Rise of the Emirates Empire
By Matthew Maier

(Business 2.0) – Call it a moment of uncivil aviation. Last May in Tokyo, at the airline industry's biggest annual gathering, some 500 attendees watched as the keynote discussion, featuring five top CEOs, suddenly went from boring to ballistic. Rising from his seat in the front row, Leo van Wijk, vice chairman of the Air France-KLM Group, the world's largest airline, grabbed a mike and glared at his chief adversary, sitting onstage--nattily dressed Tim Clark, British-born president of Emirates of Dubai, the world's fastest-growing intercontinental airline.

The subject of fair-trade practices had come up, and van Wijk wanted to know how Clark, running a carrier with just $5 billion in revenue, could be spending $15 billion on 45 new Airbus A380s, the largest and most expensive passenger jets in history. "Many of us have great doubts," van Wijk began, "about how Emirates is paying for these A380s when your cash flow isn't big enough to support it. So where do you get the money?"

The insinuation was obvious to everyone in the room: The source of funds might be hidden in the deep pockets of Clark's high-profile boss, Sheikh Mohammed bin Rashid al Maktoum, the multibillionaire crown prince of Dubai, which owns the airline. Or maybe in those of the crown prince's uncle, Sheikh Ahmed, who runs Dubai's Department of Civil Aviation, runs the airport, and serves as Emirates's chairman. Either way, van Wijk was suggesting that Emirates was getting preferential treatment.

With that, Clark launched into his own tirade--pointing out that nearly every airline represented in the room had been on the receiving end of government subsidies and perks, and that Emirates's finances could easily support the long-term leasing of new planes. As president of Emirates, Clark was accustomed to occasional professional jealousy, but this was something else. Months later, sitting in his Dubai office on a typical 104-degree summer morning, he is still fuming. "It was a bloody ambush," he says.

The tension has been building for years. Emirates launched in 1985 with just two daily flights to Pakistan; the upstart carrier quickly became profitable and has since enjoyed 17 straight years in the black. According to the financial data that Emirates discloses, the $637 million profit it earned in its most recent fiscal year--on record sales of $4.9 billion--ranks it as the world's second most profitable passenger airline, behind Singapore Airlines. As the flag carrier for Dubai, the second-largest of the seven sheikhdoms that make up the United Arab Emirates, the airline has quietly become one of the world's most successful, earning it very few friends among the competition. "They perceive us as the largest single threat to their existence in the last 20 or 30 years," Clark says.

Here's the biggest reason. Residing within 4,000 miles of Dubai--roughly an eight-hour flight on today's modern jetliners--are 3.5 billion people, more than half of the world's population. Before any other airline discovered the opportunity, Emirates capitalized on its location and created a hub to connect all these people. Much the way Chicago's O'Hare is a nexus for millions of travelers making their way across the United States, Dubai International Airport serves as the nerve center for a staggeringly fast-growing legion of globe-trotters. For two decades Emirates has grown sales at a clip of at least 20 percent a year, and it's doubled in size, on average, every four years. Construction has already begun on a new airport in Dubai that will be the world's largest when completed in 2020.

Which begins to explain why Clark, the affable Brit who helped build Emirates from a ragtag operation in the 1980s into a virtual empire, is the guy his competitors love to hate. Clark is busy scouting cities for all his new planes to fly into, and with a crown prince and a sheikh at his side, he terrifies van Wijk and others who have long dominated the world's busiest air routes. "The main reason we have so many detractors," Clark says, "is because they realize the game is up."

If there are substantial perks to running a company owned by a crown prince, they aren't evident in the executive suite of Emirates's surprisingly spartan headquarters. In a ramshackle office building adjacent to Dubai's airport, workers pass through cramped, dimly lit hallways with linoleum floors. Cricket bats in glass cases and Emirates football jerseys line the walls on the way to Clark's humble office--No. 10--on the first floor, where he's held reign as president since 2003. Between the airport and offices scattered worldwide, Clark runs an operation with 16,400 employees.

Clark's unusual ascent from aviation junkie to Persian Gulf mogul wasn't exactly planned. Reared in London, both Clark and his brother had traveled extensively by the time they left high school. While his brother would go on to fly Boeing 747s for British Airways, Clark, after earning an economics degree at London University in 1971, landed his first job at now-defunct British Caledonian Airways as a junior planning analyst. When Bahrain's Gulf Air called four years later with a sweet offer, Clark--who had visited the Middle East as a kid and had Royal Air Force buddies in the region--couldn't resist.

Clark excelled at Gulf Air, a fast-growing carrier that became the region's first major international airline. An analytical whiz by nature, he earned a reputation as a top route planner--one of several at Gulf Air who pored over demographic data and passenger statistics to identify cities to support new routes and calculate whether they made financial sense. In 1985 came the phone call: Maurice Flanagan, a fellow expat and former British Airways exec, was recruiting industry veterans to launch an airline in neighboring Dubai. Flanagan needed someone who understood how to build an aviation network. Flanagan, now 76 and still the vice chairman at Emirates, put Clark in charge of planning and gave him the chance to build a government-backed airline from scratch.

