The sources of Gulf carriers’ advantage lie in the key inputs and enablers required for an airline industry. One key input is capital, both for investment in the airline (new planes) and for investment in the infrastructure supporting the airline (such as airports). In a time of unprecedented surpluses, Gulf states are uniquely positioned to invest in both. Other carriers, meanwhile, struggle for both the capital to invest in their fleets and to lobby their governments for improvements in infrastructure.
A second crucial input is oil. Gulf airlines’ proximity to oil production sources provides cost advantages not available elsewhere. More importantly, rises in the oil price act to strengthen Gulf economies overall (and therefore increase demand for air travel), offsetting the rise in input costs.
Third, airlines need attractive routes and fundamental passenger demand. In addition to flying locals and expatriates in and out of the country, Gulf airlines increasingly tap into long-haul passenger flows from the US to Europe and Asia. Located at the crossroads of these regions, the Gulf can conveniently play host to transit passengers and short-stay tourists. According to census data sourced in 2007, nearly 30 million passengers fly through Dubai each year. That’s more than 23 passengers per resident, twice the figure for London and four times the figure for New York.
Fourth, airlines need a flexible, skilled labor force to staff their operations. Many of the woes faced by US and European carriers are linked to labor costs (especially pensions) and the effects of rigid unionisation. While the Gulf has a smaller local pool of talent to draw on, it is able to attract expatriates on lucrative – yet flexible – packages that keep labor costs manageable while also attracting strong talent.
Strength in these four areas naturally give Gulf airlines an edge in the global marketplace. At the same time, Gulf airlines do face some unique challenges. One such challenge is the risk of over-capacity. Dubai is building an airport in Jebel Ali which will be the size of London Heathrow and Chicago O’Hare combined and will have the capacity for 120 million passengers per year. That’s about 30 times the population of the UAE. Up the road in Abu Dhabi, an airport with the capacity for 40 million passengers is being planned. Qatar also has ambitious airport plans, while Kuwait and Saudi Arabia are likely to upgrade key airports soon as well.
The capacity being built by Gulf airlines – both in terms of airport space and passenger seats – far exceeds their domestic demand. They are all seeking to capture the long-haul transit market, capitalising on increased flows to China, India, and the Far East. Competition for these passengers may become fierce, and it is unlikely that all Gulf airlines will operate at their desired level of utilisation.
Gulf airlines’ ownership models can also be both a benefit and a drawback; public-sector owners can be patient for financial return, but may miss some of the shareholder pressures which can lead to robust examination and frequent reviews of their strategies. This challenge is common across a large number of carriers around the world in which governments hold large stakes.
The airline sector is one in which Gulf businesses have the key ingredients for success. GCC-based carriers are therefore likely to remain key players in the global airline sector, taking a central role in the marketplace for years to come.
Note: Aamir A Rehman is an expert in global corporate strategy. He was formerly Global Head of Strategy for HSBC Amanah, a business unit of the world’s third largest bank. He has extensive experience in strategy development for multinational corporations and the Middle East region. At HSBC Amanah, Rehman was responsible for strategy development and implementation across global markets, including the UAE, Saudi Arabia and the broader Gulf. HSBC is one of the world’s largest banks, and HSBC Amanah serves over 300,000 customers worldwide. Prior to joining HSBC, Rehman was a strategy consultant to Fortune 500 and other leading businesses since 1999. He has worked with the Boston Consulting Group and with the Monitor Group.
Rehman has written several articles on business strategy in the Middle East, including a piece entitled ‘Dubai Inc’ for Harvard Business School (HBS) publication. His management commentary has been featured in the New York Times, the Financial Times, on National Public Radio and in the Wharton Leadership Digest. He is also an author of a 2008 piece in the Harvard Business Review. Most recently he authored a comprehensive business book on the Gulf titled ‘Dubai & Co: Global strategies for doing business in the Gulf states’.
Rehman serves on the advisory panel of Dinar Standard and has contributed to that publication. He and a group of colleagues are currently founding an investment holding company focused specifically on principal investments in the Gulf states, Asia and other emerging markets.
He holds an MBA from the Harvard Business School, a master’s degree in Middle Eastern Studies from Harvard University and a bachelor’s degree from Harvard College. He is a native of Staten Island, New York, and lives in New York City. His ongoing commentary can be found on www.rehmaninstitute.com