Emirates Wants Everyone to Know That It Hates Subsidies

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, No SubsidyEmirates 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 UAEDubai-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.


37 Responses to Emirates Wants Everyone to Know That It Hates Subsidies

  1. Cranky – have to take exception on the bit about flying from Manchester to Bengaluru. British Airways, Air France and Lufthansa all provide one-stop service on this route via Heathrow, Paris CDG or Frankfurt. Flying Emirates via Dubai is not the only option

    • Rohit Rao says:

      Yeah. Airports like Ahmedabad, Kochi, or Kozikhode would have made much better examples than Bangalore, which is one of the top gateways to India.

      • Sanjeev M says:

        Yes. However let me take Cranky’s example further and say that EK has 3 dailies into BLR while BA, LH, AF are daily (except AF 6 weekly). Moreover all the Euro majors offer the day flights that arrive in the middle of the night and return to Europe early morning.

        With this frequency EK provides some spectacular schedules that no other carrier offers (except maybe QR on a handful of routes). There’s the usual 9am out of Europe that gets to BLR 4am. You can also leave at a more decent 2pm and get to BLR at 9am +1. Or even after the office leave 9pm and arrive 5pm +1. On the return there’s a 4am, 10am, and 7pm. All connections are 2-3 hours.

        EK has flights at all times of the day to avoid arriving in the overnight peak at BLR. Barely any wait for immigration and no getting picked up at 3am. I would choose EK every time based on schedule.

        • Oliver says:

          Sanjeev… So three flights from Dubai to BLR sounds great, but does Emirates have three flights per day to/from Manchester, Nice, Duesseldorf, and Prague, too? (too lazy to check). If not, it really doesn’t add to the convenience for European connecting passengers.

    • CF says:

      Should have gone back and reviewed before publishing. The point still stands, I just changed it to Kochi.

  2. The question for Emirates is can they maintain profitability. Turkish, Qatar, Gulf and Etihad are all expanding rapidly (to many of the same destinations) and with significant aircraft orders it doesn’t look like it will be slowing down anytime soon.

    I have a feeling we will be seeing some extreme overcapacity in the region which may just require some government support in the future.

    • Oliver says:

      Yup. I am still trying to figure out if there are 100 destinations in the world that will support A380 traffic in or out of Dubai every day of the week.

  3. There are a lot of tv shows that have focused on Dubai, from the building boom, to companies opening branches there, to people moving their for they job and looking to buy/rent homes.

    If the government is have a building book and companies around the world opening branches there, nauturally there is going to be a lot of air travel to/from Dubai. And if an airline has a hub there, they would be the best carriers to have service to/from Dubai and be able to have a large volumn of connections to other parts of the world.

    Now one day the growth and the amount of large body aircraft could send them the way of PanAm, but as long as the oil money is still coming in for UAE government to keep their country in the global market and businesses still go there to do business, EK will do fine.

    • BSW says:

      Oil Revenue now only makes up 6% of the economy of Dubai. They realized pretty early on that they had a limited amount of black gold, so they have been investing it heavily.

  4. AirBoss says:

    How about that new airport with the half-hour taxis in/out; will OAL be relegated there while EK remains at DXB?

  5. Bill Hough says:

    Cranky: “Dubai does not overtax airlines like European countries do.”

    Ding! ding! ding! We have a winner. Instead of whining about EK competition, Euro airlines need to convince the Europeans that their government’s policies are mucking things up for the Continent’s airlines.

    • Sean S. says:

      You do realize that Dubai and many other countries that run off essentially sovereign wealthfunds and have no sustainable tax base of their own are going to eventually run out right? In fact, that is largely what happened to Dubai’s sovereign wealth fund a number of years ago. Well yes of course when a citizen elite, supported by a large welfare state that makes its money off worldwide investments, can offer a business environment with no corporate, income, or duty taxes you’re going to have higher profit margins.

      Even European countries that have sovereign wealth funds don’t rely off them to the extent that the many of the GCC countries, which often have no functional income or corporate tax system in place, do. So the question is how long can the gravy train of no taxation last in these countries? And what will they be able to offer once taxes have to be introduced in order to alleviate their budgetary woes.

      • Bill Hough says:

        The point is not that UAE taxes might go up in the future, but that Europe’s taxes are TOO DAMN HIGH. The worst of the bunch is UK’s “Air Passenger Duty” but the entire Eurozone is overtaxed. Unless this changes, non European jurisdictions will be at a competitive advantage.