Scratch was about right: For centuries the port of Dubai, at the southern end of the Persian Gulf, had been a conduit for goods moving from India and Iran into the Middle East and Africa. But by the mid-'70s, Dubai--one of the seven Arab states operated as a British protectorate until 1971--had become a dusty pit stop in comparison with oil-rich neighbors like Saudi Arabia and Abu Dhabi. Pearl diving in the gulf was Dubai's oldest industry, and the airport had one lonely runway.

Dubai's ruler at the time, Sheikh Rashid bin Saeed al Maktoum, was the first to rethink Dubai as a transportation hub. A new airline would link it with historical trading partners like India, Iran, and Pakistan. Rashid hired Flanagan, who at the time was general manager of Dubai's airport-handling business, to assemble a team, and installed his younger brother, Ahmed, as head of Dubai's new Department of Civil Aviation.

When Emirates launched in 1985--with two leased planes and a $10 million loan from the Dubai government--Clark pounced on routes that other airlines had passed up as immature or lacking potential. Pakistan, for instance, had 165 million people but just one state carrier. Emirates began with daily flights to Karachi, and within a year Clark added service to Bombay and Delhi. During meetings with Ahmed, Clark says, "we could all see that in terms of geography, there was something there." In its first year, the carrier eked out a tiny profit.

Clark figured that Emirates was ready to expand but knew that buying planes was the least of its worries. At Gulf Air, he frequently had more planes than he had places to send them--a problem that constantly eroded profit margins. So during Emirates's first three years, Clark, Ahmed, and Flanagan spent most of their time on the road, greasing the palms of foreign dignitaries in hopes of signing agreements with governments to lock down traffic rights for as long as 20 years at a time.

Without a jet fleet, market share, or stature, Emirates posed little or no threat to rivals--the ideal negotiating posture for Emirates, as it turned out. Believing that the airline would never amount to much, most foreign governments were happy to give it access to their runways. Negotiations with Singapore in 1987, Clark says, took just five minutes. "We signed the deal and were off to lunch before the meeting even started." Today, Emirates flies into Singapore up to eight times a day, competing fiercely against the national carrier. Lim Hock San, then Singapore's director of civil aviation and one of the 16 Singaporean delegates seated at the table that day, admits that he jumped the gun. "It's not a matter of they won and we lost," San says. "They grew far faster than anyone expected." By 1991, Emirates had also inked deals with Germany, Hong Kong, Thailand, and the United Kingdom, quickly forming the basis of the route network that has allowed it to challenge British Airways, KLM, and other international carriers.

While Dubai has maintained an open-skies policy from the start--it allows any airline to fly into Dubai--airports like Britain's Heathrow have served more as protective fortresses for their flagship carriers. Clark, who despises this element of the business, frequently accompanied Ahmed to Sydney and other prospective destinations, wearing down bureaucrats until they opened their runways. "It took three years of battering the Australian government before they let us in," Clark says.

By 1994, Emirates was flying to 33 cities, bringing in about $600 million in revenue. That success helped it launch Dubai's next grand scheme: to become not just a bustling air-transit hub but a tourist destination on par with Las Vegas. The task fell to Dubai's newest leader, crown prince Sheikh Mohammed, an heir to the throne after his father's death in 1990--and better known these days as the "CEO of Dubai."

In Mohammed, Clark and Flanagan found an ideal boss--willing to bankroll expansion plans but uninterested in meddling in day-to-day operations. "Whatever that man wants," Clark says, "it happens. And he delivers in a style and manner that you would not see anywhere else." As the crown prince began investing billions in new hotels, roads, and terminals, Ahmed, Clark, and Flanagan took their expansion cues too. In 1992 they arranged for the airline to finance several new Boeing 777s, which could fly 11- to 12-hour missions without refueling.

By the end of the decade, Emirates planes touched down in 45 cities on four continents. The airline's fleet of newer, more efficient planes helped slash operational costs to 8.5 cents per seat mile, well below the industry average. Small wonder, then, that after Emirates surpassed $1 billion in sales in 2000, profits went skyward. "The more we expanded," Clark says, "the better it got."

With Emirates riding high, and the industry suffering after 9/11--carriers lost a combined $31 billion from 2001 to 2003--rivals began to cry foul. As a subsidiary of the Dubai government, Emirates was getting preferential treatment, competitors charged. "Anybody that can control the airline, government policy, and the airport should make a lot of money," says Geoff Dixon, CEO of Qantas.

