=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2005/01/11/f= inancial0919EST0043.DTL --------------------------------------------------------------------- Tuesday, January 11, 2005 (AP) >From tiny Dubai, an airline with global ambition takes off DANIEL MICHAELS, The Wall Street Journal (01-11) 06:19 PST (AP) -- DUBAI, United Arab Emirates -- Emirates Group has emerged as one of the fastest growing and most feared competitors in the global airline industry. The scene at its hub airport at 2 a.m. on a recent Friday shows why. At a time of day when noise restrictions have shut down most of the world's major airports, Dubai International was abuzz. Throngs of connecting passengers shopped for liquor, DVD players and gold jewelry in the mall-size complex of duty-free stores. Others ate Mongolian barbecue, Indian curry and McDonald's hamburgers under towering artificial palm trees. Downstairs, a crowd of several hundred travelers -- including Australian tourists heading for the local desert-sand beaches, European businesspeople arriving to strike deals, and workers from the Indian subcontinent, Africa and Southeast Asia -- waited patiently to clear customs. "It's crazy," said a harried passport agent. "It's like this every night -- and day, too." Dubai airport's round-the-clock operation and prime location at the crossroads of global travel have helped fuel Emirates' impressive track record: 25 percent average annual growth in passenger traffic over the past 20 years, one of the steepest trajectories of any carrier in the world. With much of the aviation industry wallowing in crisis, state-owned Emirates is more than doubling its 73-plane fleet. It sent shockwaves through the industry by ordering 99 big planes in the past few years, including 45 of the massive two-deck, 555-seat Airbus A380s -- by far the largest order for what will be the largest plane in the world. Now Emirates, which began with two rented planes in 1985, is bumping up against larger rivals, who accuse it of competing unfairly with artificially low fares. They warn that Emirates and two smaller state-owned carriers in Abu Dhabi and Qatar, which have also recently placed huge jetliner orders, risk creating a dangerous glut in one of the last bastions of highly profitable air travel: long-haul flights. The big fear is that Emirates and its Persian Gulf neighbors will shake up international aviation in the same way no-frills airlines have done on shorter routes in the U.S. and Europe. U.S. airlines, which don't yet compete directly with Emirates, could soon face the consequences of its growth as European and Pacific Rim airlines escape Emirates' pricing pressure by moving planes to different routes where U.S. carriers do fly. Qantas of Australia and Air New Zealand last year justified their propos= ed merger partly as a response to Emirates' expansion in their markets. Qantas Chairman Margaret Jackson this past August questioned Emirates' huge airplane orders, noting that Emirates' chairman, Sheikh Ahmed bin Saeed Al-Maktoum, is also a member of Dubai's ruling family, the head of its civil-aviation authority and runs the airport company. British Airways government-relations director Andrew Cahn charges that Emirates is "sucking our U.K. long-haul traffic over their heavily subsidized hub airport." Air France Chairman Jean-Cyril Spinetta recently even proposed sending his managers to inspect Emirates' books. Maurice Flanagan, a 76-year-old onetime navigator for Britain's Royal Air Force who has headed Emirates since it was founded, shoots back that his rivals "wish to hide behind protectionism" and many are "subsidized to the hilt." He says Dubai's ruling family invested only around $10 million to start Emirates 20 years ago and has since been repaid far more in dividends. Emirates, which publishes financial accounts audited by PricewaterhouseCoopers under International Financial Reporting Standards, has been "completely self-sustaining from the start" and consistently profitable, Mr. Flanagan says. Emirates insists its success comes from low costs, Dubai's strategic location and its ultra-efficient airport. Those assets allow Emirates to run a classic hub-and-spoke operation, ferrying world travelers through the desert city. The airline in November posted a 41 percent rise in half-year net profit, to a record $236 million, on sales of $2.2 billion. The airline has taken a hit from recent high fuel prices, but officials say its growth plans are on track. Dubai may at first seem like an odd place to launch a major airline. When Mr. Flanagan gave up a comfortable career at British Airways to run airport operations here in 1978, life had a rough edge. Although money was rolling in from oil, discovered two decades earlier, this