Competition
Global Legacy Carriers
Until the end of the 20th century, European carriers such as British Airways, Air France and Lufthansa carried substantial part of passenger and freight traffic to and from the long-haul routes between Europe and emerging markets in Africa and Asia. These carriers, and their mature American counterparts, benefitted from significant route coverage and strong brand recognition within their regional markets. They also, however, faced several structural disadvantages.
While these European legacy carriers were dominant in their home market, airline deregulation had made them susceptible to competition from low-cost carriers, which pushed down ticket prices and margins on short-haul fares. As well, many of these airlines also operated with higher labor costs than low-cost players or emerging market competitors - years of union advocacy, pension fund obligations, and industry regulations forced these airlines to devote a larger share of revenues towards labor benefits, Finally, low margins and perceived saturation within the market had forced major players to consolidate as a growth strategy, thereby reaping efficiencies of scale - heavyweights such as KLM-Air France, British Airways and lberia, and the more recent United-Continental, Delta-Northwest, and even Southwest-AirTran were all testament to this trend. Finally, the downside of a longer operating history manifested itself in a generally older fleet than emerging market competitors, which impacted everything from passenger experience to fuel efficiency.
As Emirates’ legacy competitors witnessed its rise, some had unleashed a series of claims against Emirates and its fellow Gulf carriers to highlight what they viewed as unfair policies, Chief among them was the accusation of indirect government subsidies. Carriers such as Air France, Lufthansa, and Air Canada claimed that government policies such as subsidized fuel, no income tax, and strategic synergies with the government at its principal hub were major sources of success for Emirates that disadvantaged other airlines. Emirates responded to these claims by saying its close working relationship with the government was very much arms-length and that it received no favorable advantages. In fact, policies that made Dubai a major global hub (like allowing operations 24 hours per day, 7 days per week) were not specific to Emirates and all airlines could benefit from them.
Rise of Gulf Carriers
Within the Gulf region, the last twenty years had witnessed the growth of three significant airlines - Emirates, based in Dubai; Qatar Airways, founded in 1993 in Doha; and Etihad, founded in 2003 in Abu Dhabi. (See Exhibit 17.) Though each airline serviced a different base city, all three competed to some extent to be “gateway to the Middle East” and a connection point for travelers transferring to other regions. All three airlines had also experienced rapid growth in the last 10 years, adding new destinations and increasing seat capacity by ordering new planes. Unlike the North American and European markets, where low-cost carriers were forcing the industry to reduce amenities and strip service, each of the three Gulf carriers had made a distinct push to go upmarket and built strong premium brands. These brands centered on a premium passenger experience, aided by new fleets, high-quality service, and modern airport facilities. As proof, the Gulf carriers had garnered numerous accolades for their customer service, particularly the service awarded in their premium classes. Ownership of each airline was held by its respective host government, who saw the airline as a core pillar of growth for its national economy. (See Appendix A for brief descriptions of key codeshare partners and competitors.)
Emirates: the Lone Ranger
Over the last 15 years, airlines had developed a system of airline alliances and commercial cooperation agreements to increase network service. These “codeshare” routes allowed airlines to feed into each other’s hubs and split costs and revenues without directly increasing their own capacity. Three distinct alliances had emerged: the Star Alliance, the SkyTeam Alliance, and the oneworld Alliance, which together comprised some 84% of global aviation traffic. (See Exhibit 18 for a full list of members and market share data.) Most major airlines were either aligned or affiliated with one of the three alliances; those who weren’t tended to be in emerging markets or were low-cost carriers.
Within the Middle East, Qatar Airways and Turkish Airlines were part of the oneworld and Star Alliances, respectively, and Etihad had recently announced an “extensive partnership” with AirFrance/KLM, part of the SkyTeam alliance. Only Emirates had far refrained from joining an alliance, viewing these organizations as inherently bureaucratic and a constraint to network growth. President Tim Clark had likened the alliance systems to gang warfare, noting that “[Alliances] distort and channel and direct for the greater good of the alliance thing, rather than the consumers that are driving it all. You can’t allow yourself to be subjected to the whims of an amorphous board, like the Star Alliance, saying ‘you can’t do this, you can’t do that; you’ve got to buy this airplane; you’ve got to fly this route.’ Not in the world as it is today. We want to move rapidly where we have opportunities.”
