Abstract
The Persian Gulf states have positioned the Middle East as a pivotal player in global aviation. Long-haul carriers, such as Emirates, Qatar Airways, and Etihad Airways, are exploiting the region’s unique geographic location and airport hubs to capture air traffic flows between emerging markets around the world. Meanwhile, low-cost carriers, like Air Arabia and Fly Dubai, are capitalizing on the Gulf countries’ demographic diversity to promote travel within the region. Critics of the Gulf carriers, including foreign airlines and governments, cite alleged state subsidies for fuel and favorable terms for aircraft acquisition as unfair advantages that undermine global competition. The success of these carriers, however, is a reflection of their strong business principles and of the sector’s geopolitical significance. Rather than complaining, critics would do well to pursue commercial collaboration with the Gulf carriers and conclude Open Skies agreements with the Gulf states.
Introduction
The Middle East has become a pivotal player in global aviation. This development, fueled by accelerated growth in the region’s civil aviation sector, is taking place at both the intra- and inter-regional levels and spans a number of different airline business models shaping the growth of local carriers. Such changes have significant geopolitical implications. From North America to Europe to Africa, airlines and governments across the world have voiced concerns about the expansion of the Middle East’s aviation sector. They allege that a number of the region’s carriers enjoy unfair advantages, including state subsidies for fuel and favorable terms for aircraft acquisition, that adversely affect the financial performance of carriers in other parts of the world.
The rise of the region’s aviation sector, however, is neither an overnight sensation nor the result of unfair advantages. Rather, it is the product of a business strategy that, globally, has capitalized on the region’s almost ideal geographic location as a hub linking key emerging markets in Asia, Africa, and Latin America and that, locally, has catered to the region’s unique demographics. Complainants would do well to understand this strategy and, rather than fighting these developments, find ways to pursue mutual benefit by collaborating commercially with local carriers and by concluding Open Skies agreements with local states.
The focus of this article is on the airline carriers of the Gulf states, given their dominant role in the region’s aviation sector. I begin by describing the landscape of civil aviation in the region, explaining the reasons why specific airlines have become globally important and shedding light on their possible development trajectories in the years ahead. Next, I discuss the factors underpinning the Gulf carriers’ success—strong business principles built upon quality management—and their geopolitical implications. I conclude by highlighting potential risks that may affect the sector’s continued growth.
A Modest Beginning
In the 1980s, the Middle East’s aviation sector had a limited presence in the global landscape of the industry. European and Asian carriers treated a number of destinations in the Middle East, such as Bahrain, Dubai, and Muscat, as technical stops to refuel long-haul services between Europe and Asia. These carriers also picked up limited volumes of local traffic originating from, or destined to, the region. A small number of other services offered by these carriers targeted key oil-producing countries and served mainly business traffic and expatriate workers from Europe and North America. The other main traffic flows included affluent local populations traveling beyond the region as well as religious traffic, largely to and from Saudi Arabia.
The traditional business model in the region had been for states to fund flag carriers, with airlines seen as little more than symbols of state prestige. There was no accountability for commercial results or service standards. But by the early 1990s, the structure of the aviation market changed dramatically. The arrival of the Boeing 747-400, a longer-range model of the well-established Boeing 747, allowed airlines to operate non-stop flights between Europe and Asia, eliminating the need for a technical stop in the Middle East. This development led European and Asian carriers to reduce their services to the region, creating the impetus for a number of Middle Eastern states and local airlines to protect these air links by undertaking fleet investment and growth.
In Dubai, Emirates had been established in 1985 and was initially the flag carrier of the United Arab Emirates (UAE). It carried just 86,000 passengers in its first year of operation.[i] However, as carriers beyond the region reduced their flights, Emirates began adding new aircraft and destinations, growing throughout the 1990s. From the outset, the airline’s owners made clear that it would have to operate on a commercial basis. Meanwhile, Qatar Airways, which had been established in 1994, was re-launched in 1997 under new CEO Akbar Al Baker, who still holds the post today. Under his leadership, it began to grow and, like Emirates, also operated on a clear commercial basis. These two airlines were later joined by Etihad Airways, Abu Dhabi’s flag carrier, which was launched in 2003.
