Saturday, April 14, 2012

Why is so much money being pumped into airlines?

The region's aviation sector is booming as a result of the significant investment in the industry by many of the region's governments.

To date, the UAE has invested $136 billion in its aviation sector in the last two decades; the total investment alone between 2009 and 2014 is predicted to exceed $22.3bn. Qatar is investing $14bn (including the new Doha International Airport) and Bahrain's neighbor Saudi Arabia has invested $5.3bn in recent years.

The region has also seen significant investment by individual carriers. Etihad has received high levels of investment for nine years and it is now intensifying its strategy of growing passenger numbers via tie-ups with other carriers. This includes a recent investment of $400 million through stakes in Air Berlin and Air Seychelles, with further possible investments in Aer Lingus and other ventures.

But the question is why is so much money being pumped into the aviation sector, at what benefit to these countries? Does it make economic or commercial sense or is it simply just competition to outshine one's neighbors?

The GDN spoke to a top aviation expert who outlined the reasons. Airlines provide an infrastructure asset connecting a country's businesses to global markets and sources of inputs and ideas offering the potential for boosting national productivity, economic growth and living standards.

Academics have argued that a positive relationship exists between higher levels of connectivity and higher level of labour productivity. It has been demonstrated that a 10 per cent rise in connectivity, relative to a country's GDP, will boost long-term productivity.

Take Gulf Air for example, despite its losses studies conducted indicate the national carrier makes a substantial contribution to Bahrain; its GDP contribution is equivalent to 8pc of Bahrain's total GDP. The airline is directly responsible for a contribution of $246m to Bahrain's GDP while it indirectly supports a contribution of another $133m by its major business suppliers/partners, i.e., BAS, BAC, Bahrain Duty Free.

The airline is also indirectly responsible for a contribution of $155m through travel industry business it generates and $1,391m through the wider impact on its economy across several sectors in Bahrain such as hotels, transport, etc.

As one of the largest employers in the Kingdom providing direct and indirect employment to more than 21,000 people including 3,400 in Gulf Air alone; it is important to the economic growth of the country as it provides business links with key business and financial destinations in the world helping to attract investment.

Direct links to the financial centres such as London and Paris are essential given the importance of financial services to Bahrain. Private services businesses are highly mobile and are attracted by quality infrastructure, including air services. Losing the connectivity provided by Gulf Air would severely undermine Bahrain's competitiveness versus other neighbouring states (e.g. Dubai and Abu Dhabi), said sources.

Gulf Air acts as a national infrastructure asset and ambassador to the kingdom helping maintain independent destination status for Bahrain providing links to key regional and global markets.

There are also substantial 'multiplier' contributions to GDP as those working for Gulf Air and its suppliers spend their incomes within the country.

Other airlines in the region such as Emirates, Etihad and Qatar Airways offer similar but greater benefits to their respective countries; a factor of the high levels of government investment in the aviation and tourism industries.

To remain as a key regional aviation hub and establish a strong infrastructure asset for the kingdom, Bahrain needs to provide a similar level of support to the aviation sector.

In recent years neither Bahrain's aviation sector nor Gulf Air has received the same level of investment as their neighbors. These governments consider their national carriers as an integral part of the countries' long-term growth.

During the coming weeks as the government and country debate the long-term future of Bahrain's national carrier, let's hope they understand the importance a healthy aviation industry plays in the country's economic and commercial growth

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