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May 27 2008

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Middle East industry: Tourism has region flying high

The economic boom in the Middle East, particularly in the Gulf, is bringing unprecedented numbers of both people and goods into the region

Currently, six out of 20 of the world’s fastest growing aviation markets are in the Middle East. In the five years to end-2006, average annual growth in passenger traffic in MENA reached 9%, the highest regional growth in the world. While this is set to ease slightly to around 6% over the five-year period from 2007-2011, the Middle East will still record the fastest regional growth. IATA forecasts that, over the coming five year period, total international passenger numbers in the Middle East will grow by 30m, to reach 105m. Global Futures and Foresight, a London-based “strategic futures” think-tank, takes these projections even further, suggesting that by 2025, passenger capacity in the region will exceed 300m—a threefold increase in less than 15 years. Meanwhile, average annual freight growth of 5% up to 2011, will be second only to Asia Pacific (in other words, China).

Bulging order books

Such growth in the number of arrivals clearly requires concomitant expansion in related aviation infrastructure—both on the ground and in the air. This is already happening. In 2007, Middle East carriers placed orders at the Paris and Dubai Airshows worth more than US$150bn and according to the Arab Air Carriers Organisation, in 2007, Arab airlines acquired 38 new aircraft. However, this is just a fraction of the number of aircraft needed to sustain the industry’s growth, and indeed, it is also just a fraction of what is already on order. Bjorn Naf, President and CEO of Gulf Air, stated that the region would need 500 new aircraft over the next seven years in order to meet demand. Industry analysts predict that there will be up to 1,100 aircraft based in the region by 2025. This rate of expansion will pull down further the average age of the region’s fleet, already the world’s youngest at an average aircraft age of just 9.1 years.

Emirates , the region’s leading carrier, is setting the acquisition pace. It has 58 Airbus A380s (the world’s largest passenger aircraft) on order, a huge purchase which constitutes 30% of Airbus’ entire global A380 orderbook. It also has 36 Boeing aircraft on order, ensuring that by the time the new aircraft are delivered, the company’s fleet will have almost doubled from today’s number of 96, to 190. This rate of growth merely continues the trend set over the past five years; in 2002, the company’s fleet was just 46 strong.

The UAE’s other rapidly growing carrier — Abu Dhabi-based Etihad — recently announced plans to place an order later this year for 100 planes, almost tripling the size of its existing fleet of 36. Separate to the impending order, the airline is already expecting delivery of six planes this year and a further 16 before 2011. Qatar Airways is not far behind. Since its establishment in 1996, the airline has built up a fleet of 59 aircraft. This will have doubled by 2015, expanding even further in subsequent years, with the airline having signed contracts during 2007 to acquire some 80 additional Airbus planes, as well as over 90 Boeings.

On the runway

Similar expansion is taking place on the ground. Middle East states are investing some US$37bn in new airport capacity, providing for an additional 318m passengers/year by 2012. Plans are already underway for Dubai’s third terminal, which will cater exclusively to Emirates airline, raising the regional air hub’s capacity from 22m to almost 60m. A new “mega cargo terminal” is also included in the expansion programme and is expected to lift cargo capacity to 3m tonnes/year (t/y) by 2018.

Work has also begun on the construction of a major international airport at Jebel Ali. Located half way between Dubai and Abu Dhabi airports, the new Al Maktoum International Airport will have six runways and will focus initially on cargo (to service the adjacent free zone), although it will also have the capacity to handle upwards of 100m passengers/year when complete, making it the largest airport in the world. In order to enhance co-ordination between Dubai and Al Maktoum airports (which are just 40km apart), Dubai recently announced the establishment of the Dubai City of Aviation, in which all the management and control centres for both airports, including air traffic control, ancillary services, as well as the surrounding free zone, will be located.

Although Abu Dhabi is way behind Dubai in terms of development, its plans are just as grand. Supporting Etihad’s growth, an extra runway and two new terminals will be added by 2010, raising capacity from the current level of 3m passengers/year to around 20m passengers/y. The new facility will be designed in such a way as to provide for further expansion, with allowances already made for an additional increase in capacity to 50m passengers/y as well as more than 2m t/y of cargo.

