Regional airports defying the global downturn

11 July 2008
Governments in the region are spending billions of dollars on expanding airport capacity despite the crisis facing the industry. But will their investment pay off?

Despite the global downturn in the aviation sector, billions of dollars worth of airport expansion projects are under way throughout the Middle East and North Africa, with projects tracker MEED Projects estimating there are $45.3bn worth in the Gulf alone.

The region is undergoing unprecedented airport expansion to cope with rising passenger numbers. Regional passenger traffic increased by 18.1 per cent in 2007, compared with 7.4 per cent growth worldwide, as the global aviation crisis began to take hold (see feature, page 38).

Half the global total of $50bn worth of orders for new aircraft in 2007 were from Middle Eastern carriers. Airbus estimates the Middle East and Africa region needs to invest $124bn in 1,016 new aircraft to meet annual passenger growth of 7.1 per cent to 2015, slowing to 5.2 per cent between 2015 and 2025.

“The first quarter of the year was not too bad for Middle East carriers,” says Brian Pearce, chief economist of the International Air Transport Association (IATA). “They have yet to see any major impact from the rising fuel costs. The underlying growth is about 4 per cent, down from 8 per cent in late 2007. Middle East airlines continue to grow strongly.

“But everything will depend on the strength of the travel markets in the Middle East and the airlines’ long-haul destinations, particularly with extra capacity coming in. If passengers and cargo are not priced out of the market, business should continue to grow. The question is whether this bubble will burst and oil prices come back down.”

No other region in the world is adding airport capacity on this scale. MEED Projects lists $45.3bn worth of airport-related projects under way in the GCC, Iraq and Iran, and the figure is increasing all the time. Most recently came the news that the budget for Qatar’s New Doha International Airport (NDIA) has soared from $5.5bn to $9bn.

“The pendulum is swinging away from the traditional power bases of Europe and the Far East towards the Middle East,” says Iain Burns, a spokesman for Abu Dhabi-based Etihad.

“It is not that different to what happened 20 years ago, when Changi Airport expanded in line with Singapore Airlines’ growth, or Hong Kong with that of Cathay Pacific.

“In future, it will be possible to serve any point between Europe and Australasia or the Far East to South America with one Gulf stop.”

Much of the new capacity is concentrated in the Gulf, giving rise to the future scenario of five regional hubs - Dubai International Airport, Al-Maktoum International Airport (also called Dubai World Central), Abu Dhabi International Airport, Qatar’s New Doha International Airport and Bahrain International Airport - competing for the same intercontinental transit cargo and passenger traffic.

Growing competition

One of the factors that could affect airport growth is increasing competition between regional carriers Etihad, Qatar Airways and Emirates, says Nawal Taneja, chairman of the department of aviation at Ohio State University. There is also the threat of political problems resurfacing in the region, and improved job prospects at home reducing demand from migrant workers.

Other factors include the high relative cost of the Gulf as a tourist destination and the risk, if world recession spreads, that airline ticket prices will fall just as Gulf carriers expand their fleets at high cost.

National carriers face additional pressure on revenues from new low-cost rivals such as Air Arabia. Yet few observers predict the region will have too much airport capacity.

“The Gulf has deep pockets,” says Samer Majali, chief executive officer (CEO) of Royal Jordanian Airlines and newly appointed chairman of the IATA.

“Building these airports so close to each other might look like putting all the eggs in one basket. In Saudi Arabia and Egypt, expansion and renewal of airports is in line with growth in carriers and travel.

“The biggest new airports in the Gulf are chasing the same business, driven by national governments whose carriers are instruments for national growth. It is about putting their countries on the global map.

“But while the new capacity might seem beyond the most optimistic demand, sometimes you put in excess capacity if you can afford it.”

Growing market

Bashir Abdel Hadi, CEO of Jordanian main-tenance company Joramco, says the market will sustain the new capacity. “For many years, the Middle East handled less than its share of the market,” he says. “The growth we are seeing is not only cyclical. As in India, the region is repositioning itself, ending restrictive agreements.”

Pearce says the normal rules of economics do not apply in the Middle East, where governments are improving infrastructure as part of long-term growth plans.

“With Dubai, Abu Dhabi, Qatar and Bahrain, we are looking at an approach to investment that is not necessarily down to hard-nosed economic decisions, because it is a longer-term strategy to drive growth,” he says. “Heavy investment in infrastructure is not necessarily a bad business decision.”

Projections for air traffic in the Middle East remain strong. Sydney-based thinktank the Centre for Asia Pacific Aviation (Capa) has issued bullish projections, expecting the region “to be at the forefront of the next generation of aviation evolution”. It cites the Gulf’s central location, moves to liberalise aviation and the launch of ultra long-haul aircraft providing non-stop global services.

“A picture emerges of a potentially remark-able and long-term sustainable growth path, rather than the excessive, unplanned, over-hyped bubble about to burst [that] many outside the region, and some within, may believe,” says Capa. “In this environment, growth rates can be achieved at levels that were previously impossible.”

Nevertheless, strategic divisions are emer-ging within the region. Dubai has taken an ambitious ‘build-to-create-demand’ approach with its plans to build the world’s largest airport - the same strategy that made Jebel Ali the biggest port in the Middle East. But most airports are expanding step by step.

Saudi Arabia’s General Authority of Civil Aviation (Gaca) plans to turn Jeddah’s King Abdulaziz International Airport (KAIA) into the GCC’s second largest by 2035, handling 80 million passengers a year. Capacity at KAIA will increase on a just-in-time basis and Gaca will scale back its plans if numbers fall short of current forecasts.