These three carriers have contributed much to the region’s burgeoning aviation sector, operating long-haul flights between key markets across the globe. In addition to them are the low-cost carriers, led by Air Arabia and Fly Dubai, that provide services within the region as well as to markets within a 1-5 hour flight radius of the region. Both business models are shaping today’s aviation landscape.
The Gulf’s unique demographics also support a buoyant airline sector, as a number of local countries have sizable expatriate populations. In the UAE, for example, local Emiratis constitute only 16 percent of the country’s total population.[ii] There is a large community of affluent expatriates, particularly from Europe and North America, who work in professional positions and have extensive travel requirements, both globally and within the region, for business and leisure. This provides a strong source of traffic for local airlines. There is also a large population of migrant workers, primarily from South and Southeast Asia, who generate high volumes of traffic to and from their home countries. Some states, including the UAE, are also home to substantial communities from other Middle Eastern countries, including Iran, Iraq, and Egypt, that represent another source of traffic.
Growth in the tourism sector has also aided the local aviation market. For example, as part of its strategy to diversify its economy, Dubai has led the region in developing a very strong tourism industry. This sector, supported by a diverse tourism proposition and extensive hotel infrastructure, provides yet another source of traffic for the Gulf’s airlines.
The Long-Haul Market
Since the turn of the century, the growth of long-haul air traffic has accelerated, much of it a function of the expansion of Emirates, Qatar Airways, and Etihad Airways. During fiscal year (FY) 2003-2004, 10 million passengers flew on Emirates, a figure that rose to 39 million passengers by FY 2012-2013.[iii] Qatar Airways flew 3 million passengers in FY 2003-2004 but, by FY 2012-2013, had 18 million passengers.[iv] Meanwhile, Etihad Airways, which flew just 340,000 passengers in 2004, carried almost 12 million passengers in 2013.[v] Together, these three airlines today carry in excess of 69 million passengers annually.
Three factors have fuelled this expansion. The first is concerned with market dynamics. In the global economy, the most rapid growth is taking place in Asia, Africa, Latin America, and the Middle East. The demand for air travel linking these global regions is also growing rapidly, and long-haul carriers in the Gulf have a clear geographic advantage in exploiting this potential. For markets, such as China-to-Africa or Asia-to-Latin America, it makes no geographic or commercial sense to travel via Europe or North America. Conversely, the Gulf carriers offer logical flight routes, while their purpose-built hubs provide numerous itinerary permutations between these markets, maximizing revenue from these emerging economies.
A second factor is the types and technical capabilities of aircraft in the Gulf carriers’ fleets. All three hub operators have invested in state-of-the-art aircraft—in particular, the ultra long-range Boeing 777 twin-jet and the very large-capacity Airbus A380. From Gulf airports, these aircraft can serve any market in the world on a non-stop or one-stop basis. They offer high-capacity and low-unit costs for their operators and efficient, competitive transport to customers in burgeoning markets. In the future, the region is likely to retain its competitive status, as carriers invest in next generation aircraft to further improve fuel economy and reduce risk when opening routes in new markets.
Some critics question the Gulf carriers’ large fleet sizes and massive aircraft orders. Emirates has in excess of 200 aircraft in its fleet with over 300 additional aircraft on order.[vi] Etihad Airways has 89 aircraft in its fleet and around 220 on order, while Qatar Airways has around 130 aircraft in its fleet with over 280 on order.[vii] These figures may appear ambitious, but they need to be put in context. These orders stretch out years into the future, and some represent replacement, rather than incremental, aircraft. Flight times from the Gulf are so long—17-18 hours to the western United States or Latin America—that to maintain even once-daily frequency requires a minimum of 2-3 aircraft. Higher frequencies require more aircraft. Considering the growth potential of the markets served, the ultra-long distances of the flights operated, and the high-occupancy level of flights when new capacity is added, there is good reason to believe this expansion is commercially warranted.
