Downturn hits regional airport expansion plans

15 February 2009
With more than $50bn worth of aviation infrastructure projects under way in the Middle East, the slowdown in the sector has come at a bad time for the region.

The announcement in early January of a 12-month delay in the opening of Dubai’s Al-Maktoum International airport barely registered with industry observers amid the overwhelmingly negative headlines about the emirate that have appeared in the financial press in recent months.

In early February, credit ratings agency Moody’s Investors Service indicated that it could downgrade the debt rating of six Dubai government-owned companies - which include ports operator DP World and investment company Dubai Holding - in its ratings review in the coming weeks.

While the Dubai government remains committed to supporting flagship companies and enterprises such as Al-Maktoum International airport, the ratings agency said Dubai’s deteriorating economy was affecting the government’s ability to support such projects.
The massive scale of the $10bn airport, replete with six runways, made its planned 2009 opening highly ambitious, given the reports of Dubai’s increasingly precarious financial position and the growing list of projects being delayed in the emirate.

Work on the air-traffic control tower and access roads for the airport, which is located at Jebel Ali free zone, will not be completed by the end of 2009 as originally envisaged, with construction taking longer than the ambitious development time-table had allowed for. So far, only the runway and lighting have been completed at the 140-square-kilometre site.

Ambitious timetable

Dubai Airports, the authority that is leading the development of the airport, attributes the delay to the fact that the General Civil Aviation Authority has yet to grant it an operating licence. However, project managers say recruiting the large number of staff needed to work at the airport is also causing delays.

Other Middle East governments may also have to scale back plans for airport expansion, given that many of these plans were drafted at times when passenger and cargo volumes were rising month on month. International Air Transport Association (IATA) statistics show that Middle East cargo volumes fell by 9.2 per cent from November to December 2008, evidence that Gulf airports are far from isolated from the global downturn.

“Airports reflect whatever happens outside,” says Dheya Towfiqi, executive director of Bahrain-based airport consultant DTEB. “Whatever the world is going through will affect the air transport business, which means reduced passenger numbers, fewer flights and a consequent reduction in requirements for expansion facilities.”

Middle East air passenger growth was 7 per cent in 2008, according to the IATA. Figures for the final weeks of 2008 show more spare capacity and declining traffic. Aviation analysts say these end-of-year figures are a sign of worse to come in 2009. “Most of the region has not yet felt the full impact of the global crisis due to its better financial footing,” says Majdi Sabri, regional vice-president for the Middle East and North Africa (Mena) at the IATA.

Sabri believes the global slowdown will begin to have an impact on the region’s aviation sector this year. “As a result, we will not see the double-digit air traffic growth figures witnessed in the past five years,” he says. “In 2008, passenger growth figures for Middle East carriers slipped to 7 per cent, well below the 18 per cent recorded in 2007.

“We expect significantly lower traffic growth [in single-digit figures] to continue in 2009. Airlines relying heavily on transit traffic between regions hit particularly hard by the recession - Europe, North America and Asia Pacific - as well as those depending on tourist traffic from these regions, will likely be harder hit.”

The downturn comes at a particularly difficult time for Middle East states that are in the middle of major expansion programmes. More than $50bn is currently being spent on aviation infrastructure in the region. Over the past three years, Middle East airlines have ordered more than 1,000 aircraft, worth about $178bn in total.

Oman anticipates a substantial rise in traffic through Muscat International airport on the back of national carrier Oman Air’s ambitious fleet and route expansion. The carrier launched a direct service to London in 2008, and operates eight Airbus A330s, with plans to lease six Boeing 787-800s from Kuwait’s Aviation Lease & Finance Company (Alafco) by 2012.

To accommodate a larger national airline, a new terminal building is being built at Muscat International airport, with 32 air bridges, two runways, a new cargo terminal and 6,000 parking spaces.

Qatar’s airport expansion continues. The Sky Oryx joint venture of Japan’s Taisei Corporation and Turkey’s TAV has been awarded an additional package worth $1bn at the New Doha International airport project.

The contract is an addition to the joint venture’s main terminal contract and includes an extension to the main terminal building plus in-bound baggage-handling facilities. The completion date for the terminal has also been extended to July 2011.

The long-overdue expansion of Abu Dhabi International airport is also under way as part of a $6.8bn aviation masterplan, which also includes a business and logistics park, developed by Abu Dhabi Airports Company.

It will overhaul the existing airport, which was built to handle 3.5 million passengers a year but was used by 6.7 million in 2007. The new Midfield terminal will be able to handle 20 million passengers a year. The first phase of the terminal is due to be completed by 2012, and is intended to cater for national carrier Etihad Airways’ fleet and route expansion.

Etihad plans to add 100 new planes over the next 10 years, having placed a $43bn order for Airbus and Boeing aircraft at the 2008 Farnborough airshow.

Dubai’s existing international airport is also undergoing expansion, with the award in December 2008 of an AED4.9bn ($1.3bn) contract for the third concourse. The airport will have capacity to handle 60 million passengers a year, up from 33 million.

Saudi Arabia’s airport plans spread across the country. The aviation regulator, the General Authority of Civil Aviation (Gaca), has finalised a masterplan for three new commercial zones, which will be developed around King Khalid International airport in Riyadh, King Fahd International airport in Dammam and King Abdulaziz International airport (KAIA) in Jeddah.

The government is expected to invite a real estate developer to build the commercial zones. Netherlands Airport Consultants developed the masterplans for Riyadh and Dammam, while Beirut-based consultant Dar al-Handasah (Shair & Partners) will manage the construction of Jeddah’s four new passenger terminals.

KAIA is currently undergoing a $20bn overhaul aimed at transforming it into the region’s second-largest airport by 2035.

