How Foreign Airlines Thrive as U.S. Flounders

Aug. 4, 2008— -- The world's largest passenger aircraft has arrived in the United States.

United isn't flying it. Neither is Delta, American, Continental or any other domestic airline.

No, the first Airbus A380 to land in the United States is flown by Dubai-based Emirates Airlines.

While U.S. airlines -- desperate to stay afloat -- are cutting flights and charging customers to check bags, several foreign airlines are aggressively expanding their routes and making money in the process.

Emirates, which prides itself on its high-end luxury service, is just one example. Singapore Airlines, Cathay Pacific, Etihad and Qatar are all thriving in a period when U.S. airlines are teetering on the brink of bankruptcy.

And that gap might be growing wider.

Emirates premiered its first A380 flight on Friday: a 14-hour journey from Dubai to New York. It was launched in grand style, with grand talk about expansion into a global airline.

The plane is just the first of 58 the Middle Eastern airline plans to fly within the next three to five years. Company president Tim Clark said Dubai's rapid growth and its proximity to Asia, Africa and Europe makes it the ideal spot to base the government-owned airline.

"Its geo-centricality drives our growth, creating new travel patterns," he said. "We truly will be a global brand, a global carrier."

Emirates already flies to New York and Houston and will start Los Angeles service in October and San Francisco in December. This comes as U.S. airlines are slashing large chunks of their schedules in an effort to stay afloat.

(The only U.S. exception: Southwest, which has a loyal -- almost cult-like -- following, runs an extremely efficient fleet and smartly purchased fuel at much lower prices than today's market price.)

So why are some successful and the others on life support?

The Long Haul

The biggest difference between U.S. and overseas airlines is where they fly.

Tickets for long overseas international flights are substantially more expensive than they are for short-haul domestic flights, giving airlines larger profit margins.

Roughly two-thirds of the flights operated by U.S. airlines stay within the country.

"Our route network is completely different from say American Airlines, or United or Delta," said Nigel Page, Emirates' senior vice president of commercial operations for the Americas.

For instance, Emirates flies from Dubai nonstop to places like Moscow, Vienna, Paris and Houston.

The big U.S. airlines also have such long-haul routes -- American, for instance, flies nonstop between New York and Buenos Aires -- but they also fly many shorter routes that are not nearly as profitable. For instance, Delta offers 14 nonstop flights on weekdays between Atlanta and Orlando.

Richard Aboulafia, an airline analyst with the Teal Group, said such international routes carry a higher price and higher profit. American airlines have such routes, but only as a small portion of their overall networks; not enough to offset losses on domestic flights.

Additionally, he said, the business and first class seats of these planes command especially high ticket prices. The rest of the seats could-- and often do -- lose money, Aboulafia said, but the front cabin makes up the difference.

"The best thing you can do is get backpackers off your plane," Aboulafia said.

"The flag carriers like Lufthansa generally aren't trying to carry the type of customers that far more populist U.S. carriers are trying to carry," added Robert Mann, an airline industry analyst and consultant based in Port Washington, N.Y. "European carriers don't try to carry package holiday travelers."

U.S. airlines don't offer the same level of service on their planes and it isn't an easy task for them to catch up.

"Building premium service isn't cheap. You either need new jets or terribly expense interior upgrades," Aboulafia said. "You also need to cultivate that brand, which takes time in itself."

It's the Economy, Stupid

Some of the difference stems from simple economics: the United States is flirting with a recession, while economies in the Middle East are booming.

The Middle Eastern countries, in particular, need to import goods and labor to keep their economies growing. Much of that comes in on planes. This is particularly true of guest workers.

"Those economies run on guest workers," Mann said.

Mann recently flew to Abu Dhabi on Etihad Airways, and said that "the whole cabin was full of bankers."

Oil Prices

The biggest threat to airlines – anywhere – is the high price of oil.

But some airlines are more suited to cope than others.

Oil is traded in U.S. dollars and the dollar has severely weakened against other world currencies. This hurts U.S. airlines the most.

If you sell tickets in Euros and buy oil in dollars, you are getting a relative discount on oil prices. That doesn't mean that there hasn't been a big run-up in oil prices, but it means the pain is not as great for foreign carriers.

Also, just like cars, some planes are more fuel-efficient than others. And the U.S. airlines tend to have the SUVs of the skies. The foreign airlines -- especially the younger ones -- have a much more modern fleet and can therefore operate on less fuel.

"Our fleet age is just over five years old and obviously the American carriers have got fleets which are getting increasingly old and because of that they're relatively fuel inefficient," Page said.

Even if the U.S. carriers had the cash to buy new planes, they couldn't -- there is a roughly five-year backlog on new jets from both of the two main aircraft manufacturers: Chicago-based Boeing and its European competitor, Airbus.

Emirates executives explicitly reminded reporters that although they are the flagship carrier of a Middle Eastern government, the airline does not receive any subsidies, free fuel, reduced landing fees or operating capital.

A Novel Plane

The A380 also gives the airline a few other advantages.

First, the plane uses about 20 percent less fuel than would otherwise be necessary to transport that many people.

But the real financial benefit comes in the amount of premium services Emirates can add.

Emirates configured its A380 for 489 passengers. Most are in coach but there are 76 business-class seats and 14 private suites in first-class with electronic doors for privacy. They also get showers -- yes, the top-paying customers can shower on board -- their own mini-bar, a 23-inch high-definition TV screen, their own wardrobe and meals on demand.

(The showers offer five minutes of water and include a light that goes from green to amber to red to tell you how much time is left. Clark proudly announced that he was clean and well-rested in part due to the shower. He also only used two minutes worth of water.)

The average first class ticket on the route goes for $14,635, business for $9,571 and coach for $1,477. While that is the same as the service on the airline's Boeing 777 routes, there are substantially more of these high-end seats to sell -- and that's where the profit is.

Service

A good reputation doesn't hurt either.

Singapore Airlines and Cathay Pacific have long been known for their quality service. Now, the Middle Eastern airlines are pursuing -- and obtaining -- that same image.

Like every airline executive these days, Clark was asked if his company will soon start charging for water, soda or other amenities?

"No," he responded. "We'll actually put more on and it will be free."

The airline's crew members hail from 140 different nations, he said. On any given flight, it is likely that the crew could speak eight or nine languages between them.

The airline also adapts its menu to meet its customers' needs. So if it is flying to Germany, one of the many courses will always be a German dish. If Italy is the destination, there will be an Italian dish.

Emirates also says, whether you believe it or not, that it doesn't focus on the competition. And that attitude adds to its reputation.

When asked what it does right that makes it stick out above other airlines, Page responded with that same brashness.

"We try not to worry about other airlines. We worry about what our customers want," he said. "If we worried about our competitors, we probably wouldn't be doing what we are doing."