“In the 21st century,” Clark predicts, “the epicenter of global traffic flows will shift — completely and forever.”

While large industrial corporations recognized the effects of globalization early on and established a foothold for themselves in the emerging economies, Europe’s formerly state-owned airlines were initially slow to react. Until recently, they preferred to focus on taking over troubled competitors or forging alliances with their competitors.

The rigid legal system also blocked airline efforts to expand internationally. Indeed, even today, bilateral agreements between countries stipulate in painstaking detail which airline can fly where, how often and with which aircraft.

Ideal Location

For a number of years, more generous provisions have been in force in a number of places, including within the European Union and in regard to trans-Atlantic traffic between Europe and the United States. There, the airlines can more or less decide for themselves which cities they will fly to in their partner countries or within the continental United States.

In the past, airlines such as Lufthansa, British Airways and Air France used a backdoor method, known as the “sixth freedom” of international air transport, to continue growing despite these restrictions, as well as to offer their domestic populations attractive connections to destinations around the world. The sixth freedom allows airlines such as Lufthansa to transport, for example, passengers from Cairo to Warsaw as long as there is a stopover in Germany, say in Frankfurt or Munich.

Twenty years ago, Clark already recognized the opportunities that this so-called “hub-and-spoke system” presented for his employer. Although the airline was already called Emirates at the time, it was still tiny. Clark realized that — unlike Frankfurt, Paris or Amsterdam — Dubai occupied an almost ideal location on the world map. Indeed, almost all of the major flight destinations can be reached from Dubai in roughly 10 hours.

In order to stretch his company’s flight radius even further, Clark ordered custom-made versions of airplane models from Boeing that could handle so-called ultra-long-haul routes in flights of up to 18 hours without a stopover.

Securing Traffic Rights

At this point, the only thing Clark lacked was the necessary traffic rights. Initially, the British, German and Italian governments, in particular, were relatively generous in granting these rights to Emirates, because, in its first years, the up-and-coming airline enjoyed a kind of special status merely for being exotic.

As a result, India and a number of African countries followed suit in granting the Gulf-based airline extensive takeoff and landing rights. In any case, their own airlines were far too small to handle growing global demand.

Along with his boss, Sheikh Ahmed Bin Saeed Al Maktoum, the uncle of Dubai’s ruler Mohammed, Clark knew how to put the new air rights to good use. With its 155 jets, the company today serves over 100 destinations all around the world. It’s true that Emirates has until now only had limited flights to the United States and South America. But that’s one of the reasons why the company is expanding its fleet with A380s and other models.

Rivals Accuse Emirates of Unfair Advantages

The success of the Arab state-owned airline hasn’t just made its European competitors nervous; it’s also made them aggressive. In suspiciously similar-sounding statements, they have been urging their governments not to grant any additional air rights to Emirates.

A particularly fierce defensive battle is being waged in Germany. Lufthansa, the country’s flagship carrier, wants to use everything at its disposal to prevent Emirates from being allowed to take off and land in Berlin and Stuttgart in addition to its existing rights in Frankfurt, Munich, Düsseldorf and Hamburg.

Rivals like Lufthansa accuse all three Arab airlines of massively benefiting from state-provided financial assistance. Clark vehemently denies the charge. “If anyone can ever prove we have benefited from one euro of subsidy, I will resign the next day,” Clark told Dow Jones Newswires in a recent interview.

Granted, it cannot be said that the three Arab airlines directly depend on the sheiks for life support. But one thing is true: Since the airports, air traffic controllers and transport authorities in their countries closely cooperate with each other and often even share the same management structures, the fees these airlines have to pay are significantly lower than the ones paid at European airports.

Lower Costs

Europe’s veteran airlines also strongly criticize the fact that since Dubai doesn’t levy any corporate or income taxes, Emirates can pay lower salaries, and that it primarily employs low-cost workers from countries such as India and Pakistan. That’s true. But, at the same time, Emirates also provides accommodation and health care for the majority of its employees.

The management consulting firm Arthur D. Little has calculated that Emirates’ costs are almost a third lower than those of most of their European competitors. Still, that in itself does not explain why the Arab airline has enjoyed such success.

Unlike Lufthansa, for example, Emirates does not operate an expensive short-haul network to satisfy demand in its own country. What’s more, its European competitors could never reach the 18-plus hours of use that Emirates airplanes see in an average day.

Furthermore, Dubai doesn’t have a ban on night flights like the one enforced at most German airports. For this reason, even at 3 a.m. or 4 a.m., you will find tourists and business travelers wandering through the terminal halls of Dubai’s airport, either looking for their connecting flights or for bargains in the high-end shops.

‘The Cake Is Growing All the Time’

Lastly, its customers have helped guarantee its success. Which traditional European airline offers passengers the choice of 600 radio and 150 television stations? Moreover, unlike Lufthansa, Emirates offers business-class customers seats that convert into flat beds and even limousine service to and from the airport. “They offer everything that is good and expensive,” complains one senior Lufthansa executive. “In Europe, that kind of thing just isn’t possible.”

Christoph Franz, Mayrhuber’s successor at the helm of Lufthansa, accuses Emirates of deliberately poaching passengers in order to fill its own planes. In a lobbying document directed at politicians, Lufthansa even speaks about “aggressive predatory competition.” But, in response, Clark says that: “Everybody does that. Are we now supposed to be the only ones denied this right?”

Indeed, Clark has a hard time understanding all the fuss about his airline’s expansion in any case. “The cake is growing all the time,” he says, “and everyone can have a piece of it.”

Burdensome Limitations

Still, there’s no denying that the fight being waged between the established airlines and the new high-flyers from the Gulf states is somewhat unequal. On one side, you have the defenders of a system that long ago accepted work councils, unions and bans on night flights because all those things are taken for granted in European corporate culture.

On the other, wealthy sheiks and top executives from across the world are demonstrating that you can also have air transport without all of those burdensome limitations as long as local conditions allow you to do so — as is the case in Dubai.

Having learned a similar lesson long ago, major German companies set up subsidiaries around the world, oftentimes facing bitter resistance from their core workforces back home. The aviation industry has yet to make such a move.

Jürgen Weber, a former Lufthansa CEO who now chairs its supervisory board, has apparently already realized that such a development could be necessary. “I can seriously imagine,” Weber recently told close associates, “that Lufthansa will one day be a globally positioned corporation with subsidiaries spread around the world.” But this time, the unions haven’t protested.

Translated from the German by Josh Ward

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