Aerotropolis• Term coined by John Kasarda of UNC• Seen as a complex more related to international and

other cities than surrounding land area• Singapore, Hong Kong, Dubai, Songdo Korea near

Seoul• China said to be building 100 new airports in 100 cities• Paul Romer said to be trying to sell Honduran

government and investors on one in that quite poor and underdeveloped country

• SA new airport in Jeddah, Doha before 2022 FIFA World Cup

• Airports and airlines are a crucial ingredient. Also Chicago’s OHare, Dulles, Detroit, London’s Heathrow, India’s Bangalore

Aerotropolis as Development Strategy

• Time sensitive manufacturing, especially hi-tech, communications and distribution, warehousing, hotels, entertainment, universities and research, convention, cargo, logistics, healthcare

• Seen as vehicle for promoting competition and breaking up local monopolies, especially in services

• A way to jump from low level equilibrium to a higher one but to do so requires considerable coordination very large infrastructural and other investments.

Character of Aerotropolis

• Requires large role for government and planners in design, strategy but can only be successful if the city can prosper and support the activities and allow them to grow over time. Usually these will be largely private activities.

• Timing is crucial for virtually all activities so synchronization is essential both in the investment stage and operational one.

• Because of magnitudes of the investments to be made, the risks are much larger than for individual individual entrepreneurs, appropriate rules of the game and means of getting stakeholders together.

Dubai• An especially good example is Dubai. It has

created a whole series of special zones: sports, entertainment, universities, health, press and communications, manufacturing, financial market all very near the airport. Each zone has been allowed to develop rules and institutions favorable to its own field. Foreigners allowed to do more in the way of ownership than in other places in the region.

• Also its weather is rather ideal: seldom a barrier to travel unlike Chicago and many other cities

• Open skies attitude of its government

Airlines: Industrial Regulation

• While world as a whole has been liberalizing regulations wrt product and service markets, airline industry remains heavily protected

• WTO/GATS rules (MFN, national treatment etc.) do not apply

• Instead, bilateral air service agreements between countries regulate market access; widespread capacity restrictions as a result

• Restrictive ownership rules prevent consolidation

• 3 global alliances (Star Alliance, Skyteam, Oneworld) dominate key markets

Growth Trends• Worldwide General growth: with income elasticity of air transport

slightly > 1 Varying growth due to demographics and diverging rates of economic growth

• OECD Countries: GDP growth relatively slow in advanced OECD countries

• Emerging Market Countries: Fast Growing

• Gulf Countries: favored by– High oil prices predicted for the foreseeable future– Convenient destination from virtually everywhere in a single flight

Evolution of Air Traffic in the Gulf • Until late 1980s, the Gulf was an indispensable

stopover point for European, Asian and Australian carriers connecting Europe with Asia and Australia

• Then, a new generation of long-range a/c (B747-400, B777, A340) allowed nonstop services up to 5000nm, eliminating the Gulf stopover

• Gulf airports like Dubai, SA suffered massive losses in international traffic. Also hurt by conflict (Gulf War)

• In reaction, “Cre-action” (in Babson terminology)– Emirates Airlines in 1985 with 2 leased a/c as a

vehicle for regional economic development bu Dubai– Qatar Airways in 1993 with 2 leased a/c– Etihad Airways in 2003 by Abu Dhabi

Gulf as a Hub: The Gulf’s Big 4: Growing Fast

• Fleet sizes and growth:– Emirates: 147 (A330, A340, A380, B777) + 193

on order (15 A380s in service, 75 orders)

– Qatar: 104 (A320 family, A330, A340, A380, B777) + 132 on order Etihad: 64 (A320 family, A330, A340, A380, B777) + 102 on orderSaudia: 128 a/c 38 orders early start 1946 but problems in 1980s and 1990s Dammam nearby. Will get boost with new airport for its Jeddah hub.

