Fuel, foreign exchange and global events hit Emirates' profits, but momentum not slowed

17 May, 2012

A combination of high oil prices, regional political instability, volatile exchange rates and Emirates' exposure to the global economic situation has brought the carrier back towards its international peers. Emirates reported a net profit of AED1.5 billion (USD409 million) in FY2011-2012, a dramatic 72.1% drop on the previous year's result.

Even with the stiff headwinds pushing against it during the year, the carrier continued undaunted with its growth strategy. In FY2011-2012, Emirates took delivery of 22 new widebody aircraft and added 11 new destinations - a record number of new routes for the airline in a single financial year. It flew 34 million passengers at an 80% passenger load factor and increased its overall passenger traffic (revenue passenger kilometres) by just under 10%. Emirates now connects 122 destinations on six continents from its hub in Dubai.

Overall, revenue at the airline reached AED61.5 billion (USD16.7 billion), an increase of 16.5% from the previous year. Passenger revenue climbed 18.2% year-on-year, to AED49 billion (USD13 billion) due to the overall expansion of passenger numbers and flying, as well as higher fares.

Revenue reaches record levels

The carrier's cargo business saw an 8.4% increase in revenue, the reverse of international trends that saw cargo revenue shrink last year. Globally, air cargo traffic shrank 0.7% in 2011, according to IATA. Cargo contributed 16.2% of the carrier's revenue for the year. Cargo load factors shrank 2.2 percentage points, to 66.7%, as the carrier's cargo capacity expanded more quickly than the moderate increase in cargo tonnage.

Geographically, East Asia and Australasia remains Emirates' most important region in terms of revenue, accounting for almost 30%, just ahead of Europe. The carrier's revenue base is increasingly diffused globally, particularly with the introduction of several new routes into North and South America and the development of African destinations. Emirates estimates that it has a nine-month lead-in time from deciding on a new route to putting the service into operation.

Emirates airline revenue break-down by region (AED millions): 2010-2011 to 2011-2012

The carrier achieved a 7.7% increase in yield per revenue tonne kilometre, to AED251 fils (USD68.3 cents). Conventional yield per ASK was the equivalent of USD8.3 cents. This continues the carrier's upward trend in yield, although still slightly under pre-GFC levels. While overall passenger load factors remained at 80%, the carrier increased load factors in its premium cabins by 1.9%. Economy cabin load factors eased marginally, down 0.4 percentage points to 83.3%.

Emirates yield per ATKM (AED fils): 2002-2003 to 2011-2012

The 2008-2009 financial year saw a 17% downwards correction in yields, which the carrier has slowly clawed back.

Fuel carves a chunk from Emirates bottom line

Fuel was the biggest contributor to the dramatic reduction in the carrier's profits. According to Emirates Chairman and CEO, Sheik Ahmed bin Saeed Al Maktoum, had fuel prices remained where they were in the previous financial year, the net profit "would have again soared to a new record high".

Fuel now accounts for 40% of the carrier's costs - its single highest expense item. The higher price of oil, combined with increased flying, saw Emirates' fuel bill balloon AED5.9 billion (USD1.6 billion) for the full year, an increase of 44.4%. The carrier's overall fuel costs were AED24.3 billion (USD6.6 billion). Emirates suffered from a 32% increase in the average price of fuel per gallon.

Emirates' fuel vs labour as a proportion of total costs: 2002-2003 to 2011-2012

Emirates decided to delay passing on the increase in fuel prices to passenger for most of the financial year, but was unable to resist entirely. At the beginning of Mar-2012, the airline increased a fuel surcharge across its entire network, sending some fares up by AED610 (USD165) per sector.

The surcharge will grant the carrier "the ability to respond faster to market conditions", rather than the lengthier process of adjusting fares directly. The addition of the surcharge will also allow the carrier to decrease prices quickly, where appropriate.

Unit costs continue upwards climb

The carrier's 2011-2012 growth meant costs expanded in all areas, not just fuel. Overall, costs grew 24% year-on-year, expanding more quickly than the carrier's revenue growth.

Unit costs rose 12.4% per available seat kilometre, to 166 fils (USD45 cents) per ATKM, an all time high for the airline. Excluding the affect of the higher fuel prices, unit costs rose 2.4% to 93 fils (USD25 cents) per ASK, the second consecutive year that the carrier has reported an increase in its unit costs excluding fuel.

Emirates cost per ATKM (AED fils): 2002-2003 to 2011-2012

Outside of fuel, labour is the airline's next largest cost item. Employee numbers increased 11.2% to support the carrier's expansion, but costs rose just 4.2% to AED7.9 billion (USD2.2 billion), mostly due to a dispersal from Emirates' employee profit share scheme the previous year. Employee numbers at the airline stand at around 42,500 and Emirates plans to recruit more than 4000 workers this year.

The carrier's fleet expansion saw a 10.9% increase in aircraft operating lease expenses, as well as it paying 25.8% more in aircraft maintenance, 15.8% more for aircraft landing and parking fees and a 15.9% increase in overflight fees. Aircraft depreciation also increased, up 12.6%. Upgrades to the carrier's product offering - as it fends of competition from Gulf rivals and European and Asian carriers reinvesting in their own products - rose 23%.

Emirates in it for the long-haul

A 72% dive in full year net profit might appear to be a set back, but for Emirates it represents just another number as the carrier continues to focus on the long game. The airline is the world's fastest growing airline in terms of international traffic and there is little sign of any reduction in momentum. Even with the regional crisis and all the other eternal events of the year, Emirates' growth never waned in 2011-2012. Revenue and traffic reached record levels and while the balance sheet result may have been down on the previous year, the result is still the carrier's 24th consecutive year of profitability.

The outlook for 2012 is much the same: continued growth in the carrier's international network, combined with developing existing markets with more capacity or new products. Aircraft deliveries will continue unabated at the rate of almost two new widebody aircraft per month.

Emirates raised USD3.4 billion to fund its aircraft deliveries over the financial year and the carrier's cash position increased 11.6% in FY2011-2012, to AED15.6 billion (USD4.2 billion). The carrier has 223 aircraft on order, having placed a record order for 50 Boeing 777-300ERs during the year.

The carrier has moved more deeply into long-haul markets, adding services to Seattle, Dallas-Fort Worth, Rio de Janerio and Buenos Aires in the pervious year, with Washington DC to come in Sep-2012. During the past year it also increased capacity to 34 of its 122 destinations.

Fuel remains the great uncertainty, even as oil prices are now approaching four-month lows. Emirates has no fuel hedging strategy in place - after being burned to the tune of USD428 million on fuel hedging in FY2008-09 - but has admitted that it is again looking at a programme.

Despite all the external challenges, Emirates emerges for FY2011-2012 in a stronger strategic position. The upcoming year for Emirates will not be without its challenges as the carrier will continue to integrate new capacity and seeks to improve on its efficiency. But as Sheik bin Saeed Al Maktoum said, the only once place the airline can go in 2012-2013 is "up".