was a sleepy port town. Fresh meat, sold in the open air, crawled with flies, and shoppers had to line up at dawn to buy fresh milk. Yet Dubai had already been a regional trading hub for centuries thanks to its location on the Arabian Peninsula near India and Iran. Showing foresight rare among oil-rich countries, the ruling Al-Maktoum family began investing in heavy industry and infrastructure to promote trade. The family sees Emirates and the airport-cum-shopping mall -- now undergoing a government-funded $6 billion expansion -- as continuations of the sheikdom's commercial tradition. With a native population of only about 200,000, Dubai's generally pro-Western rulers opened Dubai's economy to foreigners. They came in droves to staff and run the entrepot's businesses, dressing and drinking alcohol freely by regional standards. Today, dozens of skyscrapers are rising in central Dubai and traffic snarls the freshly paved highways between its air-conditioned shopping malls. Out in the Gulf, dredgers are creating two man-made islands in the shape of palm trees. The shoreline is a string of luxury resorts. Emirates itself is a cornerstone of Dubai's makeover because most of its passengers stop here for several days to shop or sunbathe en route from one country to another. "Emirates supports Dubai and Dubai supports Emirates," says Mark Turner, a manager in Emirates' crew-training operation. Emirates' first flights were to Dubai's old regional trading partners su= ch as India and Pakistan. Much of its traffic was, and remains, the manual laborers who staff the Mideast oil industry. In 1987 Emirates started flying to the United Kingdom. Today it has 77 weekly flights to five British airports. Emirates President Tim Clark suggests that "one of the reasons we get bricks thrown at us" is that rivals can't believe Emirates could stay profitable facing "trauma after trauma" in the Mideast. "Admittedly it doesn't help when we've got troubles on our doorstep," Mr. Clark says, but so far, the carrier has been able to overcome many travelers' concerns about the region's safety. Part of the airline's success stems from its willingness to expand boldly in a troubled region with big pent-up demand for travel. Mr. Flanagan recalls hearing missiles fly over his seaside home and hit oil tankers on the Persian Gulf during the Iran-Iraq war of the 1980s. Yet Emirates' traffic rose. And it continued rising after Iraq invaded Kuwait in 1990 and the U.S. led Operation Desert Storm the next year, in part because Emirates kept flying while many other airlines avoided the region. "Admittedly it doesn't help when there are things going on on our doorstep," Mr. Clark says, but so far, the carrier has been able to overcome the concerns of many travelers about the region's safety. In 1996 Emirates started flying to Australia and today has 49 weekly flights to four cities there. In Europe, it is reaching beyond capitals to cities including Dusseldorf and Hamburg in Germany and Geneva, Switzerland. Emirates entered the U.S. market in June, with 14-hour nonstop flights from Dubai to New York. It plans to add more American cities among a host of new destinations world-wide. In five years, it could have more seats flying globally than the current total for British Airways, the world's largest international airline, predict analysts at Goldman Sachs in London. Dubai's airport, with its 24-hour operation, remains a key to the carrier's success. Many of Emirates' busiest flights arrive and leave at hours when other airports sit silent, which allows Emirates to use its planes more of the day, generating more revenue than rivals can from similar aircraft. Today the airport handles around 20 million passengers annually, which makes it midsize by global standards. By 2010, it expects to handle some 60 million fliers, or roughly the same as Europe's busiest airport, London's Heathrow. Dubai's ruling family is now considering building a bigger airport nearby, which could rival the traffic capacity of Atlanta's Hartsfield-Jackson airport, the world's busiest. Emirates' operation is a classic hub strategy of collecting people from around its network, flying them to its base and sending them off again. This way it can connect cities that would never support direct flights, such as Peshawar, Pakistan, and Khartoum, Sudan. Indeed, much of Emirates' traffic is between places that few leading carriers serve. Its network planners are looking at expanding in 19 African countries. Low competition on such routes means they can be very profitable. A hint of the carrier's global reach: Toilet-flushing instructions onboa= rd Emirates planes are in eight languages -- including Sinhalese and Hindi -- each with its own alphabet. And Dubai has an