– Others? SA’s GACA has announced opening up its airports to new airlines for dom., international flights

Profitability and Reputation for Quality• Quality

– Qatar: Airline of the year 2011 Could go public with IPO in 2012

– Etihad: Airline of the year 2009– Emirates (EK): numerous airline industry awards– Saudia: Several specialized awards

Profits/losses:– Emirates: 1.01bn € (2011), only one annual loss since

operations started– Qatar: “operational profit” in 2011 – Etihad: not yet profitable but expected soon

Other Regional PlayersTurkish Airlines (massive expansion to all continents

except Australia, 169 a/c + 72 orders

Gulf Air (stagnating, 35 a/c)Kuwait Airways (stagnating, niche operator, 28 a/c)Iran Air (niche operator due to embargo and EU safety

blacklist, 69 a/c + 39 orders) Affected by sanctionsOman Air (expanding, 25 a/c)

MEA (from 1946)Low cost regionals: Air Arabia(Sharja), Bahrain

Air, Fly Dubai, Jazeera with about 100 ac on order between them

Threat of Overbuilding and subsequent depression

• Airports in such close proximity all committed to grow extremely rapidly with extremely expensive planes.

• Overbuilding could lead to debt buildup and default and long term economic decline such as occurred in 1980s and 90s after these countries had all built airports and similar petroleum related businesses at the same time.

• Air transport costs could rise rapidly as a result of oil prices, increased safety regulations, higher landing fees.

Other Strengths and Weakness

• High Quality Service, Aircraft Accessories• Low debt, Low costs (young crews, new planes,

absence of taxes)• Balance in operations:

– Cargo-passenger– Direct and transit– Associated Travel Services– Strong focus on the underserved and rapidly growing

areas of Asia, LAC and Africa

Weakness? Possible declining quality with growth

Strengths

World class and low-cost air transport facilitiesRelatively new Terminal 3 DXB allows unrestricted 24/7 operationCapacity: 70 m. pax/p.a. (current pax number: 28 mio)New Al Maktoum International Airport under construction: maximum capacity of 160 m. pax by 2020Extremely low airport charges

Favorable regulatory and political frameworkNo need for transit visas, limits the lines that RUH has

Very favorable geographical location3.5 bn people live within 8 flight hoursFor many city pairs, DXB compares very favorably with competing hubs regarding total trip time (e.g. South America-Asia, Africa-Asia, Europe-Oceania, Europe-South East Asia, USA-Indian Subcontinent)

Opportunities for Gulf Big 4

• Take advantage of weaknesses or obstacles to potential competitors– Many international carriers had also pulled out

of Gulf during and after the Gulf War and 1990s depression

– Qatar filling in for sanction-constrained Iran Air

Emphasis on Large long distance planes provide big 4 with competitive advantage in slot-constrained airports

Threats to Continued Growth and Success

• Huge Risks in ambitious expansion and competition with each other

• Political instability from Arab Spring, Gulf threats• Violence and War in the Region: recalling earlier

demise of MEA which lost most of its aircraft in Israeli raid and set it back with debts for decades

• Oil Price Decline that could affect economy of the entire region and air traffic

• Exclusionary threats by other countries (Germany, Canada) based partly on charges of subsidies and unfair competition

My Questions: What can be done to Mitigate or Avoid these Threats?

1. What can entrepreneurs do to avoid or deal with the bottleneck that might arise because of the rapid growth of these airlines?

What will these bottlenecks be?What skills will be most needed? Traffic engineers, logistics? Safety

design and training? Designing incentive schemes to reward quality as well as quantity?

2. How to deal with the commercial risks of the simultaneous expansions?

• Special financial arrangements, diversified sources, access to capital market

• Cooperative arrangements among these and other airlines

• Leasing of excess planes• Reduce seasonality or learn to live with (or advantage

from) it

3. What can entrepreneurs do to mitigate the risks of falling oil prices that could depress the region’s economy?

a. Further diversify economies of the region. If so, which are the best prospects?

b. Other?

4. What can entrepreneurs, accounting and financial experts do to deal with the perception of unfair subsidies?

Should all these airlines become private and go public? If so, how best?

5. Last but not least

What can political and diplomatic entrepreneurs do to maintain peace and cooperation within the region and with ROW in the face of tensions that may arise from time to time, some anticipated, others not? What can private sector due to encourage this?