Journal of Transport Geography 16 (2008) 388394

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Journal of Transport Geography

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Aviation growth in the Middle East impacts on incumbent players and potential strategic reactions
Jan Vespermann, Andreas Wald *, Ronald Gleich
European Business School (EBS), International University Schloss Reichartshausen, Rheingaustrasse 1, 65375 Oestrich-Winkel, Germany

a r t i c l e
Keywords: Airline Airport Middle East Competition Business strategy

i n f o

a b s t r a c t
In order to wean their economies away from declining oil reserves some Middle Eastern countries pursue substantial investments into their aviation sector. The bulk of these investments concentrates on the United Arab Emirates and Qatar and comprises eet expansions stoked by massive airport extensions and development projects. Following an assessment of current growth processes in the Middle East, this paper analyzes the impacts of this development on ight patterns as well as on the incumbent airlines and airport operators. Furthermore, elds for potential strategic reaction are presented. Our results show that Middle Eastern carriers will soon emerge as serious global competitors to the established carriers. Since there is no sufcient regional demand to ll their capacity, these carriers aim at redirecting international trafc ows from Europe and the Americas to Asia. As a result, major players particularly in Europe and Asia will be directly affected. However, our results also indicate that for some markets Middle Eastern players are unfavourably positioned concerning parameters like ight time and required connection ights. 2008 Elsevier Ltd. All rights reserved.

1. Introduction Airlines from the Gulf countries are increasingly challenging the incumbent carriers for a share of the global aviation pie. Emirates Airlines ordering of 58 of the 555-seater Airbus A380 is an apparent and noted example of this growth process. Nevertheless, there will be additional orderings that substantially increase the capacity provided by Middle Eastern carriers. Furthermore, extensive projects on the ground will provide the infrastructure that is required to handle the increasing passenger volumes. Since most growth projects are scheduled to be completed by 2020, the development of the Middle Eastern aviation sector is of high relevance for the socalled ag carriers. Beginning in the early 1970s, the Middle Eastern governments have been focussing on the aviation industry as a measure to diversify their industry beyond the future decline in revenues from the petroleum industry. As a result, the region is now on its way to become an international air hub, trying to redirect passenger ows between Europe, America and Asia. Through heavy investments in their long-haul eet and the recruitment of experienced industry employees from established airlines, the Middle Eastern carriers have already been able to grow exponentially in recent years (World Travel Market, 2006). In the most common denitions
* Corresponding author. Tel.: +49 6723 6022 13; fax: +49 6723 6022 29. E-mail addresses: jan.vespermann@ebs.edu (J. Vespermann), andreas.wald@ ebs.edu (A. Wald), ronald.gleich@ebs.edu (R. Gleich). 0966-6923/$ - see front matter 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.jtrangeo.2008.04.009

the term Middle East includes 13 countries, located in an area which stretches east of the Mediterranean, south to the Arabian peninsula and north to the Caspian Sea (AEA, 2006). The Middle East covers a total land area of 5 million square kilometers. Much of the area is uninhabitable desert or semi-desert. Overall, there are about 70 airlines registered in the Middle East (AEA, 2006). In our analysis, we will concentrate on air- and landside growth projects in the United Arab Emirates and Qatar, since these countries will come in with the largest projects. It is widely recognized that the aviation growth in the Gulf region will affect and reshape global trafc patterns. Since Europe, North America and the Asia/Oceania region are all within reach of non-stop ights from cities like Dubai or Doha, the Gulf region is favourably positioned for routes between Europe and Asia and between North America and Asia. Thus, it is likely that the most affected incumbent players will be major European and Asian carriers as well as their respective hubs. The impact on the individual player will vary, and will depend among others on its current long-haul routes that are potentially endangered by redirected trafc ows. The focus of this paper is on the aviation industry and strategic moves that are taken by the industry players. Furthermore, we try to discuss the implications of these moves in the light of transport geography. In this context we focus on the core elements of transport systems, namely networks, nodes and demand. Therefore we rst examine the growth process in the Middle Eastern aviation industry by looking both from a demand and a supply side

