Commercial sense: Establishing a local aviation centre to develop capacity and attract investment

Mention Abu Dhabi to the average person, and while they might well think of oil, it is unlikely that they would think of aeroplanes. That looks set to change over the next 20 or so years as the emirate seeks to build up an aerospace and defence industry. In part this is out of a desire within the UAE to increase the country’s own defence capacity, but also ties in with the emirate of Abu Dhabi’s economic diversification strategy, referred to as Economic Vision 2030.

ON ORDER: The latter is particularly relevant to Al Ain, the emirate’s second city, where a mix of public and private investment is envisaged to create a dedicated aerospace and aviation cluster, the Nibras Al Ain Aerospace Park, under Plan Al Ain 2030, its development plan. Given the current levels of spending in the aerospace and defence sectors, it makes sense from both a financial and a security point of view to develop the capacity to source some requirements domestically. At the 2008 Farnborough Air Show, Etihad, the UAE’s national airline based in Abu Dhabi, made what was at that time the largest order in commercial aviation history, ordering up to 205 aircraft, of which 100 were firm orders, 55 options and 50 purchase rights. In line with this, local press reported in December 2011 that Etihad was to buy 10 Boeing 787-9 Dreamliners and two Boeing 777 Freighters for its cargo business for $2.8bn.

DIVERSIFICATION: A common practice in the aerospace and defence industries is the so-called offset programme: in lieu of a cash discount, some work is performed in the buyer’s home country, contributing to the balance of trade and facilitating knowledge transfer. The scale of purchases by Etihad and the UAE defence establishment has created significant offset requirements to be met in Abu Dhabi.

On the military side, the UAE Offset Programme Bureau was set up in 1992 to derive economic and commercial value from the country’s extensive defence procurement programme, and was renamed Tawazun Economic Council in June 2012 to mark its 20th anniversary. In 2011, the Defence Contractors Council was set up to facilitate communication between the Offset Programme Bureau and all defence contractors, and to provide a forum for the exchange of proposals and ideas. A great deal of the UAE’s economic diversification over the past decade has pivoted around aviation and increased air links.

The country is home to two major international airlines, Emirates, based in Dubai and founded in 1985, and Etihad Airways, based in Abu Dhabi and founded in 2003. Both have been seeing annual growth in passenger numbers running at the double-digit mark for the past decade, and the onset of the world recession has done little to slow their growth. As such, both airlines have been expanding their fleets at breakneck speed.

Although no data as to the contribution of the aviation sector to Abu Dhabi’s economy was available at time of press, according to the Statistics Centre – Abu Dhabi (SCAD), in 2011 transport and storage accounted for some 2.5% of GDP that year, or just over $5.4bn at current prices.

DEFENCE SPENDING: Precise figures on the UAE’s military spending are difficult to come by, with little data in the public domain.

According to SCAD, in 2011 public administration, defence and compulsory social security accounted for 3.1% of Abu Dhabi's GDP, while the Stockholm International Peace Research Institute estimated that the emirates spent 6.9% of total GDP on defence in 2010, around $16bn. This was an increase in absolute terms on the $15.9bn in 2009, but a decline in percentage terms, with defence spending estimated at 7.6% of GDP in 2009.

In strategic terms, the UAE’s defence forces are air-focused, with land and sea forces playing an ancillary role. This was not, however, reflected in personnel numbers, with 44,000 in the army, 2500 in the navy and 4500 in the air force, according to 2010 figures from the Institute for Near East and Gulf Military Analysis. In addition to the regular armed forces, the UAE counts the presidential guard, who act as special forces. Also, the former National Critical Infrastructure Authority was merged with the coast guard to form the Critical Infrastructure and Coastal Protection Authority, which undertakes coastguard, fisheries and oil rig protection, in addition to search and rescue duties, among other responsibilities.

According to a report by consultancy Deloitte in 2012, global defence spending was expected to be flat or declining that year, as developed economies such as the US, UK and European states instigated cuts as part of deficit reduction programmes, partly offset by increases in defence expenditure in China, India, Saudi Arabia, the UAE and Brazil. Although the UAE does not number among the top-10 defence spenders worldwide, its influence on the regional defence procurement market is significant.

CURRENT AEROSPACE STRUCTURE: In 2006 Mubadala Development Company, an investment company owned by the government of Abu Dhabi, formed a dedicated division to help develop a commercial strategy for the development of an aerospace cluster. The emirate’s aviation skills base is still developing, but as a hydrocarbons economy, Abu Dhabi has plenty of capital to invest, and the ability to provide competitively priced energy. As such, Mubadala’s goal has been to attract industries with a relatively high level of automation, while undertaking ventures to produce a dedicated cadre of skilled labour among the Emirati workforce.

