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Jul062010

« THE UNITED ARAB EMIRATES: UNDERSCORING THAT THE MARKETPLACE IS NOW ABOUT GLOBAL FLOWS »

Over the past month, there have been a number of stories written on the growth of Dubai-based Emirates Airlines.  In reality, it is not just Emirates, but rather the combined United Arab Emirates (UAE) entities of Emirates in Dubai and Ethiad Airways in Abu Dhabi along with Qatar in Doha that present one of the next real competitive challenges for airlines (particularly in Europe) and each of three global alliances.  By 2020 the airports housing the three airlines are expected to handle nearly 200 million passengers.  To put that number in perspective, the 200 million passengers are more than what established world markets like London Heathrow, Paris Charles deGaulle and Frankfurt handle today.

Much of the noise and the news surrounding Emirates’ growth plans came last month at the Berlin Air Show where the carrier ordered an additional 32 A380 aircraft.  That’s in addition to the 48 Airbus 380’s; 70 Airbus 350’s; 18 Boeing 777’s; and 7 Boeing freighters the airline already has on order.

Where Is the Traffic Going to Come From?

Dubai and its counterparts in Doha and Abu Dhabi do not enjoy large local traffic bases.  Rather, the emerging operating model is designed to take full advantage of a geographic position of strength and serve as mega-connector airports.  The model is used on a smaller scale by Singapore Airlines and KLM at Amsterdam where local traffic levels are undersized when compared to Tokyo, London and Paris.  In addition, the Dubai government is solidly pro-aviation (a lesson that could be learned or at least appreciated by U.S. lawmakers).

According to The Economist:  “these pro-aviation policies stem from a conviction that aviation could act as a spur to Dubai’s economy, by facilitating trade, financial services and tourism.  At Sheikh Ahmed’s prompting, the government has implemented a highly liberal open skies policy encouraging other countries to open routes to Dubai and allowing Emirates to build its network.  It has streamlined immigration and visa policies, making it easier for people to pass through or stay.  It has made sure that airport and air traffic control capacity has kept ahead of demand.”  The Economist goes on:  “The government’s approach is to say, ‘whatever you do, don’t restrain aviation in any way’”.

Not all governments around the world are interested enough to open their markets to the same degree.  Canada and South Korea have already said no to more landing slots for Emirates.  The carrier is involved in a dispute with the Germans over fare setting as the Gulf carriers seek to undercut prices by legacy network carriers in the European Union (EU).   And the French are said to be limiting access to Paris and secondary cities like Lyon. 

For U.S. readers, remember the fear of Singapore Airlines gaining extraordinary route opportunities from the U.S. at the time in return for open skies?  It never came to fruition.  Yet the Europeans seem to be protecting their airlines from lower cost competition emerging in the Gulf.   Here in the U.S., we don’t have a lot of room to criticize as we can’t agree to lift the ownership and control limit or allow cabotage for political reasons.  U.S. carriers, though, have faced similar competition from the growth of low cost carriers and there just might be some lessons to be learned.

Lessons in the U.S.?

There is no marketplace more keenly aware of competition than North America generally and the United States specifically.  The aviation network evolved from linear systems; to hubs and spokes with a focus on building regional dominance;  to connecting regional hubs in order to create national networks; and then to establishing a connection between U.S. gateways with a gateway of an alliance partner.  Each of these evolutionary steps led to increased traffic through the stimulation of local and connecting traffic. 

As hubs began to compete with hubs, the U.S. domestic market delivered outstanding bargains to the consumer through low - and then lower - fares.  Much of this hub-to-hub competition stemmed from the aggressive use of regional jets that expanded the reach of individual hubs from 400 miles to more than 1200 miles.  As the regional jet was intensifying hub competition, the growth of the low cost carrier segment began in earnest in the mid-1990s.  Fares were disciplined in markets of all sizes as low cost carriers grew rapidly and regional jets expanded the scope of hubs competing with hubs. 

“An Investment in the World”

What we have in the United Arab Emirates is a combination of the use of technology (Airbus 380) with low costs and government policies designed to promote aviation to compete with Europe’s (and U.S.)network carriers for the same traffic.  Not all of the same traffic as North America to Europe, the largest air travel market, can be accessed by Emirates and others to the same degree that North America/Europe - Middle East, India, Southeast Asia and the Tasman markets can be.  Nonetheless, these are very important markets to Europe’s and U.S. carriers, just as they are critical to fill the large capacity equipment being flown by Emirates and its UAE brethren.

Wolfgang Mayrhuber, CEO, Lufthansa, said, “It’s a miracle that Emirates already has more intercontinental seats than Air France and British Airways combined." He added, "It took us 40 years to get 30 747s in the air in one of the biggest global economies, so one must assume that this is an investment for the world.”  The geographic position allows one-stop service to and between every world region.

The evolution of the global market does look a bit like the evolution of the U.S. market.  The real difference is the competition wrought by the United Arab Emirates carriers on the European network carriers aims to capture a share of global connecting flows whereas the U.S. low cost carriers were targeting the largest domestic traffic flows to build their businesses.   It emphasizes just how fast the borders and the airline models are blurring. 