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perspective into major infrastructure projects as well as into the carriers current eet and network expansions. We then analyze impacts on the overall infrastructural network and on some of the existing players in more detail. Finally, potential elds for reaction measures by incumbent actors are presented. In this context we present two case studies. 2. Aviation growth in the Middle East As oil states look to diversify their economies, commerce, tourism and global transport arise as new revenue sources. As of 2006 for the six-nation Gulf corporation council (GCC) region, estimations comprise some 1400 planned infrastructure projects. In Dubai alone, investments in the real estate sector are estimated to come to 50 billion USD by 2010 (Longstaff, 2007); including for example mega projects such as the land reclamation projects The World and Palm Islands and the worlds tallest tower Burj Dubai (Flanagan, 2006). The development of the aviation industry is one part of an overall master plan to develop the region into a global center for commerce and trade (Dillon and Matly, 2007). In this regard, the regional governments are strongly promoting the aviation sector, carrying out destination-marketing campaigns and ensuring the presence of the country at major international Travel and Transportation fairs. Overall, aviation growth in the Gulf region is concentrating on Qatar and on two of the seven Emirates: Abu Dhabi and Dubai. Looking at both the demand and the supply side of Middle Eastern aviation growth, it becomes clear that the development has both a demand and a supply side impetus to it. The rise of carriers from the region has become possible due to the overall increase in demand for air travel. Additionally, trafc has already been diverted from the established carriers. However, there is also another side to the growth process: Induced demand. This phenomenon occurs when after an increase in supply, more of a good is consumed. Once the full capacity becomes available to Middle Eastern carriers it has to be lled. One possibility to generate additional demand is by lowering prices. We begin by looking at the supply side of Middle Eastern aviation growth. 2.1. The supply side of the growth process Airlines in the Middle East currently account for just 9% of longhaul capacity worldwide, but are responsible for about 25% of all global long-haul aircraft deliveries over the next decade (Flanagan, 2006). Dubai-based Emirates Airlines is the largest buyer, with approximately 70% of all new long-haul aircraft orders in the Middle East the airline is planning to more than double its all-widebody eet capacity by 2012 (Flanagan, 2006). Once all these aircrafts are in use, Emirates Airlines will be the worlds largest long-haul carrier. Other airlines in the region with sizable widebody aircraft orders include Qatar Airways with an order book of about 140 wide-body aircraft and Etihad Airways with about 20 aircrafts pending delivery. Whilst aircraft orders of Gulf carriers represent real eet expansions, aircraft orders placed by incumbent carriers are mainly used to replace existing capacity (Fig. 1). Overall, aircraft orders by Middle Eastern carriers are valued at 40 billion USD (list prices). Middle Eastern carriers are building their growth strategy on wide-body aircraft that offer expanded range, enhanced passenger comfort, and improved operating economics. These aircrafts will help Middle Eastern carriers to mitigate the likely ongoing slot shortages and congestion problems experienced at some airports. New-generation aircraft are fundamental to the development of long-haul hubs in the Middle East, allowing the carriers to remain competitive by keeping unit costs low (OConnell, 2006). In order to feed a sufcient amount of pas-

Widebody fleet [quant.] Existing fleet (March 2008) Orders

196

144

47

16 30

105 20 26 44

99

Gulf Air

Etihad Airlines

Qatar Airways

Emirates Airlines

Lufthansa

Fig. 1. Fleet expansion plans of Middle Eastern carriers (as of March 2008).

