Emirates may be among the world's most innovative airlines, but even it is focused on the bottom line. And since fares have been falling, coach passengers may need to get used to the idea that Emirates will start charging for extras, just as other airlines do.
Future of Passenger Experience
To better understand the challenges facing airlines in an age of fluctuating oil prices, rapid growth, and changing passenger expectations, our Future of Passenger Experience series will allow leaders in the industry to explain their best practices and insights.
When other airlines stuck with the status quo, Emirates CEO Tim Clark took chances, both on a giant unproven aircraft — the Airbus A380 — and on a series of passenger-centric innovations, including first class suites with doors, onboard showers and opulent bars.
After more than 30 years at Emirates, Clark is likely more responsible for the airline’s success than any other executive. He has taken the airline from a small, Dubai-based carrier into a major global player and massive travel brand synonymous with luxury.
But like all airlines, even Emirates has its troubles. The airline historically has made much of its profits from shuttling oil executives around the world, a business that has become less lucrative as oil prices have fallen. Emirates has also seen demand lag in some areas hit by terrorist attacks and other external shocks. And on the passenger experience front, many airlines have finally caught up with Emirates, with several offering similar perks for premium passengers.
Emirates is still making money — it says it has been profitable for 28 consecutive years — but it has been forced to discount tickets in some markets. And the airline, which has generally not charged for extras like seat assignments or checked luggage, is now planning to be more aggressive in assessing ancillary fees from coach passengers, so it can recoup some of its lost ticket revenue. It’s also evaluating adding a premium economy section.
Skift spoke with Tim Clark at the Global Aviation Festival recently in London, asking him about the state of Emirates’ business and about the carrier’s recent investments in its passenger experience.
Note: This interview has been edited for length and clarity.
Skift: With a global slowdown in the oil economy and terrorist attacks in Europe, how is is business?
Tim Clark: Although passenger numbers are growing, we’re having to introduce fare levels that are considerably lower than they were before, to induce people to travel. This is a result of all sorts of things going on in the last 18 months — whether it be socio-economic side of things or whether it be the terrorist activity, which has been prolific in the last two years, starting with Paris in November of ’15, then Brussels, then Nice. Then, the bombs in Istanbul airport. As you work your way through all of this, you can see how that will impede demand for air travel.
The business model has got to be resilient enough to absorb the shocks, whenever they come in. I used to say to [my team], when we were a bit smaller, ‘Expect two major traumas a year, which will destabilize you operationally [and] which will destabilize you economically.’ Well, we’ve had about 10 in the last 18 months, one way or the other. It’s a difficult time. If you are strong, as we are, we’ll get through it. We probably won’t make as much money as we did in the good times, but then, that’s the nature of the business.
We try and shift the capacity to markets that will take it, and continue to grow in the business.
Skift: How have lower oil prices affected Emirates?
Clark: [Oil] went down from $115 [a barrel] to $30. In the old days, [fuel] used to represent 41 precent of our cost. It’s now well down, so you think that’s easy, they can make money. [But] what then happened is we had a race to the bottom. The euro started to fall. On top of that, the global economy lurched because the oil and gas sectors that drove so much of the economy — exploration, extraction, whatever it is — they tanked. If you talk to [International Airlines Group, owner of British Airways and Iberia], or you talk to KLM, you’ll find that that the oil and gas sector has occupied the greatest corporate segments for all of us. When that went, we had empty spaces. Also, the yield fell because [those passengers produced] very high yields. Then, as a result of the oil going south, the African economies in the developing world, which were producing oil and depended on it, went into meltdown. Many of our markets were those countries.
The paradox is that as oil prices fell, so did profits. There are many reasons for that. Had it been oil prices in isolation, without the global economy going into the situation that it is today, then maybe the story would’ve been different. But they’re very, very much linked.
Skift: Are other factors affecting profits, too?
Clark: Yes. There are other forces which are agnostic to oil. Brexit. The state of the European Union. The way the Greeks, the Portuguese, and the Italians, and everything else are being dealt with, and how that’s affecting demand out of Europe. [Then,] the euro tanked, the pound went down [and] the [U.S.] dollar strengthened. We, of course, report in dollars because [the United Arab Emirates’] Dirham is linked to the dollar.
The stronger the dollar is, all my markets outside of the dollar zone —which is most of them — went south. That bought the yield down. I would probably say, as much as between 8 to 11 percent of the yield fall is a result of the strength of the dollar for us.
Skift: In a competitive industry, how do you maintain an edge over other airlines so you can fill seats while maintaining costs?
