The global airline industry has lost $25bn in the past two years. Recovery
hinges on resisting the temptation (it usually fails) to order more aircraft
in the upturn – in effect pursuing market share at the expense of
profitability.
Airline chiefs are promising “capacity discipline” this time, and well they
should. But the Middle Eastern airlines seem to be living in a parallel
universe. Capacity there is set to rise 16 per cent this year and Emirates’
latest purchase means it now has 90 double-decker Airbus A380s on order,
more than half its current fleet size.
Method to madness
But there is method to this madness. Dubai is turning itself into a central
hub for air transfer traffic between west and east. New jets fly far enough
to give Emirates, which flew 27m passengers last year compared with British
Airways’ 31m, a global reach.
They are also more efficient, allowing the airline to undercut European flag
carriers such as British Airways and Air France-KLM on price. Passengers
will always pay more for direct flights, but many are willing to transfer if
the ticket is cheaper and the wait is not too long.
As for profitability, Emirates lacks the legacy costs and rebellious
workforces that hit the older flag carriers. And when the oil price goes up,
its owners’ pockets just get deeper. Emirates’ net profit was about $1bn
last year and had an operating margin near 10 per cent.
All that adds up to a potentially disruptive force in the long-haul market,
though Emirates will first have to deploy its new aircraft profitably and
secure more slots at big airports. That could lead to cheaper long-haul
flights in bigger and greener jets. Airline investors should be worried;
consumers might well shrug and grin.
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