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Growth phenomena

There seems to be no stopping the relentless expansion of the Gulf’s main carriers, but are their growth plans sustainable and realistic?

What is Emirates going to do with the 45 Airbus A380s it has ordered? That is one of the most debated questions among delegates at international airline gatherings. And it is not just Emirates in the Arabian Gulf that has soaraway ambitions: Abu Dhabi’s newcomer Etihad Airways and Qatar Airways are obsessed with giving Emirates a run for its money.

map mideast

Within less than a decade, the airline fleets in the Gulf will nearly treble in size. The ruling Al Makhtoum family has turned a once sleepy Dubai into a major transit hub and now a leisure destination, but can Abu Dhabi and Qatar’s capital Doha generate traffic at the level required to fill the vast increase in capacity? The sudden emergence of low-fare airlines in India, which could have a considerable impact on traffic between the Indian subcontinent and the Gulf States, has added another twist, as has Abu Dhabi’s decision to pull out of multi-national carrier Gulf Air.

The region’s financial institutions, some of which will have to provide finance for these orders, are backing this optimism. Abu Dhabi-based Emirates Industrial Bank (EIB) forecasts robust growth in the region, with passenger numbers expected to jump from 34 million in 2005 to 78 million by 2010, with Dubai international airport accounting for 60 million of this total. This means more than doubling the 25 million passengers that are expected to pass through the airport this year. Traffic at Abu Dhabi is also set to double from the present 6 million passengers to 12 million.

According to data from Airline Business sister organisation AvSoft, the fleets of Emirates, Etihad and Qatar will more than double over the next six years (see table, page 44). This does not include a commitment for 60 A350s from Qatar and significant further capacity additions at the other two. The EIB anticipates that over the next two decades the Middle East and Gulf will need 650 aircraft worth $64 billion.

One airline chief who is in full agreement is Emirates president Tim Clark. “If we did not believe there would be this phenomenal growth,” he says, “we would not have placed the orders we did. People tend to forget that these aircraft will not arrive all at once. We have a phased fleet plan that will see the A380s, for example, being delivered between October 2006 and 2012. Since we embarked on our growth scenario in 2001, traffic has tipped up by 15% and [by 2012] we will face an almost 50% shortage of capacity.”

Such optimistic projections are based on the staggering growth of Dubai, which shows no signs of slowing down. Gross domestic product is growing at 16-24% a year, and, Clark points out, the emirate is in a build phase that presently amounts to $65 billion worth of work. Between now and 2015 this effort will draw in vast numbers of expatriate labour, as well as new permanent residents. This exponential growth mode will, according to government estimates, see Dubai reach a 7-10 million population by 2015. Additionally, by 2015, the Dubai Land entertainment and theme park complex is expected to draw 20 million visitors a year.

The building boom is the way of reducing Dubai’s reliance on scarce oil revenues by establishing a sustainable economy through higher value-added services. This economic boom means the Emirates fleet plan is far from complete. “Building these numbers into our growth plan we are 50% short,” reiterates Clark.

Dubai has been particularly successful in routing traffic from India to Europe in vast quantities. But will a surging and liberalising Indian market, where more direct flights from the subcontinent to Europe and the USA will bypass Dubai, stunt the ambitions of Emirates? Clark dismisses this new threat. “Past Indian government policies have suppressed and stifled demand between India and the Gulf and this pent-up demand will lead to unprecedented traffic growth, especially as India now has a large proportion of high earners among its 1 billion population. The market will soak up whatever capacity is being offered in the future.”

Some 15% of Emirates traffic is between Dubai and India, he says, currently generating average load factors of 93%, but this would be more were it not for government-imposed limitations on the number of seats it is allowed to provide. With such restrictions removed, Emirates would expand its Indian coverage to provincial capitals.

A recent report by global banking group HSBC suggests that the plans of Emirates, Etihad and Qatar to grow faster than the Middle East market as a whole, without creating a capacity surplus, would need several prerequisites. These include above average home city origin and destination (O&D) traffic growth, using its hub to attract traffic from the Middle East and the Indian subcontinent into underserved markets, and slower growth among other leading carriers.

Clark says that the groundwork has been laid for a continued increase in O&D traffic, emphasising also that 99% of people in Dubai travel by air, rather than by road – rail networks being non-existent. Dubai is also building an intercontinental hub that will enable Emirates, with new aircraft, to serve city pairs that could never before have been contemplated. “Geographically, our centrality is a secret we have kept to ourselves,” says Clark.

