Emirates Airline: Connecting the Unconnected

For the exclusive use of S. Meite, 2020.

9-714-432 JANUARY 29, 2014

J U A N ALCÁCER

JOHN CLAYTON Emirates Airline: Connecting the Unconnected

Introduction

Late afternoon was fading to dusk as Tim Clark, President of Emirates Airline, gazed out at the large crowds mingling outside at the 2013 Dubai Airshow. Front and center at the event was the official program launch of the Boeing 777X, a massive new hit thanks to Emirates’ record order of 150 new planes. Valued at $76 billion at list prices, this was the largest airplane deal ever inked. Letting his thoughts drift, he noted, he imagined with pride these planes joining the collection of wide- bodied Emirates planes assembled on the tarmac of Dubai International Airport, ready to ferry passengers from Europe, Asia, Africa, the Americas and the Gulf to their respective destinations. This is the face of the global economy, he thought to himself, as he marveled at his company’s success.

Emirates was indeed a global success story. In just twenty-five years the airline had grown to become the third-largest airline globally by capacity and the largest by number of international passengers.1 (See Exhibit 1). Twenty-three new routes were added in 2012 and 2013,2 and capacity growth was expected to increase by 18.4% in 2013 thanks to deliveries of new aircraft, including the new A380s deployed to over 20 destinations.3 Emirates anticipated that its meteoric growth would continue and was building its fleet accordingly: with 41 A380s integrated into its fleet thus far, another 99 were scheduled for delivery in the coming years (See Exhibit 2).4

At the same time, several trends threatened to stymy the airline’s growth. Chief among them were the new 777Xs and A380s themselves. How would Emirates deploy these craft amongst its existing fleet and across new routes? Was investing over $117 billion in a fleet expansion over the last three years (including $76 billion on 777Xs and $23 billion on A380s this year alone) a shrewd strategic move or a costly mistake in today’s increasingly competitive aviation market?5 Secondly, as Emirates tried to enter new markets and compete with legacy carriers on international long-haul routes, protectionist aviation policies had surfaced in countries such as Canada and, to a lesser extent, Germany. Would Emirates’ push into new markets evoke similar reactions from other governments? Thirdly, as Emirates’ global reach expanded, untapped markets were increasingly difficult to find and exploit. Trans-Pacific markets, for example, remained attractive expansion targets, but would require a fundamental move away from Emirates’ sole hub in Dubai. Would its “mega-hub” model still function with new nodes? Finally, in a hotly contested market to capture the premium passenger segment, several of Emirates’ product innovations had begun showing up in other regional airlines. Could Emirates continue to innovate and stay ahead of competitors?

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Professor Juan Alcácer and John Clayton (MBA 2013) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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This document is authorized for use only by Sakina Meite in MBA 6208 Fall 2020 taught by SCOTT DAVIS, University of Houston - Downtown from Oct 2020 to Dec 2020. For the exclusive use of S. Meite, 2020.

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These issues swam through Clark’s mind. As the sunset reflected its dying rays on the aircraft on display, he pushed these thoughts to the back of his mind and returned to the event at hand.

Aviation in the Middle East

The 1980s aviation market in the Middle East was dominated by Gulf Air, a regional carrier backed by the states of Bahrain, Oman, Qatar, and the emirate of Abu Dhabi. While several European carriers serviced the region, the overall market was small and Gulf Air maintained a high market share. The majority of its flights emanated from its four hub cities to points in the Middle East, South Asia, and Europe, primarily on a point-to-point network.

As a non-core city for Gulf Air, Dubai experienced reductions in air service in 1985 that compelled Dubai’s leaders to launch its own airline. Local airline expertise was minimal, so the royal family commissioned a small team of expatriate airline veterans, helmed by Sir Maurice Flanagan, to charter the service they named Emirates. Divisional Senior Vice President (SVP) of Corporate Communications, Marketing & Brand Boutros Boutros remarked, “Locals or expats, management all had the same outlook and shared mentality, which ultimately helped build a successful and cohesive executive team.”6 Armed with only two planes and $10 million in seed capital provided by the Government of Dubai, the airline initially developed a regional focus to connect underserved markets.

Emirates takes hold

While the airline’s initial scope was modest, its ambitions were not. Tim Clark, Emirates President since 2003, noted, “I wrote out our business model in 1986 on a paper I still keep in my office. For inspiration on our growth strategy, we looked at the KLM and Singapore hubs of the 1990s as a model we wanted to emulate. Cathay Pacific, Singapore, and even American carriers’ domestic hubs [all operate using this mega-hub principle]. This wasn’t new, we weren’t doing anything different, except that we were global in our aspiration, linking more global city pairs, and our scale was much broader.”7 Indeed, Emirates could little afford to rely on a point-to-point route model: Dubai in the 1980s and 1990s was too small a market to service alone, and certainly not the major tourist destination it would become in the 2000s.

Conscious of its unique location and the small local market at the time, Emirates pushed to expand its international routes quickly. Initially relegated to regional routes in South Asia, the airline grew at a rapid clip in the coming years and expanded service to Africa in 1986 (Cairo), Europe in 1987 (Gatwick and Frankfurt), East Asia in 1990 (Bangkok, Singapore), and Australia in 1996 (Melbourne via Singapore) (see Exhibit 3 for a map of Dubai’s global network). With a strong growth record in the regional market, Emirates set its sights on increasingly distant destinations to feed into its hub. Its focus on long-haul service began in 2003 when new aircraft technology allowed Emirates to initiate direct non-stop service to New York and Sydney on newly purchased Airbus A340s. By 2008 Emirates had become the largest airline by revenue-passenger miles and by 2013 served 138 destinations across the globe.8 From its humble roots, in just 28 short years the airline had grown to service 39.4 million passengers, book $19.9 billion in sales, and employ 48,000 people.9 It had also consistently managed to maintain operating profitability for 25 consecutive years, no small feat in an industry that had consistently failed to return the cost of capital.10 (See Exhibit 4 for a comparison with the airline industry; see Exhibit 5 for additional Emirates financial information.)

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The Emirates Business Model

The way I see it, we’re essentially no different from a bus company. We face the same issues, such as capacity, pricing points, seat utilization, and other things. We need to depart from that mentality of a bus company and shift ourselves to build a brand, to take people towards glamour and differentiate ourselves through service as value propositions. — Tim Clark

A strategically placed hub

Emirates operated out of a single global mega-hub at Dubai Airport (DXB), a strategy it had maintained since its origins. This hub model was not a novel concept: London’s Heathrow, Paris’s Charles de Gaulle, and Amsterdam’s Schiphol all served as major airline hubs, a legacy of the transatlantic flights that formed the majority of international air traffic and of these cities’ roles as centers of former colonial empires. These historical advantages, combined with strong government support and robust inter-European demand, enabled legacy carriers such as Air France and British Airways to dominate international passenger traffic flows until the 1980s (See Exhibit 6 for a comparison among the main global hubs). While deregulation significantly disrupted the global aviation market and introduced a rash of new low-cost players and emerging markets,a Tim Clark contended that another driver ultimately enabled Emirates to grow at the expense of its European competitors: “What the airline industry missed [on international travel] was the shift from transatlantic bases to a multipolar model, including the rise of South-South demand. Emirates saw an opportunity in the BRICS countries’ rapidly growing models and in emerging markets in general, and focused our strategy on investing in these markets.”11

Dubai benefited from several inherent strategic advantages as a hub city. First, Dubai’s position on the Arabian Peninsula placed it at the nexus of global transit routes, a strategic location between Europe, Oceania, Asia, and Africa. Second, its relative distance from congested European airspace meant that aviation traffic was minimal and that flights could connect at almost any time of the day, allowing for twenty-four-hour operations. Third, Dubai benefited from relatively good weather; aside from occasional fog and the general heat, airport operations remained relatively free of the rain and snow storms that often caused delays in European and American airspaces. Finally, while most airline hubs relied on large local populations to bolster their passenger base, Emirates executives did not view Dubai’s relatively small size as a deterrent. Tim Clark maintained that “the airline’s core passenger base is not just the city of Dubai, but rather the entire region.” Executives had good reason to believe this particular interpretation: over one-third of the planet’s seven billion citizens lived within a four-hour flight of the city, and over two-thirds lived within an eight-hour flight.b (See Exhibit 7 for a map of Dubai’s proximity to major population bases.)

