Spreading its Wings


Economic News

22 Jul 2010
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Dubai has sought to strengthen its position as the Gulf's aviation hub, with companies from the emirate signing multi-billion dollar deals at the recently concluded Farnborough Air Show, though the spending spree could ramp up the competition with its neighbours also seeking dominance of the region's skies.

One of the biggest spenders at Farnborough was Dubai Aerospace Enterprise Capital, the leasing and financing arm of state-owned Dubai Aerospace Enterprise (DAE), which placed an order for 100 Airbus aircraft in a deal worth $13bn. DAE Capital's new orders, combined with those already on the books, will take its fleet to more than 250. This includes 18 Boeing cargo carrying planes it bought from Emirates Airlines, which will be leased back to their former owner.

According to Bob Genise, the chief executive officer of DAE Capital, acquiring the 18 Emirate Airways freight carriers will help drive the company towards its goal of becoming one of the world's leading leasing companies.

"'This announcement strengthens our aircraft leasing and finance portfolio, and demonstrates that we have what it takes to develop a significant global aircraft leasing and finance business from a standing start," he said at a ceremony to mark the signing of the agreement on July 16.

According to Robert Ziegler, an aviation analyst with AT Kearney consulting firm, DAE is well-placed to reach its goals, thanks to the favourable liquidity situation in the Gulf.

"Financing in the US and Europe is very tight after the US subprime mortgage crisis. This [Gulf] region is untouched by subprime, and high oil prices have created more liquidity. Capital is not a problem for airlines in the region, and right now, investing in planes looks like a lucrative idea," he told local press on July 19.

Another big spender at the airshow was new low-cost carrier FlyDubai, which placed orders worth more than $3.74bn with manufacturer Boeing for 50 Next-Generation 737-800s. The airline also inked another deal with Franco - American joint venture, CFM International for 100 low-emission engines to power its new fleet in a deal worth $700m.

Launched in March, the government-funded airline is set to take to the skies in the summer of 2009. While having placed orders for its fleet, FlyDubai is still a long way from taxiing onto the runway, said Ghaith Al Ghaith, the company's chief executive officer.

"We have a lot of work to do before we begin commercial operations next summer, and we will be making announcements on new developments in the coming months," he told the media on July 18. Al Ghaith added that this work includes having to decide on routes and key staff appointments.

Al Ghaith will also be hoping that Boeing can deliver on time, with five aircraft due to be handed over next year and another eight or nine in 2010. The US-based manufacturer has been experiencing delays on rolling out some of its newer models, in particular the giant 787 Dreamliner, and has a long backlog on its order books. Should deliveries to FlyDubai fall behind schedule, the airline could be left in a holding pattern come its departure time.

One route that may not be open to FlyDubai is Qatar. Speaking on the sidelines of the airshow, Qatar Airways Chief Executive Akbar Al Baker appeared to refer to the new airline, when he said QA would launch its own budget carrier if it saw its market-share being eroded by "low-cost companies or people that haven't thought about this low-cost model correctly".

With three low-cost carriers already flying into Doha, Al Baker said the local market was saturated, with an insufficient volume of passengers in the region to warrant more budget airlines.

Dubai also faces competition in the form of Etihad Airways, the biggest buyer at Farnborough. The state carrier for the United Arab Emirates placed combined orders for 100 planes with Airbus and Boeing of $20.7bn, with options on another 105. The move is part of a declared major expansion plan aimed at making Etihad the largest airline in the region.

Other Gulf airlines also moved to upgrade and expand their fleets, with Saudi Arabian Airlines committing $1.6bn for eight Airbus A330-300s and Qatar Airways placing orders worth $360m, adding to the $30bn of aircraft that it already on order.

Existing Dubai-based carrier Emirates did not make any new orders at Farnborough and was recently forced to raise ticket prices to counter soaring fuel costs. It has even scrapped its in-flight magazine, as well as entertainment guides and shopping catalogues on its Airbus A380 superjumbos. The move will reduce weight, and therefore fuel expenditure, by about one tonne per flight, the airline told international press.

This more cautious approach may reflect the attitude of a well-established airline, rather than the optimism of relative newcomers to the market such as FlyDubai or DAE, who are hoping to capitalise on any future recovery in the aviation sector.

The skies over the Gulf are set to become even more crowded, with Dubai-owned planes making up a large percentage of the airborne congestion. However, at a time when other airlines are cutting costs and routes, times are set to get harder for Dubai's airline companies.

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