By Mark Pilling in London
Maurice Flanagan, vice-chairman and group president of Emirates, is in a fighting mood, as he defends the carrier from competitor criticism
Flanagan has come out fighting against accusations that the carrier he helped to found in Dubai in the mid-1980s operates on anything other than a commercial basis against its rivals.
He took “immediate offence” at recent remarks made by Qantas chairman Margaret Jackson that Emirates’ fast growth reflected the co-ordinated strategy of its state owner. According to Jackson: “This is a fact that all commercially run airlines accept. It is time that Emirates acknowledges that it enjoys significant advantages that help set it apart from the field.”
He believes the Qantas attack was prompted partly by the plans Emirates had announced to step up its services to Australia. “I weighed in and we had quite a battle going on,” says Flanagan. “The effect was that it polarised opinion in Australia,” he adds, with plenty of voices raised in favour of Emirates as well as those against it. “We were surprised about the political support we got in Australia,” he notes, with some there asking why Qantas was taking such a position when its profits were quite healthy.
Flanagan believes Qantas may be concerned by the ability of Emirates to feed traffic from Europe over Dubai to Australia. “But only 15% of our London traffic goes to Australia, and we can give them feed to all these points,” he says. Flanagan reveals that Emirates and Qantas did come close to a codeshare deal a couple of years ago, but it never came to fruition.
On a personal level, Flanagan gets along well with Qantas chief executive Geoff Dixon. “In fact I invited Geoff to Dubai and showed him round,” he says. The visit included a helicopter trip over Dubai, offering its passenger the best view possible of the scale of activity taking place in the emirate. “You can’t understand the Emirates dynamic without understanding Dubai,” says Flanagan.
Over the past year Emirates has also received criticism from Air France chairman Jean-Cyril Spinetta, the Association of European Airlines and at the IATA annual meeting in Japan in June the carrier’s president Tim Clark was grilled by other chief executives about the carrier’s government support. Flanagan says Emirates has nothing to hide. “These guys can look at our books just as we can look at their books,” says Flanagan. “All we’ve had was $10 million to start up the carrier,” he says, while shortly afterwards the state put in another $80 million. Since those early days, however, Flanagan says the carrier has regularly been repaying its backers. “We have paid back $100 million in dividends each year for the past several years,” he says.
Emirates has been accused of receiving state support, such as subsidies on the price of fuel, and the carrier pays no state taxes. “There is no subsidy, none whatsoever,” says Flanagan, “and on the issue of taxes, nobody pays corporate tax in the United Arab Emirates (UAE), things are just not arranged that way.”
But Emirates does have to carry other costs. For instance, it employs a lot of expatriate workers. “These have a very high social cost. Pilots, cabin crew, engineers and managers above a certain pay grade all receive free, furnished accommodation, either in apartments or villas. We own about 1,500 villas and 3,000 apartments and pay municipal tax on those. We bear the type of costs other airlines don’t even have to think about.”
“The only advantage we have is that we established an airline on a greenfield site, we are not lumbered by baggage,” says Flanagan. So what is behind these attacks? Quite simply “jealousy”, he believes.
Another huge aircraft buy
For many, the aggressive expansion of Emirates does represent a significant threat. And the carrier shows no signs of slowing down. Flanagan was speaking just days after one of the carrier’s largest ever orders, this time for 42 Boeing 777s worth $9.7 billion.
“We don’t pay that price of course,” he notes, adding: “It’s risky, of course it’s risky, but after losing a bit of money in 1986/7 we’ve been profitable every year since.” If the carrier can retain the high level of profitability it has generated, and Flanagan naturally believes that it can, he is confident such an order will make sense for the future of Emirates.
Emirates will finance the aircraft in a variety of ways, with some coming on operating lease from ILFC, some financed by simple bank loans and some via tax leveraged leases. “It could also come to the point where we buy aircraft with cash. We have $2.2 billion in cash sitting on a short-term basis which we can access very quickly.”
Some of the new Boeings will help the carrier expand to the USA, where it currently only serves New York. Dubai has an open skies air services pact with the USA. “That’s where we’ll be headed, it’s why we’ve got all these long-range aircraft on order.”
In November, Emirates added another daily Airbus A340-500 service to its Dubai-JFK route, preferring to concentrate on the New York premium market rather than tackle Los Angeles or San Francisco, says Flanagan. Non-stops to these cities will follow, while Houston is another attractive market. In Latin America, Emirates has talked to the Argentinian and Brazilian authorities about starting services to these countries, and is studying Chile and Peru as well.
The A380 can also be used for the carrier’s long-range routes, such as New York, Chicago, Toronto or Melbourne, says Flanagan. While this aircraft will enable the carrier to continue expanding Dubai as an east-west hub, it is not neglecting its north-south flows, for example between Africa and Russia. Many of its newly started African routes have been profitable within a week of services beginning, he says, such as those to the Sudanese capital Khartoum and Johannesburg in South Africa.
While there is no pressure from his employers to retire, Flanagan, who is 77, explains that there is a succession plan in place. The carrier has a programme to bring along UAE nationals, and eventually a local will run the show. But there are no targets or timescales. In the Arab world, age is not seen as relevant to a person’s ability to run a business, and Flanagan himself shows no sign of slowing down, nor is there any dimming in his enthusiasm for the carrier or the business.
In fact, Flanagan’s current obsession is to ensure that Emirates continues to drive down its unit costs. “When it comes to economies of scale you can go backwards once you get to a certain scale and your unit cost can start to increase. After a certain point in growth, administrative costs and complexity increases and senior managers lose touch with middle management.”
Flanagan is determined to make sure this doesn’t happen. “I now have a strong personal contribution to managing our cost base, with direct control over staff hiring. I make it difficult to take on new staff.” At present the efforts are paying off, as the carrier’s unit cost is falling. In a carrier where most other measures point upwards, that is cold comfort for its competitors.