sengers into their aircraft, the airlines are continuously expanding their networks. Emirates Airlines, for instance, is already serving over 20 cities in Europe alone. Its ambition is to connect Dubai directly to well over 100 cities around the world by 2012. When looking at the number of destinations being served, Middle Eastern carriers are already outnumbering the established carriers from Europe in some markets. A closer look at the Asian market (split up into East Asia, South Asia, South East Asia, Oceania) indicates that for every market except the East Asian one, most Middle Eastern carriers have an advantage in the number of destinations (Fig. 2). Looking from a more theoretical perspective, Middle Eastern carriers are not expanding the network in a way that additional airports (nodes) are taken into the overall network. The network is rather expanded in a way that new routes (edges), i.e. alternatives of going through the network are offered to the customer (for example LondonDubaiSydney as opposed to LondonSingaporeSydney). Still, for many markets and routes, Middle Eastern carriers provide an improvement in customer convenience by reducing the number of required connections (for example GlasgowDubaiSydney with Emirates as opposed to GlasgowLondonSingaporeSydney with British Airways). In network theory this is commonly referred to as an increase in closeness centrality. Airports in the Gulf region will see more than 40 billion USD invested in their infrastructure over the next years. Airport growth projects will go hand in hand with the eet expansion plans and thus concentrate on Abu Dhabi, Qatar and Dubai. Dubai airport is already the regions busiest airport and transshipment hub ranking worlds 12th busiest airport for international passenger trafc and 11th for cargo trafc in 2005 (Airports Council International, 2005). Announced projects include an airport expansion project in Abu Dhabi and a new airport in Qatar. With a 33 billion USD investment, the new Dubai World Central airport and integrated freezone logistics city will be by far the biggest single project. This new airport at Jebel Ali, about 60 km from the current airport, will comprise a multitransport mode logistics hub and an international airport with six runways and a capacity for 120 million passengers and 12 million tonnes of cargo per annum. Once nished, this capacity will equal the current capacity of London Heathrow and Frankfurts Rhein-Main airport combined (Fig. 3). 2.2. The demand side of the growth process For Middle Eastern players, there are three potential sources of passenger demand. Firstly, domestic demand originating in the Gulf region can add to ll eets and airports. Secondly, demand can arise from foreign passengers that are bound for Middle Eastern countries may they be leisure or business travellers. And

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"Incumbents"

(1) East Asia (2) South Asia (3) South East Asia (4) Oceania Total

British Airways 4 8 2 1 15

Lufthansa Air France

11 8 5 0 24 7 4 4 1 16

Average
7,3 6,7 3,7 0,7

Emirates Airlines 7 18 5 6 36

Middle Eastern Carriers Qatar Average Etihad Airways 5,3 6 3 15,3 16 12 9,0 9 13 2,7 0 2 31 30

Fig. 2. Number of Asian destinations served by incumbents and Middle Eastern carriers (as of March 2008). (Note: (1) China, Japan, South Korea (2) Bangladesh, India, Maldives, Nepal, Pakistan, Sri Lanka (3) Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam (4) Australia, New Zealand, French Polynesia.)

Passenger handling capacity per year [Mil.]

120 75 54.2

60 40 10 2004 2020 6.9 2006 2010 2004 34.3

70

2010

2004

2015

2006

~2012

Doha

Abu Dhabi

Dubai Intl

Dubai Jebel Ali

Frankfurt Rhein-Main

Fig. 3. Airport expansion plans in the Middle East (as of March 2008).

thirdly, stop-over travel that is using the Middle Eastern airports as hubs and that is heading for destinations beyond the Gulf countries can be a source of demand. Domestic demand benets from the topography of the Gulf countries, which favours travelling by air for intra-regional transport. Furthermore, a high per capita income that is still increasing quickly, offers a base for a strong aviation industry. But there are socio-economic constraints, limiting both domestic leisure and business travel potential. Also, wealth is unevenly distributed, with an estimated proportion of 20% to 45% of the population living below the poverty line (AEA, 2006). The United Arab Emirates, Bahrain and Qatar have a combined 5.5 million people which is only about the population of the Philadelphia metropolitan area. Also, the resulting catchment areas for Middle Eastern airports and airlines are overlapping. Clearly, domestic demand is not sufcient to ll the provided capacity. Foreign leisure or business travellers bound for the Middle East form a quickly increasing demand group. The Gulf region is actively tapping into this potential, with Middle Eastern countries investing heavily to develop their tourism infrastructure. This in turn is driving investments in the air transport industry. Figures indicate that the Middle East regions share of the worlds tourism market has increased from 2.5% to 4.8% within the past decade, with international tourism arrivals reaching about 38 million in 2005 (Flanagan, 2006). Much of the increase comes from international trafc growth beyond the Middle East. Today, the Middle East is the second fastest growing region in the world for inbound tourism, almost exclusively relying on air transportation (World Travel Market, 2006). Just 4.6% of all tourist arrivals within the Middle East region are intra-regional (AEA, 2006). Forecasts expect that the Middle East will be able to further increase tourism arrivals at a growth rate of over 50% from 20052010 (World Travel Market, 2006). As a global destination, Dubai alone currently attracts over 6.5 million visitors annually. It is putting in place the infrastructure to attract 15 million visitors by 2010 (Sull et al., 2005). Looking at the future development for the region, it is predicted that by 2010, over 60% of all tourist arrivals will be long-haul, the remaining 40% will be intra-regional visitors (World

