Editorial: Shifting Sands

The airline industry received a pleasant surprise last month when IATA projected that carriers would return to profit on a global basis in 2010 after a brutal two years (see our World Airline Report beginning on p. 24). Unfortunately, even as this good news was being digested, the German government announced that it intends to impose a stiff new “green” airport departure tax to help manage its budgetary woes. The decision ignores the lesson learned in the Netherlands and elsewhere—that travelers will go out of their way to avoid paying extra for an airline ticket.

It also is an excellent example of a mindset shared by too many politicians around the world who take the shortsighted view that because such actions carry little personal risk—to the best of our knowledge, no elected official was ever cast out of office for raising taxes on passengers—they are a safe and painless way to balance budgets.

Some states take an opposite view: They see airlines not as cash cows to be milked but as powerful draft horses of commerce, to be kept well-fed and well-groomed. One such state is Dubai and the success of this model can be seen in the rise to preeminence over the past decade of its chosen instrument, Emirates Airline, as documented in our World Airline Reports for 2000 and 2010.

In 2000 (the year it surprised many by becoming the first to commit to the A380), Emirates did not appear in any of ATW’sTop 25 lists of the world’s leading airlines. Ten years later it appears in six categories (p. 33). In terms of revenue, it is now the 11th largest airline in the world and is poised to overtake British Airways and Japan Airlines this year and enter the Top 10. It became a Top 10 airline by RPKs two years ago and now sits at No. 6. Also this year it broke into the Top 25 in terms of passengers. Finally, it is the world’s most profitable airline based on
operating and net earnings for its
fiscal year ended March 31, 2010.

Many factors have contributed to Emirates’ ascent to the top, among them: Visionary leadership and highly competent management and staff who created a first class airline; a superb geographic location; the rise to geopolitical prominence of the Persian Gulf region; the development of extremely efficient mid-size long-range aircraft perfectly suited to its business model, and of course, the ability to build an airline from scratch without decades of embedded pre-deregulation costs. Underlying everything has been the Dubai state’s commitment to creating a fertile pro-business environment in which these seeds could take root and grow.

A common explanation (and complaint) for EK’s success is that it enjoys generous state support and subsidies. Certainly combining the airport, the airline and the ground handling organization into a single 100%-state-owned group conveys myriad benefits, tangible and intangible. It also helps that both the airline and the state are effectively a family affair, freed of the messy tradeoffs and compromises of democratically elected governments. Lacking publicly traded stock and an independently elected board of directors, EK can take business risks—such as ordering 32 A380s—that might not be possible for carriers without a supportive government owner. Yet no one has shown that one activity cross-subsidizes the other or that Dubai Inc. is pouring money into the airline, or that EK could not thrive on its own.

What is clear is that the emirate has done everything within its power to smooth the runway for its flag carrier. It provides first-rate airport facilities and a low- or no-tax environment that enables staff to keep more of their earnings while letting EK retain more profits for re-investment in its product. It has even funded and launched a low-fare airline to protect EK’s flanks! Does all this qualify as state support? Undoubtedly, but is it state aid or subsidy? That is a far more difficult question to answer.

To be sure, EK is not the only carrier to have blossomed over the past decade. In 2000 Ryanair carried 7 million passengers. Today it is the fifth-largest airline in the world by passengers and among the industry’s most profitable players. China’s big three are now well-established in several categories. Yet the successes of Ryanair, Air China, China Southern and China Eastern were more predictable than the rise of Emirates. We sympathize with airlines that lack EK’s strengths and advantages yet must find a way to compete, but until other governments assign even a fraction of the value to their own airlines, we would not want to bet against its continued rise