With respect to subsidies, one can only speculate. It will be interesting to see what the outcome of the ongoing EU investigation will be, together with Emirates’ response.
I think on the passenger side, Emirates has managed to strike a good balance between business class travelers and economy class travelers. The benefit of having large planes, as well as using the hub model, is that these two passengers don’t have to be mutually exclusive. What Emirates has managed to do is do drive operation costs down by having a super fuel and labor efficient organization, down to the point where both business and economy class passengers are profitable for the airline.
My thoughts on your questions
1. As you rightly pointed, high load factors are the key to the large aircrafts strategy. It looks like Emirates has managed to get this part right. You at their new routes for instance, load factors on newly opened routes are 70%+, which is quiet impressive. On North America routes Emirates has reported 90%+ load factors. I think the fact that Emirates net profit grew by 67% in 2008 at the height of the financial crisis is testimony to the resiliency of their model. I actually think that during tough times, people ditch traditional airlines and gravitate towards Emirates as it offers more value for money.
2. I totally agree, but remember that the energy is now cheap for everyone, including Emirates. So even when everyone enjoys low fuel cost per gallon, Emirates also gets to enjoy the low gallons per passenger mile component of cost savings. If I consider that around 40% of airline operating expenses is fuel, I think that savings in this area are never insignificant, so Emirates should still be able to under cut competitors on price even in a low gas price environment.
3. The main reason why most airlines make money from business travelers is that they are not cost efficient enough for the leisure traveler. Emirate’s lean cost structure allows it to make money on every passenger. With respect to business travel, you do have a point. But also bear in mind that not everyone is comfortable flying non stop for 20+ hours. So I can still see some business travelers choosing Emirates regardless of the stopover. In my opinion, the key here is to keep the layovers short.
So Dubai’s neighbors have already jumped onto the gravy train already! Abhu Dhabi, Dubai’s richer neighbor (backed by massive oil wealth) has already established a thriving flag career, Etihad, a mere 65 miles away from Dubai. Qatar (also backed by oil money) has also established its own carrier a mere 45 minutes flight away from Dubai. Emirates however has the first mover advantage as well as the benefits of scale. For instance, Emirates’ wider reach to the international markets allows it access to markets that are beyond the reach of these 2. Also when it comes to attracting talent, Dubai fares better than most other countries in this region because of its expat friendly policies. Etihad and Qatar quickly realized that they cannot compete with Emirates on cost efficiency basis, and have since decided to offer a different value proposition around quality. Responding to whether Emirates’ front seat is secure or not, only time will tell. To your 2nd question, it is very difficult to quantify the extend of contribution by each lever. But I give credit to Emirates for being able to put these together. I am pretty certain that as technology continues to evolve, location dynamics will also continue to change.
Great read. What do you think is Amazon’s core competency which has kept giants such as Walmart in the online space. Do you think it will be easy for competitors to replicate this competency? Lastly what do you think is the biggest threat to Amazon continued success?
The point to point model is indeed a rarity in today’s airline industry. Do you think this strategy has had any impact on South West’s load factors? Or has South West done anything to minimize this impact. On the all 737 fleet approach, do you think this poses a significant risk for South West as Boeing has been talking about discontinuing the 737 (the last update to this bird was in 1996). What do you think would be the impact, and the best response by South West, should Boeing indeed discontinue this line. Lastly, new planes that are much more fuel efficient than the 737 are available in the market, do you think the savings generated by having an all 737 fleet outweigh the potential fuel savings that South West could enjoy from the newer jets, given the size of South West’s fleet.
Thank you for this interesting article. Do you think that Spirit’s competitive advantage is sustainable ? From the article, it sounds to me like Spirit’s genius was in pricing, i.e. separating the seat price from all the other services. Do you think it is very difficult for Spirit’s competitors to migrate to a similar pricing model that has proved to be popular with consumers. If they did, given the massive scale of some of the competitors and the economies that come with that, do you think Spirit would still be able to maintain double digit margins and stay on its current growth trajectory?
It is true that there are some similarities between these two airlines in some respects, but I would not go as far as labelling them as “nearly identical”. To my understanding, the most important difference in their strategies is in their value propositions. Etihad seeks to distinguish itself as a premium airline while Emirates focuses on driving cost efficiencies. When asked by the Economist publication whether he thought Emirates was a threat to Etihad, James Hogan Etihad’s CEO responded by saying “My mandate is not to build the largest airline, but the best in class.” For instance, while Emirates is focusing on packing as many passengers as possible on flights by acquiring hundreds of the airbus A380s, and even lobbying airbus to build an extended version of this ginormous bird, Etihad is focusing its efforts on redefining comfort in air travel. Offers such The Residence (http://www.etihad.com/en-us/experience-etihad/flying-reimagined/the-residence/), and The Business Studio (http://www.etihad.com/en-us/experience-etihad/flying-reimagined/business-studio/) have become the main driver of growth at Etihad. The former has been reported to have tickets that cost in excess of $20 000 per flight on some routes. Unlike Emirates which virtually operates 2 types of aircraft as mentioned in the article, Etihad’s fleet consist of more than 12 types of aircraft, and many variants within these types. Again, this is a function of their strategies.
With respect to owning stakes in other airlines, it is true that Etihad has been more aggressive than Emirates. It is worth noting that Emirates has held significant stakes in Sri Lanka Airlines as well as Fly Dubai. The main motivation behind Etihad’s acquisitions seems to be an attempt to help funnel traffic to Etihad’s hub in Abhu Dhabi, in an effort to expand its international reach. Emirates does not seem to have this problem however. So while I agree that these two share some similarities, I still think that they are fundamentally different.