Travel Market, 2006). The Middle Eastern countries can build on a national tourism perception which is rated high, with a positive attitude toward foreign travellers. The Emirates as the leading destination country in the region are seen as safe from crime and violence. Dubai in particular has been able to attract growing numbers of tourists and business travellers focussing on safe resorts, fairs and entertainment. Stop-over trafc offers a third possibility to attract the passengers needed to meet the planned capacity. While the Gulf region is strongly promoting itself for end-destination tourism, seat offer that goes beyond the region to destinations around the world will provide an additional and presumably the most important possibility to ll the regions aircraft and airports. Singapore Airlines is a known example of a carrier that successfully operates this kind of business model. Today, the involvement of Middle Eastern airlines in extra-regional operations varies, but is already comparably high. Emirates is offering 82% of its seat capacity on extra-regional services. Most other important carriers from the region like Etihad Airways (74%), Qatar Airways (66%) and Gulf Air (54%) also operate more than half of their seats on extra-regional ights (AEA, 2006). Air France (26%) and Lufthansa (23%) show that the share of extraregional offer for European network carriers is considerably less, indicating that these carriers have stronger domestic markets. Transfer passengers can be diverted from other hubs or generated by serving secondary airports. Today, of Middle Eastern carriers extra-regional seat offer, 40% is to Asia and 35% is on routes to and from Europe (AEA, 2006). Seat offer by Middle Eastern carriers to Europe is concentrated around three countries the United Kingdom, Germany and France which together account for 64% of offer. Overall, supply within the Middle Eastern aviation industry is developing strongly. Since domestic passengers are far from lling their growing capacities, carriers from the Gulf region will depend on foreign demand, may it result from leisure or business travellers. 3. Impacts on incumbent players This paper examines the impacts of Middle Eastern aviation growth, addressing the following questions: Which regions will be inuenced? Which carriers and hubs will be most affected? Which customer groups will be concerned? Which impacts exactly will be observable? (Figs. 13). Aerospace companies from the Gulf region vary from established actors in a variety of elds: Main differences comprise lower operational costs as well as general travel characteristics (e.g. number of destination served, travel time, service level) (OConnell, 2006). Additionally, long-haul hub carriers from the Gulf countries differ from most of the legacy carriers concerning the way the huband-spoke model is operated (Flanagan, 2006)1. In the latter case, the airlines network consolidates short-haul operations into longhaul trafc. Carriers from the Gulf region by contrast almost solely have long-haul trafc ows. Emirates Airlines, for example, is

See Doganis (2006) for an overview of business models in the airline industry.

