Business & Finance Club - Dubai: The UAE's aviation sector is on a roll with a Dh70 billion investment in infrastructure backed by Dh435 billion in total aircraft and engine orders.

The UAE has eight international airports. Total investment in the UAE's airlines and aviation sector crosses Dh505 billion - one of the largest in the world. The $33 billion new Dubai World Central airport and the integrated free zone logistics city is by far the biggest single project.

Of these, investment in Dubai International Airport will cross Dh15 billion, while Dubai World Central-Al Maktoum International (DWC AMIA) will require a total of Dh30 billion over a period of 20 years.

In the meantime, Abu Dhabi International Airport is undergoing a Dh25 billion redevelopment programme that will lift its passenger handling capacity to 50 million per annum.

Once implemented, the six airports, including Sharjah International Airport, Al Ain International Airport and Ras Al Khaimah International Airport, will collectively serve more than 300 million passengers per annum. Of this, Dubai will have a combined capacity of 240 million, including 160 million by Al Maktoum International.

The Abu Dhabi International Airport's Midfield Terminal Building will house the operations of the UAE's national airline Etihad and will handle 20 million passengers per annum.

Unique experience

"Once completed, the Midfield Terminal will offer an unparalleled experience that has not been felt before in the region," Huraiz Almur Bin Huraiz, Chief Commercial Officer of Abu Dhabi Airports Company (ADAC), said.

"We are currently expanding capacity within Terminal 1 and 3 to handle more passengers as passenger traffic is growing."

The Sharjah Airport Authority disclosed that the bid for the construction of the second runway will be offered soon, where construction is expected to begin in 2010 and to be completed in 2012.

Of the Dh435 billion investment in aircraft acquisition, both Emirates and Etihad are in a race against time to expand fleet to serve more customers. Emirates total orderbook value currently stands at Dh251 billion while Etihad's investment is about Dh183 billion including engine deals.

At one point, Emirates was the largest buyers of all new long-haul aircraft and its orderbook in 2008 represented about 70 per cent of all new orders in the Middle East.

Collectively, these investments are expected to boost the aviation sector's contribution to the UAE economy.

Emirates Group, which delivered more than $1.1 billion (Dh4.2 billion) last year, has paid its shareholder Dubai Government a Dh1.6 billion in dividend, in what is perceived to be a challenging time, primarily caused by decline in real estate prices.

"Since 2006, major UAE airlines, the Emirates and Etihad have emerged as serious global competitor to the established carriers in Europe and the Americas," a study by the Dubai Chamber of Commerce and Industry, released yesterday said.

"Due to the insufficient regional demand to match the expanded UAE aviation capacity, the strategy of UAE major airlines is to redirect the international traffic flows from Europe and the Americas to the region. As a result, major players particularly in Europe and Asia are directly impacted."

Expanded fleets

To efficiently operate with the strategy of expanded fleets, the carriers are simultaneously expanding their networks globally, which will guarantee feeding more number of passengers into the aircraft acquired.

Analysts say, aviation, tourism, transport, logistics and the services sectors will play a stronger role in the UAE's economy. real estate, which drove the economic engine of Dubai, has taken a back seat, while oil and gas sector's contribution to Abu Dhabi's GDP has declined to 49 per cent for the first time.

"Real estate has never been the foundation of sustainable growth. At the end it is about the businesses that are located in the real estate. Seen from this perspective it is good when Dubai is concentrating on its traditional advantage as a trading hub," Dr. Eckart Woertz, Director of Economic Studies at the Gulf Research Centre, said.

With the onset of operations at Al Maktoum International Airport in June 2010 another milestone has been reached for the Emirate and the global logistics industry.

"Dubai has already given a substantial impetus to air transport in the MENASA region and beyond thanks to its open sky policy which has attracted to its airport more than 130 airlines, a larger number than at some of the busiest (such as Frankfurt 120, Heathrow 100, Charles De Gaulle 122).

As of April 2010, over 5,800 weekly flights operated from DXB to over 200 destinations," Dr Nasser Saeedi, chief economist at the Dubai International Finance Centre (DIFC), said in an economic note published by DIFC.

Currently, Dubai Airport has a capacity of 60 million passengers per year and will accommodate up to 75 million people by 2012. Passenger volumes reached 41 million and cargo tonnage 1.9 million in 2009, (a 9.2 per cent and 5.6 per cent rise over 2008, respectively). Dubai Airports projects 48 per cent cargo traffic growth by 2015 to three million tonnes.

From the supply side, the main driver for the growth of the UAE aviation sector is the massive expansion of capabilities, being infrastructure capability or vehicle capability, Dubai Chamber report said.

Modernisation

"This massive expansion of capabilities has been seen for the last few years and is expected to continue in the short to the medium term, both in terms of ground services infrastructure and aircrafts. Almost all UAE major airports are witnessing extensive expansion as well as placing record orders for new passengers and cargo aircrafts. The modernisation and expansion of the infrastructure will result in efficiency gains which should keep up the strong pressure on ticket prices," it said.

Emirates airline, which has 150 aircraft in fleet, is planning to more than double its all-wide body fleet capacity by 2012. Once all these aircrafts are in use, it is expected that the airline will be the world's largest long-haul carrier.

Industry observers are concerned about the huge building and infrastructural expansion. They say there is an extent beyond which the industry may face the problem of overcapacity that exceeds the underlying demand.

"To improve the economic outcome of the UAE aviation industry and sustaining its growth, industry policy makers are advised to eliminate all factors that can lead to the industry overcapacity and future decreasing yields which can be achieved by meticulously attuning the industry growth plans to the outlook for the growth in the underlying demand," DCCI report says.

"Building excess capacity beyond the underlying demand for the aviation service will lead to declining yields as airlines will find it economically feasible to lower prices to fill extra seats rather than the economics of allowing seats to go empty," it cautioned.