Emirates’ Ambitions Worry European Rivals

Gabriela Maj/Bloomberg News

Emirates’ growing reach, from its Dubai hub, is unnerving rivals like Lufthansa and Air France.
By JAD MOUAWAD

Terminal 3 in Dubai has 82 moving walkways, 97 escalators and 157 elevators. It is being expanded to
accommodate Emirates’ growing fleet of A380s.

BEYOND the artificial archipelagoes shaped like palm trees, not far from the tallest
skyscraper in the world, stands another monument to this city-state’s stubborn
ambition.

Even in this oasis of extravagance, Terminal 3 at the Dubai International Airport

startles. It is not merely the world’s largest air terminal. It is the world’s largest
building, period. And all 370 acres of it — all 82 moving walkways, 97 escalators, 157
elevators, 180 check-in counters and 2,600 parking spaces — were built with one
very well-connected company in mind: Emirates, Dubai’s fast-growing flagship
airline.

Emirates is pressing ahead with an ambitious expansion, despite the city’s financial
near-collapse in 2009. Its executives, with the help of Dubai’s rulers, want to place
this Persian Gulf city at the center of a transportation network linking vibrant
economies like India and China to Europe and the United States.

It might sound like bravado from the bubble years, another case of overreach in this
sandy fantasyland. This is, after all, Dubai, where exuberant developers planned not
one but three palm-shaped island chains and erected the glass-clad Burj Khalifa —
more than twice the height of the Empire State Building — alongside an
indoor ski resort. What is more, the recent political upheaval in Egypt provides a
potent reminder that Dubai, for all its air-conditioned ease and stability, lives in a
dangerous neighborhood.

But here inside Terminal 3, the rise of Emirates hardly seems a mirage. Since its
founding in 1985, Emirates, which is fully owned by the government, has grown into
the world’s largest airline by passenger miles flown. By 6:30 a.m., Terminal 3 is
teeming with travelers. Russians bound for Durban, Chinese headed for Khartoum
and Indians traveling to San Francisco weave through the restaurants and duty-free
shops. Families snooze on the white marble floors. It feels like a giant bazaar,
devoted to a new era of air travel: crowded, animated, cosmopolitan.

Tim Clark, the president of Emirates, says his airline represents the future of mass
air travel. In an era when many international carriers are struggling to sustain
themselves, Emirates has filled its planes, raised fares and consistently turned a
profit. It earned $925 million in the six months ended last Sept. 30, up from $205
million in the year-earlier period.

To win over customers, its executives want to bring a bit of glamour back to air
travel. On the double-decker Airbus A380s, full bars are standard in business class,
and the first-class cabin includes showers. No one pays for food or drinks, of course,
on any Emirates flight.

So far, Emirates’ success is partly an accident of geography. Roughly four billion

people live within an eight-hour flight from here. But to the consternation of rivals,
Emirates also enjoys the patronage of Dubai’s rulers, in particular, Sheik Ahmed bin
Saeed al-Maktoum, who is its chairman. While home-grown airlines in places like
Singapore and Hong Kong have also turned those cities into global hubs, Emirates
stands apart for the scale of its ambitions.
COMPETITORS are fighting back. SkyTeam, the global alliance that includes Delta
Air Lines and Air France/KLM, said recently that it would add two airlines — Middle
East Airlines, from Lebanon, and Saudi Airlines — to counter Emirates’ dominance
in the region.

“There is a reason that airlines around the world are afraid of the success of
Emirates,” says John Leahy, chief operating officer of Airbus, the European plane
maker, referring to Emirates’ mix of quality service, operating efficiency and low
costs. “That should strike fear in the hearts of airlines around the world.” Emirates is
one of Airbus’s top customers.

Over the next two decades, air travel in the Middle East is expected to grow by more
than 7 percent a year, outpacing every other region, according to a forecast
from Boeing in 2010. Much of that growth will be spurred by Emirates and two other
fast-expanding airlines based in the Persian Gulf area: Etihad Airlines, based in Abu
Dhabi, and Qatar Airways.

