:: November 2015 Letter ::
My profession has an easy sanity check. If a forecaster frequently uses the phrase If current trends continue…he needs a new career. Status quo bias is a toxic mindset, because current trends almost never continue. If they did, Japan would be the world’s dominant superpower, we’d mostly be flying in 50-seat regional jets, and the Beanie Baby market would be bigger than the New York Stock Exchange. It’s important to consider what will change, not what will continue.
Having said that, if current trends continue, the UAE will be the world center of aviation. Or rather, it will continue to be. I joined a Johns Hopkins University/SAIS study trip there last month, my second visit to the UAE. Here’s my report.
My first impression of the UAE’s ambitions was a cheesy ad in the Economist, circa 1990, urging people to stop in Dubai and buy stuff. It featured a happy couple encrusted in jewelry and wearing multiple wristwatches, more a critique of consumerism than an actual effort to get people to visit. But over the last 25 years, the country’s aviation industry matured at a remarkable pace. Aided by fortuitous geography and the growth of proximate markets, Dubai passed Heathrow last year as the world’s biggest international travel hub.
This was part of a conscious and smart government policy. The UAE’s city states lived through a resource bubble 100 years ago, when pearl harvesting momentarily gave them a bit of extra cash, but that industry promptly crashed once pearl cultivation began. UAE leaders knew that investing oil revenue (as Norway did) was necessary for the nation’s economic future.
Singapore provided a strong role model in many ways, particularly with its strong aviation and airline business. But the UAE has better geography. The country is positioned right between Europe and India/Australasia. It’s an eight hour flight or less from the UAE to two-thirds of all people in the world.
Unlike Singapore, the original global connector hub, the UAE had almost no origin and destination (O&D) traffic. But they turned themselves into a world business, finance, and tourism center. O&D traffic now stands at around 25% of Emirates’ and Etihad’s business. It’s not just a country with an aviation industry plan; the UAE may be an aviation industry plan with a country developing around it.
Consider the numbers.Dubai (the emirate) plans to derive 32% of its total GDP and 22% of its total employment from aviation by 2020. Emirates is the now the world’s biggest international airline; in 2000 it was just 24th. Incredibly, 19% of the world’s twin aisle jetliner backlog (by value) is for Emirates and Etihad. The A380 would be dead without Emirates. That reality makes airline market access negotiations with Europe much easier.
The UAE is now the seventh biggest customer in the world for US aerospace exports, with the country importing $4.9 billion in 2014. In 2010-2014, total imports from the US came to $23.2 billion. Around half of this is defense; UAE military equipment imports from the US came to just over $20 billion in the last ten years. All of this excludes a high level of European aerospace purchases. The UAE’s next fighter buy, for example, will probably be Rafales.
Aerospace manufacturing is also growing fast. Last year, according to the US International Trade Commission, the UAE exported just $5.5 million in aerospace products to the US, but that’s about the same as the previous five years combined, and 372% more than the 1.2 million recorded in 2013. Strata, an emerging aerostructures firm owned by Mubadala, is bringing in contracts from European primes and second tier structures companies too.
The UAE punches far above its weight. According to the 2015 CIA World Factbook the UAE has 5.8 million people, but only 19%, or 1.1 million, are citizens. That gives the UAE the highest aviation content per capita of anywhere in the world.
But again, things change. What could stop the current UAE aviation trends from continuing? I’d rule out the Open Skies complaint by the Big Three US airlines. This complaint is an unsightly mix of misplaced priorities, unrealistic expectations, and casual xenophobia. But many other events could impair the UAE’s rise to global aviation supremacy. Here are the four biggest I can imagine:
1. Other guys with the same idea. Qatar Airways is now the second biggest Gulf carrier, and they carry the superconnector idea to an extreme. They have minimal O&D traffic, they’re completely government-owned, and have little interest in profitability. At the other extreme, Turkish Airlines also wants to be a superconnector, and they’ve got a great O&D base. Even Gulf Air, the ultimate regional has-been, is looking to buy 50 aircraft to get back into the game.
2. Neighbors fighting back. The Big Three Gulf carriers have been taking advantage of terrible service in proximate air travel markets. But some of these neighboring countries want their own traffic. Ethiopian Airlines has emerged as a notable player in Africa, as has Kenya Airways. One day Indian carriers may become more competitive. Even Iran might be a different place one day, with a real airline industry.
3. New twinjets enabling non-stop flights. The 787 and A350XWB allow more efficient very long range flights, giving smaller airlines flexibility in fighting back with point-to-point routes. Ethiopian, for example, is fighting back with 787s. The Gulf state superconnectors, with geography on their side, are somewhat insulated from this trend. Two eight hour flights with a connection can be more efficient than one 15 hour flight. But front-of-cabin passengers will pay a premium to fly directly.
4. An exogenous shock. The UAE is in a dangerous neighborhood. A war or terror attack would quickly remove the appeal of changing planes there. In some ways, the two biggest UAE emirates are a bit like Athens (Dubai) and Sparta (Abu Dhabi), with a certain level of disagreement between them. The country’s Sparta emirate has a very aggressive foreign and military policy, which some believe invites trouble (for a slightly alarmist but interesting view, see qz.com/535320/dubais-reckless-foreign-policy-is-putting-it-on-a-path-to-disaster-fast/). Even without the UAE’s forceful military posture, the UAE model of Islamic pluralism and tolerance is the essence of what ISIS hates, which might make them a target.
Something on this list, or something else that I haven’t thought of, will likely disrupt the UAE’s remarkable aviation growth trends. Low oil prices don’t help the UAE’s economy, even if Abu Dhabi’s huge sovereign wealth fund provides some insulation. After my visit, the Dubai air show saw roughly zero jetliner orders, perhaps indicating a coming plateau. But no matter what happens, they’ve built an impressive and fascinating country around their gigantic airports; I’d recommend a visit.
Teal Aircraft Binder reports updated this month include the NH90, KT-1/T-50, AW609, AW129, Lynx, Phenom/Legacy, and the King Air. Have a great month.
Yours, ‘Til Current Trends Stop Continuing Altogether,
© Richard Aboulafia 1997-2006, All rights reserved.