A GOOD FIT: Rory Breen, the UAE country director for BAE Systems, said, “The development of a domestic aerospace industry fits very well with the UAE’s diversification ambitions. The market continues to grow, especially as the government invests in developing its military capabilities.”

Moreover, Mubadala holds stakes in several international aerospace players, including SR Technics in Switzerland, a leading service and maintenance, repair and overhaul (MRO) group, and Piaggio Aero, an Italian aerospace group active in the design, construction and maintenance of aircraft and engines.

Closer to home, Mubadala Aerospace also has a number of subsidiaries, including Strata, which manufactures composite aerostructures for aircraft assembly; Advanced Military Maintenance Repair and Overhaul Centre (AMMROC), a military MRO centre in partnership with Sikorsky Aerospace and Lockheed Martin; Abu Dhabi Aircraft Technologies (ADAT), a technical and maintenance services provider that to date is the sole MRO provider for General Electric’s GE nx engines in the Middle East and North Africa; Sanad, which leases spare components and engines to the airline industry; and the Horizon International Flight Academy.

“In the current global cost-cutting environment, an increasing number of companies are looking towards outsourcing non-core activities,” Abdul Khaliq Saeed, the president for Middle East and North Africa of the Mubadala Aerospace MRO Network, told OBG. “Dedicated MRO providers stand to benefit from this shift as they attract business from airlines that previously performed these services in-house.”

Strata was launched in 2009 and delivered its first products a year later, supplying Airbus with wing parts (flap track fairings) for its A330 and A340 models. In November 2011 Mubadala and Boeing reached an agreement for Strata to supply composite aerostructures to the firm, putting it on the road to becoming a tier-1 supplier to Boeing. Strata has been awarded a contract to supply Boeing with the B777 Empennage Ribs and B787 Vertical Fin Ribs.

AMMROC, a dedicated maintenance, repair and overhaul (MRO) facility, was launched in July 2010 as a partnership between Mubadala Aerospace and Sikorsky Aerospace, and in November 2010 US Defence Group Lockheed Martin bought a stake, although leaving Mubadala as principal shareholder. Aggregate committed investment in AMMROC exceeded $800m in 2011, according to a statement from Mubadala. In May 2011, it reached an agreement with Boeing to partner on specific transactions.

AMMROC is headquartered at Abu Dhabi International Airport. It has planned a move to its purpose-built facility in Al Ain by 2015. To date, the majority of its work is conducted out of the UAE Air Force and Air Defence bases. In 2013 ADAT will be fully capable to perform repair and overhaul on Rolls-Royce Trent 500 & Trent 700, and IAE V2500 engines.

INDUSTRY TRAINING: Horizon International Flight Academy in Al Ain was founded in 2003, initially to train helicopter pilots, although since 2007 it has trained fixed-wing pilots as well.

The academy takes up to 200 pupils per year, of which around 60% are military or quasi-military clients, and the rest civilian. Horizon has allowed the UAE to meet its requirement for more pilots without going to the expense of sending trainees abroad. “The UAE has a highly developed aviation industry because of the major long-haul carriers and parallel support services,” Hareb Thani Al Dhaheri, the CEO of Horizon told OBG. “This will become a generational industry going forward that will help boost the availability of human capital.”

Finally, although not a Mubadala affiliate, the Al Ain International Aviation Academy (AAIAA), an extension of Abu Dhabi’s Institute of Applied Technology, which opened in 2008, is another facility in Al Ain training aircraft maintenance personnel.

The AAIAA is certified by the European Aviation Safety Agency and recently partnered with Global Aerospace Logistics, a locally owned turnkey aerospace services provider, to train staff for air traffic control duties. Although hitherto the majority of its trainees have been Emiratis, the AAIAA recently accepted a squad of Omanis and aims to position itself as a regional training centre in the future.

MRO FOCUS: While Abu Dhabi’s long-term aim is to develop an aviation and aerospace industry which is fully integrated along the production process, i.e. assembly, manufacturing, development and MRO, much of the emirate’s initial focus is on the latter line of business. The worldwide trend towards outsourcing non-core activities means that airlines are increasingly turning to third parties to carry out this sort of work. Globally, the MRO business has been growing rapidly. At the MRO Americas conference in 2011, TeamSAI, an aviation consulting firm, expected MRO spending to grow at a compound annual growth rate (CAGR) of 3.8% between 2011 and 2016, and at a CAGR of 4.1% between 2016 and 2021. Asia was posited to see the fastest growth, with a CAGR of 6.8% between 2011 and 2021.