A third factor is the availability of adequate and expanding airport capacity that can be used twenty-four hours a day. This capacity is critical to the Gulf hub carriers’ model, which depends on having efficient operations to plan a large number of flights and optimize the itinerary options available to clients to achieve high occupancy levels. By contrast, North American and European airlines tend to be limited by night curfews at their home airports.
Airport traffic statistics demonstrate the effectiveness of these hubs’ operations. Dubai International Airport handled just under 4 million passengers in 1985, but as Emirates developed this hub, this figure rose to 18 million in 2003 and 66 million in 2013.[viii] Meanwhile, Abu Dhabi International Airport handled 4 million passengers in 2003 but, by 2013, had over 16 million.[ix] To keep pace with fleet expansion and market potential, however, further investment in airport expansion is essential. Dubai recently opened a second airport, Qatar is moving its Doha hub to a new airport, and Abu Dhabi is opening an additional terminal. Investment is also taking place in other parts of the region—for example, the provision of new airport capacity in Oman.
Low-Cost Carriers
The success of Gulf aviation is not only the result of the long-haul carriers. The emergence of low-cost carriers (LCCs) has generated new travel within and to the region on flights typically 1-5 hours in duration. Air Arabia, founded in the UAE emirate of Sharjah, is the leading LCC, having recently reached its tenth year of operation. The company is publicly traded and profitable, and has adopted a multi-country model with aircraft based in Egypt and Morocco, in addition to Sharjah. Later this year, it will open an additional base in the emirate of Ras Al Khaimah. Fly Dubai, meanwhile, has taken a different approach. Established in 2009 by the Government of Dubai, the airline provides flights exclusively from Dubai to a diverse range of destinations largely distinct from those served by Emirates. It has delivered significant profits within 4 years of its founding.
Although each airline has a different business approach, both are commercially defensible. Some intra-regional markets served by LCCs have been buffeted by political unrest, but the model has proved resilient, demonstrating that as soon as stability is restored, confidence recovers and traffic returns.
As in other parts of the world, regional customers have taken to the low-cost model, which includes a simpler service ethos, more affordable pricing, and the use of the Internet as a sales channel. This short-haul business model has democratized air travel in the Gulf and the wider Middle East. It is tapping into the region’s vast local population, particularly of young people who could not previously afford to fly, as well as the region’s vast foreign worker population that wishes to visit home in countries like India. The availability of low cost flights has also stimulated new inbound tourism, with markets, such as Russia, opening up.
The LCC market will continue to flourish, given the region’s diverse customer base and these airlines’ ability to take advantage of new sources of demand. As such, both Air Arabia and Fly Dubai have additional aircraft on order. Other country markets also offer latent potential: Saudi Arabia, for example, has a developing LCC sector. However, further growth in the LCC market will largely depend on whether local states reduce protectionist barriers that currently inhibit air service development.
Here to Stay
The region’s air transport sector is the subject of criticism from foreign airlines and governments that question the Gulf airlines’ business models. However, the evidence shows that there is a clear commercial rationale, underpinned by macroeconomic and demographic trends, to these airlines’ operations. Emirates, by its own acknowledgement, received start-up investment funding but has since stood on its own. It has delivered sustained profitability, supported by its increasingly transparent financial disclosures. Qatar Airways and Etihad Airways do not yet have this level of transparency, but there is little doubt that they intend to move in this direction. Their owners, while certainly governments, still hold them accountable for delivering profitability, and indeed, both have recently reported profits, though not at sufficient levels.