That approximately 40% of Emirates passengers originated or ended their flights in Dubai was no small feat: Dubai’s government had worked hard to build up the city’s tourism base and establish it as a travel and logistics hub (See Exhibit 8). Strategic investments in infrastructure and a number of

a Deregulation first occurred in the United States in 1978, followed by phased deregulation in the European Union. b To be certain, this geographic advantage was not unique to Emirates, as other Gulf carriers also benefited from their location. Another regional competitor, Turkish Airlines, was less proximate to India but closer to the developed European market— Turkish Airlines CEO Temel Kotil described his airline’s strategy as an attempt to serve the “village” surrounding Turkey — smaller cities within the European, African, and Middle Eastern theaters. “Turskish Airlines: Being biggest by serving the village,” Airline Leader, Issue 6 (May 2011), http://www.airlineleader.com/airline-of-the-month/turkish-airlines, accessed September 2013.

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high-profile projects, along with close coordination with the hospitality industry, helped create a strong pull that attracted business and leisure tourists alike. The Dubai government further facilitated incoming tourist flows by eliminating the majority of visa requirements and launching marketing campaigns. Tourism receipts totaled some $10.4 billion in 2012, more than any other country in the Middle East, and a majority of these passengers arrived and departed via Emirates.

Building the network

Building a global hub-and-spoke system to capitalize on these flows, however, was easier said than done. Emirates needed both a strong hub airport and access to new destinations. For each of these needs it had an enthusiastic partner in Dubai’s government. The government maintained a strictly arms-length financial relationship with the airline through its holding company, the Investment Corporation of Dubai (ICD)c. ICD’s role as sole shareholder in The Emirates Group helped foster cooperation between the city, the airport, and the airline. While other major airports such as Heathrow and JFK suffered from space constraints, NIMBYism,d and continued congestion, close coordination between government authorities and Emirates allowed the pair to invest in new terminals to proactively accommodate Emirates’ rapid growth, including the $4.5-billion Emirates- dedicated Terminal 3.12 On an operational basis, the working relationship manifested itself more routinely through close strategic collaboration and dialogue on capital expenditure plans, growth issues, and Dubai marketing campaigns.

Given its global base and high number of transit passengers, connections at Emirates’ Dubai hub were essential for running its network effectively. Twice a day, once from 12 a.m.–2 a.m. and again from 6 a.m. – 8 a.m., a spike of passengers deplaned from points west for a two-hour window to connect to their east-bound flights. These spikes strained the airport’s capacity, but they were essential to allow connecting passengers the widest possible choice of connections from points east to west. Emirates’ growth into new markets produced some additional peak-period hiccups. As Captain Alan Stealey, Divisional SVP of Flight Operations remarked, “Having eastbound and westbound flights created an ideal and rather straightforward scheduling mix, but since adding flights to Africa, China, and Japan [all points outside the east-west construct], the flight mix and scheduling has become much more dynamic and complicated to construct.”13 Growth had also come at the expense of congestion: tight scheduling combined with a restrictive number of runways meant that a small delay could cause a ripple effect of delays that could last for hours.

Route planning: tapping underserved markets

Strategic route planning was at the core of Emirates’ growth and an important source of its competitive advantage. Tim Clark, the current president, started out as the network planning manager before moving up in Emirates’ ranks, and he maintained a close working relationship with Adnan Kazim, the Divisional SVP of Planning, Aeropolitical and Industry Affairs. Emirates’ route strategy was initially predicated on capturing underserved markets with large populations but few flying options. For example, Emirates’ initial entry into the Pakistani market fared well, as most Pakistani cities at the time were primarily served by the flag carrier, Pakistan International Airlines

c The Dubai Government-owned holding company, the Investment Corporation of Dubai, which owns The Emirates Group, received an annual dividend payment and had not injected additional capital into the airline beyond its first $10 million financing. d NIMBYism stood for “Not In My BackYard”, a reference to local residents who protested against major developments proximate to their land; the proposed expansion of a third runway at Heathrow in London had generated many such protests.

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(PIA). Passengers traveling from these cities faced high fares and multiple layovers given PIA’s tendency to funnel most flights through Karachi. New carriers that introduced competition and offered service with only one stopover were welcomed.

Entering underserved markets in certain instances also gave Emirates a first-mover advantage. Cities such as Colombo, Sri Lanka, often had relatively fixed demand for international travel, so preempting competitors enabled Emirates to lock up the market and capture ensuing growth. As Kazim remarked, “Several additional considerations come in mind [when entering new markets]. We often look to preempt competitors, respond to competitive advances in markets, or at new network potential to feed into our global network base.”

As its regional presence grew, Emirates continued to funnel flights through its hub in Dubai, thereby aggregating demand more efficiently on these higher-traffic routes, increasing passenger- load factors, and reaping operational efficiencies above and beyond a point-to-point service. While less convenient to passengers than a direct flight, this connection process permitted Emirates to more effectively service a larger number of destinations to and from each city. Passenger numbers in the Dubai Airport reflected this hub-and-spoke model: roughly 60% of passengers arriving at the airport in 2012 were in transit to somewhere else. As Emirates grew, this ratio was expected to increase slightly in favor of transit passengers.14

In addition to aggregating demand from the region, many Emirates passengers used Dubai as a transit point to connect on long-haul routes. Historically many of these passengers originated in Europe (northwest of Dubai) and traveled to Asia or Oceania (southeast of Dubai). Emirates leveraged its strategic geographic location amidst this flow of passengers to increase service offerings and build market share on key routes once dominated by legacy European carriers. For example, air traffic between London Heathrow and Dubai grew 24% in 2011 to become Emirates’ most trafficked route.15

This strategy had also allowed Emirates to capitalize on new global flows of passenger demand, not only in Europe but also in Asia and Africa (See Exhibit 9). Tim Clark attributed much of the company’s strong growth to the advent of these new growth poles. “During the 1980s and 1990s there was a bang that allowed the macro global economy to connect in new ways. As emerging markets started to engage, to join the digital world, their citizens began to want to travel. Lots of companies [in the developed world] missed this phenomenon. In airlines, lots of people missed it as well. Our alignment, our structure, and our multi-level segmentation allowed us to capitalize on these new [demand] flows. This was a revelation, which changed the nature and complexity of demand. As all this growth went through the roof, pricing points started to shift quite rapidly as a result and the mix of the business changed quite rapidly.”16

By expanding service to emerging market destinations in Africa (southwest of Dubai) and East Asia (northeast of Dubai), Emirates was well positioned to accommodate increasing trade between China and Africa in the 2000s. Thus, with Dubai as its hub, Emirates benefitted from a strategic position at the cross-section of two major passenger flows: NW to SE, and NE to SW. (See Exhibit 10 for breakdowns of global passenger flows.) As Andrew Parker, former head of Emirates public affairs, remarked, “Many of our flights are not unlike a Noah’s Ark of sorts. A flight originating from Hyderabad might carry passengers going to Dubai, but also to New York, London, Guangzhou, or Nairobi. We see Emirates as able to offer a unique service in connecting these emerging markets. For the 1.3 billion Chinese citizens looking to do business with their African counterparts, what’s the most convenient way to connect? Not via Paris or London, but via Dubai.”17

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Protectionism and anti-competition

In order to tap these new markets and fill its network, however, Emirates needed regulatory approval to fly to new destinations. Global aviation is governed by bilateral Air Service Agreements (ASAs) in accordance with the 1944 Chicago Convention between nation states. While some nations such as the UAE, the US and the Netherlands have open skies agreements with other nations permitting unrestricted access to their markets by any foreign carrier, many countries continue to regulate the level of access. The UAE government supported Emirates’ entry into new markets by negotiating bilateral aviation agreements with foreign states whose markets Emirates wished to enter. These agreements benefited both Emirates and the other UAE-based airlines, including Abu Dhabi- based competitor Etihad Airways.18

These agreements had not always come so easily. In 2010, years of negotiations with the Canadian government to add additional service between Canada and the UAE broke down in dramatic fashion. The Canadian government had not granted rights to the UAE beyond a 1999 ASA that permitted Emirates to operate three flights per week to the entire Canadian market. The Canadian government was worried about the impact of additional Emirates and Etihad flights on its flagship carrier, Air Canada, and broke off negotiations and withheld further access to its Toronto, Calgary and Vancouver markets. The disagreement, part of other bilateral issues under dispute, intensified when the UAE government retaliated by imposing visa fees, ended an agreement for Canadian troops to use its military base, and publicly refused to support Canada’s UN Security Council bid. Emirates itself stepped into the battle by waging a marketing campaign and conducting an economic impact report detailing the benefits that would follow from expanded Emirates service. Blocked from flying to Vancouver, Emirates adjusted and launched a daily service to Seattle to attract nearby Canadian passengers. Air Canada’s claim that Emirates enjoyed generous government subsidies and advantages found support from European airlines as well, where Air France CEO Pierre-Henri Gourgeon remarked, “Emirates, the biggest Gulf carrier, already pays very little in the way of airport charges or fuel tax at its Dubai hub…. Those benefits could generate €3 billion ($4.2 billion) of operating income if applied to Air France-KLM.”19. As Emirates looked for new sources of growth, it remained concerned that government restrictions would further inhibit plans to add service to new cities. The majority of mainland China’s 1.3 billion citizens, for example would remain out of reach unless the Chinese government opened its airspace beyond the three major airports Emirates already served. (See Exhibit 11 for growth of air traffic in China). Obtaining regulatory approval and traffic rights to countries with restrictive aviation policies would be critical if Emirates wanted to meet passenger demand in new destinations.