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characterized by the complete absence of domestic ights within its country of origin. Thus, in order to feed their hubs with a growing number of passengers, Middle Eastern carriers are relying on expanding their global networks. As a result, the Middle Eastern carriers focus on the three major long distance routes: trafc between Europe and Asia, trafc between North America and Asia and between North America and Europe. Looking at these markets in more detail reveals that on some of these markets Middle Eastern carriers are less competitive than on others. On the Europe to Asia market, Middle Eastern carriers are particularly competitive on routes to the southern parts of Asia, whereas for the northern parts incumbent players are well-positioned concerning both variety of destinations and travelling time (see Fig. 5). Looking at the North America to Asia market, airlines from the Gulf region are favourably situated for trafc bound to South Asia (e.g. to India) but unfavourably for trafc bound to Oceania or East Asia. Redirecting passenger ows from Europe to North America via Middle Eastern hubs is disadvantage concerning the overall travelling time. Therefore, to further expand their network structure to directly connect these regions carriers from the Middle East have to increasingly look for 5th and 7th freedom rights. Impacts on both incumbent airlines and established airports strongly depend on the overall economic situation and the demand for air travel. Even if established industry forecasts are mostly based on the assumption of continuous growth (Airbus, 2007), the aviation industry has a cyclical nature and has usually been susceptible to external shocks. Thus, downturns that lead to overcapacity are always a threat, including impacts on carriers from the Middle East. 3.1. Impacts on incumbent airlines The most affected carriers will be those who are operating big long-haul eets and are heavily relying on routes that are potentially endangered by the new players from the Gulf region. In Europe, Air France/KLM, British Airways, Lufthansa German Airlines, and Virgin Atlantic will be among the most affected. In the Asia/ Oceania region, the most affected airlines will be Singapore Airlines, Cathay Pacic as well as Qantas Airways. When trying to analyze which customer groups will particularly be concerned, one has to look at what features of a ight are valued most important by a particular passenger group. While premium travellers are focussing on attributes like good connection times, travel convenience, frequent yer programs and a broad network, standard travellers have a strong focus on price but are willing to accept longer travel times. It is unclear, at what passenger groups Middle Eastern carriers are most likely to aim for. Euromonitor International, for example, is predicting that carriers like Emirates Airlines might move into the low cost long-haul sector (World Travel Market, 2006). We assume Middle Eastern carriers to increasingly compete on prices and to focus on the Economy traveller rather than on the premium traveller. One the other hand, the favourable cost structure of Middle Eastern carriers allows them to offer above average levels of quality and service, for example in the high number of ight crew on an aircraft. 3.2. Impacts on established airports Although impacts of Middle Eastern aviation growth will occur worldwide, there have been some studies on the effects of these developments for specic regions. The study of ECAD (2007) is focussing on the European and the German market. The study claims that assuming a situation of complete liberalization of trafc rights between Europe and the Middle East about 700,000 passengers will eventually travel via the Gulf hubs. According to the study, this results in a loss of 110 million EUR of income annually at incumbent players and approximately

2000 jobs that become redundant. By contrast, secondary airports will grow fast and become more attractive due to more international direct connections. Another study (Manders et al., 2006) found that a maximum of 5% of the assumed 15% European transfer ights transfer their operations to Dubai. The growth processes in the Middle Eastern aviation industry will have an impact on incumbent players in a variety of elds. Since it can be assumed that carriers from the Gulf region will be able to partially redirect international trafc ows, the current network structure will be inuenced. More precisely, the importance of the European hubs is likely to diminish with regard to their role as transshipment centers for trafc bound for Asia (Flanagan, 2006). For these airports the re-direction of passenger ows might result into a threat, if trafc falls below a critical mass endangering the entire hub structure of a carrier. This development presumably concentrates on the big hubs since other airports generally do not offer international ights. Secondary airports might reduce their importance as a passenger source for the existing ag carriers, by feeding some of their passengers with international destinations directly into the Gulf hubs (OConnell, 2006). However, this development does not impact the total passenger ow at these airports.