Hub location

“No intercontinental hub is better positioned,” says Clark. “Within eight hours’ flying time of Dubai we can reach 3.5 billion people. I also look at the domestic base of Emirates not just as the UAE, but anywhere within a thousand-mile radius of Dubai. We have always been thinking on a global scale. Part of our ethos has been and is to move away from the bilateral structure that has governed air transport for far too long. Let market forces decide who goes where and when.”

The only constraints, Clark admits, are that Dubai’s airport cannot keep up with demand, and, in the longer term, that environmental pressures will put a break on air transport. Dubai airport is growing by 15-22% a year and is building at a frantic pace to increase capacity to 70 million, but is physically restricted from expanding much beyond present plans. But the government has foreseen this potential shortage and has started work on a new airport at Jebel Ali, which eventually will be able to accommodate 120 million passengers a year.

A suggestion that Emirates may need to join a global alliance to extend its international reach further draws a robust defence for its go-it-alone attitude. Clark is well known for his aversion to alliances, although he concedes that it would suit some airlines, but not Emirates. “We have been living in a war zone for 30 years, we have faced SARS, high fuel prices, the Asian currency meltdown and more,” he recalls. “All that time we have continued to grow, both in revenues and profit. We are absolutely determined to shape our own destiny. We are going to grow at a pace decided by us and go to places decided by us. We will retain complete control over what we do.”

Acquiring so many A380s, not to mention other types, has led to suggestions that the Dubai government is considering a full or partial initial public offering (IPO) to finance this huge investment. Clark confirms that an IPO has been discussed, but this is certainly not imminent. He insists that the airline does not need the funds and would not have contemplated this acquisition if it had to go to the government with its cap in hand. “We are cash positive, we have $2-3 billion in cash, and our obligations are easily met from our own reserves and our ability to borrow on the international financial markets,” he says. Clark says any IPO would be heavily oversubscribed, and, if partial only, would be taken up entirely by local institutions. “Emirates would prove a gilt-edged investment,” he says.

Abu Dhabi, seat of the government of the United Arab Emirates and with a greater share of gross domestic product largely generated by its huge oil and gas reserves, has long envied Dubai’s aviation success. The government has a vigorous strategy designed to parallel its accomplished neighbour. In July 2003, it set up a new indigenous flag carrier, Etihad Airways, and initiated the development of Abu Dhabi international airport into a more effective global hub, with plans for a dedicated Etihad terminal between the existing runway and a new runway. It will also withdraw from Gulf Air within six months, a move that has surprised few industry observers and has been expected ever since Qatar made a similar change in May 2002.

Etihad is making much faster progress than Emirates did in its formative years, but sustaining this rise depends on how fast Abu Dhabi can diversify its economy away from oil and gas and create the conditions for air traffic to develop and prosper. Although Abu Dhabi has a significant expatriate community – some 80% of the total generating good business, friends and family traffic – its population is less than Dubai’s and the tourist industry is still in its infancy.

In July, the Abu Dhabi government appointed Robert Strodel, formerly head of cargo and mail at Etihad, as its first chief executive. He is busy drawing up the carrier’s strategic plan, believed to focus largely on linking Abu Dhabi with direct flights to capital cities across the world, with one destination added each month. The carrier expects to serve 70 cities by 2010.

This level of services has already been achieved by Qatar Airways, which was established in late 1993, although its steep rise did not begin until the installation of the present leadership and a change of direction in 1997. Its elevation in status to national carrier also seems to have fuelled its ambitions, including orders for the A380.

Given that Qatar’s capital Doha has a similar O&D and hub profile to Abu Dhabi, both being decidedly weaker than Dubai, such massive projected capacity growth might appear optimistic. But Qatar Airways chief executive Akbar Al-Baker says that the carrier’s orders only reflect growth in recent years and projections for the next decade. “We have grown by 35% year-on-year in the past seven years, and this will be sustained until 2009-10, when we estimate reaching a plateau,” he says. “Growth thereafter is expected to be in the region of 18-23% annually.” The headline order numbers present a slightly skewed picture. “Not all of our [80] new aircraft are for growth,” Al-Baker says. “Only 60% are required for growth, the remaining 40% are being bought to replace older A320/A330 aircraft. It is our policy to rotate the fleet to keep residual values high.”

