If Dubai’s emergence as a regional trade hub was founded on its creek, its emergence as a global transportation centre is rooted in its busy airport and fast-growing airline, Emirates.
Boston Consulting Group has issued a report arguing that, at its current rate of expansion, Emirates will become the world’s biggest wide-body carrier by 2015. Its regional competitors, Etihad of Abu Dhabi and Qatar Airways, won’t be far off the top 20. But BCG warns that turbulence will increase as they boost their long-haul operations in an increasingly competitive international market.
Dubai’s ‘Aerotropolis’ strategy – a city flourishing around the busy east-west air corridor it serves – has developed as fast as the city’s debt and real estate woes pulled the emirate back from its hubristic rise over the past decade.
Protected by tax-free, low-cost domestic environments, Emirates and other state-owned Middle Eastern airlines can ramp up global operations quickly, threatening established legacy carriers.
Over the past five years, Emirates has tripled capacity and revenues as it opened up 32 new destinations. Yields have reduced from 28 per cent to 23 per cent, but BCG notes this came within the context of a problematic market place.
Emirates has grown with implicit government support, allowing it to borrow to expand more cheaply, while not having to pay corporate tax, benefiting from cheap labour and minimal airport fees at its Dubai hub.
Similar advantages are at hand for its smaller regional competitors, Etihad and Qatar Airways.
Dubai established itself as a trade entrepot thanks to its strategic location in the Gulf and now its central position between established and emerging markets is driving air traffic.
Over the past five years, passenger traffic through the Middle East increased by 45m with another 45m increase forecast over the next five years – or 11 per cent compound annual growth.
Europe, South Asia and Africa are the largest drivers of volume traffic through the region. Northeast Asia is growing faster from a lower base.
But Emirates and its regional competitors face a conundrum: margins weaken as they expand and come into more direct conflict with an increasingly congested global marketplace.
BCG’s pricing analysis indicates that Middle East megacarriers’ most profitable passengers are those travelling into the region (35 per cent) or transiting from the Middle East, through the Gulf, onto other international destinations.
The 45 per cent of passengers who use a Gulf city to transit between cross-continental city pairs are less profitable, the report says. So the easy money made on regional traffic is subsidising Middle Eastern carriers’ entry into European and Asian destinations with a high proportion of cross-continental traffic. BCG concludes that this may be a good starting point but as a strategy it has limits. As these megacarriers continue to expand, they will transfer “a significant allocation of capacity to unprofitable customer segments”.
The region’s carriers not only face increasing competition from local low-cost carriers and each other – their continued rapid global expansion could start to undo their seemingly inexorable money-making efforts.
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