Emirates announced today at the Dubai airshow an order for 50 Boeing 777’s valued at approximately $18USD Billion dollars with an option for 20 more that brings the value of the deal’s potential to $26USD Billion.
I dont quite understand their logic, but maybe thats why I don’t run an airline. Emirates already has large open orders for 41 777’s , 73 A380’s and 70 of the new A350. I know their plan for global expansion is an agressive one, but based on current undelivered aircraft and today’s order, we’re looking at a total of 234 brand new aircraft that they’ll be adding to the fleet over next few years.
These orders also represent all long haul aircraft. Its not as if they are ordering dozens of regional jets to help set up feeder routes. I wonder if there are even enough cities on the map for these planes to visit. Last week, I took a closer look at Emirates when they reported their corporate earnings. Those numbers were not impressive, and indicated that there were substantial headwinds due to decreasing load factors and increasing fuel expense. You can read that post here.
The IATA has issued their forecasts for the airline industry and they see a 40% reduction in airline revenues for 2012 as well as observing a substantial softening in advanced ticket sales. Granted that Emirates is thinking long term, but these orders for the most part are firm commitments and they’ll need even better revenue than they’re experiencing now to cover the invoices for the airplanes. Fuel pricing pressure is not going away and in my opinion will only get worse as inflation continues to push commodity prices. If and when Europe gets its financial house in order and Euro regains its strength against the dollar, we’ll see a bit of inflation acceleration and that will only add to the pressure on the bottom line for any company.
According to Emirates, they say they have enough capital and financing to get through 2012 without issuing any new debt and have indicated that if necessary they could go back to the market when the time was right. But isn’t this the behavior that has put us in the global economic mess that we have now? How many companies no longer exist because of irresponsible leverage? Borrowing more money against uncertain future revenue? I would have hoped that lessons had been learned in the corporate world that borrowing more just to buy stuff is not a good idea especially when you can’t get a profitable return on the things you’re financing.
I do not intend to sound anti-Emirates. I’m not. I love the airline. I hope they succeed and accomplish their goals as they continue to grow and mature into a global presence. But my concerns still exist. Earlier this year announced the initiative of hiring 8000 people. What happens if the numbers don’t work for Emirates? How will they break that news to their new hires that their employment may no longer be secure as a result of the hubris of their leadership?
I’m thinking why the rush Emirates? Do they really need to have firm orders for 234 new aircraft? I hope they are right, not only for their sake, but for all the passengers that enjoy their product.