Yes, we still have an outdated bilateral regime present as Emirates tries to negotiate rights to fly more into France, Germany and the United Kingdom and other countries.  These too will fade away. 

Pro-aviation policies that embrace the airline industry’s role as an economic facilitator cannot be overemphasized and should serve as a lesson to all governments that want to tax their respective carriers into oblivion.  In order to compete with this new world order, cutting costs and reduced taxes will have to remain the mantra for the network airlines in Europe and North America.  Those who say that the three alliances do not provide sufficient competition need look no further than Dubai, Abu Dhabi and Doha.

Some will say that the growth of Emirates, Ethiad and Qatar will only impact the EU carriers largely dependent connecting traffic.  But there will be a downline impact on U.S. carriers as well given the interdependencies of the global alliances and the flows created by the combined networks.  But also think about the U.S. east coast traffic flows to Southeast Asia and Australia and New Zealand and even India.  Might traffic that once connected across a west coast U.S. gateway instead choose to use a UAE gateway?  Technology (aircraft range) and cost (low labor and a government aversion to aviation taxation) are at work in attempting to redraw the airline map as we know it.

There has been competition and innovation at every corner of the industry's evolution.  This fact will remain.

More to come.

Reader Comments (10)

Qatar is not part of the UAE.

07.6.2010 | Unregistered CommenterJoe Jones

Unions are ILLEGAL in the UAE. Game, set, match. They win.

Pro-aviation government policies (subsidizing) obviously benefit stakeholders if they are one in the same. Is the global airline market an example of free market capitalism? Game, set, match. They win.

History has, as in other industries, shown what is to come. Let freedom ring.

07.7.2010 | Unregistered CommenterAM

Travel between the US East Coast and Australia is already being affected - I know several New Yorkers who are now connecting via DXB or AUH, either because it's cheaper, the service is better or, for those travelling to Perth, it's much faster.

I'm also sure that Dubai has full open-skies with the UK and that Emirates can fly wherever it wants to in Britain. Indeed, for a preview of what Emirates has planned for the US, I'd look to the UK. After fifteen years of relentless marketing and expansion, they're a top choice for people flying east - particularly from outside of London. It can't be long before you start to see the strategy repeated - look out for the Emirates brand to start appearing in NHL, NFL, NBA.

07.7.2010 | Unregistered CommenterRory

it is all about taxes. emirates doesn't have to pay any and everyone else does. what do you think emirates pays for fuel in dubai? finally, back to the good old days when a flight attendant can be fired for aging or gaining a couple pounds.

07.7.2010 | Unregistered Commenterairwolf

Oh yes, by all means lets go back to the good old days of making FAs sex dolls for the pilots....and while we're at it, let's go back to the days where pilots were barred from wearing glasses and taking ANY meds.....got a little high blood pressure....well, you better find another line of work....by all means, let us reinstate all the onerous medical requirements of the past....bet if we did about 50% of current pilots would be instantly grounded.....

07.7.2010 | Unregistered CommenterGreg H

greg,

i didn't mean for it to sound if that was a good thing. my intention was to be cynical. my point is emirates is not playing with the same rules as most airlines.

07.7.2010 | Unregistered Commenterairwolf

Ok airwolf, I'll buy that....But I have little tolerance for cherry picking the past, be it real or romanticized or just deluded.....

07.8.2010 | Unregistered CommenterGreg H

Flag carriers from the United Arab Emirates and Qatar do have cost advantages as a result of low taxes and favorable work-rules (which some may equate with a lack of union representation) in their home countries. However, they do pay the same price for fuel as every other carrier. One advantage some Arabian Gulf carriers have that has not yet been mentioned yet is that their cost of capital (to acquire aircraft, etc.) comes at more favorable rates because it is backed as sovereign debt.

Emirates Airlines has a further advantage not yet been mentioned here: DNATA, the airport operator at Dubai International Airport is a subsidiary of Emirates Airlines. Whether Emirates Airlines or Other Airlines increase service at Dubai (which is consistent with the Emirate's aviation policy stated previously) Emirates benefits (1) from the ability to spread the costs of facilities and ground staff as well as (2) from the revenue generated from handling Other Airlines. DNATA has been granted a monopoly on ground handling at Dubai by the government. Originally, Emirates Airlines was established as a subsidiary of DNATA, but the relationship was reversed, and this little-discussed benefit has resulted.

Royal Jordanian has a similar arrangement in place at Queen Alia International Airport in Amman, Jordan.

KC, interesting info about the DNATA/Emirates Airline relationship. Are there any restrictions for something like that to happen in the USA? Does it occur in any other countries?

07.10.2010 | Unregistered CommenterBW

The Economist's June 6 issue includes an in-depth (for a non-trade pub) overview of aviation in the Gulf. It tackles some of the myths (like cheaper fuel) and notes some of the disadvantages (absence of any government support for retirement, funding of expatriate schooling, etc.) inherent in running an airline in the region. Worth reading if only to understand the basics before trying to compare and contrast what "we" do vs. what "they" do.

http://www.economist.com/node/16271573?story_id=16271573

07.16.2010 | Unregistered CommenterAn Observer

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