Aircraft manufacturers must love the Gulf Cooperation Council (GCC) right now. In a time of global caution GCC countries keep filling the order books of many aircraft manufacturers.
On the military side, Oman in December 2012 placed a $3.75 billion order for British-assembled Typhoon and Hawk planes. Saudi Arabia’s orders for military aircraft from the United States last year entailed 84 new F15 fighter jets and 84 upgrades, along with orders for assorted helicopters and transport aircraft.
In commercial aviation, low-cost and full-service carriers in the GCC have made large purchases of single-aisle airliners in recent years, in addition to making global headlines with mega-sized orders for 90 Airbus A380s by Emirates and 40 Boeing 787s by Etihad in the United Arab Emirates, plus 30 B787 orders by Qatar Air.
The aggressive growth of GCC-based carriers and defense investments by regional governments are great news for aircraft manufacturers. Yet the most important development for aviation in the Middle East is not these big ticket orders. Far more significant for regional economic growth is the emergence of the GCC as a producer of aerospace products and provider of aviation services.
Booz & Company forecasts that the region’s air traffic, as part of a global trend, will double in volume during this decade. Next to the ongoing growth of GCC-based carriers into global aviation brands that compete in the top league of carriers, GCC countries are already investing in this trend by upgrading their airports — making them important stop-over points in international air traffic.
But two other trends also play very favorably to the region’s aviation ambitions. Recognizing the growing needs of commercial airlines and jet owners for on-the-ground services, the GCC is becoming an aviation supplier in its own right, providing maintenance, repair and overhaul (MRO) services for aircraft, components and subsystems.
Moreover, the commercialization of space is set to dramatically change and enhance the aerospace industry over the next decade and Gulf countries are tapping into this new potential with significant investments. In aligning themselves with both trends, GCC states are opening up growth chances for new high-end employment and economic gains for the entire region.
Remarkably for countries with little industrial background, the GCC states are entering aerospace and aviation sub-sectors such as manufacturing, geo-info services and space through such ventures as Mubadala Aerospace (which is involved in MRO and manufacturing), Virgin Galactic (which is planning a space port in Abu Dhabi) and Bayanat (which is offering commercial companies access to its 40-year-old military database).
These are important forays into a challenging industry where incumbent players in developed economies can easily stumble. If they are to thrive, however, the GCC’s aviation and aerospace sectors will need to build capabilities in three key areas: human capital, supply and production, and global reach. Focusing on these areas will allow GCC aviation and aerospace players to enter businesses in which they can establish a lasting presence and which will also help to broaden their national economic bases.
Building human capital
The aviation and aerospace industries are human capital intensive, demanding specialized skills and considerable knowledge of dealing with highly complex engineering systems that seamlessly work together to ensure the safety of passengers and aircraft in the sky. So while aerospace and aviation have tremendous capital costs, these industries cannot operate without engineers, technicians and support staff with advanced skill sets.
Expertise in these areas is in short supply in the GCC and the wider Middle East. The small number of experienced professionals, such as designers and engineers, has led to intense competition among industrial companies and academia.
GCC aviation and aerospace companies can take internal and external approaches to deepening their pool of talent. Developing and nurturing skilled staff internally is an important long-term option. Senior engineers often need seven to 10 years to train new or junior employees. This leaves significant gaps in the talent base over the short-term.
GCC aviation and aerospace players can fill the skills and expertise gap in the short-term from external sources. They can leverage their international industrial partnerships to gain skills and capabilities.
GCC aviation and aerospace companies should also develop and display rewarding career paths that will attract high-quality staff. For instance, a career path tailored to high-knowledge middle-level managers might include defined career milestones, opportunities for international assignments and cross-functional activities.
Education also has an important role to play. For instance, in the UAE, the government and industry partners have already teamed up to establish several engineering programs and course majors at universities to match the region’s needs.
Enhancing supply chains and production
The global aviation and aerospace supply chain cannot keep up with the sector’s appetite for aircraft, a constraint that is preventing some airlines from growing, including those in the region. While most of the new demand for aircraft is coming from Asia — China alone needs 300 to 400 aircraft each year to keep pace with its demand — the Middle East is also an important buyer, requiring an estimated 100 aircraft per year for the next 20 years. More than 400 wide-body aircraft currently operate in the region.
This means that the global industry will face execution challenges, pushing up costs and forcing original equipment manufacturers (OEMs) to move toward a more global supply chain and manufacturing footprint. In order to capitalize on the global supply chain in aviation and aerospace, the GCC must also develop its supply chain and production proficiencies. Specifically, there is a trend toward consolidation in the supply chain. For example, United Technologies Corp recently purchased Goodrich in a $16.5 billion deal. This process of consolidation is forcing OEMs to understand where and how value is changing along the supply chain. OEMs therefore need to rethink their strategies to protect their value from further erosion.
OEMs can achieve this through partnerships, such as with emerging firms in the GCC, or more expensively through vertical integration. As an example, aerospace players in the region are seeking to secure access to key aircraft programs in the future and thereby secure stable, high-profile, expertise enhancing business — precisely the kind of international partnership that OEMs need.
Gaining global reach
GCC aviation players (such as those involved in MRO) also need global reach. A possible path for GCC companies aspiring to achieve leadership positions in the aerospace (i.e., aircraft and equipment manufacturing) value chain is to pursue long-term preferred risk-sharing partner positions with OEMs.
These partnerships require suppliers to invest in the development of aircraft programs to secure a share in the production of aircraft components. GCC firms can achieve this through direct contracts or through the acquisition of leading tier-one suppliers. By nurturing their relationships with the leading industry players and OEMs, emerging GCC suppliers will secure access not only to the aircraft development programs but also to new technology and new capabilities. This will in turn provide suppliers with the ability to achieve strong positioning and the means to build a sustainable business in the aerospace industry.
Achieving global reach also requires GCC players to emulate the ability of industry leaders to meet their clients’ needs, thereby placing them at the top-tier of service providers. It involves a capacity to capture the market whenever it is in an upswing and to have the skill to manage inevitable downturns. Emerging GCC aviation players can acquire global reach by joining international networks or acquiring companies in key international hubs. Both approaches will provide them the access they need to branch out overseas.
The aviation and aerospace industries have remarkable growth prospects, which GCC countries can take advantage of by building capabilities. These efforts will not only help the aviation and aerospace industries soar but also help promote the region’s national development goal of becoming high-value added, knowledge-based economies.
Fadi Majdalani and Alessandro Borgogna are partners, and Leonardo Monti a senior associate, at Booz & Company