Take airport operations, for instance. Emirates chairman Ahmed, 46, who sets Dubai's aviation policy, declared from the beginning that Dubai's airport would be open around the clock. Unlike most destination cities, which abide by noise restrictions, Dubai hosts landings and takeoffs at any hour. That means that Emirates can keep its fleet in the air an average of nearly 14 hours a day, compared with 11 for many rivals. At an average cost of $150,000 per hour to maintain a plane on the ground, that translates into tens of millions of dollars in annual savings.

Emirates also pays no income tax--a factor that saves it some $250 million per year. And thanks to Dubai's proximity to India and Pakistan and their vast reserves of cheap labor, Emirates's labor costs tie up just 18 percent of the airline's operating budget, compared with 27 percent for Lufthansa and 29 percent for United Airlines.

As for other allegedly unfair perks, analysts and Emirates financial auditor PricewaterhouseCoopers disagree with execs like Dixon and van Wijk. "We can find little evidence of any subsidies," reads a recent report on Emirates from UBS Investment. "We believe that the strengths of Emirates can be explained by the business model rather than special treatment." Though it is not required to do so, Emirates releases annual reports that disclose almost everything its competitors must, breaking out cash flow, debt, and working capital. (Citing client confidentiality, Azfar Aboobaker, one of Emirates's accountants at Pricewaterhouse, declined to comment on the carrier's financials.)

The numbers Emirates releases show that the airline's costs are typical of the industry. As with nearly every carrier today, fuel represents Emirates's fastest-growing expense. According to the airline, the fuel tab to keep its 77 planes in the air doubled in 2004, to $893 million. At 21 percent of its total costs, fuel affected Emirates roughly the same as its larger rivals. "Dubai is not just throwing money at Emirates," says Andrew Miller, a director at the Centre for Asia-Pacific Aviation, an Australia-based airline consultancy.

Take aircraft leases, for instance. Like most airlines, Emirates leases many new planes instead of purchasing them outright. Of the 77 Boeing and Airbus aircraft Emirates flies, 50 are on lease from companies like GE Commercial Aviation Services or International Lease Finance Corp., the largest lessor of aircraft in the world. According to Emirates's annual report, the carrier spent $511 million on leases last year, up 38 percent from 2003. But thanks to a boom in air travel and on its most popular routes--to London and Australia--Emirates stockpiled nearly $2 billion in cash last year, much of which went to paying down its leases. "Emirates may get a slight volume discount on its lease rate," says one executive at Boeing Aircraft Holding. "But other than that, they don't get any special treatment."

Maybe not. But rivals fear that Emirates's massive aircraft orders mean that Clark will soon be scouting cities, invading their markets, and endangering routes where they enjoy little or no protection. (Van Wijk declined to elaborate on his complaints for this story.)

Emirates certainly isn't hiding anything when it comes to outdueling rivals on service. First to offer in-flight personal video systems to all its passengers, the airline has repeatedly bucked the austerity trend that has swept much of the industry. Business-class passengers have reclining seats with built-in massagers, as well as wireless e-mail access. First-class cabins are profligate: The front of each Airbus A340-500 includes 12 fully enclosed personal suites, each with a minibar, room service, and a leather seat that reclines into a bed.

None of it is cheap. Round-trip first-class airfare between London and Sydney costs about $8,000. Yet despite ticket prices that can be as much as a third higher than those of direct rivals, Emirates fills planes at an average 74.6 percent capacity--on par with rates for British Airways and Air France. Analysts estimate that Emirates's higher-margin first-class customers generate 15 percent of sales, above the industry average.

And so the empire continues to grow. Within weeks of adding Shanghai to its network last year, Emirates noticed that the new route was running 80 percent full, an unexpectedly strong start. "We wondered who was traveling it and where they came from," Clark says. Groups of as many as 80 Egyptian businessmen, his planners found, were flying to Shanghai after layovers in Dubai to meet with suppliers of manufactured goods exported to Cairo. By connecting the cities, Emirates closed the loop on two growing markets.

It was proof of one of Emirates's founding visions--that thanks to its geography, Dubai was in a unique position to move people from one corner of the world to another. Shanghai and Cairo are just the latest spokes to meet at Dubai. From there, passengers can reach any of the 160 destinations connected by the airport. "Once you start assembling feeds from scores of different arrivals," Clark says, "you can just open the doors and watch the planes fill up."

And if you're lucky, you can keep shopping for planes from Airbus and Boeing. As a measure of Emirates's rising clout, its planes are more frequently outfitted these days with custom features that Clark and Ahmed specifically request. The cabins of Boeing's latest aircraft, for example, offer higher ceilings, more legroom, and mood lighting. And the new A380s, expected to start flying late next year, "will bristle with new gizmos and gadgets," Clark says. Is this a fringe benefit of working for the royal family? You bet. And this one Clark will happily admit. "They know that if they make them our way," he says, "the sheikh will buy them."