How EMIRATES is WINNING when Other AIRLINES are going BANKRUPT?

Emirates the Long Haul carrier known for its luxury Services has set new Abu Dhabi was built on a sandbed so it's never had a proper Harbor but that didn't matter much when there was nothing but a few dates to ship out and a few tins to ship in Emirates Remains the world's largest operator of the Airbus A380 the Emirates Airbus A380 can see over 600 passengers and has a range of roughly 9,000 M Emirates is one of the best Airlines I've traveled in it almost feels like a five-star [Music] hotel hi everybody we all know what Richard Branson meant when he said if you want to be a millionaire start with a billion dollars and launch a new Airline this is because the aviation business is one of the most expensive and yet one of the least profitable businesses in the world the aircrafts are very expensive labor costs are very high and most importantly even with a slight change in oil prices your profits could either Skyrocket or nose dive back when oil prices were soaring they helped not some airlines out of the sky and into bankruptcy or old prices could have a SE severe credit effect and we're starting to see that in the airline industry fuel costs are important because they are the airline's single largest expense this is because in the aviation business business fuel cost alone accounts for 30 to 40% of your revenue and profit margins are barely 10% so if your fuel cost shoots up by 30% due to a geopolitical event unless you increase your prices your airline will start bleeding losses this is the reason why Airlines go out of business not just in India but all across the world with even financially healthy Airlines across the world staring at bankruptcies another airline has hit turbul go pest is filing for bankruptcy Czech Airlines one of the world's oldest Airlines is going through bankruptcy but you know what guys while hundreds of Airlines have gone bankrupt all across the world the leaders of Dubai have built such a legendary airline that this airline has been profitable for 35 out of 38 years of its operation in fact before Co from 2018 to 2020 this Airline generated an average revenue of $16.5 billion and an average profit of $428 million this Airline is none other than the legendary Emirates Airline and if you're a business owner or a leader this story of Emirates has some very very important business lessons for you so in this episode today let's do a deep dive and try to understand what is the story of Emirates Airlines in a world where airlines are going bankrupt every year how is Emirates so profitable and most importantly what are the business lessons that we need to learn from the legendary Emirates [Music] Airline this is a story that dates back to late 1960s Dubai and during that time Dubai was Far different from what it is today they had not found oil and they were majorly dependent on Pearl trading for money back then the United Arab Emirates had not been formed and Dubai was just another fishing town that existed at the creek along the Middle Eastern trade route so let alone buildings it was just another desert with nothing else but people riding on camels but this is when something crazy happened on the 4th of July 1962 an oil tanker called British signal sailed from Das Island carrying Abu dhabi's first ever cardo of oil in 1958 the first offshore well was drilled in the ol field of Abu Dhabi and it was from this field that the first shipment of crude oil for the World Market was exported on the British signal in 1962 the progress and achievements made since that time have affected not only only Abu Dhabi but also the United Arab Emirates as a whole in the 1960s the Middle Eastern regions discovered tons of oil benit them and suddenly they realized that they were practically sitting on a gold mine and as the oil prices started shooting up billions of dollars started flooding into Dubai this is when in 1971 the United Arab Emirates was formed which is today a Federation of seven Emirates which are Abu Dhabi Dubai sharja Ajman umil Quin fuera and Russell kma these entities are almost like states that work autonomously within the Federation Now While most countries who found oil spent their money recklessly you know what the ruler of Dubai said he said and I quote I have good news and bad news we have found oil but not much he said that because UAE is only the seventh largest oil Reserve in the world and in UAE also while Abu Dhabi has 92.2 billion barrels of oil Dubai has only 4 billion barrels of oil so it's not like they had infinite wealth so the ruler of Dubai knew very well that even though they have oil it can give them money only for the next 50 years and if they don't build alternate sources of revenue Dubai will again become a poor country this is why the Crown Prince of Dubai shik Mohammad bin Rashid al- makum called in experts to understand how to solve this problem and many of these experts had one opinion in common and that was to start Dubai's own Airline this is because these experts understood the importance of Dubai's Loc if you look at the map Dubai is in such a strategic location that it is just an 8h hour flight away from 5 billion people which is 60% of the world's population and these 5 billion people are from some of the fastest growing economies in the world like India China Africa Middle East and even the developed countries of Europe and this gives Dubai three major advantages number one since Dubai Falls at the midpoint the Dubai airport could be used as a Transit Hub so if a flight is going from Europe to India it could halt at Dubai for a layer refuel and move to India same is the case with a flight going from Europe to China secondly if the Dubai airport can act as the hub for so many airlines then if Dubai has its own Airline it could cater to a huge demand for flight routes to connect 5 billion