  6. Ron says:

    Open skies between the U.S. and Dubai?! Shouldn’t it be the UAE? I thought such treaties were usually signed between national governments, not sub-national governments. I can’t find much information on the open skies agreement, but if indeed it covers the entire UAE then it should afford Etihad exactly the same privileges enjoyed by Emirates.

    Also, the open skies agreement is absent from the list of agreements with provisions that counter the Fly America Act: http://www.gsa.gov/portal/content/103191 . Does this imply that UAE negtiators didn’t do their job diligently? Or perhaps they didn’t have much leverage to begin with? Leverage must play a role, since the E.U. (plus Norway and Iceland who are bundled in the same agreement) managed to get more exceptions to Fly America than Australia, Switzerland and Japan (each with a separate agreement). Emirates may love the U.S., but they’re not allowed to carry U.S. government traffic.

    • I think that open skies may be just with Dubai, but I am not sure 100%. Assume it’s true, from the US perspective, is it a good idea for a big country to have open skies with a single airport? Is there some sort of an imbalance there?

      I mean, if Emirates flies to another airline’s hub, that airline can fly to Dubai just as well and if they can’t compete from their home base, it’s not Emirates’ fault. But places which are non-hubs like Seattle and even fragmented hubs like Los Angeles are just ripe targets for Emirates to serve with no possibility of US competition. Good for passengers, but the policy essentially promotes business taken away by a foreign carrier. I am not sure what the answer is, but in my view government policy cannot be 100% driven by passenger benefit disregarding airline benefit.

    • CF says:

      Yes, it’s the UAE. I’ve fixed it.

  7. BSW says:

    The ban from Stephen Harper’s government was a good thought, but it was really miss guided. Air Canada and Emeriates does not compete against Air Canada on really any routes or destinations. They may have long term plans to expand, but for the time being there are issues.

    • Arcanum says:

      The ban in Canada is a complicated issue.

      Emirates may not compete directly with AC on many routes, but it does compete on alliance and partner flights. For instance, someone flying from YYZ to JNB or BKK could take AC to FRA/NRT and then connect on LH/TG. EK would offer viable competition on those routes.

      EK may also be willing to target smaller airports like YYC and YUL that have limited long-haul service from AC at the moment. People may be willing to pay to avoid another connection in YYZ the way they will pay a premium to fly AC rather than connect through the US.

      Ultimately, the goal of the EK ban in Canada is to preserve AC’s market share, particularly in the premium cabin. While AC is no longer a government-owned carrier, it is still the only airline providing service to many of the smaller centres in Canada. Certainly there is pressure on the government to ensure it stays afloat.

  8. Scott says:

    I also believe that UAE have no income tax, which means they can pay their employees less. Some would argue it is an indirect subsidy, but one that is available to any business based in Dubai (or Abu Dhabi)…

    What’s curious is to see the contrast between Dubai and Abu Dhabi… Feels like the difference between JFK and La Guardia. Emirates definitely is far ahead of Etihad.

    • steve says:

      Personally, I find it the other way around- EY is miles ahead with ground and onboard service, though with a more limited route network. They’ve also been far more helpful for corporate relationships in my experience. (At least out of the UK.)

  9. Just wanted to check on their US destinations, EK currently flies to JFK, IAD, DFW, IAH, LAX, SFO and SEA. YYZ is the only Canadian destination. A little surprised to not see ORD.

    Wonder if the airline is committed to using the 777s on the thinner routes (DXB-SEA) or if they have 787s on order? Current seating capacities show 354-442 on the 300 and 300ERs, 290-346 on the 200 and 266 on the 200LR. They have over 70 300ERs which have a range of 7,880 nm and the 200 LRs can do 9,420 nm. The LRs certainly fit the bill but the 300ERs seem to be awfully large for thinner long distance routes.

  10. SingBlue says:

    Emirates (like a few of the Middle East carriers) also very competitive on one-way fares. I used to work for a govt agency in Singapore, and was compelled to fly with SQ on business, but whenever I was flying to Europe visiting family, it was EK everytime.

    I don’t know if this has changed, but back in 2008 I was working in Dubai briefly, and was talking with their head of development (relating to the new Metro). I asked what the deal about the new airport in Jebel Ali was (massive, 5 parallel runways). He said it was for freight, but when I asked why they were building a terminal capable of handling 125m pax per annum, he fessed up that once complete, the plan was to make the existing airport an Emirates (as in EK) only airport, and shift everything else out to Jebel Ali.