But growth is not restricted to just the UAE. Saudi Arabia has plans to build five new airports at a cost of US$5bn. Oman also needs improved transport links to support ongoing development in what was once a sleepy corner of the Arabian peninsula. The Omani government recently announced plans to invest US$3bn in upgrading its two existing airports (at Muscat and Salalah) and adding a third at the industrial port city of Sohar. Qatar, despite just having completed the upgrade to Doha’s existing airport, has plans well under way for the New Doha International Airport, which will have two runways, catering for a capacity of 12m passengers/year. Kuwait also has plans to build an extra terminal and runway, while work is underway in Bahrain to expand the existing airport, which will triple capacity from the current 5m to 15m by 2010.

Outside the GCC, tourism-focused investment in airports is also going ahead in several countries, notably in Egypt and Tunisia. Turkey’s TAV Airport Holding is getting close to completing its project to build a third terminal at Cairo International Airport , and recently secured a €392.5m (US$605m) loan to finance its ongoing work on the upgrading of Monstir airport and the construction of a new airport at Enfidha, both in Tunisia. Lats year saw the inauguration of Terminal 2 at Sharm al-Sheikh airport in Egypt’s Sinai peninsula, with a capacity to handle 8m passengers/year. The Egyptian Airport Company has also recently invited applications to prequalify for a contract to build a new terminal at Hurghada airport , the main gateway to the Red Sea resorts. It will have the capacity to handle 7.5m passengers/year. In 2007, Egypt received 11.1m tourists, a year-on-year increase on 22%.

Low-cost options

One of the reasons airlines in the Gulf expect such a growth in numbers, is the rise in demand for low cost carriers (LCCs). Air Arabia , the first, and currently, largest LCC in the region, posted a 272% growth in net profit in 2007, a rate of growth which has led it to place purchase orders for over 60 Airbus aircraft. With Kuwait’s LCC — Jazeera Airways — enjoying similarly strong growth and Bahrain’s Bahrain Air rapidly expanding its routes, Emirates is considering entering the LCC market. Typically, LCCs configure their aircraft to squeeze in as many passengers as possible, giving rise to rumours that Emirates may use some of it new A380s in its LCC operations. If so, a tightly configured A380 has a capacity of 1,000 passengers, necessitating the construction of ground facilities to cater for mass arrivals and departures.

Strains

But such rapid growth within an industry inevitably faces obstacles. With so few global airline manufacturers, all carriers are in hock to lengthy delivery lead times, as the two main rivals, Airbus and Boeing, struggle to keep up with orders. Indeed, Boeing recently announced delays in the production of its 787 Dreamliner aircraft. Owing to its fuel-efficiency, the Dreamliner is the fastest-selling model in aviation history, with more than 850 planes on order, yet production schedules have slipped and carriers expecting delivery in 2012 are now unlikely to receive them until 2016. This will retard expansion plans in the Middle East to an extent, although the aircraft leasing industry is also enjoying significant growth and is able to cover most gaps.

Another concern is a growing shortage of pilots. A T Kearney, a global strategic management consulting firm, estimates that at least 200,000 new pilots will be needed globally in the next two decades, with the number of pilots required in the UAE and other GCC countries, increasing by 75% by 2020. As a consequence of this, Etihad Airways , has already launched a new pilot training initiative.

However these obstacles are not insurmountable and indeed the industry is proving itself to be both innovative and flexible. The potential shortage of aircraft and pilots, for instance, as well as still strict scheduling regulations, has given rise to a burgeoning intra-regional business aviation sector, with the hiring of private jets showing rapid growth. This adaptability, coupled with the region's geographic advantage of being at the centre of the East-West axis, will assure the Middle East's future as the hub of the global aviation industry.

The blossoming of the aviation industry will be an essential ingredient supporting the expansion of tourism, particularly in the Gulf. This issue of BME looks at the plans that various countries in the region are making for the sector. A common theme is the hugely ambitious scale of most of the development programmes being undertaken.

SOURCE: Business Middle East