Operations and route strategy

Airplanes

At the core of any airline’s operations lay its planes. From its humble origins as a regional airline with two planes, in just over twenty years Emirates had amassed a fleet of 197 aircraft worth $22.4 billion.e 20 Emirates’ current fleet composition was rooted in more than a decade of collaboration with

e Value includes $10.2 billion of aircraft as assets and $12.2 billion of future aircraft operating leases.

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aircraft manufacturers to expand aircraft ranges, integrate new technologies, and develop additional amenities.f

During Emirates’ rapid growth in the 1990s, one of the major growth constraints the airline faced was aircraft range; existing plane models could only fly distances of up to 14 hours, which left key potential markets such as Los Angeles or Sao Paulo out of Dubai’s reach. Emirates reached out to Boeing and Airbus and pushed the two airline manufacturers to develop ultra-long-range, wide-body aircraft that were better suited to Dubai’s longer routes. The result? In 2004 Boeing released the 777- 300ER (“ER for Extended Range”), a modified version of its existing line that enabled connectivity between cities up to 9,400 miles apart, bringing an entire set of new cities within Emirates’ reach.g 21 Influencing aircraft design and capabilities did not come cheap, however. In essence, Emirates backed its design modification requirements by leveraging its buying power and booking massive orders, thereby reducing manufacturers’ risk by guaranteeing demand for the new aircraft.

The expanded Emirates fleet consisted of three types: Boeing 777s, Airbus A330/A340s, and Airbus A380s. Restricting its fleet to these three types allowed Emirates to optimize its pilot deployment, effectively serve its long-haul destinations with all three types, and standardize the customer experience. Emirates also maintained one of the youngest fleets in the industry, with an average airplane age of 6.4 years. (See Exhibit 12 for comparisons with other airlines.)22 While newer planes enhanced the passenger experience and increased fuel efficiency, they also came with a hefty price tag. The book value for a new Boeing 777 ran between $260 million and $315 million; an A380 was listed at $390 million (which excluded industry discounts for bulk orders).23

The pride and joy of the Emirates fleet were the new double-decker A380s. When the first A380 had been delivered in August 2008, Emirates had 58 of the new aircraft on order in total, the most of any airline at the time and a strong market signal of its confidence in future growth.24 These planes had been deployed on routes with high-demand and/or constrained runway capacity to ferry passengers to Dubai, where they then debarked or transferred to their ultimate destination. The massive planes required a significant expansion of airport facilities to house them, and Dubai Airport (along with other major airports) had acquiesced by extending runways and building larger docking facilities. (See Exhibit 13 for a list of major airports with A380 access/frequency.) As of early 2013, Emirates was operating 31 A380s servicing 21 destinations on 402 individual one-way routes per week —more than twice as many as Singapore Air’s 190 routes.25 26 At the 2013 Dubai airshow, Emirates had also bested all previous ordering records by ordering 150 of the new 777X planes (as well as 50 additional A380s) – though they wouldn’t be delivered for several more years, these planes would enable Emirates to reach virtually any destination on the planet from its Dubai hub.

Emirates also invested significantly in safety and cost control systems. One such example was the Flex Tracks, an in-air routing system that integrated real-time data to allow aircraft to take advantage of favorable weather conditions such as jet streams.27 Marking its 10 year anniversary in December 2013, the Flex Tracks program reduced over 3,800 tons of fuel on Emirates’ daily flights to Australia, reducing CO2 emissions by more than 12,000 tons over a 12 month period. Emirates also worked with

f For example, after an Air France Airbus 380 hit a Delta Comair airplane in JFK in April 2011, Emirates convinced Airbus to install electronic systems that alert pilots of objects around them while taxiing (similar to those used in cars for parking). g As Emirates has exhausted the list of cities within reach of its present fleet, it has continued to push Airbus and Boeing to develop ultra-long haul range planes such as Boeing’s 777X, with up to 20-hour ranges, enabling connectivity between cities as far away as Sydney and Rome.

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IATAh to pilot iFlex, an initiative that worked with African governments and new technology to shorten airline flight paths between Dubai and Sao Paulo, Rio de Janeiro, Lagos, and Accra, shaving 28 minutes of flight time per route and avoiding 13,200 tons of CO2 emissions per year. Such systems allowed Emirates planes to fly courses that aligned with the fastest possible route between two city- pairs based on prevailing weather conditions.

Emirates carried more than just people, however – it also ranked among the world’s largest cargo carriers. Emirates Cargo handled freight and logistics operations for Emirates, and contributed 15% to Emirates’ top-line transport revenue in 2012.29 Dubai was the sixth largest cargo airport in 2012 by volume, which aligned with the city’s strategy to become a global logistics hub for both goods and people.30 After UPS and FedEx, Emirates transported the most cargo as measured by freight-ton kilometers, though this was undoubtedly due to the relatively longer distances that freight traveled to reach Dubai.31

Deploying new craft

Determining where and how to allocate new aircraft orders, in the words of Divisional VP of Route Planning Anand Lakshminarayan, was an “art more than a precise science. If you commission five of our staff to prepare a market study, you’ll get five different outlooks. The right balance needs to be met between finding the right capacity of existing routes and adding new reach as a global airline, and building out the overall existing airline system.” Indeed, Emirates’ consideration of craft deployment was a complicated process. Three to five years out, the planning department forecasted major growth regions and placed orders for the number of new planes it expected to use. Once the planes were confirmed, the planning team examined the overall fleet, the available craft currently in use, and how many planes remained. On this basis, they then determined whether to add capacity to existing routes or launch a new route.

If the former option was chosen, Emirates would determine whether to add new service to an existing route (i.e. increase service from 1x to 2x daily) or to swap out a service’s existing plane with a larger, newer craft (i.e. upgrade service to an A380 plane). Since Emirates relied on only three types of aircraft, planes could be deployed onto existing routes to increase or decrease supply to more easily match demand. This tactic came in particularly useful for increasing passenger traffic to congested airports like London Heathrow: with an allocation of only five daily landing and departure slots, Emirates maximized each by using the largest plane possible, the A380. This tactic also worked well to ramp up seat supply on untested routes. When Emirates launched service from Dubai to Copenhagen in 2011, the route used the relatively small A330 to serve the relatively small Danish city. In light of high demand, however, within nine months Emirates swapped the A330 with a larger 777.32 Choosing this option had ripple effects throughout the system. As Kazim noted, “When we increase capacity from an A330 to a 777-300ER, that frees up that A330 to launch to a new destination.” From a cost perspective, adding new service to existing routes helped Emirates disperse fixed costs associated with the existing operation. Such route management came into play particularly during the 2008 financial crisis, when Emirates deployed a higher proportion of its new aircraft to increase frequencies along existing routes.

h IATA (International Air Transport Association) is the de facto trade association for a majority of the world’s scheduled airlines

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Choosing new routes

New markets offered Emirates the ability to generate new revenue streams, but they also carried higher risk: Would those revenues actually materialize? To reduce its risk, Emirates invested heavily in market and demand research before launching a new route. Over and above this upfront investment, other factors such as preempting competitors, responding to competitive advances in markets, and new network potential to feed into the hub system factored into new route decisions. The planning team also calculated aero-political considerations: certain markets offered limited entry windows due to restrictions in the country’s air service agreements, forcing decisions on whether to enter preemptively or hold out for a better opportunity. Finally, six to twelve months out, a research team was sent in to look on the ground, determine operational capacity, validate desk research, and make a final recommendation on route launch.