Matching demand

One Gaca official tells MEED that the kingdom’s airport expansions are insulated from the global financial downturn as its strategy is geared not towards meeting a projected increase in passenger numbers but to keeping pace with existing demand. Passenger traffic grew from 28 million a year in 1998 to 40.5 million in 2007, and is predicted to continue growing by about 6 per cent a year.

The fact that the main passenger terminals in Jeddah and Riyadh are currently heavily congested suggests that money spent on expansion is being targeted correctly. “There is a problem of limited capacities at certain airports in the Gulf, but much depends on government policy,” says Towfiqi. “It might be the case that some governments want to think about expanding their airports now. For any airport expansion, we are talking about years before they will be designed and built, by which time passenger numbers may be on the increase again.”

There is broad agreement that infrastructure expansion in some countries such as Saudi Arabia is overdue because of the exceptional traffic growth and future potential. But Sabri says there should be thorough consultation with users to ensure it is cost-efficient.

“The industry cannot afford to have lavish or over-expanded facilities that will be expensive to operate and maintain, which will reflect adversely on user charges,” he says.

Meanwhile, a raft of expansionary budgets announced early this year indicate a willingness to spend more of the region’s oil revenues on essential infrastructure. Saudi Arabia announced SR45bn ($11.9bn) spending plans for 2009, with SR19bn allocated to telecoms and transport, including airport projects.

But airports are capital-intensive projects. The lowest bidder for the development of Muscat International airport bid $1.22bn to carry out work that will nearly treble capacity from 4.5 million passengers a year to 12 million, with phase one due for completion at the end of 2010. Three additional phases could increase capacity to 48 million passengers a year by 2050, but this would depend on the sultanate meeting ambitious future projections for passenger numbers.

The short-term outlook is not auspicious. Total passenger traffic through Muscat International airport fell by 5 per cent to 4 million passengers in 2008.

In contrast, passenger traffic at Dubai International airport grew by 9 per cent in 2008 to 37.4 million, despite the economic downturn, while air cargo volumes grew by 9.4 per cent.

Investment risk

Still, questions remain over whether post-credit crunch Dubai will need two major air hubs within 20 kilometres of each other. Although long-term plans call for the migration of foreign carriers from Dubai International to Al-Maktoum International, now may not be the best time to do this.

Al-Maktoum International’s $10bn price tag is steep, and this kind of investment does not come without risk. “In the near term, airlines will have to adjust capacity to match the downturn in demand growth,” says Sabri. “In the longer term, there is a real risk that we will face an overcapacity situation with airports. Last year, 160 million passengers flew into, out of or within the Middle East. By 2012, the 10 leading airports in the region will have a combined capacity of 320 million passengers a year.”

There are some ways of reducing costs. The IATA is challenging monopoly providers - airports and air navigation service providers (ANSPs) - to deliver the same efficiencies that airlines have achieved.

“In July, we wrote to 133 airports and 66 ANSPs asking for urgent action in light of the financial crisis,” says Sabri. “Some responded positively. Kuwait airport provided incentive packages for airport services and a 10 per cent fuel price discount. Dubai Airports gave a commitment not to increase airport charges for the next four years.”

However, Saudi Arabia, Egypt and Jordan have granted management concessions to private operators to run their airports, which Sabri warns could lead to increased charges. Instead, the IATA urges regional authorities to commit to liberalisation, which has resulted in the launch of new airlines in countries including Saudi Arabia, the UAE, Jordan and Morocco.

Proponents of liberalisation say it will stimulate long-haul markets and help fill the airports being built in the region. For example, Morocco’s 2005 open-skies deal with Europe, which liberalised Morocco’s aviation sector allowing European airlines to fly to the country, is boosting tourist numbers towards 10 million a year from 5 million a year in 2003.

Morocco’s plans have largely been fuelled by tourism growth. The expansion of Oujda airport in the east of the country involves two new runways and a new terminal building. The airport received a boost when Sharjah-based Air Arabia announced its westerly hub would be in Morocco. According to the Moroccan authorities, the number of passengers travelling through Oujda airport will reach 1.2 million by 2015, compared with just over 250,000 in 2006.

Airport expansion schemes explicitly geared to the tourism market have proved successful. Egypt brought forward a planned doubling of expansion at its Red Sea airport at Marsa Alam by four years, to 2007 from 2011, and the airport is now capable of handling almost 2,000 passengers an hour.

Tourism of a different sort - religious pilgrimage - is behind Iraq’s plans to build a new international airport near Karbala, a southern city considered holy to Shia muslims. In the Kurdish-controlled northern region of Iraq, plans are under way to build an airport at the capital Irbil. The project will be developed in four phases and will have capacity to handle 4 million passengers a year.

Iran’s major airport expansion scheme is designed to service its free trade zone at Qeshm and attract foreign investment. Plans include the expansion of the Qeshm airport to accommodate projected growth in passenger traffic from 150,000 a year to 1 million a year by 2015. However, this may be over-optimistic, given the sanctions against the Islamic Republic.

Qeshm is a business rather than a tourist destination, with projected growth assuming a steep increase in business passenger numbers.

As with many major projects across the Gulf, the argument for pressing ahead with airport expansion plans is that they are long-term projects.

Countries such as Saudi Arabia are playing catch-up with their airport plans, as ageing terminals are replaced to keep up with rising demand. For ambitious plans such as those in Abu Dhabi, Doha and Dubai, the need for multi-billion-dollar terminals is based on projections of a large increase in passenger numbers.

Governments, civil aviation authorities and airlines in the region will need to work together to make sure their investments are justified by the Gulf becoming the world’s new aviation hub.

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