Contrary to critics’ claims, the success of the Gulf carriers can be attributed to strong business principles, including the vision, ability, and continuity of their management. Emirates has built its business over almost 30 years. Sir Tim Clark, Emirates’ president and an Englishman with vast industry experience, has been with the airline since its founding and initially headed its planning team. He was instrumental in leading Emirates’ move to tap into existing markets, such as Europe-to-Asia and Europe-to-Australasia, and to spot the potential of new markets, like Asia-to-Africa. He has also greatly influenced the direction of Boeing and Airbus’s aircraft design specifications from which Emirates and other global airlines have benefited. Clark has provided continuity in leadership to the airline and has instilled a high degree of entrepreneurialism into its management personnel—what he describes as the “Emirates DNA”. This is a key qualitative factor in Emirates’ success.
Qatar Airways has also benefited from the sharp commercial focus of its CEO Akbar Al Baker, who has been at the airline’s helm since 1997. He sees himself, first and foremost, as a businessman and is recognized as a tough negotiator with suppliers. His own words encapsulate the drive of the airline: “Qatar Airways does not fly airplanes to carry fresh air to any destination.” He adds, “We don’t go anywhere to please any government. We go where there are economic opportunities, when there are business opportunities for the airline.”[x] His leadership has succeeded in steering the company from a small local airline into a major global player.
Strong business principles also explain the success of the LCCs. Their capable management has brought a discipline that compares favorably with best-in-class LCCs globally, combining efficient low-cost operation with high productivity.
Although all three long-haul Gulf airlines continue to focus on hub operations, there is evidence that their business strategies are becoming more divergent. Emirates has formed a deep commercial partnership with Australia’s Qantas. There is no cross-shareholding between the airlines, but regulations permit the two airlines close commercial cooperation, including joint optimization of schedules. Qatar Airways recently joined the oneworld alliance—one of three such alliances in the world—that will allow it to cooperate more closely with alliance partners, notably British Airways. Initially, the level of collaboration will not be as deep, due to regulatory limitations, as that of Emirates and Qantas, but this could change. Etihad Airways has taken a third path by establishing what it terms “equity alliances.” It has purchased minority stakes in a number of airlines and engages in management contracts with some of its partners.
There are strengths and weaknesses to each of these approaches that will become clearer over time. But what we are witnessing is a willingness on the part of the three Gulf carriers to seek collaboration with partners beyond the region. Although the Gulf carriers provide tough competition for many airlines in other parts of the world, some in the industry recognize the value of working with, rather than complaining about, them. Willie Walsh, CEO of IAG, the parent group of British Airways, has indicated his strong support for the commercially rational approach of the Gulf carriers.[xi] This represents a new phase of maturity in the region’s aviation development and one that I see as positive for the future.
Sustainable Growth?
The success of the Gulf aviation sector is based on linking rapidly growing global markets and capitalizing on favorable demographic and economic conditions within the region. This success is confirmed by data from the International Air Transport Association (IATA), which reported, in 2013, 12 percent growth in passenger traffic for Middle East carriers, the strongest growth shown by any region in the world. IATA credits this figure to the “continued strength of regional economies and solid growth in . . . travel, particularly to developing markets like Africa.”[xii] IATA also projects that the UAE will be among the world’s top 10 markets for air travel by 2016, accommodating 87 million passengers. By comparison, the U.S. market accommodates 223 million passengers and the UK market 200 million.[xiii]
Other projections underscore the sustainability of this trend. According to Boeing forecasts, between 2013 and 2032, airline traffic in the Middle East will grow by over 6 percent, higher than the global average of 5 percent and well ahead of mature markets, such as North America and Europe. During the same period, Boeing foresees demand for 2,610 additional aircraft in the region, roughly 7 percent of total global demand. More importantly, the region’s demand for new long-haul, wide-body aircraft represents 23 percent of global demand, reflecting the significance of the region’s hubs.[xiv] In the geopolitical context, aircraft orders by these airlines support thousands of high-quality jobs beyond the region, particularly in the aerospace industries of Europe and North America.
It is time for critics to reappraise their views. Policy makers should seek additional liberal air service agreements, termed Open Skies agreements, to and from, as well as within, the region. Lack of such agreements seriously hinders sector growth and economic development. The UAE is the model, having concluded over 100 such agreements that underpin Dubai’s economic success.