While Emirates continued to evaluate opportunities to expand its network to new cities on an individual basis, four trends became clear. First, the airline continued to expand service to the major destinations it already served; with 41 A380s already in service and 99 more coming online, Emirates was banking on continued growth to major markets such as London, New York, and Mumbai. Second, Emirates continued to add new destinations to secondary cities in existing markets. Cities such as Lyon, France or Warsaw, Poland that were not focal cities for existing airlines were places where Emirates saw growth opportunities. Third, the increasing reach of its new planes allowed the airline to increase its network to new destinations in the Americas. From serving just one North American city in 2004, by 2012 Emirates flew to 11 cities in the Americas, all of them more than 7,500 miles from Dubai, and entered into a codeshare agreement with the US budget carrier JetBlue to support Emirates’ growth in the massive US market. Finally, in addition to its direct flights from Dubai, Emirates also operated a limited number of flights to and from non-UAE cities via ‘fifth freedom’ rights33. In certain instances, such as Emirates’ Milan-JFK route, Emirates’ decision to enter this market was based on rising demand projections and a view the market was underserved by US and European airlines, particularly in the premium class offerings. In others, these flights were made chiefly due to latent unmet demand and a desire to increase airplane asset utilization. Thus, when an airplane in Sydney would normally sit unused for 12 hours before returning to Dubai, introducing a Sydney-Auckland route allowed the plane to take passengers in what would have otherwise been down time for the aircraft.

While this process was nothing short of diligent, occasionally mistakes were made. Over the years, Emirates had to close 3 or 4 routes because of lackluster demand. Its Dubai–Nagoya route was one example. In that case, the planning team predicted sufficient demand to warrant a new route, but passengers proved unwilling to connect directly to Dubai and preferred instead to travel to Tokyo to obtain lower fares. Despite multiple reductions in seat supply on the flight, ultimately Emirates closed the route as it became uneconomic due to the higher fuel prices in 2009.

Case study – investing in Clark Airport

Clark Airport in the Philippines offered an example of how Emirates evaluated new routes. In 2012, Emirates operated three daily flights from Dubai to Manila. Demand for flights from the Philippines was high, and Emirates’ existing frequency entitlements to Manila were unable to adequately serve demand. Scouring data on catchment areas,i the planning team noticed that

i A catchment area is the region that feeds demand for a particular flight; for example, the greater New York City-Long Island metro area serves as the catchment area for flights originating from LaGuardia Airport.

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passengers on its Manila flights were commuting two or three hours through Manila’s congested traffic to reach the airport. A retired US airfield close to the Manila suburbs presented an opportunity to launch a new entry point, and the research desk, sales team, and market surveys all indicated that the route’s catchment area was wider than expected and could accommodate a new flight.

Emirates sent a team to Manila to speak with business communities, sales forces, and governments to gather both qualitative and quantitative information. The planning team derived the value of potential demand for a new flight, then worked on the supply side to evaluate which aircraft to deploy and what volume of passengers to serve. To ensure the new flight would be a constructive addition to the global network, the team also gauged Manilans’ final destinations to see if a new flight would reduce total travel time by a few hours (relative to the alternative of using European gateways).

Product

We’re trying to replicate the Pan Am experience, to bring the glamour back into flying. — Terry Daly

In an industry characterized by decreased service amenities and increased discomfort to improve bottom lines, part of Emirates’ appeal to many passengers was its emphasis on a premium service experience. Differentiating itself through service not only enabled Emirates to build passenger loyalty and reap subsequent value, it also allowed the airline to avoid direct competition with low-cost competitors based on price. (See Exhibit 14 for a sample breakdown of fare contributions by class.) The experience began at Dubai Airport, which offered the world’s largest duty-free retail shopping space, modern facilities, and lounges with services such as luxury spas for business and first-class customers. While the airport’s massive Terminal 3 sometimes made quick transfers difficult, most passengers ending in Dubai benefitted from no-hassle visas on arrival, a unique offering in a region where tourist visas were the norm.

To enhance the in-flight experience, Emirates converted a greater proportion of its seats to premium classes, increased the scope of its luxury amenities, and aggressively added new planes to its fleet that offered the latest amenities. As one of the first airlines to receive delivery of the A380s, Emirates tailored its crafts to offer such luxury layouts as individual first-class suites, “shower spas”, and a full-service walk-up bar. (See Exhibit 15 for photos.) The airline had already received the travel industry’s World Travel Award for best first-class service three times in the last ten years and claimed over 400 industry awards for airline service, and would go on to win the award for best overall airline in 2013. While adding such premium amenities were expensive, Emirates refused to see these investments as sunk costs. As Divisional SVP of Service Delivery Terry Daly remarked, “These amenities are great, but at the end they all have to help contribute to the bottom line to make money. Showers are good uses of the front of our aircraft, and the bar has been a popular additional amenity, but they still preserve the optionality to allow us to convert to more seats to bolster the bottom line.”

Competitors, however, and particularly its regional counterparts, had successfully copied Emirates’ premium strategy. Etihad had won the travel industry’s World Travel Award for best first class for the last five years running, and Qatar Airways won the “best airline” award for two years running. As manufacturers made the innovations Emirates pioneered available to competing airlines, Emirates found itself increasingly innovating on the service side. To this end, it developed “Paradise”, a CRM tool aimed at its passengers. The tool allowed cabin crew to note frequent fliers’ preferences and subsequently personalize their experience, from food and beverage preferences to

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stocking favorite magazines and assisting with missed connections. One Emirates passenger recalled how he casually mentioned attending his sister’s wedding to a flight attendant; six months later, that same flight attendant happened to serve the passenger again and recalled the specific details about the wedding he had earlier described in their conversation.34

Marketing

As a marketing team, we asked, “How can we reach a mass audience? How should we build awareness of the Emirates brand? How can we launch a campaign to cover the entire world so that people know we exist?” The answer was a no brainer: sports. — Boutros Boutros

Since its inception, marketing played a key role in both attracting and retaining Emirates customers. In its initial years, many potential customers in target markets were still largely unfamiliar with Dubai, and few saw it as a principal tourist destination. To lure tourists, Emirates partnered with local tourism organizations to promote the city of Dubai. Tourism packages offered events such as desert safaris, and the airline structured its bookings to allow short stopovers for little or no cost. Faced with limited budgets, the airline had to develop creative ventures to promote Dubai and generate awareness. Higher-profile projects such as the Burj al Arab, the World and Palms development projects, and the Burj Khalifa tower helped grow the city’s global renown, which in turn led to higher volumes of tourists. Dubai’s attractiveness as a relatively liberal state in a region that included many conservative states, as well as its positioning as a proxy for the Caribbean and southern parts of Europe for wintering Europeans seeking warmth, also created a pull that helped reduce Emirates’ marketing burden.

Given its global customer base, Emirates faced a challenge that many multinationals confronted: short of creating individualized marketing campaigns for each location it served (a time- and cost- intensive effort), how could Emirates reach a global audience? Emirates found a simple, cost- effective, and highly visible answer in sponsoring sports teams. One of the early major sponsorships Emirates signed was the 1999 Cricket World Cup, a deal which gave them exclusive branding access to the event. As the airline pushed into new markets, it saw sports as a popular way to build brand awareness among the general public and in key markets. As Divisional Senior Vice President of Corporate Communications, Marketing and Brand, Boutros Boutros explained, “The number one sport in the world is soccer, followed by cricket, tennis, and golf. If you want to reach Europe, you have to go into soccer. In certain parts of the world, cricket dominates, while in other places we’re expanding into rugby, then golf, and in the last 2-3 years into tennis. Sponsoring European soccer clubs means we have fans from Latin America to South Korea that are wearing Emirates jerseys. Complementing what we do in sports, we also now cover cultural events. If you look at our portfolio, we have the whole world covered.”35 Gaining endorsements required some creative thinking on behalf of the marketing team – Emirates worked with league officials to brand its logo on the highly visible spaces most frequently on television, such as behind the cricket wicket or on the umpire’s jersey. While the US sports franchises had been a tougher nut to crack – “sports sponsorship agreements [there] are very expensive, approximately $150 million apiece, and jersey real estate is held sacrosanct” – the airline had made inroads by sponsoring major golf and tennis tournaments such as the US Open.