Tourist attraction

If Qatar Airways is to realise its growth projections, it will need to increase its O&D traffic, which currently accounts for only 25% of the total. Al-Baker is quietly confident that this share can be increased to 40-42%. He bases his belief on forecasts by world tourism bodies which foresee a doubling of tourism in the region over the next 25 years. The Qatari government itself has developed a tourism masterplan to boost cultural, educational and exhibition activities. Additionally, Qatar Airways, which manages and operates Doha International Airport, has embarked on a $5.5 billion programme to build a new international airport, some 4km from the existing facility, which is due to open in 2009 with capacity for 12 million passengers. When fully developed, scheduled for 2015 but dependent on demand, the new airport will be able to handle 50 million passengers and 2 million tonnes of cargo.

Al-Baker gives two reasons for not fearing competition from India’s new low-fare airlines. “As a full-service network carrier our offer cannot be matched. There are still too many regulatory hurdles in this region, few suitable secondary airports and poor infrastructure in India (see related story on page 64).” While there will be an initial flurry of new services, Al-Baker does not think this can be sustained. But the big advantage Qatar Airways enjoys over its Gulf rivals, he says, is one of route structure. “Our traffic flow is equally spread, we do not have high-frequency connections to the Indian subcontinent.”

There are parallels to be drawn between Qatar and Etihad Airways. Both are expanding aggressively, backed by governments that have the finances and determination to carry through their plans, and both operate from fast developing hubs. Qatar Airways already has good brand recognition, while Etihad’s is growing. Al-Baker says that both can flourish side by side.

Gulf Air, the national carrier of Bahrain, Oman and, for not much longer, Abu Dhabi, could be in danger of being left behind in the scramble for a bigger slice of the growing aviation pie in the region. This prospect is strongly refuted by the airline’s chief executive James Hogan. “Absolutely not,” he says. “Last year, we saw 23.8% growth in our traffic, carrying a record 7.48 million passengers. So we certainly don’t think we are missing out on the growth opportunities in the market. We don’t aspire to be a global airline; rather we aim to be a leading regional player, with a fleet to match. In addition, we will expand our fleet only to meet route and network developments, which will deliver profitable revenues for the airline. We are currently evaluating options for a fleet replacement programme and, within this, we will allow for steady and sustainable growth of the airline.” However, a mega order to rival those of its closest competitors is not expected.

Hogan says that having always planned for a range of business eventualities, Gulf Air has been able to react to the Abu Dhabi decision quickly. “We are now working on the detail of an enhanced strategic plan, having fully reviewed our organisational structure and route network,” he says. “We will complete this within the next 90 days. As we complete the smooth withdrawal of Abu Dhabi from its position as a shareholder, we are clearly going to focus far more on a two-hub strategy in Bahrain and Muscat. A two-hub strategy gives us the opportunity to review our network and bring in even greater business synergies in route planning. It also gives us the opportunity to review our business operations and our cost base to ensure the long-term prosperity of the airline.”

The position of Gulf Traveller, which operates an all-economy service out of Abu Dhabi, is also being reviewed. But, says Hogan, “as a brand under the Gulf Air masterbrand, Gulf Traveller is just as flexible as any other airline brand in terms of location. Its unique approach of offering all-economy services can be transferred to any other hub as and when it makes commercial sense to do so.” A strong commercial player in the Indian subcontinent for many years, Hogan is confident that Gulf Air can retain this position, suggesting that competition stimulates travel and grows the market.

Publicly, at least, Hogan has shrugged off the setback of losing Abu Dhabi and points out the success of the three-year turnaround programme, which returned Gulf Air to profit in 2004. “Fuel aside,” he says, “the core indicators of the business are strong and continue to develop, I am confident the enhanced strategic plan will allow us to build a platform for long-term sustainable profit, with strong, supportive and focused owners behind us.”

GUNTER ENDRES/LONDON analysis by FABRICE TACOUN

Analysis

Growth rates at Emirates and Qatar Airways far outstripped other carriers in the region over the past five years. In fact, ignoring shrinking El Al, these two account for over 80% of total growth. Both are focusing on long-haul markets, with Emirates strengthening services to Africa and Australasia, and Qatar building up its European and African presence. The Middle East is being redefined with the emergence of three main types of carrier: intercontinental (Emirates, Qatar); regional players with some intercontinental routes (Gulf Air, Royal Jordanian); and regional carriers with limited intercontinental services (Yemenia, Oman Air). Regionals have suffered at the hands of Emirates and Qatar.

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