These opportunities aside, there remain risks to future growth. Serious military conflict and political unrest, for example, would be extremely damaging to the sector. Fallout from the 1991 Persian Gulf War and the 2003 Iraq War illustrate the negative consequences of these shocks to the industry. At the operational level, insufficient air traffic control capacity and the inefficient use of airspace due to military considerations are serious impediments to air traffic expansion in the region. Averting this problem requires Gulf states to invest resources and muster the political will to avoid a future logjam.
In spite of these risks, aviation in the Middle East is reaching a new level of maturity. The sector is led by well-managed airlines that are best-in-class by global standards. It also has the benefit of its unique geographic location relative to shifting macroeconomic trends. In the years ahead, by making shrewd use of aircraft and airport resources, the Gulf aviation sector is likely to increase its importance both within the region and around the world.
Works Cited
[i] Tim Clark, e-mail correspondence with John Strickland, March 2014.
[ii] Froilan T. Malit Jr. and Ali Al Youha, “Labor Migration in the United Arab Emirates: Challenges and Responses,” Migration Information Source, 18 September 2013, accessed on 9 April 2014, http://www.migrationpolicy.org/article/labor-migration-united-arab-emirates-challenges-and-responses.
[iii] Emirates Group, “It Takes a World: Annual Report 2012-2013,” 2013, 152, accessed on 9 April 2014, http://www.theemiratesgroup.com/english/facts-figures/annual-report.aspx
[iv] Qatar Airways, “The Qatar Airways Story”, March 2014, accessed on 9 April 2014, http://www.qatarairways.com/iwov-resources/temp-docs/press-kit/The%20Story%20of%20Qatar%20Airways%20-%20English.pdf.
[v] Etihad Airways, e-mail correspondence with John Strickland, February 2014; Etihad Airways, “Fast Facts and Figures: Q4/2013,” 2013, 2, accessed on 9 April 2014, http://www.etihad.com/Documents/PDFs/Corporate%20profile/Fast%20facts/Q4-2013-en.pdf.
[vi] Emirates Group, “Tim Clark on 2013 and going into 2014,” Open Skies 18 (February 2014): 2 and 12, accessed on 14 April 2014, http://content.emirates.com/downloads/ek/pdfs/open_sky/OpenSky_18_Final_9Feb.pdf.
[vii] Etihad Airways, “Annual Report 2013,” 2013, 28; Qatar Airways, “The Qatar Airways Story.”
[viii] Dubai Airport, e-mail correspondence with John Strickland, February 2014; Dubai International, “Fact sheets, Reports, & Statistics,” 13 April 2014, accessed on 14 April 2014, http://www.dubaiairport.com/en/media-centre/facts-figures/pages/factsheets-reports-statistics.aspx?id=9.
[ix] Abu Dhabi Airport, e-mail correspondence with John Strickland, February 2014.
[x] Akbar Al Baker, interview with John Strickland, 2012 Arabian Travel Market Dubai, Dubai, UAE, May 2012, accessed on 9 April 2014, http://www.youtube.com/watch?v=b06r3hmwQ90.
[xi] Ed Attwood, “No issue with Gulf carriers says IAG boss,” Arabian Business, 10 April 2013, accessed on 10 April 2014, http://www.arabianbusiness.com/no-issue-with-gulf-carriers-says-iag-boss-497406.html.
[xii] International Air Transport Association (IATA), “Air Passenger Market Analysis, December 2013,” 6 February 2014, accessed on 9 April 2014, http://www.iata.org/publications/economics/Documents/passenger-analysis-dec2013.pdf.
[xiii] IATA, “Projected Top 10 International Passenger and Freight Markets in 2016,” accessed on 9 April 2014, http://www.iata.org/publications/Pages/airline-industry-forecast.aspx.
[xiv] Boeing, “Current Market Outlook 2013-2032,” June 2013, 3, accessed on 9 April 2014, http://www.boeing.com/assets/pdf/commercial/cmo/pdf/Boeing_Current_Market_Outlook_2013.pdf.