While Emirates used sports as the vehicle to generate brand awareness among the general public, its marketing theme was catered with a much more specific theme in mind: the premium in-flight experience. Ad campaigns focused on the higher-end amenities offered in its premium cabins, highlighting its in-flight suites and bars, high-end service, and savvy, cosmopolitan cabin crew. Such

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ads appeared in magazines that targeted sophisticated readership bases such as Vanity Fair or The Economist. Even in sports sponsorships, the brand targeted segments with higher-end audiences such as golf, tennis, rugby, sailing and Formula One racing. As it looked ahead, Emirates continued to push its high-end flight experience as its signature message, one which resonated strongly with consumers – according to EuroMonitor, Emirates was the most valuable airline brand in the world.36

People

The Emirates executive leadership team included a diverse mix of backgrounds. Sheikh Ahmed bin Saeed al Maktoum, the Chairman and CEO, was the uncle of current ruler Sheikh Mohammed and had been involved in Dubai’s aviation space since Emirates’ inception; he also served on a number of executive roles and boards across the emirate of Dubai including chairman of Dubai World, the Emirates’ chief vehicle for infrastructure investments.37 Tim Clark served as President, the culmination of his continuous rise in leadership positions that began as Head of Airline Planning in 1985. The other members of his management team consisted of a mix of Emirati nationals and expatriates, all seasoned veterans of the commercial aviation industry and most with extensive careers at Emirates. Emirates had adopted a flat organizational structure, a move that encouraged flexibility and autonomy and lowered costs.

The leadership team presided over a workforce that numbered over 55,000 employees, including 3,500 pilots and 17,800 flight attendants.38 The cabin crews, in particular, were emblematic of Emirates’ global passenger base, hailing from over 148 different countries and speaking over 50 languages.39 The cabin crews serviced Emirates’ flights and were an integral part of shaping the customer service experience. Crew members tended to skew towards being female and young:—75% of cabin crew members were female, the average age was 29 years old, and the average tenure was just over four years of service—and underwent a seven week-long training program to prepare them for traits the airline valued in its employees.40 Both pilots and crew members were non-unionized, as unions are not allowed in the UAE. While labor costs per employee were lower than their counterparts at other airlines (see Exhibit 16) and did not receive pensions, employees benefited from tax-free incomes, free residential housing, healthcare plans and end-of-service benefits.41 All flight and pilot crews were based in Dubai, as well, a feature that made scheduling cabin crew and pilots to flights much easier than operating from multiple hubs around the world.

To effectively cater to its diverse passenger base, Terry Daly, Divisional SVP of Service Delivery, explained the driving ethos behind Emirates’ cabin crew as, “In a word, we want [our crews] to be cosmopolitan. This means we need cabin crews who can speak a variety of languages. Second, we want nationalities that represent our route network—at the moment, our catchment area is planet earth. We have nationalities of focus, not just to showcase diversity but for language skills and cultural backgrounds.” Crews were deployed to serve on routes to and from their home country, but also on more subtle routes. For example, each flight from Sao Paulo to Dubai had at least one Japanese-speaking cabin crew member to accommodate the sizeable Japanese-Brazilian population that commuted via Dubai to Tokyo. To maintain a diverse front and ensure no single nationality was overrepresented, 30% of each crewmember’s time was devoted to her or his home routes, and 70% on other routes; that is, a Japanese national would spend 30% of her time on Dubai–Japan routes and 70% of her time on routes elsewhere.

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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 Iberia, 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.j 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 the 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 the “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,k adding new destinations and increasing seat capacity by ordering new planes. Unlike the North American

j Not all legacy competitors were critical of Emirates and its fellow Gulf carriers. Willie Walsh, CEO of International Airlines Group (which owns BA and Iberia), said, “I'm not one of the airline CEOs that is critical of the Gulf carriers - quite the opposite. I don't believe they get cheap fuel, I don't believe they get financial assistance. I believe they have rational, commercial business models.” Source: Ed Atwood, “No issue with Gulf carriers, says IAG boss,” arabianbusiness.com, April 10, 2013, http://www.arabianbusiness.com/no-issue-with-gulf-carriers-says-iag-boss-497406.html k Emirates’ relatively rapid passenger growth rate of 15.3% CAGR from 2005-2012 was matched by Etihad’s 39.3% and Qatar’s 16.4%, albeit from smaller passenger bases.

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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.42 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 thus far refrained from joining an alliance, viewing these organizations as inherently bureaucratic and a constraint to network growth.43 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.”44

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.)45 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 that 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?

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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, was 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

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continued growth for trans-Pacific routes between Australasia and the Americas, a market that Emirates could enter. The trans-Atlantic market was also a lucrative prize that Emirates had already begun to tap: with its Dubai–Milan–New York flight Emirates had become the top carrier between New York and Milan, a success it could potentially replicate in other large European markets subject to regulatory approval.

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Appendix A: Overview of key codeshare partners:

Qantas Airways Qantas was both the largest Australian carrier and historically a dominant carrier for traffic between Australia and Europe. Given the sheer distance between these two regions, Qantas had traditionally operated a stopover in Singapore to connect its most popular Australian routes to London and beyond. In 2013, Qantas transferred its stopover hub to Dubai by entering into a partnership with Emirates. The carrier now flew 14 codeshares per day from Australia to Dubai (2 flights per day operated by Quantas and 12 flights per day operated by Emirates), with connections to 34 European destinations and three other continents. In return, Emirates gained access to 55 Australian domestic destinations that would otherwise be unfeasible to directly serve from Dubai.

JetBlue JetBlue was the sixth largest US-based carrier and operated primarily out of key focus cities along the East and West Coasts. A large hub at New York’s JFK airport complemented Emirates’ triple- daily Dubai-JFK service, which allowed Emirates to build a feeder network and aggregate passengers from 27 US cities it did not currently serve. While the codeshare agreement was mutually beneficial for both parties at present, outside observers questioned whether this relationship would endure moving forward as Emirates continued to weigh a more rapid expansion into the US market.

Overview of key regional competitors:

Turkish Airlines Over and above the Gulf carriers, Turkish Airlines had also grown to become a significant regional player in the Middle East and as a long-haul carrier. With a hub in Istanbul, Turkish Airlines also benefitted from its strategic location between Europe and Asia —its Istanbul operations served more non-stop destinations from a single hub than any other carrier in the world.46 Unlike the Gulf carriers, it also had the advantage of a large domestic passenger base of almost 75 million people, as well as closer proximity to European destinations. Its fleet of smaller aircraft was able to land at many of the secondary cities where wide-body aircraft (such as Emirates’ A380s) couldn’t land. CEO Temel Kotil described his airline’s strategy as an attempt to serve the “village” surrounding Turkey — smaller cities within the European, African, and Middle Eastern theaters that were better served by medium-sized aircraft. Its recent growth reflected both these structural advantages and successful strategy deployment—from 2010–12, it added 29 planes and 26 destinations.47 Lean operations and top- line revenue growth of 26% had contributed to a healthy profit margin of 7% in 2012, well above the industry average.48

Qatar Airways Qatar flew to over 120 destinations out of its Doha hub. The airline was founded in 1993 and remained privately owned by the Qatari government, who viewed the airline as an important conduit to promote Doha as a regional business hub. Growth had subsequently become impressive, as the airline maintained double-digit passenger growth rates for almost every year from 2005 – 2012.49 Beginning in 2013, the airline had been included as a member of the oneworld Alliance, a strategy it helped would add to organic growth by funneling additional passengers through its Doha hub.

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Etihad Etihad was both the youngest and the smallest of the Gulf carriers. Conceived in 2003 to provide enhanced airline service to Abu Dhabi, the airline had witnessed a decade of strong growth, including some of the highest rates of passenger growth in the region (doubled growth in 2005 had tapered off to a still-impressive 22.6% by 2012).50 The airline prided itself on a high-quality product, with numerous Skytrax awards as testament to this quality play, and had consistently added to its new roster of destinations to build service just under 85 destinations. The airline also owned a minority stake in airBerlin, as well as other minority stakes in airlines in Europe, the South Asian subcontinent and Australia

Summary of key regional competitors

Emirates Qatar Airways Etihad Turkish Airlines Principal hub: Dubai Doha Abu Dhabi Istanbul Country: UAE Qatar UAE Turkey Population: 8 million 2 million 8 million 75 million # Destinations: 120 125 86 217 (181 intl.) # Craft: 190 127 72 202 # on order: 230 230 100 187 Founded: 1985 1993 2003 1933 Avg. fleet age: 6.1 5.1 4.9 6.6 Ownership: 100% govt. 100% govt. 100% govt. 49% govt.

Source: Air Transport World’s ‘World Airline Report’, July 2012; Turkish Airlines 2012 press release.

