How long can Gulf carriers maintain their rapid growth?
Just how long can the Arabian Gulf carriers maintain their rapid growth? The carriers seem to think it will last a lot longer, if their recent aircraft orders are any guide.
Yet the sheer scale of the ambition of the Gulf carriers is starting to cause alarm among their more established competitors. With the global economy showing signs of a downturn, there are growing worries the new aircraft could flood the market with new capacity, sparking a familiar spiral of cutthroat competition and falling yields in both the passenger and cargo markets.
Recent aircraft orders in the Middle East have certainly been of an eye-popping size.
Emirates, which already has a record $30 billion aircraft orders, enough to double its current fleet to more than 200 aircraft, announced another round of orders as large again at the Dubai Air Show in November. The $34.9 billion in passenger aircraft deals - the biggest order in history - included 120 A350s, 11 more A380s and 12 more 777-300 extended-range planes, and bring the carrier’s total outstanding order book to 246 aircraft, all of them widebodies.
That means Emirates will not only be the world’s largest A380 operator - it has 58 of the aircraft on order in total - but also the world’s biggest user of 777s; it has 57 total orders.
The orders mark a telling contrast with the most recent aircraft orders by established carriers.
In September, British Airways, which has 238 aircraft, 139 of them widebodies, ordered 12 A380s with seven options and 24 787s with 19 options as part of the revamping of its long-haul fleet. Cathay Pacific Airways, with a fleet similar to Emirates in size, with 111 aircraft, added seven 777-300 extended-range aircraft orders in November, bringing to 30 its outstanding orders for the type. Air France, which has 97 widebody aircraft, has 12 A380s and 18 777s on order as part of its re-fleeting plan.
Emirates is betting it can grow significantly faster than all these leading rivals, and the Dubai-based carrier is not alone in its ambitions.
Qatar Airways ordered 80 A350s and three more A380s at the Paris Air Show in June, and in November added $13.5 billion worth of aircraft orders from Boeing, including 27 777s, seven of them freighters, and 30 787 Dreamliners. Abu Dhabi-based Etihad, which has a modest 27 passenger aircraft, ordered 12 assorted Airbus airliners at the Paris Air Show, and is also expected to issue a major aircraft order soon, including one for long haul freighters, with the aim of doubling its fleet by 2011.
None of these aircraft will be delivered at once. Some will arrive in 2008, while others are slated for later delivery. Emirates is getting 22 aircraft this year.
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Analysts are expressing growing concern about the amount of new aircraft capacity being added.
While not singling out the Middle East specifically, DVB, the German transport bank, said in a January report, "New capacity is arriving at a time of slowing traffic," and added: "In the past, the industry has an unfortunate record of ordering aircraft at the cyclical peak and taking delivery during the subsequent downturn."
The Association of European Airlines singled out Gulf carriers for concern. However, the Centre for Asia-Pacific Aviation, a consulting and research firm based in Australia, stated in a recent report that Middle Eastern carrier growth was sustainable because the region offers one-stop connections from everywhere to everywhere in the world.
This high-level of connectivity offered by Gulf carriers is indeed often cited as a justification for their growth, both on a passenger and cargo level.
Ram Menen, senior vice president cargo for Emirates, is fond of saying Dubai is a powerful transit hub because it’s halfway between Europe and Asia, on the doorstep of the Indian subcontinent, and at the crossroads of routes to Africa and Central Asia. "Dubai is a new hub for the whole world," he said. "It is not just Emirates that benefits. Look at all the other airlines putting capacity into here as well."
But can such growth continue if the world economy slows?
In January Menen was complaining the cargo market was "very erratic." despite booming passenger traffic. "It shows that the old fundamentals don’t really apply," he said. Key transit traffic lanes, such as exports from China and India were down, he said, and the political problems in Kenya had also affected traffic from that key African market.
By past standards, Emirates cargo performance recently has also been a bit disappointing: but disappointment here is relative. The carrier got used to annual cargo growth of 20 to 25 percent in the early part of the decade: in the last couple of years that has fallen to a hardly catastrophic 13 percent.
Etihad, meanwhile, reports cargo yields are currently under pressure. Executive Vice President for Cargo Des Vertannes predicts 2008 will be "a bumpy year."
He’s also concerned about export traffic from Asia: "I was surprised to read comments that the Asian economies would ride out the storm, and believe this needs to be watched very carefully."