Clark: The trick is to match [price], and deliver more. That is becoming more difficult these days, because in the old days, we were the only kid on the block doing what we’re doing. Now, there are others who are emulating us. They are following, essentially, the same business model. It’s becoming more competitive and let’s say, interesting. Because certain segments of our markets have become deeply discounted, we’re having to look and see whether we can extract more value through the the ancillary revenue stream. It’s somewhere we’ve never traditionally gone, but the digital world tells us that that’s the way people are thinking. Where the value is clear to them, and is delivered to them on a manner that they expect, they will pay for [extras].
Skift: What are you looking at charging for? Is it bags? Other things?
Clark: You might go after a second bag, or a weight allowance supplement. You may go after seat selection. We have a lot of families and groups traveling, and they all want to sit together. They are basically prepared to pay more to get peace of mind so that, if you’re a family with two young children, you could sit in a quad with the two kids in between, and control [the experience.] You’ve got people hen parties, stag parties, golfers, footballers. They all go in groups. Strength in numbers, they like to do whatever it is they’re going to do. They really don’t want to be all over the aircraft. They want to be together. They’re willing to pay for it. [Editors note: Since the interview, Emirates has indicated it will charge for some advanced seat assignments in coach beginning on Oct. 3.)
There are other areas that we’re looking at. We could lift what could be in the economy. If you want a better meal than we’re prepared to give you, you can pay for it. If you’d like a glass of champagne, a bottle of champagne, if you want this kind of thing. It’s a bit like [British Airways] had done recently. You get the standard meal, but if you want to lift that, for any reason, you can pay for it.
You could offer premium check-in. You can offer expedited [security] search. [We can offer] our chauffeur drive, on a pay basis. [Let’s say] you’re in the rural part of Germany, and you want to get to Frankfurt, and the choice is a taxi, or a train, and a bus. We’ll give you a Mercedes, but you pay for it. We’ll put a margin on the cost to us, [and] everybody’s happy. The trick, then, is to be able to deliver that, operationally and logistically, to make sure that you deliver what they paid for.
Skift: You’re also evaluating premium economy, right?
Clark: We’ve been looking at it. I’m not saying we’re rushing to market on it. There are impediments to all of this. Simply, one is the logistical incorporation on 254 aircraft. Once you launch a new aircraft — say one of the A380s comes out with premium economy —then the application of that to the whole fleet is difficult. We haven’t gotten on that airplane, we have got on this airplane. There are introductory problems. Second, you’ve got the definition of the product. How are you going to do it? Do you bring the economy standard down? Or, do you leave it and increase the economy premium? Importantly, what is the value you’re going to extract from this? I need to be 100 precent sure that demand for that segment is strong enough, and sustained enough, to be able to put it into fleet-wide application, because the cost of doing it is horrendous. I have to know that it’s going to work. At the moment, it’s a bad time to make those assessments, simply because demand is what it is.
Skift: Is it possible you might focus on selling discounted business class seats instead?
Clark: I know certain segments will take [premium economy] straightaway. Baby boomers, the aging population of Europe. No mortgages, money in the bank, spending the inheritance of the children, that kind of thing. But they would prefer to have a bed.
You might just say, ‘OK, I’ll give you a special price, just for the [business class] bed. I won’t give you the incentives. I won’t give you ground. You’ll get the business product in the air only, and that’s it.’ No chauffeur drive, no business-class lounge, no expedited [security] search. No uplifting your baggage allowance, et cetera. You just pay for the bed. I’ll give you a price for that. Maybe, if you’ve got business class seats going begging, that’s the easy way to go, rather than create a completely new product, which is going to upend the distribution systems, upend service delivery and upend the logistical management on the operational side.
Skift: You’ve made the A380 a major piece of your fleet, and you’ve asked Airbus to create a next-generation aircraft called the A380neo. But few other airlines seem interested. Do you expect Airbus will produce it?
Clark: We were well down the road to its definition, with airframe and propulsion. I have to say it was contingent upon orders being placed. Clearly, there haven’t been. I’m not optimistic. Pity, because it would be a fantastic airplane. The one we’ve got is great, but the new one coming along was going to be that much better. Really, a piece of work.
Skift: Why do you think other airlines have been so reluctant to place orders for both the old and proposed new models?
Clark: Unfortunately, my peer group in the airline community, who are fairly conservative, worry about taking a $400 million asset and being able to work it for 16 hours a day and fill it. It concerns the boards.
Skift: You’ve innovated often at Emirates, but you’re probably best known for installing first class showers on your A380s. Why did you do it?