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Exhibit 1 Size of major global airlines

ASK's per week^^ Scheduled Passengers Carried Scheduled Freight Tonne - Kilometres Scheduled Passenger - Kilometres Flown Total Total Total Global Δ International Domestic (International + International Domestic (International + International Domestic (International + rank Ranking Domestic) Domestic) Domestic) % Dec- Dec- Airline Dec-2011 Dec-2012 Variance Rank Thousands Rank Thousands Rank Thousands Rank Millions Rank Millions Rank Millions Rank Millions Rank Millions Rank Millions change 2011 2012

United Airlines^ 3,676,173,972 6,149,398,758 67% 4 1 3 8 24,843 4 67,776 3 92,619 19 2,672 8 391 20 3,063 2 140,711 1 147,571 1 288,282 Delta Air Lines 5,659,984,201 5,643,676,049 0% 1 2 -1 11 22,015 2 94,712 1 116,726 18 2,880 12 316 18 3,196 5 125,141 2 146,426 2 271,567 Emirates 4,217,428,241 4,992,911,535 18% 3 3 - 4 37,733 16 37,733 1 9,319 3 9,319 1 180,880 4 180,880 American Airlines 4,740,187,417 4,800,884,481 1% 2 4 -2 12 21,278 6 65,057 4 86,335 28 2,080 10 343 25 2,422 11 85,290 4 118,047 3 203,336 Lufthansa 3,232,470,602 3,158,824,795 -2% 5 6 -1 2 50,877 33 13,516 8 64,393 5 7,170 ** 5 6 7,175 3 136,882 63 5,630 5 142,512 British Airways 2,969,790,657 3,049,528,888 3% 7 7 - 6 31,273 74 5,436 18 36,710 8 4,728 ** 4 8 4,732 6 121,272 99 3,046 9 124,318 Air France 2,947,863,927 2,825,526,843 -4% 8 8 - 5 33,693 23 16,943 10 50,636 13 4,306 ** 2 13 4,308 4 125,966 41 9,855 7 135,821 Singapore Airlines 2,284,561,770 2,375,715,435 4% 11 10 1 15 18,053 46 18,053 6 6,694 7 6,694 9 92,944 16 92,944 Cathay Pacific 2,518,689,815 2,311,927,122 -8% 9 11 -2 13 21,145 37 21,145 2 8,433 4 8,433 8 93,842 15 93,842 Turkish Airlines 1,546,786,987 1,918,119,411 24% 22 15 7 10 22,381 27 15,773 15 38,154 30 1,828 46 20 31 1,848 15 63,437 45 9,416 19 72,853 Qantas Airways 1,967,029,665 1,863,468,681 -5% 14 16 -2 23 12,443 10 35,089 13 47,533 27 2,009 19 177 28 2,297 14 65,143 10 42,908 10 108,051 Qatar Airways 1,653,642,624 1,798,311,481 9% 19 17 2 16 17,188 * NA * NA 12 4,323 12 4,323 12 71,945 * NA 20 71,945 JetBlue Airways 1,189,448,769 1,214,788,293 2% 27 26 1 71 4,064 16 24,871 23 28,934 ** NA 43 23 ** NA 81 8,443 9 45,566 26 54,010 Etihad Airways 989,471,343 1,135,831,421 15% 32 28 4 30 10,236 71 10,236 20 2,642 23 2,642 19 47,717 * NA 29 47,717 GRAND TOTAL 81,823,394,427 87,310,342,925 6.70% 327,222 339173 649207 59084 1281 60452 1359613 528465 1888078 Source: Created by casewriter using data from Innovata, IATA,World Air Transport Statistics, 57th ed., 2013.

^United and Continental has been combined for 2012 but not 2011 **Representative sample week in December of each year * not in top 100 **not in top 50 Note: US major airlines include the regional services operated by other carriers but marketed by the majors only.

Exhibit 2 Number of A380 and Boeing 787 ordered (number of aircrafts)

Airbus A380 Boeing 787 Airline Aircrafts Airline Aircrafts Emirates 90 ILFC 74 Singapore Airlines 24 All Nippon Airways 66 Qantas Airways 20 United Air Lines 50 Lufthansa 17 Japan Airlines 45 British Airways 12 Air Canada 37 Air France 12 Air France-KLM Group 25 Etihad Airways 10 Etihad Airways 41 Korean Air 10 LAN Airlines 26 Qatar Airways 10 Qatar Airways 30 Hong Kong Airlines 10 Air India 27 Source: Airbus and Boeing.

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Exhibit 3 Emirates Airlines global route network as of Nov 2013

Source: Company.

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Exhibit 4 Profit and loss of airlines worldwide from 2004 to 2013 (in billion U.S. dollars)

Source: Created by casewriter using data from Statista, ″ Profit and loss of airlines worldwide from 2004 to 2013,″ http://www.statista.com/statistics/268330/profit-of-airlines-worldwide/, accessed September 2013.

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Exhibit 5 Key financials for Emirates

Income Statement Fiscal Year Currency (US millions) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Revenue 1,672 1,890 2,568 3,550 4,876 6,072 7,800 9,923 11,559 11,565 14,524 16,886 19,600 Cost Of Goods Sold 890 1,048 1,099 1,581 2,432 3,357 5,876 7,928 8,733 8,641 10,648 13,249 15,344 Gross Profit 783 842 1,469 1,969 2,443 2,715 1,925 1,995 2,826 2,924 3,876 3,637 4,255 Other Operating Exp., Total 660 725 1,218 1,514 1,731 1,993 1,043 1,040 2,301 2,103 2,636 3,215 3,788 Operating Income 123 117 250 456 713 722 882 955 525 821 1,240 422 467 Net Interest Exp. (54) (48) (34) (35) (29) (16) (24) (44) (28) (7) 4 (67) (135) Other Inc. Exp. 56 68 50 42 13 15 48 479 (316) 183 266 100 340 EBT Incl. Unusual Items 124 137 266 463 697 721 906 1,390 181 998 1,510 455 673 Income Tax Expense 3 4 5 5 15 24 44 8 (23) 14 21 14 17 Net Income to Company 122 134 261 459 681 697 862 1,382 204 984 1,489 441 656 Minority Int. in Earnings (7) (6) (15) (30) (26) (24) (18) (15) (17) (21) (25) (32) (34) Net Income 115 127 247 428 655 674 843 1,367 187 963 1,463 409 622

Balance Sheet Fiscal Year, Ending March 31 Currency (US millions) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ASSETS Current Assets 875 1,425 1,795 2,695 3,131 3,913 4,202 5,117 4,228 5,085 5,954 6,858 9,515 Net Property, Plant & Equipment 1,443 1,696 1,899 2,073 2,784 3,684 4,677 5,819 7,918 9,189 10,849 13,394 15,529 Other Assets 62 88 139 224 543 948 1,459 1,730 771 849 919 735 767 Total Assets 2,381 3,208 3,833 4,992 6,457 8,545 10,337 12,666 12,918 15,123 17,722 20,987 25,811

LIABILITIES Current Liabilities 669 757 1,055 1,422 1,819 2,684 2,881 4,211 3,845 5,042 5,797 6,819 8,527 Long-Term Debt 27 437 456 936 1,105 1,255 2,069 1,994 2,066 1,542 1,593 2,090 3,180 Capital Leases 866 972 1,040 961 973 1,221 1,311 1,371 2,200 3,146 4,139 5,444 6,742 Pension & Other Post-Retire. Benefits 31 37 54 59 68 87 102 121 100 99 130 172 209 Other Liabilities 150 193 188 250 284 327 389 383 468 536 396 618 882 Total Liabilities 1,743 2,395 2,794 3,628 4,249 5,573 6,751 8,079 8,679 10,365 12,055 15,143 19,540

Common Stock 178 188 199 210 218 218 218 218 218 218 218 218 218 Retained Earnings 450 550 743 1,089 1,715 2,283 3,018 4,583 4,032 4,572 5,546 5,787 6,188 Comprehensive Inc. and Other (4) 59 68 34 235 436 315 (257) (55) (87) (154) (227) (209) Total Common Equity 624 798 1,010 1,333 2,168 2,937 3,551 4,544 4,196 4,703 5,610 5,778 6,197

Minority Interest 13 15 30 31 41 35 35 42 43 55 56 66 74 Total Equity 637 813 1,039 1,365 2,208 2,972 3,587 4,587 4,239 4,758 5,667 5,844 6,271 Total Liabilities And Equity 2,381 3,208 3,833 4,992 6,457 8,545 10,337 12,666 12,918 15,123 17,722 20,987 25,811

Source: Capital IQ.