Both expect the downturn to be relatively short-lived, and for the region to bounce back. Both point to niche markets, where they continue to expect strong growth.
For Gulf carriers, the overriding question remains, if there is a downturn, will their special circumstances insulate them from poor economic times?
Gulf carriers are creating new markets to maintain market share.
Edwin Laird, managing director of Air Cargo Management Group, points to the success of the New York flights of Emirates and Etihad. "They’re always packed, because they are the only way to get from New York to many places in East Africa, North Africa, the Middle East or the southern Commonwealth of Independent States without making two stops," Laird said.
The same applies for cargo on many routes. When Emirates starts flying to Glasgow, Casablanca or Sao Paulo, it gives those cities a connection, via Dubai, to large swaths of Asia and Africa. And the younger carriers such as Emirates, Qatar and Etihad have almost certainly grown at the expense of more moribund traditional players in the region, including Gulf Air and Saudi Arabian Airlines, Laird said.
He also points to the many informal freighter connections out of Dubai, which sustain it as a cargo hub and may provide a window on the site’s future as a prominent trading point. "Look around the rim of the airport, and you will always see a dozen freighters - IL-76s, TU-204s or turboprops without markings - that fly to Azerbaijan or other places in Central Asia," he said. "Most of these aircraft would not be allowed to fly to Europe, so they use Dubai as a transit point."
Africa is a key transit market from Dubai. China’s massive investment in Africa is sparking a major increase in trade flows between Asia and Africa that Dubai and the other Gulf hubs are well placed to exploit. Wen Jibao, China’s prime minister, said in December trade between Africa and China could reach $100 billion per year by 2010, a more than 10-fold increase in a decade.
In addition, Dubai has a growing reputation as a hub for humanitarian aid. Paris-based Dynami-Aviation is just the latest charter broker to open an office in Dubai for this reason.
"Dubai has opened up a humanitarian village, and most of the major aid agencies have or are thinking of having some kind of operational base there," said its managing director, Quintin Cutler. "If you look at the major disasters and crises recently - the Indian Ocean tsunami, the Pakistan earthquake, Darfur - they are all within easy reach of Dubai, so it makes sense."
A similar kind of traffic is supplies to the United States military operations in Afghanistan and Iraq, something that Dubai undoubtedly benefits from to some extent.
However, Laird says the benefit the Gulf carriers get from the military should not be overstated. "Most of the supplies go via Kuwait and fly on U.S. carriers," he said. "The U.S. has been quite selfish in keeping that traffic for its own airlines and not letting any get into the hands of Middle Eastern carriers."
One other important market that generates good passenger and cargo growth for the Gulf carriers is the Indian subcontinent.
Menen sees this as a key justification for the huge fleet growth at Emirates. "We are next to India and China, which are very populous markets, and where currently on a tiny fraction of people fly," he said. "Lots of people are now travelling because of wealth creation and falling yields. Restrictive traffic rights regimes also throttled growth in the past, but now those restrictions are being relaxed and we are benefiting."
In India, however, local carriers, such as Jet Airways and Kingfisher Airlines are flexing their muscles by launching international direct services.
Will these moves adversely affect the Gulf carriers? Laird is skeptical. "Yes it might eventually happen, but none of them have a really serious cargo strategy yet," he said.
All these markets give the Gulf hubs, Dubai particularly, some niche markets that could help them ride out any downturn. But given the numerous orders for new aircraft, are not overcapacity and a rate war inevitable?
Menen admits the possibility, but said the introduction of the A380 will prompt a sharp fall in belly capacity. Emirates begins taking delivery of the aircraft in August, and although it has not yet announced which routes they will fly, Menen is steeling himself for a drop in cargo capacity of around 35 percent or higher when the A380s replace the 777s.
Emirates has ordered eight 777 freighters, of which the first is due to arrive in December 2008. Originally there were plans for these aircraft to be used to start new cargo routes to make up for the loss of belly-hold capacity with the A380s. Now, Menen admits, such plans are on hold while he waits to see how the market unfolds.
Despite a possible downturn, the Gulf carriers are confident their capacity expansion is justified.
Some industry observers believe the Gulf carriers will take market share from established major carriers, although the official line is that there is plenty of growth for everyone.
With geography on their side, and space to expand their airports -something that is almost impossible in Europe - the ambitious plans of the Gulf carriers may yield dividends. Or these grand plans could be viewed as just another example of "irrational exuberance" by industry.