people so with such high demand an airline is just bound to be profitable in Dubai and thirdly these experts saw that since Dubai is placed right at the crossroads of cargo flows it can even ship goods to Major countries and benefit from cargo revenues and if you see the map Dubai connects Asian economies like China and India to Africa Dubai connects Europe and Southeast Asia it connects Europe to Australia and New Zealand and even connects India to North America this is the reason why the shake accepted the suggestion but you know what guys he also imposed two very very strict conditions on this team now number one he said that if at all Dubai has an airline it should be of the highest quality standards in the world and secondly he said that there would be no additional Capital injections from the government other than the $10 million given to them so if the airline makes a profit with these conditions well and good if not Dubai would rather not have an airline at all so you know what in spite of sitting on billions of dollars worth of oil the Dubai government did not buy an aircraft at all instead they used a concept called wet leasing to get aircraft from Pakistan so if you know what is wet leasing please skip to this timestamp if you don't here's a very very simple explanation of the same people wet leing is a leing arrangement in the aviation industry where one Airline who is the Lesser they provide the aircraft a complete crew maintenance and insurance facilities to another airline which is the lessi and in return the lessi pays the Lesser on a per operated our bases and once they receive the aircraft they are only responsible for fuel costs airport fees taxes and other operational expenses in this case the lesie was Emirates who entered into a vent lease agreement with Pakistan International Airlines and this was for two aircrafts a Boeing 737 and an Airbus a300 and this gave Emirates five major advantages firstly vet leasing allowed Emirates to commence operation within just 5 months of its Inception second it provided Emirates with the flexibility to test routes and gauge the passenger demand without committing to buying an aircraft thirdly by leasing aircraft with crew and maintenance Emirates avoided significant upfront costs which enabled them to invest in other areas like marketing and customer service fourthly because they had a well-maintained aircraft and an experienced crew Emirates was able to offer quality service from day one which quickly built them a reputation for excellence and lastly after they started testing their Roots they found that some Roots had very high demand and some did not have high demand and once they found the most profitable routs in the world Emirates could confidently invest in its own Fleet and could expand strategically and you know what guys this execution was so fast and so precise that they were able to start operating within just 5 months and within just 9 months Emirates was a profitable Airline this is how Emirates started its operation and this brings us to the next question when the international market was so competitive when the geopolitics of the world was so messy how is it that Emirates has been such a profitable Airline well the first thing that helped them was Labor Management if you see this chart in the last 3 years from 2020 to 2022 the average employee cost of Emirates has been 21.6% of their operating Revenue the same for United Airlines has been 42.1% and for British Airways it has been 33.8% so do you see this the cost of Labor as a percentage of revenue for Emirates is remarkably low and if you look at the number of Labor strikes that Emirates has seen it's practically zero but at the same time if you look at what happens to European airlines like Ryan Air their operations are frequently disrupted due to labor strikes and pilot strikes now Aviation Wars are continuing to affect people in Europe there were long cues at the ryion a desks in Malaga on Thursday because union members called a 3-day strike over pay and conditions so all flights were cancelled there was fresh pain for European Travelers on Friday after ryion air cabin crew went on strike in Belgium Spain and Portugal security staff at London's heo Airport have announced a 31-day strike affecting Travelers at UK's busiest airport these strikes disrupt the operation cause heavy losses to the airline and also decrease passenger trust for future bookings but if you look at Dubai they have deris themselves from stri stes in Union very very smartly firstly the United Arab Emirates does not recognize trade unions at all this means the workers do not have the legal right to collective bargaining or to go on a strike secondly Emirates hires its crew from over 11 16 nationalities and this diversity itself makes it very challenging to mobilize a large group of workers around common grievances thirdly Emirates employees are often signed with fixed term contracts and if employees breach these contracts by participating in an unauthorized strike they could either be terminated or be penalized so on one side while this looks like a strict rule on the other side Emirates also offers competitive taxfree salaries accommodation and other benefits to make it attractive for the employees so in short they give you everything you need provided you don't cause chaos this is the reason why Emirates labor costs do not touch unreasonable levels and their operations are not disrupted this brings us to the second strategy of Emirates profitability which is their fuel strategy firstly Emirates enjoys a short supply chain to nearby oil resources in simple words because Dubai itself has a ton of oil it results into less fuel transportation cost secondly Emirates very cleverly managed its fuel cost using a strategy called fuel hedging for those who don't know fuel hedging is like an insurance policy against volatile