(by Bruce Lyons) Even in the arcane world of airline regulation, it was still surprising to hear last week’s announcement that Emirates would be fined if it continues “to engage in price leadership” and does not raise business class fares on routes out of Germany to non-EU destinations. I think we can read this to mean “if Emirates continues to undercut national champion Lufthansa”.
The Federal Office for Goods Transport is Germany’s transport regulator and was responsible for this decision under a law applicable when “public transport interests are being permanently damaged”. I find it difficult to imagine that German travellers are worried about their access to inter-continental travel being permanently damaged by low fares. Or am I being naive in my interpretation of “public transport interests”?
Emirates flies from four German airports and its flights connect with the Dubai hub and on to destinations like Singapore, Hong Kong and Johannesburg. Such connecting flights are always priced more cheaply than direct flights, especially for business class, but they provide a constraint on what are often monopoly or duopoly routes for direct flights. It has to be said that, having checked a few fares non-scientifically on a flight booking site, Emirates fares are very much lower than Lufthansa. It seems that Emirates has a business model more in tune with recession and pressure on business travel budgets. The press has not reported any claims of predatory pricing or particular state subsidies, yet Emirates has grown rapidly and is flying nearly five times as many passengers as it was a decade ago. This makes enemies of national champions, even ones as profitable as Lufthansa.
I don’t expect Emirates to take this ‘fares-follower’ requirement lying down. Reuters reports their senior vice-president as saying that they have no intention of withdrawing any flights, in fact “We’re absolutely committed to the German market. We buy a very large amount of German-made aircraft” (i.e. Airbus). As a hugely significant customer of both Airbus and Boeing, who share $55b of its orders at present, the airline has a very large and credible bargaining chip to play with.
It was quite a week for Dubai and its Emirates airline. On 17th November, the Emirates Chairman announced another expected $1b profit next year. On 20th November, the German regulator threatened the airline with fines if it did not raise fares. Then on 25th November, all this was overshadowed when Dubai World dropped the bombshell of its debt standstill that has resulted in this week’s financial crisis in the emirate.