Profit drop at Emirates Airline won’t deter expansion

Gulf carriers pinched by high fuel costs, aircraft shopping sprees, growing competition; chairman says airline focused on long-term strategy.

By DAVID ROSENBERG / THE MEDIA LINE
November 6, 2011 12:25
Dubai International Airport

Dubai planes 311. (photo credit: The Media Line)

 
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Emirates airline, which has leveraged its hub in the tiny city-state of Dubai to become among the world’s largest carriers, saw its profit slide by three quarters in the first half of its financial year.

This was the firmest indication to date that Gulf carriers are being pinched by higher fuel costs, shopping sprees on new aircrafts and growing competition.

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Profit for the Dubai-based carrier in the six months ending September 30 dropped to 827 million dirhams ($225 million) from 3.4 billion dirhams the same time in 2010, but the airlines’ other parameters were improved. Revenue climbed 16% to 29.9 billion dirhams while passenger traffic, as measured by revenue passenger kilometers grew 5.7%.

"Emirates remained focused on its long-term strategy despite global instability, ever climbing fuel prices, which resulted in Emirates paying $1 billion more in fuel costs over the same period last year, and fluctuating exchange rates," Chairman Sheikh Ahmed bin Saeed Al-Maktoum said in a statement.

Emirates is not only the biggest of the Gulf’s glittering airlines – carriers famous for their service, their massive expansion drives and their growing threat to older airlines in Europe – but one of the few to make its financial and operation performance public.

Among those that have reported results, the low-cost carrier Air Arabia earlier this week reported a 26% decline in third-quarter profits even as turnover increased 22% to 691 million dirhams and passenger traffic increased 5%. A month ago, Etihad said its revenue grew 39% from a year ago to $1.1 billion in the third quarter, but it didn’t report earnings or losses.

“Our clear target is to break even in 2011 and this is another big step in the right direction for us,” Chief Executive Officer James Hogan said in a statement.

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While the Arab Spring has dealt a heavy blow to the tourism industries and economies of the Middle East and North Africa, Emirates and the other Gulf airlines have largely bypassed the problem because their focus is on carrying long-haul passengers from Europe and North America to Asia. At Emirates and  Gulf, Middle East traffic contributed to just a little more than 10% of revenues in the last financial year, ending March 31.

The carriers’ problem is the cost of jet fuel, which has hit airlines across the globe. Singapore Airlines, another carrier that has leverage a small but strategic hub with long-haul services, said on Thursday its second-quarter net profit dropped 49% due to high jet fuel prices and said yields will remain under pressure.

Prices for the benchmark Brent crude oil edged higher on Thursday, pushing toward $110 a barrel. A year ago, Brent was trading at about $86 a barrel.

Meanwhile, Gulf airlines are spending big to add to their fleets even as the outlook for the global economy and travel look increasingly clouded. Emirates has added 41 jets to its fleet since 2004 to bring the total to 161. Since the start of the current financial year it has accepted delivery of 10 aircraft and expects to get 13 more by next March. To help pay for the new aircraft, it issued $1 billion in bonds in the first half.

Maktoum said in Thursday’s statement that they intended to “to stay on course and continue to grow despite the unsteady marketplace.”

Emirates released its results ahead of the Dubai Airshow, which starts on November 13. The state-owned carrier is expected to announce more plane orders to feed its fast-paced expansion plans into Europe, Asia and other markets.

That’s on the cost side. On the revenue side, Gulf carriers are encountering increased competition from a new generation of low-cost airlines, like flydubai, which began operations in June 2009, and Jazeera Airways, which began flying in 2005.

“Competition is intense in this area of the world. And, when competition is intense, you lower your ticket price and the yield you get from passenger goes down,” Philip Butterworth-Hayes, lead consultant at PMi Media, a British firm that tracks the aviation and defense industries, told The Media Line.

Etihad Airways on Thursday announced the “Fantastic Falling Fares” promotion, which will see fares to destinations slashed by as much as half.

Majdi Sabri, regional vice president for the Middle East and North Africa for the International Air Transport Association (IATA), warned on Tuesday that the region’s carriers faced a tough year.

“Tightening global economic conditions are resulting in declining profits. The $900 million profit returned by the Middle East carriers in 2010 is expected to fall to $800 million this year,” he told regional aviation experts gathered for two days of discussions in Jordan. “For 2012, we see a further reduction to $700 million.”

Even though the outlook for the region’s airline industry is poor, Butterworth-Hayes said the Gulf carriers are “pretty well placed in the medium term” because they still have plenty of room to expand their operations.

Positioned half way between Europe and the burgeoning economies of Asia, Dubai and other Gulf countries have built massive airports that can funnel passengers quickly and efficiently. Emirates said on Thursday it would be adding routes by early 2012 to and from Rio De Janeiro, Buenos Aires, Harare, Lusaka, Dallas, Seattle and Dublin.

“The Gulf airports are now taking over the hub transfer business, which until recently was centered on London, Frankfurt, Paris and Amsterdam,” he said. “If you were flying from Washington to Bangalore, a few years ago you would have changed planes in Heathrow. Now you’ll change planes in Dubai.”

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