4. Current situation and potential reactions by incumbent actors Incumbent players reactions to the growth process in the Gulf region have to focus on individual strengths and competitors weaknesses (Manders et al., 2006). Therefore, in a rst step, the current situation of both the incumbents and the players from the Middle East is examined. Afterwards, we will focus on elds that show promise for potential strategic reactions of the incumbent players. The objective is to show how to convert these players strengths into competitive advantages and thus offer a base for potential strategic reactions. We use two case studies to illustrate this point. Strengths of the incumbent carriers comprise their integration in worldwide airline networks. Being part of an alliance has become more and more important in recent years (Czipura and Jolly, 2007). Nearly all big players are part of an alliance. The Gulf carriers continuing refusal of being part of an airline alliance offers them autonomy (Knorr and Eisenkopf, 2007; Sull et al., 2005), but also implicates that they have no partners feeding passengers into their networks. Consequently, these carriers are completely dependent on acquiring passengers on their own. Another strong asset are their hubs, which are mostly situated in attractive catchment areas located in densely populated countries with high purchasing power. Furthermore, incumbents look back on a decadelong accumulation of know-how. Contrariwise, the incumbent players suffer from several nancial and regulatory constraints often resulting into long decision making processes. Also, for these carriers, which are often operating out of outdated and inefcient hubs, high landing charges and handling costs at their hubs are disadvantageous (ECAD, 2007). Middle Eastern Carriers, on the other hand, benet from very low ticket taxes and airport charges. Even at a time of high investment in new facilities, these charges are considerably lower than those at airports across Europe, North America and Asia (ECAD, 2007). Dubais airport charge is about 10% of what is required at London Heathrow. Compared to Middle Eastern players, the incumbents do not seem to have access to such comprehensive nancial resources. Players in the United Arab Emirates and Qatar benet from a favourable tax structure. Companies in the Middle East pay low if any corporate income tax. Also, there is no sales tax and individuals are not liable for income tax. In addition, many

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Cost Share of total cost1

Kerosene 23%

Fees 12%

Personnel 32%

Fleet 15%

Station 10% -25%

Sales 5% 20%

Catering 3% -5%

Cost difference of Middle -20% -39% -48% -20% Eastern Carriers2 1 Typical allocation for Network-Carriers with high share of long-distance routes 2 Analysis based on: O'Connell (2006), ADL-Research (2007), own research

Fig. 4. Cost comparison EU-Carrier vs. Middle-East-Carrier. (See above-mentioned references for further information.)

of the regions long-haul carriers such as Emirates, Qatar, and Etihad are operating young and efcient aircraft eets that are more cost effective to y and maintain than older eets (Hill, 2002; Hosea, 2007). Middle Eastern carriers are expected to have a cost advantage over US and European carriers of between 18% and 32% (Budde et al., 2006). A cost comparison for Middle Eastern carriers is illustrated in Fig. 4. Overall, the cost structure of Middle Eastern players results into lower operating costs, allowing the airlines to be competitive on prices, often resulting into higher prots (Flanagan, 2006). In addition, the region is characterized by the absence of congestion and night curfews at its airports, which are major issues at European airports. The economic rise of China and India, countries with huge domestic source markets, is both an opportunity and a threat to Middle Eastern carriers. China, for example, with a strong economic climate and an ongoing air trafc expansion, will not only develop sizable domestic demand, but increasingly ask for intercontinental routes. Middle Eastern carriers might gain part of that newly arising demand. On the other hand, China and India are building up their own aviation industry. Nevertheless, since both countries neither have the same level of political commitment nor the capital investments to drive the development of air transport infrastructure as is already being seen in Dubai, it is unlikely that Chinese or Indian airports will develop into major long-haul hubs in the short to medium term (Flanagan, 2006). Having looked at the current situation of the concerned actors we now examine potential reactions to the growth processes in the Gulf region. So far, incumbent players try to impede Middle Eastern aviation growth by spurring regulative activities. In Australia for example, Quantas Airways has been granted some protection, since the Australian government decided to reject Qatar Airways request to y from Doha to Australia (World Travel Market, 2006). Future measures by incumbent players will have to increasingly focus on the market itself, since relying upon regulatory authorities, that often decide in favour of market access and competition, does not represent a sustainable strategy. Since the growth of Middle Eastern airlines and their base airports is part of a bigger master plan that is pursued by the government in order to diversify the economy, one should consider that actors from the Gulf region are likely to be granted backings that are necessary to ensure their competitiveness and nancial health. This and the aforementioned low cost structure lead to a situation that is likely to prevent western carriers to solely compete on price. Current strategies of Middle Eastern players are aiming at building up and holding a service-image while at the same time offering competitive prices. Thus, there is no clear focus on either quality or price. Looking at the relatively small market for premium travellers, it will be rather difcult for Middle Eastern players to ll their rapidly growing capacities only with these travellers. Consequently, Middle Eastern players will feel impelled to shift their focus to the large group of standard travellers. Since this passenger group generally has a strong focus on price when making a decision for a ight, carriers from the Gulf region might be obliged to increasingly compete on price rather than on quality.