fuel prices so if the cost of fuel today is $30 like we learned from a previous episode if a country like Russia invades another country then due to geopolitical tensions the cost of fuel May shoot up to $60 so suddenly if the fuel cost increase by 100% then the airline companies will start bleeding losses right so in fuel hedging what the airline company does is that they make an agreement with another entity like an insurance company or the oil company such that the airline would pay a premium today so that they get constant prices tomorrow in this case a company like Emirates would agree to pay $10 extra per barrel today so they would pay the oil company $40 per barrel today with the condition that tomorrow even if the oil price shoots up to $80 a barrel the airline would still pay $40 only similarly if the oil price dips to $10 a barrel the airline would still pay $40 only so do you see what's happening over here the airline is indirectly betting that the fuel price might go up and they would get oil at a discount whereas the oil company is betting that the oil price will go down and they would enjoy premium prices even when the market is down this is called as as fuel hedging and this gives a company like Emirates two advantages number one tomorrow if the oil price sky rockets Emirates can get oil at a discount number two because Emirates already knows that it is going to get oil at $40 a barrel it can allocate its money for other expenses without bothering about the oil price shooting up so they can spend comfortably on marketing without worrying about the fact that the oil price will shoot up and they will have to pull back their marketing budget so fuel hedging gives you both stability and pred predictability of your expenses this is how Emirates used fuel hedging because of which they saved billions of dollars in fuel costs and lastly we have the fuel efficiency Factor long story short the younger your aircrafts are the more efficient they are the older they get the more inefficient they become also just like an old car needs more maintenance every old plane needs more maintenance so younger aircrafts mean less maintenance and more fuel efficiency in fact through a study on Turkish Airlines it was observed that a 1% increase in the average Fleet age causes a 6.93% increase in fuel expenses so if you see this chart while the average age of an Emirates Fleet is 9 years British Airways stands at 13.9 years and United Airlines average Fleet age is 16.7 years so Emirates incurs less cost because their Fleet is Young this is the fuel strategy of Emirates and cherry on the cake as the tourism industry of Dubai is booming it perfectly complement the revenue of Emirates and this is one of the most fascinating things that I discovered in the case study long story short if Dubai hosts a World Expo the government and Emirates partner together for promotions special combo packages and flights to get more visitors similarly inlight magazines entertainment systems and announcements in the Emirates promote Dubai's attractions their events and their festivals this way Dubai gets to Market itself to the richest people in the world on top of that the Emirates members can earn and spend miles not just on flights but also on experiences and services in Dubai this includes everything from hotel stays to even recreational activities so do you see this tourism of Dubai is benefited due to Emirates marketing and the Emirates is benefited due to Dubai's festivals and tourism traffic this is how by frugally understanding the aviation Market by using the oil money in the right way by strategically hedging its fuel by drisking sale from labor strikes and by establishing a strategic partnership with Dubai tourism Emirates has become one of the most profitable and one of the most legendary airlines in the history of the world and this brings us to the last part of the episode and that are the business lessons that we need to learn from this incredible company called Emirates lesson number one frugality is not a trait of the impoverished but a Hallmark of the wise in this case in today's world While most people spend money lavishly in spite of not having having a healthy financial status the shake of Dubai himself in spite of having a billion dollars chose to spend only $10 million to start an airline now do you realize he could have easily bought two planes but even then Emirates leased an aircraft from Pakistan so that they don't end up in losses so frugality is not a trait of the impoverished but a Hallmark of the Wise lesson number two as much as it is important to spot opportunities for your business it's equally important to spot risks to your business in this case while Emirates identified the importance of Dubai's location they also sharply spotted and mitigated the labor and the fuel risk which help them survive without disruptions lesson number three the Synergy of complimentary products is one of the most powerful instruments of growth in this case while Dubai's location helped Emirates grow Emirates marketing bolstered Dubai's tourism as Dubai's festivals attracted more passengers to Emirates the Emirates skywoods program increased tourist spending in Dubai and this symbiotic relationship is why their partnership has emerged as a billion doll Revenue machine today this is the story of the legendary Emirates Airline and I just hope you learned something valuable from the story that's all from my S today guys if you learn something valuable please make sure to hit the like button in order to make you baba happy and for more such insightful business and political case studies please subscribe to our Channel thank you so much for watching I will see you in the next one bye-bye [Music] n

Channel: Think School

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Length: 18min 7sec (1087 seconds)

Published: Tue Aug 15 2023