In December 2014, Dubai International Airport (DIA) emerged as the busiest airport in the world for crossborder passengers, surpassing London’s Heathrow airport, according to The Guardian, with 70.5m international passengers, compared to 68.1m at Heathrow. This was despite a reduction in traffic due to runway renovations, making it likely that Dubai will cement that position in the near future, capping what has been an inexorable rise. When domestic flights are included, Heathrow remains ahead of Dubai by overall passengers, with 73.4m in 2014. DIA is targeting 79m passengers for 2015.
Growing Traffic
In the first three months of 2014, DIA welcomed 18.36m international passengers, compared to 16m passengers passing through Heathrow in the same period. While the latter’s performance remained flat, Dubai grew by 11.4%, compared to the same period of 2013. This double-digit growth has almost become routine, with the emirate’s volumes showing dramatic expansion over the past decade. Indeed, in 2003 the airport welcomed fewer passengers over the course of the full year (18m) than it did in the first quarter of 2014. In 2013 alone, passenger volumes at the airport increased by 15.3% to 65.9m.
The news that Dubai could surpass Heathrow is a symbol of shifting patterns of international air travel and an endorsement of the emirate’s growth strategy. The GCC is emerging as a new centre for the global airline industry. The region is an eight-hour flight from approximately two-thirds of the world’s population and, as such, is set to benefit from new patterns of passenger movements in the twentyfirst century. According to an Alpen Capital report on GCC aviation that was released in March 2014, the Middle East is likely to outperform all other regions of the globe in terms of aviation growth over the coming two decades, until 2032. Revenue passenger kilometres are forecast to expand at a compound annual rate of 6.7% during this period, while freight tonnage per kilometre is predicted to increase at a compound annual growth rate of 7.2%. In the UAE specifically, air passenger traffic could grow at a rate of 6.6% per year. Indeed, the Middle East region is likely to be one of the best-performing outbound routes in the next two decades, with growth outstripping traditional routes such as Europe-Europe and Europe-North America, according to Alpen Capital.
Capacity Expansion
Dubai is well place to capitalise on these emerging trends. The airport has thrived as a hub for long-haul travel between Asia and Europe and the US. Approximately 50% of passengers currently handled by the airport are in transit. The authorities are keen to reinforce their position as a global centre by building additional capacity. DIA is set to increase annual passenger capacity from the current level of 75m to 100m by 2020. However, this pales in comparison to the plans for Al Maktoum International Airport in the south of the city. Dubai’s second airport, opened in 2013, has a current capacity of 5m passengers per year. Yet under a $32bn expansion plan, the airport will be able to handle 120m passengers per year within eight years, and capacity will reach as many as 200m passengers in the second phase.
These plans raise questions about overcapacity. Indeed, in the longer term, one concern is that technological advancements could produce long-haul jets that go point to point and make the hub model redundant. However, the authorities have considered the issue of point-to-point competition in their designs and visited a significant number of international airports for comparison. Indeed, Dubai has built its aviation strategy on winning business through the rapid construction of capacity and access. Paul Griffiths, CEO of Dubai Airports, told The Financial Times, “Air travel remains an aspirational commodity. It is growing consistently. If there are places in the world where supply cannot keep up with demand, demand will go where there is supply. So long as other countries remain ambivalent [about capacity] the more the UAE is … providing it.”
Strong Strategy
It is the “hub” strategy that has allowed Dubai to surpass its competitors, such as Heathrow, as domestic political considerations have hindered expansion plans in the UK. Furthermore, it seems clear in the medium term that there will be strong regional demand for additional capacity. According to Alpen Capital, the Middle East is slated to receive deliveries of some 2610 aircraft with a total value of $550bn between 2012 and 2032. While some of this inventory will be used to replace ageing components of the fleet, the total stock of aircraft is expected to grow at a compound annual growth rate of 4.7% during this period.
This trend is likely to be evident in the Dubai and UAE market as well. For example, the 2013 Dubai Air Show set a global record with a $162.6bn order book within three hours of opening. This was largely on the back of deals announced by Abu Dhabi’s Etihad Airways, Dubai’s Emirates Airline and flydubai, and Doha-based Qatar Airways. While the next iteration of the aviation exhibition in 2015 might not produce such headlines, there is still an expectation of several large announcements.
The Fleet
The capacity additions at Dubai airports have enabled fleet expansions for its local carriers. Indeed, Emirates Airline and Dubai Airports have worked in tandem to foster aviation growth in the emirate. The flagship carrier has experienced substantial growth over the last decade. During the 2013 Dubai Air Show, Emirates announced the purchase of 50 Airbus A380 and 150 Boeing 777X, at a combined value of $99bn. In the 2013/14 financial year, the Emirates Group invested Dh22bn ($6bn), its most in a single fiscal year.
The airline currently serves 142 destinations in 80 countries with 218 aircraft. Furthermore, the carrier is not resting on its laurels: its order book has a value of $162bn for 374 jets from Boeing and Airbus, and the group plans to hire 11,000 new people by March 2016, a staff increase of 6%. The expansion of the carrier’s network also seems to be paying off: for the financial year 2013/14, operating income and profit both rose significantly, up 13% and 50.1%, respectively. As a result, Emirates Group’s total revenue and operating income of Dh87.8bn ($23.9bn) were the highest in the company’s 28-year reporting history. This was the result of an increase of 5.1m in passenger numbers to 44.5m.
Future Opportunities
Given the development of Al Maktoum International Airport, Emirates will have plenty of room and opportunity to expand. The carrier has made no announcement on a full relocation to the new airport, however, its cargo division, Emirates SkyCargo, has set up at Al Maktoum and Dubai World Central (DWC), the free zone city attached to the airport. The new facility allows the carrier to handle approximately 700,000 tonnes of cargo per year, with the potential to expand to 1m tonnes. This will help maintain Emirates’ position as the leading global carrier of cargo and help build on DIA’s performance of handling 2.4m tonnes in 2013.
Lowering Costs
In addition to Emirates, the lowcost carrier flydubai has also been rapidly expanding its network and posting impressive results. Passenger numbers for the company increased by 38% to 6.8m in 2013. The carrier has been busy adding routes in Eastern and Central Europe in 2014, including Sofia, Bratislava, Prague and Sarajevo. By the end of 2014, flydubai will serve 75 destinations, adding 23 destinations in 2014. As such, the carrier has been investing in its fleet. In July 2014, the company took hold of three next-generation Boeing 737-800s, and as of January 2015, the company was searching for six additional aircraft.
The low-cost segment, while growing, is not expected to pose significant competition to the more established, larger airlines, and it is unlikely to erode their market share, appealing instead to an altogether different niche of travellers. “Although there have been a number of low-cost airlines entering the UAE in recent years,” Emre Ismailoglu, general manager for Turkish Airlines UAE, told OBG, “the services that they provide and markets they cater to overlap minimally with full-service airlines.”
While the government has been overseeing the expansion of airport capacity, Dubai’s local air carriers have been growing their fleets and the regulatory environment has been steadily liberalised to allow foreign air carriers to enter the market. All this activity has resulted in a capacity issue, with regard to airspace. In April 2014, the International Air Transport Association (IATA) cautioned that the region was facing gridlock in the available airspace. According to the association, approximately 60% of GCC region’s airspace is reserved for use by national and international air forces operating in the region, limiting civilian capacity. However, if this challenge can be resolved, Dubai looks set to cement its position as a leading centre for the aviation industry.
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