In Abu Dhabi, the new Midfield Terminal, built in the shape of an X, allows Abu Dhabi Airports Company (Adac) to build on more capacity as needed.

Others say that building in future capacity from the outset is critical. “When building a new airport, it is necessary to look at the maximum demand across 20 or 30 years,” says Abdul Wahab Teffaha, secretary general of the Arab Air Carriers’ Organisation. “This capacity will not be under-utilised.

“Growth in regional travel, liberalisation of Middle Eastern skies and moves towards a single aviation market mean there is a clear need for this capacity. Look at Beirut, which built a new airport in 1996. The first phase was completed in 1998, with capacity for 6 million passengers a year. But it handled 3.5 million passengers in 2004.”

Dubai Airports says that staggered expansion is counter-productive. “Incremental development inevitably leads to too little capacity coming on too late,” says Paul Griffiths, its CEO. “It takes several years to harness resources. Ideally, you should expand several years before it is needed, otherwise there is a danger of not completing on time.

“With the incremental approach, there is a very real danger that decisions are taken too late. We believe that the quicker you build, the quicker you get the business and the people to fill that space.”

Many regional airports are already full. In Kuwait, the airport is close to capacity, after a 14 per cent increase in passenger throughput to 7 million last year. But a billion-dollar expansion plan has suffered repeated delays. However, Kuwait denies that its plans to attract 20 million passengers are over-ambitious.

“Kuwait is not pursuing a ‘me-too’ policy in expanding its airport,” says George Cooper, CEO of Kuwait National Airways. “It is not positioning itself as a centre for tourism, or as a mega-hub for traffic between Asia and Europe. It is about servicing Kuwait and perhaps southern Iraq - about the point-to-point needs of the Kuwaiti market.”

Across the region, airports are looking at ways to maximise returns on investment. Security concerns mean that travellers will have to check in even earlier in future, with money to spend and nowhere to go until take-off. Longer passenger waiting times represent a captive market for duty-free shops and departure-lounge leisure outlets.

Airports are capitalising on this by installing ever more glamorous retail, leisure and entertainment outlets. This will be particularly lucrative for airports handling large numbers of transit passengers.

Successful models

“Although most airports in the region are state-owned and operated, and return on investment might not be on the top of their list at this time, they are developing successful models in retail businesses, and a wide range of handling services and free zones concepts,” says Joramco’s Abdel Hadi.

Many choose to calculate the returns based on contribution to the national economy, as in Abu Dhabi, where Etihad depends on airport expansion to meet its growth targets.

Etihad contributed 6.6 per cent of Abu Dhabi’s non-oil gross domestic product (GDP) in 2007, generating 5 per cent of the emirate’s non-oil jobs.

The airline expects to increase its contribution to GDP by 67 per cent to $4.9bn by 2011, and to $7.6bn by 2016.

Abu Dhabi Airport Company (Adac) says the pressure to deliver remains. “The infrastructure is government-funded, but Adac must be a profitable operation, attracting airlines and maintenance, with a remit to attract revenues from aeronautical services,” says a spokesman for Adac.

“We have plans for a business park, property development and non-aeronautical services such as logistics. We have awarded a contract to DFS Group to manage retail at terminal three. Adac is looking at achieving as broad a revenue base as possible. We are all under pressure to deliver returns.

“In addition, we are offering the Midfield Terminal as a build-operate-transfer contract, and are examining the shortlists with a view to work starting on the project in the autumn.”

The shortlisted companies are Aeroports de Paris, Hochtief and TAV of Turkey.

In Saudi Arabia, Gaca has recouped at least some of the cost of expanding KAIA, imposing a surcharge of $2.70 per passenger on airlines operating out of the new terminal. It is also privatising its three international airports, awarding six-year concessions earlier this year, while new airport cities in Jeddah, Riyadh and Dammam will provide additional income.

Airport privatisations

Gaca is also privatising its three international airports by 2015. Earlier this year, it named the foreign companies that will take over operations at KAIA, at King Fahd Airport in Dammam and at King Khaled International Airport in Riyadh on six-year concessions.

Changi Airports International of Singapore will take over operations at Dammam, while Fraport of Frankfurt will manage Jeddah and Riyadh airports. The concessions cover all aspects of airport management while the airports are upgraded. The operating companies will earn fixed fees, topped up with result-related bonuses.

Their brief is to increase passenger and cargo traffic, improve efficiency and push the airports towards profitability. When the concessions end in 2014, Gaca expects the three airports to be in profit and ready for privatisation.

Dubai Airports’ revenue will come from operating charges to airlines and from retail, according to Griffiths. “The bigger the enterprise, the higher the income,” he says. “Dubai World Central will be a standalone commercial operation and we do not expect to impose surcharges when we can generate revenues from duty-free sales and catering. There is always room for diversity.”

Pearce says there is strong evidence to support the view that better air connections accelerate economic growth in developing countries. “Investment in infrastructure brings far-reaching, long-term benefits - access to global markets and skilled labour,” he concludes. “While these projects may not seem to have immediate success, the long-term value could be spread across the airport’s 40-50-year lifespan.

“It is a difficult balance to strike in terms of returns on these investments. A private sector company would be more efficient in generating jobs and new business, whereas governments look at longer-term rates of return, rather than at the profitability of the project itself. There is always a risk of inappropriate investment.”

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