If you were looking for clues on how to save the troubled airline industry, you might be tempted to start by focusing on Dubai-based Emirates — one carrier that has continued to increase traffic and revenues at more than 20% annually even as most of its rivals struggle with rising fuel and personnel costs and mounting losses.
But industry legend Maurice Flanagan, who launched the global air giant in 1985 with just two leased planes and remains at the helm as Emirates’ executive vice chairman, conceded that it would be hard for any American airline to duplicate the success of the Dubai carrier because of the U.S. industry’s entrenched costs.
During his recent talk as part of the Wharton Leadership Lecture series, Flanagan said the problem of money-losing U.S. carriers reminded him of a joke about a man who is asked “‘how to get from here to there,’ and he says, ‘Well, I wouldn’t start from here.'”
In the case of the U.S. carriers, “here” includes what Flanagan considers high labor costs for pilots and other employees. He cited the situation at employee-owned United Airlines where pilots received 40% raises in a four-year contract in 2000, triggering a rise in labor costs across the industry. “That is simply not sustainable,” said Flanagan, who noted that the high salaries in American commercial aviation also translate into larger pension costs — two problems that Emirates does not share. The government-owned Dubai carrier has lower personnel costs than much of the industry, in part by drawing many workers from the nearby low-wage nations of Pakistan and India.
Emirates has other advantages that have placed it on a par with Singapore Airlines — the two are the world’s fastest-growing and most profitable jetliners — including its remarkable Dubai location within an eight-hour flight of more than half the world’s population, a lack of income taxes and an airport that is open around the clock. But the one thing that Flanagan stressed repeatedly to his audience is that Emirates has never needed much of a helping hand from Dubai’s oil-rich emirs.
The rulers of Dubai gave Flanagan just $10 million to start the Emirates airline 22 years ago, said Flanagan, who noted that Sheikh Mohammed bin Rashid Al Maktoum, who is now the crown prince, told him: “Don’t come back for any more and don’t expect protection against competition or subsidies of any kind.” In fact, the government has given the airline a total of just $18 million, including the start-up money, while Emirates now returns a dividend to the government of more than $100 million a year. In contrast, Flanagan noted that Air France and British Airways have received huge bailout packages or debt relief.
Soccer’s Loss, Aviation’s Gain
Like the centrally located hub of Dubai itself, Flanagan used the occasion of his Wharton leadership talk as a jumping-off point for his views on a wide range of topics, including his own ideas about being a leader (the autocratic style is the worst, he insisted), his long career in aviation, and his views on the growth and long-term success of Emirates.
Flanagan, a native of the U.K. and a graduate of Liverpool University, still retains his British accent, despite spending most of the last three decades in Dubai. During his talk, he occasionally leaned forward to hear students’ questions, apologizing for hearing problems he blamed on his work on the runways for the former British Overseas Airways Corp., or BOAC, back in the mid-1950s. “Anybody with my background in the airline business who is not deaf is a fraud,” said Flanagan, who also served for two years in the Royal Air Force, which is where he began to learn the aviation industry. He had started military service in 1951 with lingering dreams of a career as an international soccer player, until he stepped in a hole at an air force base on Prince Edward Island and badly damaged his knee.
Soccer’s loss was aviation’s gain. Upon beginning his civilian work with BOAC, Flanagan learned various parts of the industry, including flight planning, “in the days when using a computer meant using a circle and a slide rule.” He served around the globe for Britain’s main overseas carrier, rising to the upper management ranks before he was tapped in 1978 by the rulers of Dubai, a part of the United Arab Emirates (UAE), to manage DNATA, the sole ground handling agent at Dubai International Airport.
Upon arriving in Dubai, Flanagan was able to forge a remarkable partnership with the ruling family, including both Sheikh Mohammed, the current ruler of Dubai and prime minister of the UAE, and the ruler’s uncle, Sheikh Ahmed bin Saeed Al Maktoum, chairman of the Emirates airline.
