Emirates, connecting the world.
Emirates Airline, connecting the world. A classic example of well aligned business and operational models.
The business model
Emirates Airlines (Emirates) sits at the epitome of success when it comes to effectively aligning one’s business and operational models. The alignment of the business and operational models at Emirates has resulted in the airline’s astounding growth over the last 30 years. Emirates has doubled in size every three or four years since its formation 30 years ago [1].
At the core of the Emirates operations, is the long haul to long haul business model, or what can be loosely translated as a long distance passenger crossdocking operation. Passengers are flown in “bulk” (just as a truckload of products from one manufacturer is delivered to a cross docking warehouse) from different corners of the globe into a central hub. They are then reallocated into different planes according to their destinations and flown out in “bulk” to their final destination (just as product pallets from different manufacturers are broken into smaller units and mixed with other manufacturers’ products to form a truckload for final delivery to a retailer). Two operational factors that play a pivotal role in supporting this business model are the location of Emirates’ hub, and its fleet of aircraft.
The operational model – location
While the hub type of operation is not new in the airline industry, Emirates has successfully capitalized on its location, Dubai, a small state strategically located to reach 75% of the world’s population in a flight of less than eight hours, to build a fast growing and profitable hub based business model [2]. The model works best on long-haul routes requiring refueling, such that by basing itself in a location that is central to Asia, the West and Sub Saharan Africa, Emirates doesn’t lose out to competitors by stopping in Dubai. Whether the choice of having the hub in Dubai is a function of strategy, luck or necessity is irrelevant to this analysis.
![Dubai International Airport, terminal 3, Emirates hub [3]](https://i4tsk12in2b2y7uts14c528g-wpengine.netdna-ssl.com/wp-content/uploads/sites/4/2015/12/Emirates’-new-A380-hub-Concourse-A.jpg)
Landing, parking, catering and handling costs are generally lower at Dubai International Airport [5] . Although pricing is nondiscriminatory, Emirates benefits the most from these lower rates as its aircraft spend the most time at Dubai International Airport.
Operational Model- Aircraft fleet
Another key to Emirates’ success is its decision to fly young, fuel efficient, super-sized planes. This allows emirates to reduce the expenses per passenger. For instance, Emirates has a 16% lower fuel cost per passenger mile compared to Virgin, a prominent international career [4]. These savings allow Emirates to undercut fares of established rivals while still making money. Underscoring its incredible growth, Emirates is currently the world’s largest operator of both the Airbus A380 and Boeing 777 aircraft [6].
![EK412 Emirates A380 Jumbo landing at Sydney International Airport [7]](https://i4tsk12in2b2y7uts14c528g-wpengine.netdna-ssl.com/wp-content/uploads/sites/4/2015/12/Emirates-A380-landing.jpg)
A business model such as Emirates’ largely depends on an open skies policy, and bilateral agreements with destination governments. Being such a valuable customer of entire aircraft production lines has given Emirates some bargaining clout that has been useful in helping negotiate bilateral agreements with American and European governments who’s aviation policies have been protectionist historically [6].
The alignment and efficacy of the Emirates business and operational models cannot be overstated. Emirates ranked only 24th among international airlines as recently as 2000. Since then it’s achieved a six-fold increase in traffic, defined as passengers carried multiplied by the distance flown. The Dubai carrier zoomed ahead last year to join Lufthansa and Air France-KLM Group as the biggest operators of international flights [1].
- http://www.economist.com/node/16271573
- https://www.researchgate.net/publication/251631030_The_Rise_of_the_Arabian_Gulf_Carriers_An_Insight_into_the_Business_Model_of_Emirates_Airlines
- http://www.arabiangazette.com/dubai-international-world-s-busiest-airport-infographic-20150127/
- http://centreforaviation.com/analysis/unit-cost-analysis-of-emirates-iag–virgin-about-learning-from-a-new-model-not-unpicking-it-147262
- http://www.emirates.com/english/about/int-and-gov-affairs/our-business-model/our-business-model.aspx
- http://www.bloomberg.com/news/articles/2010-06-22/emirates-splurging-on-45-000-seat-fleet-rattles-lufthansa-singapore-air
- http://www.sydneyairport.com.au/corporate/media-centre/multimedia-gallery/gallery-details.aspx?cat=%7B5C23F5A6-45E2-4A27-90FD-272E87DC6E67%7D
- https://en.wikipedia.org/wiki/Emirates_fleet
Tariro, I’m curious about how you would compare the operating models of Emirates and Etihad.
They’re pretty much identical in terms of location, government support, clientele, and hard product, but I’m aware of one big difference: Etihad tends to make equity investments in other airlines with which it partners (http://www.etihad.com/en-us/about-us/our-equity-partners/), while Emirates does not. Do you think this type of approach might better position Etihad in the creation of a global route network?
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.
Awesome man, thanks for clearing that up. For some reason I assumed that Emirates was also focusing on the high end, but that might be because I’ve been fortunate enough to only fly with them for business! Excellent comparison.
Tariro – thanks for your interesting insights. I travel with Emirates quite often and it is great to learn more about the company.
Reading through the article, it does seem that they have huge advantages because of their location and the support from the government. Do you think the other countries in this region could pose a serious threat to Emirates in the future if they tried to build a hub around the national airline, focusing on low cost travel? And my second question would be, how do you separate the contributions of aligning operating/business models (which can be replicated) and the contributions from the geographic location (which cannot be replicated by other companies)?
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.
Interesting post, on its long haul business model (a bit similar to HK where all flights are essentially “international flights”) with controllable cost. Although I do have questions to clarify:
1) how are they able to maintain at the low cost with only operating at the large aircraft i.e 380 and 777. It could only be possible when the passenger per carrier is higher / occupancy rate is higher. Is the low cost still valid in a weaker econ environment when people travel less?
2) another edge of low cost thanks to lower energy cost. What’s your view on the prolong weak energy price is gonna impact its competitive advantage to continue pushing out favorable price to its customers. as it seems now every airline is enjoying the benefit
3) being a travel hub in the region. It certainly is strategically located within reach of different continents. But i think the only time i will take connecting flight is for personal travel but not business. But i know most airlines only make money from its business travelers. In a less cost competitive market and less bargaining power in pricing, will the business model continue to be viable?
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.
Very interesting. Even though there is a lot of speculation around the fact that Gulf companies such as Emirates and Qatar are subsidized by their respective governments, I don’t know how much of that is true.
It’s interesting that Emirates has bought very large planes (which I guess are largely economy class), while being able to create a luxury brand. Was curious to know what their business model really was – a focus on economy or on the business/first class customers?
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.
Tariro – thank you for the interesting post. I’m always very interested in airline business and took Emirates before. I’m pretty curious on several points you’ve made in your post:
1. The model that Emirates uses large airplanes such as 777 and 380 is very different from American Airlines. In the US, I noticed even between two biggest cities with long distance NYC – LA, all airlines operated in small airplanes such as 737 and 320. What do you think drives the difference? NYC -LA should have huge customer numbers as well.
2. How do you think about Emirates capital structure? They buy the plan or lease the plane? If they buy them, how do they have access to so much capital?