    It’ll be interesting to see how it works when they do it. They’re building a Metro line to connect the two airports, and if plans haven’t changed, it’ll be non-stop.

    With only a few years worth of oil left, they’re trying to diversify their economy. Not everything has come off, but it’s an interesting transition to watch.

    • AirBoss says:

      Of course, that’s a subsidy — OAL paying new remote airport fees and dealing with the half-hour taxis in/out; while EK remains at “close in” DXB.

    • CF says:

      SingBlue – Again, I haven’t seen this stated anywhere officially. At this point, it’s just rumor from what I can tell. If it happens, you can be sure that there will be hell to pay for such a protectionist move. The US is not going to just sit there and allow it to happen. So I wouldn’t put stock in this just yet.

  11. Flyopia says:

    Great article! I’ve flown them and I’ve always wondered how they can be so wonderful. Great planes, great service, definitely not a U.S. domestic experience. I definitely assumed subsidization.

  12. ybd says:

    “Dubai and the US have had open skies for some time.” That’s like saying California has an open skies agreement with the UK. The Open Skies agreement is between the U.S. and the UAE, not Dubai.

  13. Matt Weber says:

    Several points. While I will concede that EK gets no direct subsidies, it does benefit from some much more subtle subsidies. The UAE lacks the social contract in place in Europe and to a lesser extent in the USA. There are no effective labor unions in the UAE as far as I know, nor is there is any sort of effective grievance procedure. If you complain,your residence permit simply isn’t renewed, and you are forced to leave. So from a management perspective being based in Dubai is a dream come true.

    In addition oil revenues pay for massive infrastructure investments that have to come from taxpayers and users in most of the rest of the world. The net effect is the cost of living in Dubai is in fact subsidized, so EK can pay wages that are substantially lower than a US or European based airline would pay.

    Two of the US carriers key disadvantages are health care cost and pension costs. As the legacy carriers have failed to grow significantly in the past decade (the whole is smaller than the parts after merger, plus the loss of market share to LCC’s), there have been layoffs, generally based upon seniority. The result is a work force that ages far more rapidly than the general population. Any actuary will tell you that does really ugly things to both pension and health care costs, and US already has the highest per capita health care costs in the world by almost a factor of TWO! Health care alone probably produces a roughly $4000 per year per employee cost disadvantage for US carriers.

    By contrast carriers like Southwest and Jetblue have grown substantially over the years, so they tend to have much younger workforce (which means substantially lower health care and pension costs).

    • I’m not sure I would classify any of those as “subtle subsidies” as much as simply the facts of life in a global economy. For years, GM and Ford were at a huge disadvantage compared to Japanese automakers for many of the same reasons (pensions and retiree health care costs). A few bankruptcies later, combined with a maturation of the Japanese auto industry (and the Japanese economy as a whole), and a much different picture is painted now than in 1980. Similarly, the economic advantages experienced in Dubai will not always be the case. In a global economy, companies must figure out ways to compete with their competitors, all of which come with different comparative advantages and disadvantages.

    • CF says:

      Matt – Many good points. I actually have been working on a follow-up piece for tomorrow that talks more about while “subsidy” isn’t the right word to use, there are major advantages. And are they fair advantages?

  14. Doug says:

    I know why Emirates won’t whine about the US – Export-Import Bank. We subsidize them too.

  15. Ellis Taylor says:

    The other key to EK’s success is, if you look closer, in many ways they are the first of the current generation of longhaul LCCs. Many of their medium and longhaul destinations are operated by 777-300ERs with a very tight configuration in economy which gives them great seat-mile costs. Also that type carries a lot of freight, so even on pax light services, they are getting some good coin on freight, which also benefits from their geography. And the A380s they have are all about generating those low seat-mile costs on some of their larger markets.

    Of course EK don’t put an emphasis on ancillary revenues and they do offer a very good premium product up the pointy end, but at the end of the day they cut a lot out of their operational cost base which allows them to offer some cheap fares around the world via DXB.

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  17. steve says:

    Agreed on most counts, but all Abu Dhabi (and I believe UAE) employers are obliged to provide health care, and a severance package at the end of employment. There is also a good grievance procedure for employees subjected to contractual breaches, and there is a grace period to find a new employer in the UAE after employment finishes…

    From management experience (setting up a branch office in AD of a UK firm), the grievance procedure can be a complete, unmitigated nightmare.

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