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An airline can't make losses if it manages to keep its fleet above the ground for more than 12 hours per day with a decent load factor, an aviation expert once said. Every year, the announcement of Emirates' annual results seems to prove this theory over and over.
Emirates' aircraft utilisation, or how long they fly on average, was one of the highest in the industry at 13.7 hours per day, according to its annual report. And the airline reported a profit of Dh5 billion in 2007-08, which is a 62.1 per cent surge over the previous fiscal.
But this is only one of many factors behind Emirates' success.
Take, for example, the 'Dubai' factor. The city is in the midst of an unprecedented housing and economic boom, which is boosting travel demand.
"This is a big cake, and admittedly, Emirates has a big slice of it, but there is plenty for the other airlines," said Shaikh Ahmad Bin Saeed Al Maktoum, the chairman and chief executive of Emirates airline and group, as he proudly presented the annual results to the media last week.
David Kaminski-Morrow, Aviation analyst at Air Transport Intelligence, agrees: "Aside from the favourable economic climate in the Middle East, and Dubai in particular, Emirates is able to post strong figures because it has a low-cost structure, low enough to be profitable on a yield which is one-third lower than the sort of figures seen in Europe.
"Emirates also operates from an airport which is open for 24 hours a day, enabling it to achieve greater aircraft utilisation," he says.
An increase in load factor on First and Business Class cabins was also behind the soaring profits.
"Despite the long-term forecast of a decrease in the number of passengers travelling in First and Business class ... Emirates once again bucked the trend and boosted our seat factor in the forward cabins," Shaikh Ahmad said.
However, a 62.1 per cent growth in net profits remains quite unusual in recent aviation history, given the fact that the oil price jumped nearly 100 per cent during the last financial year ending March 31, 2008, to nearly $120 per barrel.
"Emirates' performance is certainly extraordinary compared with that of other full-service airlines. Lufthansa is one of the most successful airlines in Europe, but its full-year operating margin for 2007 was only six per cent. British Airways is similarly falling short of its 10 per cent margin target. Emirates' 13 per cent figure puts BA's and Lufthansa's position in stark perspective," says Kaminski-Morrow.
"The percentage rise in profits isn't surprising - a net profit figure can rise one year and plummet the next. The surprising aspect is the consistency with which Emirates is able to repeat this performance."
Subsidy
Critics, however, say that the reason Emirates makes such huge profits at a time other carriers report losses and some file for bankruptcy is that it receives government subsidies - particularly subsidised fuel.
Shaikh Ahmad denied such claims. "I wish this was true. I would love to have them, why not? But we buy fuel from the market at international prices," he said.
"Last year, we spent Dh1.83 billion ($500 million) extra on fuel on top of our budget," he added.
Fuel costs remained the top expenditure for the fourth year running, accounting for 30.6 per cent of total operating costs compared with 29.1 per cent the previous year and 27.2 per cent the year before.
Fuel hedging saved the airline Dh888 million ($242 million) in 2007-08. In total, it has saved in excess of Dh3.7 billion ($ 1 billion) since the financial year 2000-01, Emirates said. "I don't believe Emirates is subsidised. I believe operating from Dubai brings certain benefits, such as those arising from the local tax regime, but I think Emirates achieves its profitability by maintaining an efficient, high-utilisation, long-haul, low-cost operation," Kaminski-Morrow said.
Outlook
Going forward, the real question is: will the airline be able to maintain this performance and for how long, especially at the backdrop of the global slowdown led by the US housing slump and credit crunch?
International Air Transport Association (IATA) has already lowered its projection for industry profits to $4.5 billion this year.
Brian Pearce, chief economist of IATA, says in his latest global outlook presentation, "The uncertainties facing us are far greater than usual. If central banks fail to reverse the credit crunch, the outlook, particularly for the US industry, could be far worse. Our next forecast in June will be able to take a clearer view on the extent of the economic difficulties."
However, the outlook for China, the Middle East and Latin America has been revised higher, despite the problems originating in the US.
Airlines with operations diversified across these regions will face much stronger market conditions than those with operations concentrated on US markets. Emirates has a well-diversified network across six continents.
"Like any airline, Emirates is having to put up with the high price of aviation fuel, but it remains one of the financially strongest airlines in the world and will be reinforcing its position in the Middle East as Dubai's new terminal opens and the carrier starts taking delivery of its new Airbus A380 fleet," says Kaminski-Morrow.
The surprising aspectis the consistency with which Emirates is able to repeat this [2oo7] performance," said David Kaminski-MorrowAnalyst, Air Transport Intelligence.
Doing the mathematics
Here is a peep into Emirates' result book: Although capacity increased 13.7 per cent, traffic increased faster, by 16.6 per cent which helped push seat load factor to 79.8 per cent from 76.2 per cent the previous year and improve yield by 7.9 per cent to 236 fils per revenue tonne kilometre (RTKM) - payload available for passengers, mail and cargo by the distance in kilometres flown by the aircraft. "This result was due to improved yields and higher load factors on increased capacity; as well as other operating gains," an Emirates statement said.
While yield improved for the sixth consecutive year to 236 fils (64 US cents) per RTKM up from 216 fils (59 US cents) in 2006-07; high jet fuel prices and rising costs drove breakeven load factor up to 62.7 per cent from 59.9 per cent last year.
In a layman's terms this means that the airline would have broken even last year with 62.7 per cent seat load factor, up from the previous year's 59.9 per cent.
So, with 79.8 per cent seat load factor - 17.1 per cent higher than the breakeven load factor - the airline couldn't have made a loss.
Unit cost increased by 18.9 per cent to 148 fils per tonne kilometre, due to high fuel price and staff costs.
Cargo revenue contributed 19 per cent to the airline's total transport revenue, yet again one of the highest contributions of any airline in the world with a similar fleet.
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