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Exhibit 6 Airport statistics 2012 – major airports in the world

Number of Total Number Number of Number of Number of International Cargo Freight Airport Country take-offs of international international international Freight (Tonnes) (Tonnes) and landings passengers* passengers flights** seats** (Tonnes) Atlanta (ATL) USA 930,250 95,462,867 9,834,525 1,281 219,154 643,240 604,330 364,427 Chicago (ORD) USA 878,108 67,091,391 9,960,869 1,938 295,650 1,512,186 1,450,638 1,021,118 Dallas/Fort Worth (DFW) USA 650,124 58,591,842 6,108,921 1,072 165,618 602,245 573,718 297,574 Denver (DEN) USA 612,557 53,156,278 1,729,728 400 42,730 Los Angeles (LAX) USA 605,480 63,689,354 16,826,240 1,905 422,555 1,771,907 1,684,959 991,451 Beijing (PEK) China 557,169 81,930,275 15,454,284 2,174 539,138 1,783,158 1,783,158 699,433 Charlotte (CLT) USA 552,093 41,226,035 2,702,751 357 57,442 Las Vegas (LAS) USA 527,739 41,666,527 2,874,056 394 67,844 Houston (IAH) USA 510,242 40,022,736 8,767,747 1,592 205,884 437,998 406,845 217,456 Paris (CDG) France 497,763 61,611,934 56,201,242 7,858 882,770 1,949,560 1,949,560 1,909,226 London, GB (LHR) GB 475,180 70,038,804 65,257,750 8,488 1,733,713 1,556,203 1,464,596 1,462,433 Tokyo, JP (HND) JP 391,156 67,787,528 7,899,571 3,289 798,327 2,006,173 1,964,416 1,952,207 Frankfurt, DE (FRA) Germany 482,242 57,520,001 50,748,828 8,095 833,396 2,066,432 1,986,533 1,938,769 Hong Kong China 361,286 56,068,339 55,663,563 6,938 1,516,496 4,062,913 4,026,623 4,026,623 Memphis (MEM) USA 4,016,126 4,015,387 259,255 Shanghai (PVG) China 361,720 44,880,164 16,297,199 3,304 638,793 2,939,157 2,854,729 2,183,482 Incheon (ICN) S. Korea 256,521 39,154,375 38,350,976 4,877 1,021,567 2,456,724 2,397,186 2,396,972 Anchorage (ANC) USA 280 806 2,449,551 2,449,551 1,632,014 Dubai (DBX) UAE 344,251 57,684,550 57,120,270 6,751 1,699,433 2,267,365 2,267,365 2,267,365 Louisville (SDF) USA 2,168,365 1,901,735 0

**Source: Created by casewriter using data from CAPA, http://centreforaviation.com/profiles/airports/atlanta-hartsfield- jackson-international-airport-atl, accessed September 2013, IATA, World Air Transport Statistics, 57th ed., 2013 & Center for Aviation * Total passengers enplaned and deplaned, passengers in transit counted once.

Exhibit 7 Dubai and competitors’ place in the world

Middle East access to major world markets Major hubs of Emirates, Turkish, Qatar, Etihad

Source: William S. Swelbar, “The Future Economics of the Airline Industry,” Powerpoint Presentation, http://www.aci- na.org/sites/default/files/swelbar_stateofindustry_6-5-12.pdf, MIT International Center for Air Transportation, Cambridge, MA, accessed September 2013; Created by casewriter using data from, Free World Maps www.freeworldmaps.net, accessed September 2013.

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Exhibit 8 Ranking of the 20 countries with the highest quality of infrastructure in air traffic in 2012/2013

Country Index* Singapore 6.80 Hong Kong 6.70 United Arab 6.70 Emirates Finland 6.50 Panama 6.30 Spain 6.20 Switzerland 6.20 Germany 6.10 Qatar 6.10 France 6.10 Belgium 6.10 United States 6.00 South Africa 6.00 Canada 6.00 Norway 6.00 Barbados 6.00 Iceland 6.00 New Zealand 5.90 Malaysia 5.90 Czech Republic 5.80

Source: Statista : The Statistics Portal, ″Ranking of the 20 countries with the highest quality of infrastructure in air traffic in 2012/2031, ″ http://www.statista.com/statistics/270167/ranking-of-the-20-countries-with-the-highest-quality-of- infrastructure-in-air-traffic/, accessed September 2013. * Index values: 1 = underdeveloped, 7 = extensively developed by International standards.

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Exhibit 9 Major airlines serving emerging markets Nov 2013

Source: Internal presentation Emirates Airlines.

Exhibit 10 Map of traffic flows between regions - Global passenger traffic flows in 2010

Source: UBM Aviation via Emirates publication ‘Aviation at the Crossroads’, “Global passenger traffic flows in 2010” (PDF file), downloaded from Emirates Airlines website, http://www.emirates.com/zm/english/images/Aviation_at_the_Crossroads_Aug11%5B1%5D_tcm539-713620.pdf, accessed September 2013.

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Exhibit 11 Growth of civil air traffic in China 1990-2012

Number of Number Number of civil aviation Number of routes launched air of civil routes by the Beijing International passengers aircraft Airport (in millions) Domestic* International Domestic International* 1990 503 1995 852 694 85 2000 982 1,032 133 2002 86 2003 88 2004 121 2005 138 1,386 1,024 233 2006 160 2,181 2007 186 2,405 2008 193 3,191 2009 231 1,329 263 112 101 2010 268 1,578 302 118 96 2011 293 1,847 443 116 106 2012 319 126 110 Source: Civil Aviation Administration of China.

* includes Hong Kong and Macau ** includes Hong Kong, Macau, Taiwan

Exhibit 12 Comparison of average fleet age for select competitors

Source: Created by casewriter using data from Airfleets.net, http://www.airfleets.net, accessed September 2013.

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Exhibit 13 A380 departing flights per city as of May 2013

Source: CAPA: Center for Aviation, “The A380 becomes mainstream, with 103 now in service: which airlines, destinations, stage lengths?,” http://centreforaviation.com/analysis/the-a380-becomes-mainstream-with-103-now-in-service- which-airlines-destinations-stage-lengths-110352, accessed May 2013.

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Exhibit 14 Sample revenue breakdown by fare class for Emirates Dubai-New York flight

Source: “From The New York Times, November 20, 2011 © 2011. The New York Times. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited."

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Exhibit 15 Examples of premium amenities on new A380s

First class suite on A380 In-flight shower spa

Source: Justfares Blog: “Emirates Business To First Class Upgrades Available Now,” http://www.justfares.com/blog/?p=946; http://3.bp.blogspot.com/-UYAXow09XE4/TZ1XpZwEokI/AAAA AAAADWs/Za_E8v9NzR8/s1600/Emirates-A380-Shower-empty-600x400.jpg

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Exhibit 16 Outline of cost structure of peer airlines

Source: Air France, IAG, Lufthansa, Emirates 2011 financial statements.

Exhibit 17 Regional airlines

Qatar Turkish Emirates Etihad Airways Airlines Principal hub Dubai Doha Abu Dhabi Istanbul Country UAE Qatar UAE Turkey Population 8 million 2 million 8 million 75 million # Destinations 120 125 86 217 (181 intl.) # Craft 190 127 72 202 # New craft orders 230 230 100 187 Founded 1985 1993 2003 1933 Avg. fleet age 6.1 5.1 4.9 6.6 % of gov't ownership 100% 100% 100% 49% Source: Air Transport World’s ‘World Airline Report’, July 2012; Turkish Airlines 2012 press release.

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Exhibit 18 List of alliance members and market share

oneworld SkyTeam Star airberlin Aeroflot Adria Airways American Airlines Aerolineas Argentinas Aegean Airlines British Airways Aeromexico Air Canada Cathay Pacific Air Europa Air China Finnair Air France Air New Zealand Iberia Alitalia All Nippon Airways Japan Airlines China Airlines Asiana Airlines LAN Airlines China Eastern Airlines Austrian Airlines Malaysia Airlines China Southern Airlines AVIANCA Qantas Airways Czech Airlines Brussels Airlines Qatar Airways Delta Air Lines COPA Royal Jordanian Kenya Airways Croatia Airlines S7 Airlines KLM EgyptAir Invited to join Korean Air Ethiopian Airlines SriLankan Airlines Middle East Airlines EVA Air Total fleet: 2,488 Saudia LOT - Polish Airlines TAROM Lufthansa Vietnam Airlines SAS Xiamen Airlines Shenzhen Airlines Invited to join Singapore Airlines Garuda Indonesia South African Airways Total fleet: 2,853 SWISS TAM Airlines TAP Portugal Thai Airways Turkish Airlines United Airlines US Airways Total fleet: 4,701 Source: Alliance websites.

