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The Emirates Pie

As one of the jewels in Dubai’s crown, the Emirates Group has been an important player in increasingly competitive airline industry. However, unlike their rivals, diversification appears to have been a key part of the Group’s strategy. In the current market, with organisations more inclined to focus on core business, why adopt this approach? In this special feature, Chris Sheppardson reports on the little known Emirates business model and its potential for adding value, featuring comments from Richard Hollands, CEO, Emirates Leisure Retail

Established airline brands have been grappling with the dual pressures of a fall in demand and high operating costs during the course of this recession. One of the widely publicised stories has been the fortunes of British Airways, who reported a £400 million loss recently, compared with a £883 million profit the previous year. In contrast the story of Emirates Airlines remains critical to Dubai’s international reputation and economy, having reported 20 consecutive years of profit.

Recently posting profits of US$268 million for 2008/09 the Emirates Group stands out in a year which has seen the wider aviation industry face serious setbacks as a result of the global recession. Though this year’s results were comparatively modest compared with US$922 million the previous year, it is thought that Emirates will not only survive the recession, but continue to profit.

The rising importance of budget airlines has been one of the key trends of the debate on the future of airlines. Emirates achievements stand in contrast to this development. However, its ownership by the Dubai government and location has provided significant advantages such as tax free status and fuel subsidies. This has resulted in a comparatively low cost base and it has been reported to be second only to Ryanair on a cost per seat basis. Whilst some competitors have called this an unfair playing field, this set of circumstances has underpinned the development of a business model which includes diversification into a multitude of business interests inextricably linked to Emirates core service. It was recently noted by one analyst that:

“Critical to Emirates success is the fact that it owns a number of cash generating businesses that work either as monopolies or duopolies, some of which report directly into the Emirates Airline balance sheet.”

The Emirates Group is made up of two separate companies, Emirates Airlines and Dnata, its ground handling division. However, within this arrangement there is a network of wholly owned subsidiaries providing a range of services linked to its core product and ensuring financial leverage through its ownership structure. The hospitality sector is an important component of this diversification strategy, and Emirates interests include hotels, partnerships with brands such as Le Meridien and Premier Inn, bars and restaurants, and travel agencies.

Emirates Leisure Retail

Retail has been high-lighted as an important source of revenue for the future aviation industry, premised on the argument that it will make them less ulnerable to market volatility. Emirates Leisure Retail is a wholly owned subsidiary of the Emirates Group and was established in 2007 as a divestment from MMI, (another Emirates subsidiary involved in the sales and distribution of alcohol) offering a broad range of catering and leisure services. As Richard explains,

“The business is principally located in the UAE and the growth of the brand strategy has been closely aligned to the rapid growth in the UAE as a whole. ELR has grown very rapidly over the past few years and by UK standards would be perceived as one of the largest hospitality groups in terms of both profitability and number of brands and outlets.”

ELR is part of the Emirates Airlines balance sheet, and is divided into three categories: ELR bespoke brands (eg Hey Pesto), ELR partnerships (including Costa Coffee UAE) and Community Clubhouse Management, branded clubhouses providing leisure services to residents of Palm Jumeirah at Shoreline, the Nakheel property development. The strategic focus will continue to be on building the business by:

  • Expanding their international franchise and own developed brands.
  • Expanding into new markets when the economic climate and conditions are right.
  • Developing closely associated sales channels such as ‘events’ as the business demographics change in the marketplace.

Inherent to this business model is the capability to develop new brands or deliverer franchise brands that meet the requirements of its customers. Bedouinn's Bistro & The Retreat, for example, was created to cater to the guests of Premier Inn in the region.

Beyond the Gulf

Having focused its diversification programme largely within the Gulf, Emirates Leisure Retail is now positioned to expand its services into other parts of the Middle East such as Bahrain and Qatar. In an important strategic move, which may indicate a desire to position itself as more of a global player, Emirates Leisure Retail Australia has been established as a subsidiary of the ELR business. Richard explains:

“Despite the global downturn which has affected the industry across the world, the Australian marketplace has shown a great deal of resilience. After completing a thorough due diligence, ELR has completed its first acquisition and has alreadycommenced developing its brands in prime locations that will gain great visibility. Our future growth strategy will be to cement a solid foundation in Victoria and New South Wales before building the scale of our business in a country that is larger than Europe. We are delighted to have quickly established a solid infrastructure and we have outlets trading in every state including Tasmania.”

In March this year, ELR Australia acquired Hudsons Coffee, a coffee shop chain with a strong airport presence. Though this story has had limited press coverage, it signifies an important step forward and the business is preparing to develop further into this market. Richard comments:

“The recent acquisition of Hudsons Coffee in Australia (with over 60 outlets) has given ELR an immediate platform through which to grow the business and other brands in the portfolio in Australia. The company carried out a lot of research on the marketplace before deciding to make this step and the management is very pleased with the progress of the business to date.”

Costa is one of ELR’s major partnerships in the UAE, with 65 outlets in the region, and the business has been expanding at a rate of 10 stores per year since opening its first store in 1999. With a proven track record in launching brands here, and with the flexibility to operate an owner-operated or franchised model, the acquisition demonstrates the added value that diversification can provide in terms of realising growth and positioning. However, Richard states that when the time is right and only when the economic conditions support such a growth strategy, ELR will continue to review opportunities for overseas expansion.

As the airline industry continues to grapple with many challenges, Emirates diversification strategy has provided it with a sound basis for the future. Though it is not immune to the impact of falling demand which has blighted most airline carriers, it is clear that there is a degree of stability gained through this complex network of inter-linked services. And whilst its ownership and base in Dubai has bought about some major advantages, the story is changing to reflect a broader connection with the wider industry. As Emirates journey progresses beyond its ‘comfort zone’, interest levels are set to remain high as we emerge from recession.

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