Global Economics

Mideast Airlines Soar Onto Global Stage


With a population of only 860,000, the Persian Gulf nation of Qatar seems an unlikely locale for one of the world's fastest-growing airlines. But Qatar Airways, based in the capital of Doha, plans to expand its fleet of 44 planes to 110 over the next decade. Qatar already serves 70 destinations in Europe, the Middle East, Africa, and Asia, and its first U.S. route is set to open this year. "We're positioning Qatar Airways as the national symbol of the State of Qatar, which has become an economic force on the global stage," Akbar Al Baker, the airline's chief executive, said during a recent appearance at a travel industry trade show in Berlin.

Qatar's neighbors have outsized ambitions too. Etihad Airways, a two-year-old startup based in Abu Dhabi, has $8 billion worth of planes on order. Dubai-based Emirates, founded only 20 years ago, is now the world's 10th-largest carrier and is branching out into hotels and resorts. Collectively, Persian Gulf-based carriers are set to increase their passenger capacity 140% by 2011, according to estimates by JP Morgan Securities.

What's behind these airlines' near-vertical takeoff? With oil prices at record highs, the Gulf region is flush with petrodollars. Mindful of the oil industry's boom-and-bust history, the region's leaders are investing heavily in travel and tourism in a bid to diversify their economies and cushion themselves against the next down cycle (see BW Online, 3/13/06, "The New Middle East Oil Bonanza").

STRATEGIC HUB. So great is the purchasing power of Gulf airlines that they can force Boeing (BA) and its European rival Airbus to design new planes to their specifications and undertake costly revamps of existing models (see BW Online, 3/27/06, "An Airline With a Deafening Roar"). And they're taking direct aim at rival carriers, especially in Europe and Asia.

True, the baking-hot Arabian desert may never rival New York, Paris, or Hong Kong as a travel destination. But Gulf carriers, especially Emirates, are building hub-and-spoke operations that capitalize on the region's location between Europe and Asia. "Their great advantage is geographic," says Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a Sydney-based consulting group.

For example, a passenger flying from Sydney to Paris on Australian carrier Qantas must make at least two stops, Harbison says. "Via Emirates, the Australian passenger will usually get there with only one stopover, in Dubai."

INDIAN ROUTES. To feed their hubs, the Gulf carriers are developing extensive route networks in Europe and Asia. Emirates, for example, operates 84 flights a week between Dubai and London -- three times as many as British Airways (BAB) -- as well as serving Manchester, Birmingham, and Glasgow. Qatar flies to six major European cities, and Etihad flies to five.

Gulf airlines also have become a major force in the fast-growing Indian market. "They have a strong intent to capture traffic on key routes from India to [Britain] and the U.S.," wrote JP Morgan analysts Peter Negline and Wai-Shin Chan in a recent research report. That growth has put pressure on Indian carriers, especially startups such as Jet Airways, the analysts said.

In Asia, second-tier carriers such as Thai Airways and Malaysia Airlines may be forced to curtail their growth plans in the face of strong competition from the Gulf, predicts Damien Horth, a Hong Kong-based analyst with UBS Securities. While stronger Asian carriers such as Singapore Airlines and Cathay Pacific are still growing, the Gulf upstarts are growing much faster. "Over the past decade, traffic at Dubai has grown 500%, while Singapore's healthy growth is a bit over 50%," Harbison says.

LOW LANDING FEES. All the Gulf airlines are government-owned, fueling suspicions that they benefit from subsidies. Air France-KLM (AKH) Vice-Chairman Leo van Wijk even confronted Emirates President Tim Clark at an industry conference last year, demanding to know how Emirates could afford the $37 billion worth of planes it has on order.

Clark says Emirates gets no subsidies, apart from a $10 million startup grant in 1985. Although privately held by Dubai's ruling family, the airline publishes audited financial results, and analysts who have combed through the numbers say they've found no evidence of subsidy. On the other hand, Emirates benefits because Dubai has no corporate income tax, and landing fees at the Dubai airport are lower than at most major hubs. Emirates reported $637 million in profits on $4.9 billion in sales last year. Qatar and Etihad do not disclose financials.

POSSIBLE BUMPS. The most important reason for Emirates' profitability, analysts say, is a rock-bottom cost base. Its spanking-new fleet keeps maintenance costs low, and Emirates isn't burdened with costly pension obligations, as many older carriers are. Moreover, Emirates won deep discounts on big aircraft orders that it placed during the post-September 11 industry nosedive. "They were very clever, and now they're taking delivery in the upturn," says Habib Fekih, the head of Airbus' Dubai-based Mideast subsidiary.

Could the Gulf carriers run into unexpected turbulence? Political instability in the Mideast is always a worry. And as competing carriers acquire new aircraft, allowing them to fly longer routes without stopovers, the Gulf's importance as a connecting hub could diminish. But for now, expect these fast-growing airlines to keep flying high.


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