The decision of Emirates Airline to reverse a strategy of low fares to more high-end charges has paid off with increased business.
Emirates get more business with higher fares
When Emirates Airline announces its annual results in early May, it will owe an expected profitable outcome to the surprising decision to raise prices last year when other airlines were cutting theirs. "We had dropped our fares thinking it would stimulate markets," recalled Tim Clark, the president of Emirates.
"At about March, I began thinking 'this doesn't make sense to me, and if we carry on like this we will be at yield levels pre-dating the turn of the millennium, so we better sort ourselves out'." After the airline spent hundreds of millions of dollars building its upscale brand, including putting first-class showers on its A380 superjumbos and sponsoring horse racing, yachting and football events, Mr Clark worried about the adverse effects of the basement fares pervading the industry.
Such price cutting would hit profits, undermine investments and jeopardise the business model, he thought. So between April and December, Emirates increased fares by 35 per cent across its network. Rather than seeing demand wither away, it grew - helped by a global economy slowly emerging from the downturn. "You know something? Seat factors went up, loads went up," Mr Clark said. In some markets, other airlines even raised prices, helping to put an end to destructive price wars.
Emirates's ability to weather economic shocks and recessions has allowed it to turn a profit in all but one of its 25 years, and it expects this year to be no exception. Emirates' financial year end this month. It will announce more profits, Mr Clark said, including another record for passenger traffic, probably above the 23 million mark - in a year that saw what the International Air Transport Association called "the worst demand decline in airline history". Airlines worldwide are estimated to have lost US$9.4 billion (Dh34.52bn).
Mr Clark attributes the carriers success to creating new "city pairs" via a single stop at Dubai. Now transit times for people travelling from Guangzhou to Nairobi, Sao Paulo to Osaka, and Los Angeles to Tehran, have been dramatically shortened. And the idea has a big potential to grow, Mr Clark said. Emirates could theoretically operate more than 500 profitable destinations under the model, up from its current network of 101 cities. "This is the tip of the iceberg," he said.
Ultimately, it will be the physical constraints of Dubai International Airport, including airspace, runways and other physical infrastructure, that will limit the use of the city pairs concept to in "excess of a couple hundred destinations", he said. The airline's philosophy has always been to build for the long-term, evidenced by ambitious aircraft orders placed at each of the past Dubai airshows, including a record order for as many as 143 wide-body aircraft, worth $34.9bn at list prices, at the 2007 event.
Emirates has remained committed to these orders even as global travel and trade patterns have been thrown off course by the economic downturn. Last year, for example, as Singapore Airlines said it would ground 17 aircraft to ride out the slowdown, Emirates announced plans to expand its fleet by a similar number. "When the world turned upside down, profiles were skewed, the demand patterns changed overnight, and we were trying to manage chaos," Mr Clark said.
"But in the end, in that chaos, you fall back on your instinct and your instinct is saying 'you've done this before'. "Global meltdowns, meltdowns in the Asian economies in 1998, oil crises - you look at what you did then, which basically was keep the ship dead straight on course. You might slow it a little bit, you certainly don't turn it off course. You keep it going." While demand for premium seats did drop, Mr Clark disagreed with airlines that made far-reaching decisions to cut back on first and business-class seating.
When airlines say "there is no first class or business class, well, this is music to my ears", he said. "I'm sorry guys. If you really think planet Earth is going to be in the doldrums circa 2008 forever, forget it. It's not going to happen. This premium business is going to come bouncing back, as it already is. "In this part of the world, is first and business-class going away? No way. We also have a lot of first class coming out of Europe, Asia and South America."
Emirates' success has not come without its detractors, however. Rival airlines have complained about its advantages, which include the full support of the airport and civil aviation authorities for its growth plans - a relationship that is often antagonistic in other parts of the world. The airline's growth, which relies on globalisation as well as the easing of bilateral air traffic restrictions, is being opposed by competitors in some places such as Canada, where Emirates is allowed to fly to only one city, Toronto, which it serves with three flights a week.
Calin Rovinescu, the chief executive of Air Canada, said on March 15: "Emirates' real aim is to dump its excess capacity resulting from too many wide-body aircraft commitments, including A380s, into the Canadian market, just as it has elsewhere in the world." Mr Clark is upbeat about a resolution to the Canadian dispute this year. An Emirates-funded study said greater access to Canada would result in nearly 3,000 new jobs in the country and $480 million in economic benefits.
"I can only hope that sense prevails," he said. email@example.com