Emirates is by far the most ambitious of the three. Its greatest strides have come
from building routes to developing countries long neglected by traditional carriers
and providing an alternative to local airlines. Instead of connecting through
European hubs like London or Frankfurt, all of these new routes run through Dubai.

“The legacy carriers still see us as the monster of the Middle East, the bête noir of
civil aviation in the 21st century,” says Mr. Clark, 61. “But they won’t accept that the
business we are carrying wasn’t theirs anyway. The 21st century is very different
from the 20th century.”

Emirates, for instance, offers 184 flights a week from Dubai to India, to cities like
Ahmedabad, the commercial hub in the state of Gujarat. It flies to 17 cities in Africa
and, in China, to Beijing, Shanghai, Hong Kong and Guangzhou. It runs two daily
flights to Bangkok and nine to Australia.

The strategy has prompted a strong reaction from airlines like Air France and
Lufthansa of Germany. These carriers hope to persuade their governments to limit
Emirates’ access to French and German airports.
“Emirates’ strategy is aggressive,” says Pierre-Henri Gourgeon, the chief executive of
Air France, who complains that Emirates is siphoning off passengers from Europe’s
traditional hubs. “Europe is at the center of the global aviation world. It’s the result
of aviation history.”

Antoine Antoniol/Bloomberg News

Tim Clark is president of Emirates, which is owned by the government.

Wolfgang Mayrhuber, the C.E.O. of Lufthansa, notes that it took 40 years for
Lufthansa to build up its fleet of 30 Boeing 747s in Germany, one of the world’s
largest economies. Emirates already flies 15 A380s, the world’s largest passenger
airliners, and has ordered 75 more for delivery by 2018. (Air France, Lufthansa and
British Airways have ordered a total of 39 A380s and, among them, have only eight
flying.)

In Canada, discussions to expand Emirates’ landing rights took a particularly bitter

turn. After the Canadian government turned down Emirates’ request to fly to Calgary
and Vancouver and to increase the frequency of flights to Toronto, the United Arab
Emirates scrapped a military agreement that allowed Canadian forces to use a
logistical base near Dubai.

Craig Jenks, an airline consultant based in New York, says Emirates threatens
established carriers in the one market where these airlines are making money: long-
haul international trips. “There’s nothing better than a highly motivated cowboy
airline in a small country,” he says.

LIKE so much in Dubai, Emirates started out small but dreamed big. It was
established after Gulf Air, a regional airline then owned by Bahrain, Qatar, Oman
and the United Arab Emirates, reduced its service to Dubai in the early 1980s.
Feeling shunned, Dubai’s rulers created their own carrier.
The government provided $10 million in capital. Emirates began flying with two
planes, a Boeing 737 and an Airbus A300, both leased from Pakistan International
Airlines. The new carrier was run by a band of British aviation executives, including
Mr. Clark, who had been at Gulf Air, and Maurice Flanagan, a former top executive at
British Airways.

Much of Emirates’ early traffic connected Dubai with cities throughout the Indian
subcontinent and a few European destinations, including London.

By the 1990s, however, new airplanes with longer reach, like Boeing 777s, enabled
Emirates to establish Dubai as a world hub. Sheikh Ahmed, the company’s chairman,
boldly proclaimed that Dubai would be “at the center of the new Silk Road between
East and West.”

Rivals express grudging admiration for Emirates. “Emirates recognized the value of a
global hub,” says British Airways’ chairman, Willie Walsh.

And Mr. Clark says: “If you want to go from Africa to Asia, or from South America to
China, the straight line is through the Middle East.”

But geography is only one element in the Emirates formula. Government support has
also been essential. From the start, Emirates was seen as integral to the
government’s ambitions of building Dubai into a commercial, financial and tourism
center in the Persian Gulf.

Sheik Ahmed plays a role in almost every aspect of air travel into and out of Dubai.
Indeed, he is known as “Mr. Aviation.” He is the chairman of FlyDubai, the city-
state’s budget airline, and of Dnata, the airport’s ground handling company. He is
also the president of the Dubai Civil Aviation Authority, which oversees the industry.
And he happens to be the uncle of Dubai’s current ruler, Sheik Mohammed bin
Rashid al-Maktoum.

