Dubai's $82 billion aerospace gamble

Dubai inching closer to building world's largest airport and aerospace industry.

By AUDE LAGORCE / MARKETWATCH
October 5, 2008 12:45
Dubai's $82 billion aerospace gamble

Dubai Palm Hotel/airport. (photo credit: AP)

 
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It's a windswept desert of dunes, rocks and 120-degree heat home to camels, snakes and antelope. Cutting through this desolate landscape, a dark tongue of asphalt is the only evidence that a project first dreamt of 30 years ago - to make Dubai the world's top airport hub and a global aerospace player - is on the verge of coming true. One of the seven states that make up the United Arab Emirates, Dubai may have a population of just 1.6 million, but it's got grand ambitions - and deep pockets to bankroll them. Its latest venture? An $82 billion gamble centering on the construction of the world's largest airport and the creation of an aerospace champion with leasing, maintenance and training capabilities. Despite turbulent conditions in the airline industry and rising fuel costs, Dubai is determined to become a top global aerospace player and home to the world's biggest, busiest airport. "The Middle East is taking over the aerospace industry and Dubai is at the heart of it," said Doug McVitie of consultancy Arran Aerospace. The tiny-but-rich Persian Gulf emirate has just completed the first runway at the heart of the future Al Maktoum International Airport, about 40 kilometers south west of old Dubai, on land set aside 30 years ago by former ruler Sheikh Rashid bin Saeed Al Maktoum. Blessed with fewer oil and gas reserves than its neighbors, Dubai has long had to find other ways of making a living. For centuries not much more than a staging post and pearl-diving port along ancient Middle Eastern trading routes, it has most recently reinvented itself as a playground for the super rich, with a focus on extravagant Las Vegas-style real-estate projects such as the world's first seven-star hotel. A history of success at pulling off such grand schemes has emboldened Dubai of late. After diversifying its economy into real estate, tourism and financial services, it has recently turned its attention to the loftier aerospace sector. And why not? For a sheikhdom at the crossroads of Europe and Asia, awash in cash and eager to have a say on the global stage, aerospace could be just the ticket, allowing it to parlay its ideal geographic location and rising international profile into an industry that will create jobs and support its economy in the long term. "Dubai has less oil than Abu Dhabi. They need to create jobs for the population. This is them saying 'let's convert our oil money into something tangible,'" said Richard Aboulafia of US-based aerospace consultancy the Teal Group. According to consultancy McKinsey, the Gulf economies need to create more than 4 million jobs over the next decade for its citizens. More than 350,000 new jobs could come from the aviation sector by 2015. While a chunk of the industry likes to portray Dubai as a somewhat clueless teenager indiscriminately spending daddy's money on vanity projects, it would be a mistake to dismiss the emirate's plans too hastily. "The level of ambition and the money and willingness to support it is staggering," said David Stewart, head of the European practice of consultancy AeroStrategy. As projects like the construction of the world's biggest mall, tallest building and longest bridge attest, when Dubai sets itself a goal, it goes for it big time. And it usually delivers. "They're in it for the long term. They have a 50-year horizon. They didn't just hatch those plans when the oil price doubled. They've given the stuff some serious consideration," said McVitie. When Sheikh Ahmed bin Saeed al-Maktoum, of the Dubai ruling family, held a press conference last year to publicize the emirate's aerospace plans he said: "What we are witnessing today is the rewriting of the world's aviation history and the beginning of a new era of global aviation." Although that prophecy has yet to come entirely true, Dubai and the Gulf countries' rising influence on the sector is undeniable. Not only are the region's domestic airlines steadily taking traffic away from more established Western carriers thanks to their ever-expanding network of routes, flashy new planes and competitive pricing, but they're also gaining clout with aircraft makers Airbus and Boeing. When Airbus in 2006 unveiled the first design of its next-generation long-range aircraft, the A350, several Middle Eastern carriers, including Dubai-based Emirates Airline, complained the cabin was too small and the fuselage not to their liking. Airbus went back to the drawing board. A few months later it introduced the A350 XWB, which boasts a wider cabin and a different fuselage. Emirates ordered 70 aircraft. Qatar Airways ordered 80. Together, the two carriers account for nearly half the orders for that plane. Emirates is also the biggest customer of Airbus' flagship A380 superjumbo, with 58 to be delivered. With orders from Middle Eastern airlines accounting such a large chunk of the European aircraft maker's book, "it would be foolish to expect them to just stand back and watch," Vitie said. In fact, they don't. Maurice Flanagan, the founding chief executive and current vice chairman of Emirates, said in an interview that the airline has a very close relationship with Airbus and Boeing and is vocal about its needs. "We're always pushing them for more range, for instance," he said. And Airbus can't afford not to listen. "Airbus needs these orders. If you were cynical you might say Europe is sacrificing its flag carriers to save Airbus," the Teal Group's Aboulafia said. The extraordinary success of Emirates may well be a harbinger of things to come from Dubai in the rest of the aerospace sector. While the carrier was barely on the map 15 years ago, it has grown at breakneck speed to become the Middle East's No.1 airline. It is consistently profitable and has built a reputation for top-notch service, making it a formidable competitor to the likes of Air France-KLM, American Airlines and British Airways in the battle for lucrative business customers. It is partly Emirates' rapid ascent that has encouraged Dubai to delve deeper into aerospace. "The idea was to capitalize on Emirates' success. We though we might as well take advantage of the entire value chain," said Robert Mionis, head of the engineering division of DAE Aerospace, the holding company spearheading Dubai's aerospace efforts. Dubai wants a toe in every corner of the aerospace industry. But without a doubt the project most emblematic of its ambition is the construction of the world's largest airport complex - Dubai World Central. At nearly twice the size of the island of Hong Kong, the $33 billion development will consist of six different zones clustered around a new airport, Al Maktoum International at Djebel Ali. The new hub will have six parallel runways and an annual capacity of 120 million passengers to allow Dubai to exploit its growing status as a tourism and financial hot spot. The facilities will also take pressure off of the emirate's first airport, Dubai International, which is bursting at the seams. (MarketWatch)

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