Earlier this year, Emirates put out a scathing report to combat all of the accusations that the airline is subsidized by the Dubai government. The paper, of course, claims that Emirates is unsubsidized. Is that true? Yes, but that doesn’t mean that there aren’t great advantages to being based in Dubai.
Emirates is actually quite up front with its finances. You can see annual reports dating back a decade on the airline’s website. The result? The airline is profitable, but not insanely-so. In the most recent fiscal year, Emirates posted a 2.9 percent operating margin.
So why is it that nobody believes this modest result to be possible without subsidy? It’s probably because most airlines that are complaining can’t sustain any kind of consistent profitability. The assumption is that there’s something funny going on.
Geography is Key
But the reality is that there are a lot of things that Emirates has going for it based simply on geography. Dubai is a very wealthy place that’s filled with ex-pats. So there is a great deal of high yield travel starting and ending in Dubai. Is there enough to fill 100 A380s? No.
But then there is the geographic advantage of being able to carry people between Europe and Africa, the Middle East, India, and Southeast Asia quite effortlessly. This high level of connectivity means that the airline can support flights to secondary cities in Europe that would require at the very least a connection via a European hub to get to many of the destinations Emirates serves.
The Connection Game
Think about it this way. If you need to go from Manchester to
Bengaluru Kochi in India, what are your options? You aren’t going to get there even via a European hub because there isn’t enough traffic to support a flight. But you can go via Dubai. Dubai can support Bengaluru Kochi flights based on local demand plus connections from the same places the European airlines fly as well as from the Middle East and Africa. And it goes even deeper than this.
Emirates can support flights into European cities like Birmingham, Nice, Dusseldorf, and Prague. These aren’t the largest cities by any stretch, but they can connect with a single stop to much of the world via Dubai. It’s a very compelling option.
What’s unfair about that? Well, the geography puts European carriers at a disadvantage, but there is more. It’s a lot easier to do business as an airline in Dubai than it is in Europe. And that makes it easier for Emirates to compete.
The Dubai Advantage
Dubai does not overtax airlines like European countries do. Dubai is also a generally less expensive airport to operate at than large European hubs. Add in the fact that labor costs are much lower in Dubai than Europe and it can be a lot less expensive for Emirates to carry someone from Glasgow to Bangkok than it would be for a European airline. With European airline costs, that slim 2.9 percent margin can go negative quickly.
Technically, this is an advantage for Emirates, but it’s hard to classify that as a government subsidy. Costs are higher in some places and lower in others. It’s just the way of the world. If someone else wanted to start an airline in Dubai, they could enjoy those same advantages.
Why is Emirates going on the attack? It’s because the airline is constantly being barraged with these claims and it wants to expand in places it can’t. Canada is a great example. The country greatly limits the number of flights that Emirates can operate. That’s pure protectionism. Whether it’s good or bad is up for debate, but personally I’d rather have more flight options if I lived in Canada.
Emirates Loves the US
In the US, it’s a different story, and that’s why you see very little criticism of the US in this report even though some is due. Emirates gives example after example of subsidies to European airlines from governments but conveniently leaves out all the subsidies that US airlines have received in the last decade. This isn’t a coincidence.
Dubai The United Arab Emirates (where Dubai is located) and the US have had open skies for some time. In other words, any US airline can fly to the UAE Dubai as it pleases and the same goes from UAE Dubai-based airlines in the US. That’s why we see Emirates flying to places like Seattle and Dallas. There is going to be more to come, as long as the routes are profitable. This is great for people in those cities who now have new one stop service to a whole host of new cities around the world.
I don’t expect that this report will change a lot of minds where the most minds need to be changed – in governments. But it can at least help provide a counterpoint for the general public in Europe and Canada, where the party line is that Emirates and all gulf carriers are subsidized.
It’s great to see Emirates supporting a no-subsidy policy, but that’s easy to do when you’re a young, profitable, and fast growing airline. I’ll be curious to see if we hear a change in tune years from now when growth slows and costs rise. It might be a different story. But for now, Emirates is happy to crow about being subsidy-free.
Do you believe it? Read the report and chime in below.