Sat down to read through Emirates Airlines’ earnings press release tonight and a few things jumped out at me as a cause for concern.
Emirates reported a reduction in net income of 78% for the 6 months ending September 30, 2011 vs. the same period 1 year ago. They were still profitable, clearing $255USD million but have acknowledged some headwinds that they will be facing. This comes at a time when they were positioning themselves to become a global power in the airline industry with an aggressive route expansion strategy.
Commentary from Emirates indicated that fuel was the overriding negative impact as fuel expense surged 1 billion USD. According to their reporting, their fuel expense grew 50% over a year ago in spite of their hedging strategies. As their expansion plans grow and their routes expand to further corners of the globe, I suspect this pressure will continue. If substantial global inflation ever rears its ugly head as has been rumored for a few years, this will only add to the pressure on their profitability. We saw this happen 3 years ago when oil prices skyrocketed due to weakness in the US dollar and the fear of inflation, which usually wreaks havoc with the prices of commodities.
Earlier this year Emirates announced plans to hire upwards of 8000 more associates, primarily for cabin services to help fill the 90 Airbus A380’s they have ordered, of which 17 are in service. In addition to the A380’s, they also have firm orders for 70 of Airbus’ new A350 and also have 41 777-300ER’s on order from Boeing. As far as the A380 orders are concerned, the next largest open order for the aircraft is for 20, by Australia’s Qantas.
Emirates brought on 8.2% in additional capacity on it routes, but only increased passenger traffic by 5.7%. This ratio is not going to resolve their challenges as additional larger capacity aircraft come on line for them over the next few years.
During the same time frame, most other airlines reported lower net incomes, but not nearly as severe as Emirates. Additionally, the IATA (Int’l Air Transportation Association) is forecasting a 40% reduction in earnings for the airline industry for 2012. Airlines are already experiencing soft advanced ticket sales, which goes to support what the IATA sees for next year.
Strictly as my own opinion but did Emirates go a bit too far in their plans for expansion? I guess only time will tell, but with the current reality of the industry and the pressure to maintain profitability, one would think that airlines will be forced to further reduce capacity to control fixed expenses or raise fares, further risking passenger traffic.
Although Emirate’s recent financial performance is a cause for concern for the airline, I think there may be bigger issues that will affect Airbus and Boeing. If profitability continues to be at risk, no doubt airlines will be forced into having conversations with the Aircraft Manufacturers about deferring or canceling orders as they did in the aftermath of September 11, 2001. Airbus especially has the most at risk since Emirates has the most open orders for their long haul aircraft and has become one of its largest clients. The 73 open orders for the A380 alone, represents $17 billion (based on list price) in future revenues expected at Airbus. Add the A350’s and that number goes up substantially.
What do you think? Are my Macro-Economics flawed??? Feel free to post or email me your thoughts!