Flanagan described the American-educated Sheikh Ahmed as charismatic and said it has been easy to teach him the basics of the airline industry. “In a couple of years, our tutorial evolved into the sort of discussion you would expect between a chairman and a chief executive of a business,” he said, adding that over the years, Emirates has strived to increase the number of UAE citizens who are executives and pilots (currently at 11%).
Since the start-up of Emirates in 1985 — with one Airbus A300 and a Boeing 737-300 leased from Pakistan International Airways and flying to Karachi and Mumbai — the airline has been marked by an aggressive growth strategy. Flanagan was asked by a member of the Wharton audience to describe his attitude toward risk. “It’s there; it’s just a fact; you just live with it,” Flanagan said. “Either you accept it or you don’t. It’s easy to walk away from risk, and you don’t actually have to face it. Success is based upon overcoming the inherent risk you can’t manage your way out of.”
He did note that Emirates’ decision-making abilities are greatly helped by the lean management structure of the state-owned carrier, which allows for bold moves to be discussed and quickly executed by a small inner circle that includes Flanagan, Sheikh Ahmed, Sheikh Muhammad in some cases, and a handful of others. “We have the chemistry of a family business [which] works very well for us.”
Skipping the Galapagos
Indeed, Emirates has been in the news lately for what many see as a bold and perhaps risky venture: It placed the first and also the largest order of any airline, by far, for the new Airbus 380, which — when delivered next year — will be able to handle up to 644 passengers. As the launch customer for the A380, Emirates so far has ordered 55 of the new jumbo jetliners at a cost of approximately $250 million each.
Flanagan said that while on the one hand, it may look like a gamble, the super-sized Airbus jets are also the best strategy for dealing with the shortage of available runway slots, especially in key markets in Europe. “The risk is not so great. We took [the jetliner] because it had more seats, and you need more seats because slots are constrained right now. You see that happening at all the airports anybody wants to go to — in London [including] Gatwick, Bangkok, Paris, Sydney and Melbourne. All these places are at capacity. And an aircraft with 50 seats takes just as much of a runway slot as an aircraft with 600 seats.”
However, he also noted that one large market is still fairly open in terms of awarding coveted runway slots: The United States. As a result, Emirates is hoping to add one more flight into New York’s crowded Kennedy Airport and is also looking to expand into Houston and most likely San Francisco. According to Flanagan, there are very few major markets that Emirates can’t reach within one eight-hour leg. “The only place that’s a problem is the Galapagos Islands, and we’re not planning on going there any time soon.”
Dubai’s central location is just one of the many natural advantages that Emirates has successfully exploited. Others are the lack of corporate taxes and the ability to keep labor and other fixed costs much lower than its established rivals. In addition, because of the global routes that it flies, Emirates has little to fear from a low-cost carrier, Flanagan added, although he noted that the Dubai carrier had looked into starting its own less-expensive brand. He also predicted that most low-cost carriers are about to hit a very rough patch: Fuel is typically the largest component of their budget, and oil prices are at an all-time high. “There’s no such thing as low-cost fuels,” Flanagan said.
In fact, Emirates has succeeded by taking the exact opposite tack — by offering top-notch cabin service and the latest in technology aimed at serving the customer on its long-distance flights. For example, the carrier was offering personal video screens for its passengers, even in economy class, back in the 1990s — long before that feature began appearing on other airlines.
The current information and entertainment system on most Emirates flights includes more than 130 on-demand movies and 60 TV channels as well as 350 audio channels. Seats are also equipped with a telephone handset and a controller for video games. Flanagan said that some of the new Airbus A380 jetliners will also offer first-class customers separate cabins with sliding doors, similar to a compartment in a first-class rail car.
The emphasis on providing customers with such unique service may be part of the reason that Flanagan says he hates the word “marketing.” Indeed, he essentially banned the use of the term at Emirates. One time when he found that 11 of the firm’s 20,000 employees had the word “marketing” in their job title, he moved them to other positions. “It means nothing,” Flanagan said. The word is so broad, he added, that marketing officials at different airlines have completely different job functions. “You have the worst middle managers down there doing their own thing — middle managers creating worthless brands. We just have one brand — and we associate it with excellence.”