Clark: What Airbus had offered was they put a little art gallery with a bench, and people sat there and looked at a picture. I said, ‘Is that it?’ [I said,] ‘If I put showers in, can you give me the technology to be able to pump water, heat it, and put it under pressure?
It took me a year to persuade them to do it. In the end, I had to work conspiratorially with certain elements of the design studio of Airbus, who were fully supportive of what we were doing, because they knew what we were up to with the [older] Airbus A340-500. Quietly, I built a mock-up in their own facility. Then, when it was all built, I brought in the management. I said, ‘Why can’t that work?’ They said, “Oh, my God! How could you have done that?’ I said, ‘How could I have done that? It’s what you should’ve done.’
Skift: Did many people tell you not to bother with showers?
Clark: I’m not the slightest interested in what people think about what I do and don’t do. In the end, I do it because I think it’s the right thing to do, and my instinct was telling me to put showers in the dead area of the 380.
You know something? If I had listened to everybody who told me it was nuts to do this, we would be four airplanes. The whole Emirates business model has been a complete destabilizer, disruptor to the aviation world.
Skift: What about the onboard bar for business and first class?
Clark: [They said,] ‘No, no, no, we can’t do it.’ I said, ‘Watch. It’ll happen.’ People said, ‘No, nobody will use it.’ I said, ‘You’re telling me that nobody will want to get up and stretch their legs on a 16-hour flight?’ [They said,] ‘they’ll never use the bar. It’s waste of space. Put business-class seats in there.’ [I wanted] an upper deck of quality — a premium offering. A bit like a cruise ship there, on the top decks. The collegial, convivial atmosphere is great.
You know what happened? I put eight drop-down oxygen masks in the bar, for certification, on the basis that if they were right, and I was wrong, only eight people, at a maximum, would be using the bar. The first flight, we had 40 people in it. The first-class passengers were coming down, moving the girl behind the bar, and standing behind the bar getting everybody to take pictures of them. They were like children! They still are today.
That bar is the talk of the industry. It’s the talk of the consumers. People meet. We’ve had marriages, divorces, whatever it is, in that bar. People go out of the way to meet again on that thing. It’s a been a huge selling point for us. Can’t be that bad, because everybody else has come up with them, as well. Yes, you talk about [Etihad] and The Residence. I know that Abu Dhabi felt that they had to raise a level. It’s good for them. I’m immensely proud that a lot of the work that we did, that predated all of this, has caught on in the industry.
Skift: With the first class suites and the showers and the bars, do you think you changed how other airlines view passenger experience?
Clark: If you look at the way Emirates has shaped interior design and product offering in flight, you’ll see that the answer is that those naysayers are now on the bandwagon. Delta has now got suites in business class with the doors. Where do they come from? Ask yourself that. It’s our design, on our first-class suite, [from] 1999. I didn’t take a patent out on those, because it would’ve been my name. I’m an employee of the company. I didn’t want a toss-up between the company and me, so we abandoned the patent.
Skift: Why is it so important for you to have the ‘wow factor’ in premium cabins?
If you are going to spend a lot of money on a first-class seat, what would you expect? Look at the hospitality trade. If you’re paying that kind of money, you want to go into a suite in the hotel, and you expect that hotel suite to be really something. You don’t expect to see dirty carpets, lousy sheets, staff badly dressed. It’s got to be crisp and proper.
The trick is for us is to deliver as close to that [hotel experience], make money, and keep them coming back. The 380 was the answer for us, because we could do all of that, at lower unit costs, simply because the aircraft is so big, and because we can get 75 to 85 precent seat factors out of it. When she motors along, she’s putting money in our pocket. Everybody’s happy, and they’ll keep coming back. We now have 85. We brought six into Heathrow, and we’ve got three into New York. A second one is going into LA.
Skift: And yet even you have introduced special high-density A380s with no first class cabins and far more economy seats than usual. Why?
Clark: Yeah. We’ve actually brought those to market at the time when global economy goes into flat line. On the basis of when they were planned, [we put in] 617 seats. We’ve still got 58 business upstairs, plus the bar. The rest is all in economy. We put it on Copenhagen, once a day. Filled up. We’ve got it on places like Taiwan. We would like to put it into other areas, but there are some impediments. Scale is the thing. You’ve got to be able to fill it.
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Photo credit: Few airline CEOs have driven as much innovation as Emirates' Tim Clark. But with business faltering slightly, he may soon make some tweaks to the airline's passenger experience. Emirates Airline