advantaged position, Mr. Flanagan boasts. Take a classic flat map of the continents, with Alaska in the upper left and New Zealand in the lower right, and Dubai is in the center. Using the latest ultra-long-haul aircraft, Emirates and its highly efficient hub can connect almost any two points on the globe. To serve all those places, Emirates has more than 5,500 air staff from 1= 15 countries. Flight attendants speak an average of 10 languages on every flight. By 2012, the airline expects to employ some 15,000 cabin crew and today receives around 250,000 job applications annually from around the world. Workers are coming on so fast that the Emirates Aviation College in central Dubai is running double shifts to promote economy-class flight attendants to business class. Near midnight on a recent Tuesday, Passaporn Pookpant, a 23-year-old Bangkok native, stood inside a full-size mockup of a jetliner interior. She offered a fellow flight attendant from Belgrade, Serbia, a selection of gourmet cheeses as an instructor looked on. Ms. Pookpant says she quit a sales job at International Business Machines Corp. in Thailand after hearing from friends about the "nice lifestyle" working at Emirates. Staffing globally yields a big bonus for Emirates, says Dermot Mannion, who runs Emirates' finance, human resources and other support services. The airline sets salaries at levels prevailing in each employee's home country, some of which are very low. Carriers in the U.S. and Europe struggle under huge labor bills that in recent years topped 35 percent of costs. Mr. Mannion says that Emirates' mix of nationalities, plus the absence of income tax in Dubai, have allowed him to keep staff expenses below 20 percent of costs -- a level comparable to lean no-frills carriers. "It's a significant advantage over the competition," Mr. Mannion says. Now, the sheer quantity of seats Emirates is offering prompts warnings of damaging price wars. A business-class seat from Frankfurt to Sydney, Australia, recently cost about $4,300 on Emirates versus nearly $7,900 on Germany's Lufthansa, according to a study by Goldman Sachs. Goldman analysts predicted in a research note last year that pressure from Emirates and its Gulf neighbors means that Lufthansa and other old-line carriers face "an inevitable erosion" of passenger revenue over the next five years "as the long-haul business model begins to implode" -- just as short-haul business has collapsed under the squeeze of no-frills airlines. The implications of this are global. If European and Asian carriers see profit margins falling on routes where they compete with Emirates and other Gulf carriers, they will probably shift planes to more-profitable markets where they don't yet face Emirates, such as routes to the U.S. That shift would hurt U.S. carriers, who have recently increased international flights to escape their losses in the domestic American market. A similar dynamic struck in 1998 when the Asian financial crisis hammered Pacific air traffic, and European and Asian carriers moved planes to U.S. routes. Then, as the economies in the U.S. and Europe surged in 1999, many big carriers lost money flying across the Atlantic because the glut of airline seats prompted savage price wars. Giovanni Bisignani, director general of the International Air Transport Association, a global airline trade group, says there is already "too much unprofitable capacity world-wide." He warns that Emirates must "be very careful" because expansion "distorts the market" if not linked to real growth in demand. "Overcapacity? No way," responds Mr. Clark at Emirates. He says the airline is creating new long-haul demand, much as budget airlines have done on short-haul routes around the world. The U.S. holds big promise, and markets in China and India are "ready to rock and roll," he says. Battling for the Skies Emirates fares between Europe and Asia are generally lower than on competing European airlines. On some routes this is because Emirates must stop in Dubai, while European airlines offer nonstop flights. But even between Europe and Sydney, Australia -- a flight so long that European airlines also must stop en route -- Emirates undercuts its European rivals. Below are some recent examples of savings to Sydney on Emirates: ORIGIN AIRLINE STOPOVER BUSINESS-CLASS FARE SAVINGS London British Airways Singapore $9,636 33 percent Emirates Dubai 6,425 Frankfurt Lufthansa Singapore 7,836 44 percent Emirates Dubai 4,356 Paris Air France Singapore 8,715 24 percent Emirates Dubai 6,612 Notes: Fares are from September 2004; Data are converted from British pounds to U.S. dollars at current rate Source: Goldman Sachs ---------------------------------------------------------------------- Copyright 2005 AP