Middle East Airlines, Linking East and West

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Macroeconomics

A quiet revolution is going on in the airline industry, one that will have profound effects for the airlines we fly and the routes we take in the years ahead. In a similar manner to the migration of the world’s metals production and consumption to Asia from mature western markets over the last ten years, the world’s airline industry is moving east. Much as London became the center of financial trade in part because of its position midway between Asia and North America a small part of the Middle East is taking on a role in aviation out of all proportion to its tiny local population.

In an Economist article, the growth of the Gulf airlines and the impact they are having on long haul air travel is explored and reveals some astounding facts. Within a decade Dubai’s Emirates, Qatar Airways and Etihad from Abu Dhabi will between them have the capacity to carry almost 200m passengers a year, nearly four times as many as they took with them last year. No other region is growing so fast with the exception of China’s domestic market. Even though the domestic market for these airlines is only some 4 million people, three airports all within close proximity of each other are growing up outside the respective capitals. By 2015 Dubai, Doha and Abu Dhabi will be able to handle around 190m passengers a year. When Dubai’s new five-runway mega-airport is finished, capacity will rise by another 70m”to about the same number of passengers as were handled last year by London’s Heathrow, New York’s JFK, Japan’s Narita, Singapore’s Changi and Germany’s Frankfurt combined!

As if to underline their ambitions, Dubai’s Emirates airline, who last month announced its profits had soared four-fold to $964m for the year to the end of March, has just placed one of the largest civil aircraft orders in history when it said it would buy 32 A380 super jumbo passenger jets from Airbus in a deal worth $11.5bn. A report in the Financial Times explains the A380 is the world’s largest passenger jet, typically configured with 525 seats and costs $346.5m at list prices. Nor is this Emirates first order for the jet. The airline already has 58 A380s on order, with this week’s announcement at the Berlin air show taking that number to 90, firmly cementing its position as the largest operator of the super-jumbo in addition to 70 A350’s on order plus a host of smaller planes form Airbus and Boeing its ambitions are clear. Airbus’ suppliers probably fly Emirates out of gratitude for the years of dependable demand those orders will confer. Airline executives shake their heads and ask where Emirates and its fellow Gulf airlines are going to find the passengers from but the answer seems clear they will take them from established European, North American and Asian carriers in a coming shake up of long haul traffic similar to the impact low cost carriers have had on the short haul market over the last decade.

Established carriers will no doubt begin to complain about unfair competition although the level of state handouts to some carriers in Europe and repetitive debt avoidance and restructuring afforded to American carriers by Chapter 11 undermines the moral case for many. The fact remains these Gulf carriers will have distinct advantages.  Although fuel costs will be similar, take off and landing fees comparable and finance costs are at market rates they have one current advantage and potentially another down the road. First, their fleet of high technology fuel efficient jets makes the cost per passenger mile some of the lowest in the industry, providing they can achieve sufficient capacity utilization. Emirates has been consistently profitable every year bar one since its launch suggesting they at least have maintained good aircraft capacity numbers. The other advantage could come when competitors in Europe are hit from 2012 with emissions penalties in the form of carbon trading. Gulf airlines will almost certainly wait to see if other regions such as Asia and North America follow Europe’s lead before burdening their own champions with the same obligations.

–Stuart Burns

Comment (1)

  1. eric says:

    Makes one think what all this planes do to our environment? Apart from that a good article.

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