Aviation in the Middle East has been seeing sharp growth over the past decade, with the rise of carriers such as Emirates, Etihad and Qatar Airways, which in turn has led to greater demand for MRO facilities locally. Taken with factors such as the UAE’s political stability and access to local and international capital, Abu Dhabi’s position between the wealthy European market and the rapidly growing South and East Asian economies not only makes it a logical location for the air transit business, but also for the MRO business. Another advantage is that a rapidly expanding carrier, Etihad, has its headquarters in the emirate, although Etihad by no means accounts for all the growth in the MRO business in Abu Dhabi.

“Developing a strong civilian and military maintenance, repair and overhaul industry within the emirate is a key component for the local aerospace industry. Aerospace-related manufacturing and design are also growing in parallel to the MRO segment,” Fahed Al Shamesi, CEO of AMMROC, told OBG.

MRO also forms part of Abu Dhabi’s strategy to develop its industrial base through partnerships with international firms. The emirate offers a competitive cost base and good infrastructure, but to move up the value chain and produce more complex machinery and services will require significant knowledge transfer into Abu Dhabi. As local MRO companies win more business with international players, in turn the credibility of the local industry will increase, helping prompt further investment and enhancing the expertise and skills base available in the emirate.

NIBRAS: In terms of aerospace, the core of the industry in the emirate is set to be the Al Ain Aerospace Park, branded as Nibras (from the Arabic word for “the guiding light of a lantern”), which is a joint project between Mubadala and Abu Dhabi Airports Company. The site, based around the current Al Ain International Airport is to be redeveloped in a 50-year period through 2060, although the first three phases, which run from 2010 to 2030, are the focus at present, in line with Plan Al Ain 2030.

The first phase consists of building the infrastructure, which will take place over a five-year period commencing in 2010, so that the anchor tenants, such as Strata and AMMROC, can move in, while over phases 2-3, which run from 2016 to 2030, the focus will be on attracting suppliers and promoting foreign direct investment from other aerospace organisations, catalysing a cluster effect.

In addition to the airport, Strata, Horizon and the AAIAA, the AMMROC facility is expected to create some 6300 new jobs at Al Ain. By 2030 Nibras is expected to contribute $1.7bn to the local economy and support around 10,000 jobs.

A GROWING CITY: Al Ain itself is currently a medium-sized city of around 350,000 inhabitants. It is known in the UAE for being relatively green (it shares an oasis with the neighbouring Omani town of Buraimi), and retains a great deal of its traditional architecture and culture. It has strong links with Abu Dhabi’s royal family – Sheikh Zayed bin Sultan Al Nahyan, founder of the UAE, was born in Al Ain.

Raising the population to 1m as envisaged means that it will be necessary to attract more industry. Such a population hike will necessitate jobs, and although the city is recognised as being slightly more conservative and as a result women have not traditionally been encouraged to enter the workplace as much as in the capital, the aerospace industry is one that offers high-calibre jobs that the authorities know Emiratis will want. Specifically, women’s relatively greater dexterity is sought after in many branches of the industry. Indeed, the majority of Strata’s Emirati workforce are women. The authorities expect the high-calibre jobs to attract both women and men from across the emirate. However, the authorities plan to retain a significant proportion of foreign workers in the short to medium term to ensure the knowledge and skills transfer necessary to make the aerospace cluster a success in the long term.

DEFENCE INDUSTRY STRUCTURE: Although there is a degree of overlap between civilian and defence-related aerospace facilities in Abu Dhabi, as in the case of AMMROC, for instance, the emirate also counts a core of defence-oriented businesses.

Of these, the bulk are offspring of Tawazun Economic Council, which has successfully set up over 40 joint ventures over the course of its existence, attracting more than Dh4bn ($1.09bn) in foreign investment and contributing noticeably to the diversification of Abu Dhabi’s economic base.

Tawazun Holding, a strategic investment company set up in 2007 as a fully owned subsidiary of the Tawazun Economic Council, has several subsidiaries and partnerships engaged in the UAE’s nascent defence industry. These include Tawazun Precision Industries, a manufacturing and service centre for military components; Caracal, a small arms manufacturer with two further subsidiaries, German rifle and shotgun manufacturer Merkel and Tawazun Advanced Defence Systems, a sniper rifle manufacturer arising from the restructuring of Russia’s Tsar Cannon Group; and Abu Dhabi Autonomous Systems Investments, a maker of remote-controlled vehicles and drones which produces its own unmanned aerial vehicle system known as Al Sabr, with a range of up to 150 km from the relevant ground communications system and an endurance of up to six hours.

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The Report: Abu Dhabi 2013

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