Emirates Finally Hits Turbulence

Emirates Finally Hits Turbulence
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Deep in a lengthy Bloomberg Businessweek article on Emirates Airline was a quote that spoke volumes about the airline's strategy and confirmed the case that the U.S. carriers have been making for more than two years. In "Is Emirates Airline Running Out of Sky?" Chief Operations Officer Adel Ahmad al-Redha said: "We have never equated our investment into a dollar return."*

Mr. al-Redha makes plain what longtime observers have been saying for years: Despite the flash of all those brand-new, big airplanes, a hub airport loaded with bling, Jennifer Anniston as celeb-spokeswoman and gushing accolades from passengers, Emirates does not rely on turning a profit to survive, a requirement for U.S. airline carriers and most other airlines and businesses. This acknowledgement demonstrates that Emirates is not a real airline.

Having spent my entire working life in and near real airlines with investors and bank loans and other challenges, I was certain that sooner or later a credible business journalist would question whether, even with massive government subsidy and other big advantages, Emirates' business model was sustainable.

It was heartening to read a simple truth that other journalists dance around; at the top of the article, author Matt Campbell wrote that Emirates is "owned by its government." And he did a nice job of uncovering other basics:

  • The cozy linkages in what is essentially a single entity - call it Dubai, Inc. The author wrote, "The company's chairman is Sheikh Ahmed bin Saeed Al Maktoum, the uncle of Dubai's absolute monarch. He also runs the airport authority, the aviation regulator, and the city's largest bank, should Emirates ever need a loan." That the national regulator is essentially the airline is especially troubling.
  • The absolute control that Emirates exercises over the company and its workers, from company dormitories with specified curfews for flight attendants to company doctors, all the way down to the precise shade of red lipstick for female cabin crew (the author noted they are "referred to invariably as 'girls'"). Creepy.
  • The company's dizzying growth trajectory is bumping into slowing demand in many of the regions that have been the foundation for its global ambitions; in May 2016, Emirates reported the first revenue decline in a decade, and since then more warning lights have blinked on. The author noted these declines in the context of Emirates' orders for "50 A380s and 174 Boeing 777s, adding to the 92 and 148, respectively, it currently flies."

As readers dive into the article, I would suggest keeping two important facts in mind.

First, American Airlines, Delta Air Lines and United Airlines have produced overwhelming evidence to prove the existence of massive amounts of government support provided to the three Gulf airlines. This is not a schoolyard "is too/is not" argument. The three U.S. airlines spent several years producing incontrovertible proof of at least $50 billion in subsidies and other support. They hired forensic accountants and investigators and built an enormously powerful case. Importantly, because the UAE does not comply with international accounting standards (called IFRS), it's impossible to really determine what's going on by looking at Emirates' annual report and other financial statements published in Dubai. (The U.S. airlines found the true numbers in reports Emirates and the other two airlines filed with authorities in Singapore, Hong Kong and other places with transparency and genuine accounting rules.)

Second, it should not be forgotten that the massive subsides have allowed Emirates (and the other two Gulf titans) to divert traffic away from U.S. airlines and their European joint venture partners. As just one example from the U.S., India is the largest "beyond" market for Emirates, Etihad and Qatar, and their shares of bookings through travel agents and other intermediaries more than quadrupled from 2008 to 2014. More examples of traffic diversion are available in a Forbes article here.

And the notion (in the article and many previous stories) that Emirates has grown the market only exists because massive government support allows them to flood markets with too many seats, thus driving down prices. That may be good for consumers in the short term, but totally distorts the market and creates instability in the medium and long term.

The U.S. carriers, their customers, employees, and investors have benefited from the U.S. government's 120 Open Skies agreements, which have opened global markets, bringing new opportunities. But the governments of the United Arab Emirates and Qatar, and their state-owned airlines, have violated the terms of these agreements through the massive subsidies and other state assistance. As President-elect Trump takes office this week, I'm optimistic that the new Administration will see how damaging these trade violations are and seek to enforce our trade agreements and level the playing field for U.S. airlines and their workers.

* Emirates is by no means the only Gulf carrier where execs are free from normal commercial reality. Last month, I had lunch with a friend who was an executive at Air Berlin at the time Etihad Airways bought almost 30% of the German airline; on his first trip to Abu Dhabi, he met a senior Etihad official who told him, "Our goal is to make Etihad the best airline in the world, and if possible economically viable."

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