The Middle Eastern air travel sector faces additional obstacles to future growth in the region. Internet as well as card penetration, for example, remain low across the region, which requires more staff and therefore is a major cost driver. Also, for their growth process, Middle Eastern carriers have managed to attract high quality personnel from other airlines, mainly through tax incentives and higher salaries. In the longer term, however, the players from the Middle East need to develop their own workforce for their aviation sector, because recruiting from other airlines is more expensive and less reliable in terms of developing staff loyalty. Airlines and airports in the Middle East are already struggling to attract talents from the international market, since skilled labor such as pilots, aviation engineers, and ight controllers are worldwide in high demand (Flanagan, 2006). In addition, inner-Arabian competition is likely to play a signicant role in the regions growth process, since apart from their dissimilar positioning all carriers from the Gulf are obliged to acquire foreign demand. This may result in a potential fall-out or rationalization. Some industry watchers have already expressed scepticism about the viability of multiple airports in the Gulf region. Once there is an economic downturn, Middle Eastern carriers in particular will face major problems to ll their capacities at adequate prices. 4.1. Case study: Lufthansa German Airlines As an immediate reaction to Middle Eastern aviation growth, Lufthansa has tried to impact competition by trying to persuade the regulatory authorities to refuse additional landing rights to the Gulf states. These landing rights would have allowed Emirates Airlines to serve new destinations like Stuttgart and Berlin (The Economist, 2007). However, the airline has to develop additional steps to react to the growth processes. Today, the existing carriers from Western Europe and Asia are earning a high portion of their money on long-haul ights from Europe to Asia. Lufthansa German Airlines for example is reported to realize half of its prots on ights to Asia and one quarter of its prots on ights to India (Capital, 2007). An analysis comparing Lufthansa German Airlines with Emirates Airlines on the long-haul Europe to Asia/Oceania market indicates that the incumbent carrier is particularly endangered on routes to South East Asia (i.e. to Kuala Lumpur and Singapore) and to Oceania (i.e. to Sydney and Auckland). Emirates, for example, is offering prices that undercut those offered by Lufthansa between 12% and 37% on these routes. Furthermore, additional stop-overs that become necessary only lead to a minor increase in extra travelling time. On routes to East Asia (i.e. to Tokyo and Seoul) however, the incumbent player has a competitive advantage because it excels the Middle Eastern carrier both on overall-travel time and offered prices. The ndings are illustrated in Fig. 5. As stated above, economy class passengers generally have a strong focus on price and are willing to accept longer travelling times. Premium travellers focus on convenience and consequently prefer direct ights over stop-over connections whenever possible. Looking at the ndings illustrated in Fig. 5 it becomes clear that for

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East Asia Tokyo Seoul (HND) (ICN) South East Asia Kuala Lumpur Singapore (KUL) (SIN) Oceania Sydney Auckland (SYD) (AKL)

393

Destination Lufthansa German Airlines (LH) Estimated Travel time (h) Stops Price (LH = 100) Emirates Airlines (EK) Estimated Travel time (h) Stops Price (LH = 100)

11:00 0 100

11:00 0 100

14:00 1 100

12:00 0 100

24:00 1 100

26:00 1 100

27:00 1 103,50

19:00 1 104,37

18:00 1 88,74

16:30 1 87,73

27:00 1 74,81

36:00 3 63,22

Fig. 5. Pricetime comparison for the EuropeanAsian market. (Note: Origin: Frankfurt (FRA); Each gure based on an average of 10 round-trip ights; ight dates randomly chosen from half year period beginning 3/17/2008; return ight = outbound ight + 7 days; Economy class.)