To compensate for the influx of out-of-network passengers that alliances brought, Emirates relied on a series of bilateral codeshares to reach geographical frontier markets and feed its network. (See Appendix A for additional information on two key codeshare partners, Qantas and JetBlue.) Adnan Kazim noted, “Passengers still want to go onto secondary cities that they can’t access [through our network]. We look at the market and passenger data to see where passengers are ultimately traveling to and from. Then, if we can’t directly service it, we look to complement it through partners. The big advantage for passengers is their baggage is checked directly through, and they receive a preferential fare through their partner to a city like Chicago.” On the other side of the Pacific, the codeshare between Emirates and Qantas allowed Emirates passengers to connect to over 55 Australian destinations, many of which would have otherwise been too small for Emirates to directly serve.
As Emirates looked toward the future, it needed to reevaluate these relationships: Should they continue, or should the airline enter the newest markets on its own?
Trouble on the horizon
Anti-competitive claims
Tim Clark had previously extolled the advantages inherent in having a sole owner, noting that Emirates “didn’t have to worry about 200 stakeholders, from hedge funds to ratings agencies; this [allowed] us the ability to focus on operations and performance.” Other airlines maintained, however, that this ownership structure gave Emirates unfair advantages, such as implicit government underwriting of debt issuances and preferential government treatment. The airline refuted both claims, but charges of unfair competition had nevertheless been used by some countries to restrict Emirates’ access to their airports.
Airport congestion
While Emirates was by far the largest airline operator at Dubai Airport, it was not the only one - some 150 airlines carried more than 60 million passengers to and from Dubai, which created congestion on both the runway and in the airport facilities. While Emirates and the airport both used capacity management to maximize landing slots, the airport was undeniably approaching the seams of its current footprint. To compensate, Dubai Airports was constructing a mammoth new airport further out in the desert, “Al Maktoum International at Dubai World Central.” Already home to cargo operations, the airport was expected to eventually relieve Dubai International Airport’s capacity limits and transition to become Dubai’s main airport. Nobody, however, sure how or when Emirates and other airlines serving Dubai International would transfer to the new airport. Should the budget airlines be the first to leave Dubai? Should foreign airlines transfer to the new location? Should Emirates gradually shift its operations base to the new airport, at the risk of disrupting its mega-hub? Only time would tell.
Competitors
Emirates faced no shortage of competition as it expanded to new markets. Flagship carriers in both developed (particularly Europe) and emerging markets (Singapore Airlines, Thai Airways, or Cathay Pacific) were also expanding beyond their regional bases to offer increasing non-stop service to key Asian, European, and American gateways. Other Gulf carriers and Turkish Airlines enjoyed the same geographic advantages as Emirates, and had to varying degrees built operating models that offered a similar range of high-end service offerings. While Emirates welcomed competition on routes and on quality products, its aircraft innovations such as in-flight bars were being heavily copied. Would Emirates remain able to differentiate itself from competitors?
Leadership change
Emirates had benefitted from the consistent leadership style of two visionary leaders since its inception: Sir Maurice Flanagan, who stepped down as president in 2003 and Tim Clark, who had been instrumental in pushing the company to maintain its growth trajectory. As Clark edged toward retirement age, however, no obvious successor had arisen to replace him. When Clark retired, would Emirates be able to continue its rapid growth without its charismatic captain?
Beyond Dubai
As Emirates continued expanding its network to more distant destinations, industry analysts wondered whether the airline should rethink its mega-hub model. Forecasts showed strong continued growth for trans-Pacific routes between Australasia and the Americas, a market that Emirates could enter. The