Source: International Air Transport Association - World Air Transport Statistics 57th edition.

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Endnotes

1 CAPA, “United ends 2012 as world’s biggest airline, Emirates third. Turkish and Lion Air the biggest movers,” http://centreforaviation.com/analysis/united-ends-2012-as-worlds-biggest-airline-emirates-third- turkish-and-lion-air-the-biggest-movers-93047, accessed September 2013. 2 Bloomberg Sustainability, “Emirates Chief Says 30 More A3802 Needed for New Routes,” http://www.bloomberg.com/news/2013-01-07/emirates-may-need-30-more-a380-superjumbos-for-network- expansion.html, accessed September 2013. 3 Emirates, “Emirates A380 Flight Schedule,” http://www.emirates.com/english/flying/our_fleet/emirates_a380/emirates_schedule/emirates_flight_sched ule.aspx, accessed September 2013.

4 Emirates, “A double celevbration as Emirates welcomes its 40th and 41st A380s to the fleet,” http://www.emirates.com/english/flying/our_fleet/emirates_a380/news_and_events/40th-and-41st-a380s-to- the-fleet.aspx, accessed September 2013.

5 All quotes are list prices and do not reflect discounts included in deal; source is case author interview. 6 Case author interview. 7 Case author interview.

8 Emirates, “Emirates Airline Arrives in Afghanistan,” http://www.emirates.com/english/about/news/news_detail.aspx?article=1470103&offset=0, accessed September 2013.

9 Emirates ICE interview with Chairman Al Maktoum, Emirates 2012 Annual Report, case author interview with Tim Clark, http://www.emirates.com/english/about/news/news_detail.aspx?article=1214741

10 Bangkok Post, “Global airline industry: Unprofitable,” http://www.bangkokpost.com/learning/learning- from-news/279650/global-airline-industry-unprofitable, accessed September 2013.

11 Aviation Economics, “News & Analysis,” http://www.aviationeconomics.com/NewsItem.aspx?title=Market-Update:-Middle-East-Airlines, accessed September 2013. 12 Dubai Airports, “Strategic Plan 2020”(PDF file), downloaded from Dubai Airports website, http://www.dubaiairport.com/en/media-centre/Documents/Dubai%20Airports%20- %20Strategic%20Plan%202020.pdf, accessed September 2013. 13 Case author interview.

14 Financial Times, “Emirates Boosted by Passenger Numbers,“ http://www.ft.com/intl/cms/s/0/850c77ce-2c9a-11e2-a95d-00144feabdc0.html#axzz2FFevXW, accessed September 2013. 15 Anadeus, “New Outlook on Worldwide Air Passenger Demand,” http://www.amadeus.com/blog/08/05/new-outlook-on-worldwide-passenger-demand/, accessed September 2013.

16 Case author interview.

17 Case author interview with Andrew Parker, former Senior Vice President of Public, International, Industry and Environment Affairs at Emirates.

18 Case author interview with Tim Clark.

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19 Air Canada, “Industry Facts: The Impact of Emirates on the Industry,” http://www.aircanada.com/en/about/media/facts/industry/emirates.html, accessed September 2013.

20 Emirates 2012-2013 financial statements. 21 McGinley, Shane, Arabian Business, “Emirates targets 20-hour ultra long-haul flights,” http://www.arabianbusiness.com/emirates-targets-20-hour-ultra-long-haul-flights-505051.html, accessed September 2013.

22 Emirates Airlines, “Emirates Fleet,” http://www.emirates.com/english/environment/efficiency_and_technology/emirates_fleet.aspx, accessed September 2013.

23 Prices are for 2012 and are quoted in USD; sources are Boeing, “Jet prices for commercial airplanes,“ http://www.boeing.com/boeing/commercial/prices/,” accessed September 2013 and Airbus, “New Airbus aircraft list process for 2012,” http://www.airbus.com/presscentre/pressreleases/press-release- detail/detail/new-airbus-aircraft-list-prices-for-2012/, accessed September 2013. 24 Emirates Airline, “Emirates A380,” http://www.emirates.com/english/flying/our_fleet/emirates_a380/news_and_events/first_airbus_ a380_ enters_emirates_fleet.aspx, accessed September 2013.

25 Emirates 2012-2013 financial statements 26 Centre for Aviation, “The A380 becomes mainstream, with 103 now in service: which airlines, destinations, stage lengths?,” http://centreforaviation.com/analysis/the-a380-becomes-mainstream-with-103-now-in-service- which-airlines-destinations-stage-lengths-110352, accessed September 2013.

27 Airspace, First quarter, 2008,pp 22-23 28 Greenair, “"New iFlex airspace routes over Africa and the South Atlantic stand to reduce Emirates' emissions by over 13,000 tonnes," http://www.greenaironline.com/news.php?viewStory=1486, accessed September 2013. 29 Emirates 2012-2013 financial statements.

30 Statitsa, “Leading airports in China in 2012, by cargo throughput (in 1,000 tons)," http://www.statista.com/statistics/258235/leading-airports-in-china-by-cargo-thoughput, accessed September 2013. 31 Statista, “"Cargo airports worldwide by freight volume from 2008 to 2012 (in million tons),” http://www.statista.com/statistics/270201/freight-volume-of-cargo-airports-worldwide, accessed September 2013.

32 China Daily, “Emirates launches direct Dubai-Copenhagen route,” http://www.chinadaily.com.cn/world/2011-08/02/content_13033138.htm, accessed September 2013.

33 For a detailed definition of the different types of freedoms of the air, see International Civil Aviation, “Freedoms of the Air,” http://legacy.icao.int/icao/en/trivia/freedoms_air.htm, accessed September 2013. 34 Case author interview with Terry Daly

35 Case author interview with Boutros Boutros 36 Brand Directory, “Top 20 Airlines Brand 2013,” http://brandirectory.com/league_tables/table/top-20- airline-brands-2013, accessed September 2013.

37 Dubai World, “Biography of top managers,” http://www.dubaiworld.ae/hh-sheikh-ahmed/, accessed September 2013.

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38 Information provided by Emirates 39 Emirate Airlines, “Emirates Group Careers: Cabin Crew,” https://www.emiratesgroupcareers.com/english/Careers_Overview/cabin_crew/default.aspx, accessed September 2013.

40 Ibid 41 Casewriter estimates based on standard 90 hours/month flying time; peer group includes American, United, Delta, British Air, Singapore Air. Peer salaries sourced from Glassdoor.com, Emirates salary data sourced from Emirates Career website

42 Case author interview.

43 Case author interview.

44 Flight Global, “Interview to Tim Clark, Emirates CEO,” http://www.flightglobal.com/page/interviews/tim-clark/the-interview/, accessed September 2013.

45 Emirates Airlines, “Code sharing agreements,” http://www.emirates.com/english/help/faqs/FAQDetails.aspx?faqCategory=193393, accessed September 2013. 46 Airline Network News and Analysis (ANNA), “The big leak: Which airports are on Turkish Airlines’ route network shopping list?,” http://www.anna.aero/2012/12/12/the-big-leak-which-airports-are-on-turkish- airlines-route-network-shopping-list/, accessed September 2013.

47 “Turskish Airlines: Being biggest by serving the village,” Airline Leader, Issue 6 (May 2011), http://www.airlineleader.com/airline-of-the-month/turkish-airlines, accessed September 2013. 48 Turkish Airlines, “Turkish Airlines recorded 1.133 million TL net profit in 2012,” http://www.turkishairlines.com/en-int/corporate/press-room/press-releases/20468/turkish-airlines- recorded-1133-million-tl-net-profit-in-2012, accessed September 2013.

49 Aviation Economics, “Market Update: The Big Three Gulf Airlines,” http://www.aviationeconomics.com/NewsItem.aspx?title=Market-Update:-Middle-East-Airlines, accessed September 2013.

50 Ibid.

This document is authorized for use only by Sakina Meite in MBA 6208 Fall 2020 taught by SCOTT DAVIS, University of Houston - Downtown from Oct 2020 to Dec 2020.