Cont’d… Part 3 of 4: Aviation: Climbing through the clouds, from The Economist paints an excellent current state of the airline and aviation industry. All systems go for continued growth in the Asia Pacific Region, home to China and India and a host of other economies that are expanding faster than anywhere in the world.
Newcomers in new places
Perhaps the most surprising bout of consolidation and revival, however, has been in Latin America. Governments in the region have followed Chile’s lead and decided to get out of the way of private airlines.
The failure of Brazil’s state-owned airline, Varig, was a turning-point. It helped the rise of Gol, a Brazilian low-cost carrier, and TAM, which has a more traditional network. Now TAM is planning to merge with LAN, a privatised Chilean airline which has long set the regional standard for efficiency in its open, liberalised home market. LAN has built partnerships with airlines in Colombia, Costa Rica and Panama. Most of these are family-owned and are therefore able to act quickly and boldly without the hindrance of nervous capital markets or restrictive state shareholders. The merged company, LATAM Airlines Group, will be one of the largest quoted airlines in the world.
The rise of another region, the Gulf, is causing acute pain to American and European airline executives. Led by Dubai’s Emirates, Gulf Air are redefining long-haul travel. Emirates is often accused by envious Europeans of growing thanks to state subsidies. It is owned by the government, but had only a tiny capital injection to get going 25 years ago.
Since then it has expanded profitably, helped by its government’s pro-aviation policies such as the rapid expansion of its home airport and the provision of efficient air-traffic control. Above all, Emirates, led by two British veterans, Maurice Flanagan and Tim Clark, twigged that in the age of aircraft capable of flying 18 hours non-stop, Dubai was the ideal spot for a new kind of hub. Planes such as Boeing 777s (of which it is the biggest buyer) and Airbus A380s (ditto: 15 are already flying and 90 are on order) can fly anywhere in the world from Dubai. It is free of air-traffic congestion, has no ban on night flights and has plenty of runway space. Emirates’ remarkable success is one reason why air-travel growth is fastest in the Middle East.
Dubai is handily placed to connect nearby emerging markets, such as India and Pakistan, with the rest of the world: as people there become better off, they want to travel more. But it has built links to Europe too. While Europe’s flag carriers concentrated on their hubs, Emirates sought secondary markets such as Manchester, Glasgow, Hamburg and Dusseldorf. Messrs Flanagan and Clark saw that passengers would happily fly from such cities to Cape Town, say, via Dubai, stopping briefly or even overnight, if transit was pleasant and the fare was cheap.
When Emirates was setting up these routes, European governments saw no threat from this upstart Arabian airline and were happy to grant it traffic rights in liberal bilateral treaties. Now they are stuck with them and can do nothing to fight the competition, since Dubai is, in essence, a tax-free zone with access to cheap labour from the Indian subcontinent. Emirates reported a 52% rise in profits this May; the year before they increased fivefold. Because its routes are exclusively long-haul, Emirates has planes flying 18 hours a day, making them remarkably productive.
Dubai already has the world’s third-busiest international airport, with traffic growing at 20% a year. On July 6th it said it would spend $7.8 billion on expanding it. Yet a huge new one, costing $35 billion, is being built and is already open for cargo. In about ten years, with its five runways and capacity to handle 160m passengers a year, it will be the largest airport in the world.
Emirates will also have the biggest fleet of the biggest airliners. Some observers believe that Emirates is a pioneer of low-cost long-haul travel, capable of keeping economy fares below competitors’ if it has to. By deploying so many large, economical aircraft from a vast base, open around the clock and halfway between Europe and Asia, Emirates could in effect run a global hub, reducing European airports to a feeder role and impoverishing their associated flag carriers. No wonder airlines such as Lufthansa keep sniping at Dubai and its alleged “subsidies”. And no wonder aviation accounts for 28% of Dubai’s GDP.