Critics say this tight relationship among Emirates, airport authorities and regulators
gives the airline an unfair advantage. Emirates, these critics say, essentially receives
government subsidies, in the form of low tax rates and shiny new facilities like
Terminal 3, where another expansion is under way to accommodate Emirates’
growing fleet of A380s.
Emirates disputes this characterization. The airline publishes audited financial
reports, and its executives say Emirates gets no government subsidies.

“Emirates works like a corporation,” says Ram C. Menen, who runs the company’s
global cargo operations. “We’re a business unit of Dubai Inc. And it’s a happy
relationship.”

The airline, however, does have undeniable advantages over competitors, including
lower labor costs. While Emirates pays its pilots international wages, it hires
inexpensive workers, usually from the Indian subcontinent, for tasks like handling
baggage or working in catering services.

Nathan Zielke, a transportation specialist at the consulting company Arthur D. Little,

estimates that Emirates’ overall costs, including those for labor, are 30 percent lower
than those of its rivals.
“It’s extremely difficult for other airlines to close that gap,” Mr. Zielke says. “Because
their costs are so much lower, Middle East carriers will be the most profitable
carriers with the lowest prices in the market.”

ON the road to Abu Dhabi, about an hour’s drive from downtown Dubai, city
planners want to build the world’s biggest airport. It would have five parallel
runways and be able to accommodate 160 million passengers a year. (Hartsfield-
Jackson Atlanta International Airport now handles 90 million passengers a year,
more than any other airport in the world.) The estimated cost of this giant is more
than $34 billion.

Although Dubai has shaken off the worst of its financial crisis, the shock has
nonetheless stalled this grand plan for now.

Yet Emirates has proved remarkably resilient to recent financial shocks — the
economic slowdown did not hamper its growth. The question now is whether
Emirates can sustain its momentum without jeopardizing quality and service.

Each week, as many as 90 new trainees file through the company’s training academy,
a modern building near the Tennis Club, a popular Dubai spot among the expatriate
community, close to the historical center of the city.

Its growing fleet of A380s means that the airline will need to hire an additional
11,000 flight attendants in coming years, nearly doubling its current roster of 12,000.
Over eight weeks of training, the new employees — most in their early 20s and
speaking some English — learn all the ropes of the job. Life-size mock-ups of airline
cabins mounted on hydraulic legs are used to simulate safety drills. Elsewhere, the
trainees are taught how to serve meals or use the first-aid kits.

Emirates executives say they recognize the challenges ahead. “We don’t forget who
we are, and what we do,” says Mr. Clark, the president. “We’re a bus company. We
have seats, we have people, and we recognize what it is that makes life more
comfortable. If we hit the spot, passengers come back.”

Emirates has emerged as a formidable player on the international travel scene. Its
innovations, including private suites in first class and individual entertainment
screens in the coach cabin, have been copied by many other airlines; its emphasis on
quality has forced traditional legacy carriers to pay more attention to their own
products.

So far, Emirates has benefited from the weakness of some airlines in China, India
and African nations as it establishes its presence in those and other developing
countries.

But that advantage may one day come to an end. In India, the advent of a new
generation of quality carriers, including Kingfisher Airlines and Jet Airways, now
offers some appealing domestic alternatives for India’s vast expatriate population,
long one of Emirates’ growth engines.

The recent tensions in Egypt, Yemen and Jordan have also hurt Emirates. Mr. Clark
said last week that traffic to many of these destinations had a “pretty resounding”
drop as tourists postponed holiday plans.

Another threat is on the horizon. As more airlines start using long-range planes now
in development, like the Boeing 787 Dreamliner and the Airbus A350, they will be
able to fly more people nonstop to most any other place in the world. That could pose
a problem for the Emirates business model: its reliance on the Dubai hub.

“One survey that is consistent is that people simply do not like to change planes,”
says Richard L. Aboulafia, an aviation consultant at the Teal Group, a consulting firm
in Fairfax, Va. But, he added, “Underestimating the competition is a time-honored
feature of the airline business. Is it confidence or is it hubris? It is only hubris if you
lose.”