incumbent players, rst and business class travellers will be easier to hold on to than to economy class passengers. Particularly, as long as Middle Eastern carriers do not offer direct ights going out of the major demand regions, these carriers will nd it difcult to attract premium travellers. For the incumbent carriers like Lufthansa, this offers an opportunity, since premium passengers are of higher value to an airline. As a result, incumbent players should try to react to this threat by offering new direct ights even if this might endanger their existing hub structure. Lufthansas recent strategic change can already be partly attributed to the increasing competition from new players. So far, the airline has focused its long distance ights on its two hubs in Frankfurt and Munich, but now has announced to offer intercontinental ights out of other German cities like Duesseldorf, too. By doing so, the airline will react to competitors that undermine its hub structure. Lufthansas reaction could prove an effective measure to respond to new competitors. On the other hand, multi-hub systems may be less cost efcient than megahubs. Furthermore, the airline might take off its own customers from its hubs to other airports and therefore cannibalize its own network. As a result, the hub-and-spoke system of the airline may become less effective. 4.2. Case study: Frankfurt Airport Frankfurt Airport is one of the biggest airports in Europe. As a major hub, the airport is connecting both short-haul and long-haul routes. As shown before, hubs like Frankfurt are those most affected by the new competitors. To react to the challenges the airport has to improve its overall attractiveness. It can, for example initiate measures to reduce delays or provide additional offers like shopping opportunities and areas to relax. Furthermore, in the aviation industry, it is not only about getting passengers from one destination to another, but rather about being able to get people from ones doorstep to the other. Thus, it becomes clear that an efcient infrastructure, like an intermodal transport concept becomes important to an airport. Frankfurt airport for example is currently working on future concepts on how to further improve its infrastructure concerning the interconnection of air, car and rail trafc. This would not only increase the catchment area of the airport but would also make the airport more attractive as an ofce and retail location allowing it to open up new opportunities of business (Sharp, 2007). Overall the future aviation development is likely to bring about a competition of systems, comprising airlines and their respective hub airports, rather than of individual actors. For example, a passenger travelling from the US to India will be balancing reasons for a Lufthansa/Frankfurt combination against an Emirates/Dubai combination. 5. Conclusion In order to diversify their traditionally oil- and gas-dependent economies, some Middle Eastern countries are heavily investing in aviation infrastructure, both on the ground and in the air.

Growth developments in the Middle East mainly concentrate on the United Arab Emirates and Qatar. The Gulf region benets from its strategic position between Europe on the one side and Asia on the other side. Consequently, the aviation industry from the Middle East is aiming at this trafc, trying to redirect it via its hubs in Dubai, Abu Dhabi and Doha. Once all current expansion plans are implemented, the Middle Eastern carriers will provide long-haul eets that are among the worlds biggest and ground capacities that exceed those of major European and American airports. Thus, carriers from the Gulf will become serious competitors for the incumbent players. The simultaneous rise of several players from the Middle East with resembling business models will add to the problem of competition. Impacts of the growth processes are likely to affect the ag-carriers in Europe and Asia as well as their base airports and will concentrate on trafc between these regions. Our analysis indicates that for this market looking from a European perspective trafc ows to South East Asia and Oceania will be more affected than those to Eastern and Northern Asia. Premium trafc is probably not as affected as standard travelling, as long as direct ights are an option. A comparison of strengths and weaknesses, both for incumbents and actors from the Middle East, shows that there are advantages and disadvantages on both sides. Access to a nonunionized and relatively cheap labor force at their home bases and the pro-business tax regimes within provide Middle Eastern carriers with a relatively low unit cost base compared with their European and US counterparts. However, responding to the growth processes in the Middle East only by cutting costs is an insufcient strategy for the incumbent players. Pricing systems, for example, have been developed in decade-long processes and are difcult to copy. Other important elds and assets for reaction are strategic networks and co-operations, frequent yer programs and booking systems. We assume that the emerging competition will be one of systems rather than of single actors, since transfer passengers always make a decision for a carrier and its respective hub airport. It is still too early to tell if the growth process of the Middle Eastern aviation industry will prove successful. However, the regions ambition to develop an aviation industry will have an inuence on world aviation. References
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