The perfect model to exploit future demand

The business of international air transport is, to mix metaphors, at a crossroad. So it is appropriate that Emirates Airlines is turning that to its advantage. Emirates has perfected a model that exploits the UAE's traditional location as a trading port, updated to the 21st century. Its financial results show just how well Emirates' management understand the fundamental changes that are underway in the industry. Their prescience was threefold: it encompassed the regulatory environment, the technology and the need for an integrated approach. International aviation continues to be governed by the Chicago Convention of 1944. That limits the routes that airlines can fly to those agreed bilaterally between national governments. When the axis of world trade was across the Atlantic, British and American carriers were ideally placed to provide services to travellers. That axis is now shifting. Asia, the Middle East and increasingly Africa have grown to be at least as important. Passengers want to travel to and between these places. Being based in Europe, and restricted to operating from Europe, is a burden. Global market change coincided with a sea-change in aircraft technology. Emirates' CEO Tim Clark was personally responsible for pushing both Airbus and Boeing very hard as they designed new generation aircraft. Clark wanted to be sure that they had the capacity to deliver what Emirates needed. Using these aircraft Emirates built a new business model — that of the long-haul hub-and-spoke airline. Traditionally, airlines used small aircraft to bring passengers into their main hub (for example, Heathrow, Frankfurt or Sydney) and then transferred passengers from these various short-haul destinations onto large, four engine aircraft for long-haul sectors. The new generation two engine aircraft, with longer range, lower per-passenger operating costs and improved environmental performance (both lower emissions and reduced noise) change that. The mystery of the hub-and-spoke model is that by putting together the travel requirements of a large number of passengers from a variety of cities, enough will want to travel between any two of those cities that it is economically feasible to provide services to all of them. From the passenger perspective it is easy to understand the attraction. In the new paradigm passengers fly directly to Dubai (in the case of Emirates) and then transfer onto a second long-haul direct flight. Melbourne-Geneva went from being a three stop journey of some 28 hours to a one stop journey of 22 hours. Passengers are prepared to pay for that convenience. The third element of Emirates' success was to understand the need for an integrated aviation policy — not, as some US airline executives recently demanded an airline policy, but an aviation policy. Having an airport that can support this model, having engineers and maintenance facilities is as important as having aircraft. A look at the results of this week show how successful this model is proving to be for Emirates. Their fleet plan is to build up further B777 aircraft for the long-haul ‘spoke' sectors and to use the super-large A380 on those ‘trunk' routes that can sustain large passenger volumes. Fuel prices continue to be high and volatile. That is a cost element over which airlines have little control. Just last week America's Delta Airlines bought its own refinery in an attempt to control its fuel costs. Infrastructure limitations around the world, including the airspace above the UAE, need to be addressed. Competitors continue to press their governments to use the Chicago Convention system to limit where and how frequently Emirates can fly. The new technology aircraft continue to have teething problems, as we saw with the cracks to the A380 wings. These all need attention. Emirates is active in all of the relevant forums to push for change. Change happens slowly in air transport, but Emirates has shown the world how to combine new generation technology with new generation markets to create a new generation airline.