Gulf airlines: Ego-trips or essential?

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Is an industry, aviation has always attracted the wealthy.Tycoons rarely resist the chance to have their own airline,as Howard Hughes, Aristotle Onassis or Richard Branson areenough to prove, whilst virtually every country in the worldproudly flies a national flag carrier, even if it makes aloss in doing so.

Little surprise, then, to observe the billions of dollarsbeing poured by Gulf states into the expansion of airlinesand airports. Thanks largely to this investment, the MiddleEast is now easily the fastest growing region in the worldin terms of air traffic, which in 2006 rose by 16% comparedto a global average of 5.1%.

But aren’t there just too many fish swimming in too small apond? Despite the small size of the domestic market in theGulf, there are now at least eight airlines operating fromKuwait, the UAE, Bahrain, Qatar and Oman alone, with moreset to arrive.

Older players like Emirates continue to expand, marketingthemselves ever more aggressively in new markets like the USor the far East. Meanwhile, the original stakeholders ofGulf Air—the governments of Abu Dhabi, Bahrain, Qatar andOman—have gradually pulled out of the partnership to createnew airlines.

Abu Dhabi launched its own carrier, Etihad, in 2005, whilstDoha has spent extravagantly on expanding Qatar Airways inthe past few years. Low-cost carriers have also entered themarket, and with great success. After its launch in 2003,Sharjah-based Air Arabia chalked up a $27.5 million profitin 2006 and offered a $700 million IPO last month. JazeeraAirways, a privately-owned Kuwaiti airline which beganflying no-frills flights in 2005, already goes to 20destinations and says it also wants to list stocks.

Even more new airlines are on the way, including a fourthUAE carrier, the delayed RAK Airways, which will operatefrom the northern emirate of Ras al-Khaimah. Across theborder, meanwhile, Saudi Arabia has said it will issuelicenses for two low-cost domestic carriers in theKingdom.

On the surface of it, the preponderance of upstarts in sucha tiny geographical area would seem to be nothing but anego-trip, a publicity stunt designed to get names on the mapand planes around the world. Yet whilst an element of thatmight be hard to deny, this lavish expense on aviation formspart of a longer-term, and fairly sensible, economicstrategy for many of these countries.

Thus far, the growth of all these airlines can be attributedto a number of contributory factors. Most important is thewider economic boom in the region: the massive influx ofimmigrants to the Gulf, whether middle-managers from Europeor legions of construction workers fromthe subcontinent, has filled hundreds of thousands of planeseats, whilst long-haul tourism is developing quickly inplaces like Dubai and Oman.

Second, most airlines rely heavily on the so-called hub andspoke model for their business, bringing passengers in froma large number of cities around the world, connecting themat the airport and then flying them out to their finaldestination. In some cases, like Qatar and Abu Dhabi, thesekind of transit passengers make up more than 70% of totaltraffic.

With that in mind, it helps greatly that the Gulf liesbetween large centers of population with underdevelopedinternational airlines, namely Iran, the Indian subcontinentand Africa, as well as being a natural halfway point betweenEurope and the Far East.

The airlines can also benefit from airport investments whosesize and cost seem to make no commercial sense. Over $40billion is earmarked for airports in the Gulf over the next10 years, with Dubai building what will be the largestairport in the world and Abu Dhabi, Qatar, Oman and Kuwaitall spending combined billions on new infrastructure tosupport aviation growth.

Lastly, many suspect that these airlines are given an unfairleg-up from their government patrons. Some European carriershave queried whether the Gulf airlines receive hiddensubsidies, have access to cheap rates of borrowing orbenefit from a privileged position at their hubairports—which are also owned by the state.

Whatever the case, though, this is missing the point. Evenif they’re doing well now, these airlines don’t really needto make money in the short-term. Qatar Airways, forinstance, doesn’t even expect to turn over a profit until2012. Instead, they should be seen as elements of a widerinvestment plan—which includes tourism, ports, media andfinance—to sustain Gulf economies once the oil and gas dryup.

Many argue that everything epitomized by the Gulf boom isbuilt on hydrocarbons and hyperbole. That may be true. Butfor now, there is more than enough money being spent toensure that by the time economic growth slows down, the newarrivals become fewer and energy resources dwindle, thesecarriers will have been able to establish a global marketshare that will both sustain their businesses and, moreimportantly, keep bringing people into and through theGulf.

Perhaps not all of them will manage to be successful in thelong-term, but there is at least some justification—apart from national pride—for so many apparently nonsensicalairlines in such a small area.