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market manipulators. By guzzling $42 billion of state subsidies over the past ten years - according to the contested claims of their US rivals - Emirates, Etihad and Qatar Airways are accused of creating an uneven playing field on which privately-owned foreign airlines simply cannot compete.

Each of these ‘big three’ state-owned Gulf carriers has developed a colossal hub-and-spoke network to maximise their reach. They operate alongside two smaller UAE airlines that seek to catalyse price-sensitive demand on short-haul routes: flydubai, the sister company of Emirates; and Air Arabia, the privately-owned no-frills carrier based in Sharjah.

EvEn for aviation pundits well accustomed to the extravagance of the Gulf carriers, last summer’s unveiling of the ‘Residence’

- an ultra-luxurious First Class product developed by Etihad Airways, the flag-carrier of Abu Dhabi - caught many in the industry by surprise.

nestled in the nose of Etihad’s double-decker Airbus A380s, the Residence comprises a living room, bathroom and double bedroom spread across 125 square feet of airborne real estate. Passengers who stump up the $32,000 price tag for a one-way flight to new York are accompanied on their journey by a Savoy-trained butler and a personal chef. nine smaller ‘Apartments’ fill out the remainder of the vast First Class cabin on Etihad’s A380s.

While gawking at the sheer opulence of the Residence, journalists attend-ing its May 2014 launch were quick to raise questions about the commer-cial viability of the product. Could Etihad really justify sacrificing so many standard seats for one single, ultra-high-yield customer? Would the super-rich clientele being targeted not

simply prefer to charter a private jet?Those questions - still unanswered

today, owing to the lack of transparen-cy in Etihad’s financial reporting - lie at the heart of the seemingly endless controversy over Gulf carrier business models.

To their supporters, Etihad and Emirates Airline, the flag-carrier of Dubai, are corporate revolutionaries, sweeping away the inefficiencies of a global aviation industry long dominat-ed by legacy rivals in Europe and north America. The commercial innovation and product excellence benchmarked by the UAE’s flag-carriers have, for many travelers, made flying enjoyable again after decades of shrinking seats, lengthening delays and declining

to their supporters, Etihad and Emirates are corporate revolutionaries, sweeping away the inefficiencies of a global aviation industry long dominated by legacy rivals in Europe and north America, and are making flying enjoyable again after decades of shrinking seats, lengthening delays and declining on-board service

[Emirates president] tim Clark has always kept his foot firmly on the pedal. He told reporters at an industry conference in June this year that Emirates will deploy between 280 and 300 aircraft by 2025

With 239 widebody aircraft in its fleet and 269 more on order, Emirates is the unchallenged goliath of the bunch. Founded by Dubai’s government in 1985, the airline started life under the stewardship of its chief executive the late Maurice Flanagan, and Shaikh Ahmed bin Saeed al Maktoum, chairman and member of Dubai’s ruling family. Current president Tim Clark also joined the company in its launch year.

Emirates commenced operations with $10 million of seed capital and a gift of two Boeing 727s. In 1986 the airline recorded what management claim to be their only ever annual loss - purportedly due to infrastructure

Emirates is expected to deploy between 280 and 300 aircraft by 2025

by Martin Riversthegulf@tradearabia.net

on-board service.To their detractors, however, the

Gulf carriers are nothing more than

costs. There followed a truly remark-able period of expansion that contin-ues, uninterrupted, to this day. Annual passenger growth averaged 30 per cent during the airline’s first decade, before maturing to 15 to 20 per cent by the turn of the century and about 10 per cent today.

This relentless expansion has seen Emirates passenger numbers balloon from two million a year in the early 1990s to 49 million in 2014. It is now the world’s largest airline by Revenue Passenger Kilometres (RPK), the industry’s standard measure of traffic (which combines footfall with actual distances flown).

With a global network of 149 destina-tions spread across 81 countries, Emirates has in turn driven rapid expansion of its home base at Dubai International Airport (DXB). The mega-hub overtook London Heathrow Airport as the world’s busiest interna-tional gateway last year, handling 70 million passengers.

Asked when the growth will eventu-ally plateau, Clark has always kept his foot firmly on the pedal. He told reporters at an industry conference

UAE

Fast-growing Emirates and Etihad are standard bearers for the Gulf airline industry. While not everyone in the industry is entirely happy with their perceived business models, it is clear that passengers are

Game changers still playing the field

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in June this year that Emirates will deploy between 280 and 300 aircraft by 2025. By that time, the flag carrier expects to have relocated from DXB to Al Maktoum International Airport in the newly rebranded Dubai South economic zone in Jebel Ali, south-west of Dubai.

“There is nothing stopping us doubling in size once we get to [the new airport]. It’s as simple as that,” he was quoted as saying by Abu Dhabi’s The National newspaper, hinting at a maximum size of 600 widebody aircraft.

