Wednesday, November 11, 2009

Wonder why Emirates (Dubai) soars and BA (Britain) falters

I first heard about Emirates Airline in 2000 when I was to fly to Dubai for an interview. Never heard about this airline before.
Why Emirates soars and BA falters

One of the business world's oddities is that two companies doing largely the same thing can experience massively differing fortunes. Take Apple and Microsoft, the most influential companies in the technology sector over the past 25 years. The stock of one is soaring high while the other is struggling – and yet both do almost identical things: they both build operating systems, software and hardware.

Despite the similarity in activities, Microsoft's net profits in the last quarter were 18 per cent down on a year ago while Apple was up 46 per cent. Go back 10 years and the performance of these twins was reversed with Microsoft sitting on top of the world and beloved by investors while Apple was pining its hopes on an embryonic device called the ipod.

This capacity for divergence in the same market was driven home last week when both Emirates airline and British Airways published their results for the six months to the end of September. Both carriers saw revenues decline by 13 per cent because both have been forced to cut ticket prices to combat the wider economic downturn. But that is where the similarity ends.

Emirates increased profits by 165 per cent to Dh752 million while BA slumped to a £292m (Dh1.79 billion) loss from a profit of £52m in the same period last year.

Emirates increased passenger numbers by 18 per cent to 13 million while BA's numbers fell 2.6 per cent to 17.7 million. Emirates directly contributed Dh10bn to Dubai's economy while BA once again cancelled its dividend.

Both these carriers operate in the same market and fly to many of the same destinations and yet BA's results are painful. Indeed, BA's performance looks increasingly desperate when you consider that its revenue is weighted towards the northern summer while Emirates can look forward to a spike in this half as its leisure passengers head south towards the sun.

There are a number of things that could explain the wildly differing fortunes of these two airlines. The first, which is often raised by European airlines in reference to the Gulf's carriers, is the argument that the playing field is not level. Emirates is a privately-held company and therefore its disclosure is rather limited.

This, European airlines argue, allows Emirates to hide state aid in the form of cheap airport fees and subsidised fuel being the most commonly cited examples. There is nothing that annoys Emirates executives more than hearing this old line used to denigrate their achievements and they will swear until blue in the face that it is not true. Indeed, competition at Dubai is greater than at many European airports because the emirate has an open skies policy.

In the case of Apple and Microsoft, one of the clear reasons for their differing fortunes has been that one is creating products that capture consumer imagination while the other is still reeling from the horror show that was Windows Vista. If we look at BA and Emirates, the product differences are not so great. True, Emirates' A380 is superior to anything BA can serve up at the moment but, to be fair, BA remains a benchmark in terms of quality. It would be a different matter if we were comparing Emirates with Delta or Alitalia but the gap between BA and Emirates is far smaller.

So, if we eliminate subsidies and product as the reasons for the divergent performance of these airlines we are only really left with efficiency. Here, I suspect, BA loses out. It is a legacy carrier that has inherited ways of operating that were developed over decades, many of which you would not willingly choose if you were starting from scratch. BA is attempting to tackle this issue by stripping out costs and cutting jobs as fast as it can. But its workforce is heavily unionised and a showdown is brewing. Its 14,000 cabin crew are up for a fight over plans to change their working conditions and cut the various allowances that mean their average salary is twice what crew on Virgin Atlantic get paid.

For BA, I suspect things will get worse before they get better. However, if the airline can tackle the serious challenges it faces, a recovery is certainly possible. For Emirates the challenge is to learn lessons from companies like Microsoft so as not to blunder in the same way and, instead, maintain an upward trajectory.

- The writer is Business correspondent with The Times of London

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