Will costly oil prices stop Emirates from hitting the gas?
Emirates Airline, flying to more than 150 global destinations, the world’s largest operator of Airbus A380s with over 100 such aircraft in its fleet, continues on its current streak of making profits, a stretch covering at least the last 2 dozen years, despite market headwinds, highlighted in 2018 by a spike in oil prices.
Fuel costs were 42% higher when compared with the same first half of last year.
The future doesn’t bode well for fuel-guzzling carriers.
“In the 2020’s we are going to have a clear physical shortage of oil because nobody is allowed to fully invest in future oil production,” Michele Della Vigna, Head of EMEA Natural Resources Research at Goldman Sachs told CNBC last Friday.
However, oil prices have recently dropped 12 consecutive sessions in a row and today WTI is trading at a 10% discount from Brent at $57.
Despite high crude prices wiping out $1.25bn from Emirates profits, there is some good news in the mix.
Quick analysis of the negative results
Emirates Airline (EK) on Thursday announced an 86% drop in H1 profits to $62 million, $390 million less than last year, half-on-Half, on account of fuel costs amounting to a third of its expenses.
“The high fuel cost as well as currency devaluations in markets like India, Brazil, Angola, and Iran, wiped approximately $1.25 billion from our profits,” said Sheikh Ahmed bin Saeed Al-Maktoum, chairman and chief executive of Emirates Group.
Profit for the Emirates Group, which also includes Dnata, a leading air services provider, was also down by 53% to $296 million.
“The next six months will be tough, but the Emirates Group’s foundations remain strong,” Sheikh Ahmed said in a statement.
Saj Ahmad, Chief Analyst at StrategicAero Research told AMEinfo: “The results do not come as a surprise because when you look at the physical size of Emirates, you understand just how big an impact fuel really has and the pressures of cost escalation and how they try to balance and mitigate against it.”
“With a pure widebody fleet, fuel is neither cheap nor is it enough in terms of filling up numerous A380s and 777s.”
Of course, Emirates is likely not the only premier carrier to suffer from this, but perhaps the best equipped to cope with adversity of this kind.
“Even if oil prices continue rising,won’t stay in the black, but it will make it harder for them to cope with fuel needs in the absence of hedging,” adds Ahmad.
“We are proactively managing the myriad challenges faced by the airline and travel industry, including the relentless downward pressure on yields and uncertain economic and political realities in our region and in other parts of the world,” said Sheikh Ahmed.
Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM told AMEinfo: that the downbeat economic outlook that has come through from Emirates reiterates once again how major corporations and economies around the world can be negatively impacted by the very uncertain external environment that is encouraging high levels of financial market volatility.
“Financial market fluctuations that have been caused by issues like trade tensions and consequent weakness across emerging markets represent just some of the uncertainties that are challenging the global economy. …therefore I am not surprised that Emirates has warned around the impact of these challenges,” Jameel Ahmad writes.
The good news
Emirates’ revenues were 10% higher than the previous year at $13.3 billion. dnata ’s revenues were up 11% to $1.9 billion, with profit up 31% to $235 million.
“Emirates is still a major brand and the desired airline of travel for people all over the world through different forms of travel purposes in spite of global/economic and industry challenges,” said Jameel Ahmad.
The Group’s cash position, though down $1bn, is still positive as of 30th September 2018 at $5.9 billion.
“Dubai continues to attract travel demand, as the airline saw 9% more customers enjoying Dubai as a destination in the first half of 2018-19 compared to the same period last year. We expect this demand to remain healthy as new attractions come online and the city gears up for Dubai Expo 2020,” said Sheikh Ahmed.
In the six months to September 30, the airline carried 30.1 million passengers, up 3%, on an overall capacity expansion of 3%.
As the business continues programs to improve efficiency through the implementation of new technology and workflows, the Group in the past six months trimmed the employee base by 1% compared to 31 March 2018, from an overall average staff count of 103,363 to 101,983 (1,380 employees).
More aircraft efficiency
During the first six months of 2018-19, Emirates received 8 wide-body aircraft – 3 Airbus A380s, and 5 Boeing 777s, with 5 more new aircraft scheduled to be delivered before the end of the financial year. It also retired 7 older aircraft from its fleet with further 4 to be returned by 31 March 2019. The airline’s long-standing strategy to invest in the most advanced wide-body aircraft enables it to improve overall efficiency and provide better customer experiences.
Emirates further developed its partnership with flydubai, offering customers even more benefits as both airlines combined their loyalty programme under Emirates Skywards. Emirates and flydubai continued to leverage their complementary networks to optimize flight schedules and offer new city-pair connections through Dubai, as well as open new routes including Kinshasa (Congo), Krakow (Poland), and Catania (Italy) in the first half of 2018-19.
SAJ Ahmad said: “The linkage with flydubai will help both airlines manage capacity on routes better where they can mix airplanes on different routes, particularly when widebodies aren’t needed.”