If Emirates’ present scale and future ambitions are impressive, the strategy underpinning them is nothing short of brilliant. Ever since the airline first took to the skies, Dubai’s government has placed aviation at the heart of its economic development programme. The sector directly and indirectly contributed $27 billion to Dubai’s economy in 2013 - nearly 27 per cent of GDP - while supporting 417,000 jobs, or 21 per cent of the emirate’s workforce. The latest projections envisage this rising to $53 billion and 755,000 jobs by 2020.

Geographical good fortune is the key ingredient for Dubai’s aero-economy. Any two major cities on the planet can be connected with a single stopover in the emirate. Certain air corridors - China to West Africa, for example, or Europe to Australia - are flown in a virtual straight line. Factor in that one-third of the world’s population lives within four hours’ flying time of Dubai, and it is not hard to see how this once-sleepy fishing port has become the nexus of global aviation.

The Gulf’s success, however, comes at the expense of others. For every passenger now swapping planes in Dubai, Abu Dhabi or Doha, there is potentially one less customer transit-ing in historic aviation centres like Paris, Amsterdam or Frankfurt.

As well as drawing economic activity away from Europe, this realignment of intercontinental traffic dampens profits at Air France-KLM and Germany’s Lufthansa - legacy flag-carriers already weighed down by punitive tax regimes and onerous labour agreements.

It further undermines the commercial

prospects of north American carriers like Delta Air Lines and Air Canada, which have long enjoyed lucrative traffic-sharing deals with their partners in Europe.

Set against this backdrop, it is not surprising that three US carriers - Delta, American Airlines and United Airlines - are now calling for traffic restrictions to be imposed on routes between the US and the Gulf. Their European counterparts are already protected by such caps.

Whereas Emirates attributes its success to forward-thinking invest-ment and pro-business governance, the US lobbyists spin an altogether less flattering narrative. They accuse Dubai, along with Abu Dhabi and Doha, of pouring money down a black hole to advance “massive expansion in the flow of international air passenger traffic through their hub cities”. The growth of these mega-hubs, they argue, is artificial and self-serving - a product of deliberate “capacity dumping” that elevates macro-economic interests above rational commercial conduct.

Both sides agree that the Gulf has had a disruptive effect on global aviation. But they disagree on the causes - and so the merit - of this trend: one hails its

entrepreneurial excellence; the other sees darker machinations at work. In truth, there are valid arguments coming from both camps (see also page 37).

However fair the Gulf-carrier business model, it is here to stay. nearly

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Western airlines may want rid of the Gulf carriers, but Western aircraft manufacturers are having a field day with the Gulf boom

Etihad’s investment strategy gives it back-door access to protected markets in which it has only limited flying rights with its own metal, particularly Europe and india.

half of the 317 A380s in Airbus’s orderbook are destined for Dubai. A similar proportion of Boeing’s under-development 777X - 306 of which have been pre-sold - will eventually fly in Emirates’ colours. Western airlines may want rid of the Gulf carriers, but Western aircraft manufacturers are having a field day with the Gulf boom.

For latecomer Etihad, founded in 2003, Emirates’ first-mover advantage presents a dilemma. Even after gobbling up $17 billion of alleged subsidies, Etihad handles barely one quarter as much RPK traffic as Emirates.

The Abu Dhabi flag carrier deploys less than half as many aircraft as its

big brother, counting among them 32 smaller narrowbody jets. Emirates, by contrast, is an all-widebody operator. (For thin markets that are better suited to narrowbodies, Emirates leans on the 50-strong fleet of its equally fast-expanding affiliate flydubai.)

Unable to match his rival in terms of overall size, Etihad chief executive James Hogan has prioritised in-house quality while also pursuing non-organic expansion elsewhere. The flag carrier now owns large stakes in seven airlines: Air Berlin (29 per cent), Air Serbia (49 per cent), Air Seychelles (40 per cent), Alitalia (49 per cent), Switzerland’s Darwin Airline (33 per

cent), India’s Jet Airways (24 per cent) and virgin Australia (24 per cent). Equity and codeshare partnerships contributed $1.1 billion to Etihad’s topline last year.

The investment strategy gives Etihad back-door access to protected markets in which it has only limited flying rights with its own metal, particu-larly Europe and India. In doing so, it has provoked scrutiny from anti-trust regulators wary of excessive foreign influence.

It has also raised eyebrows for the amount of cash being splashed around. Etihad signed a €1.76 billion ($2.4 billion) contract for its Italian investment, despite Alitalia having been consistently loss-making in recent history. Hogan may be an accomplished turnaround specialist, but such gigantic sums are inevitably seized on by those who accuse the Gulf carriers of flouting commercial reality.

This September, Etihad answered critics of its extravagant spending by announcing a partnership with Chapman Freeborn, the private jet charter specialist, to market its plush First Class cabins.

The deal will see super-rich travelers combine short hops on a private jet with long jumps on Etihad’s A380s. As impressive as it is, it only muddies the already murky debate about Gulf carrier business models. Any airline that can tailor its scheduled, commer-cial network to the needs of one quintessentially exclusive customer is either doing something very, very clever, or very, very reckless. <

Sleeping giant? the commercial viability of Etihad’s First Class Residence product has been questioned

Foot firmly on the pedal: Emirates president tim Clark