Is the Gulf Airline Boom a Bubble?

From looking at the boom in Abu Dhabi, the nascent recovery in Dubai, the (somewhat opaque) financials and expansion plans of Emirates along with Etihad and Qatar Airways, and the airport expansions to accommodate them, you might conclude that the sky is the limit in Gulf-based commercial aviation. But then your attention might be drawn to the civil war in Syria, the instability bordering on civil war in Iraq and the Maghreb, economic stagnation and political fragility in Egypt and unrest in Bahrain, not to mention a potentially unsustainable political system in Saudi Arabia and confrontation with Iran. Now note oil production in Alberta, offshore drilling in the South Atlantic, shale oil in North America, a natural gas glut, and possible political reform in Venezuela revitalizing access to enormous reserves.

Is it possible that the current boom in Gulf-based airline activity is one of the biggest bubbles in the history of commercial aviation? If it is, what are the implications for the airline business?

The fleets and order books for the three main Gulf airlines show 386 aircraft in service with 458 on order as of December 2012, mostly widebodies, with additional orders placed since. These imply a dramatically increasing demand for airline services based in the Gulf. But the demand projections are fragile, when read in conjunction with the newspapers and news magazines.

The development of alternative oil sources and instability of Middle East robs rich Gulf States of their financial underpinnings, which in turn creates their own political instability.

1. Loss of Middle East oil dominance reduces Gulf state wealth, both local and invested from elsewhere in the Middle East.
2. The political instability of the rest of Middle East reduces economic demand for Gulf financial and tourist services.
3. Damage to their financial base may lead to political instability in the Gulf States, which may in turn create a loss of confidence in their stability and safety as a home for flight capital and undermine their replacement of Beirut as a locus for “r&r”.

What would be the impact of these developments on commercial aviation?

1. Any slackening in demand would exacerbate what is already a likely overcapacity threat as Etihad and Qatar Airways expand rapidly.
2. The introduction of the relatively small, long-range Boeing 787 means more opportunities for nonstop overflights between Europe and Asia (ultimately Australia as well), further reducing Gulf demand.
3. The rise of Turkey and the Turkish airline industry creates an alternative hub for access to Middle East and India with much stronger local fundamentals.
4. Any development of aviation infrastructure in India, however uncertain, would significantly reduce Gulf hub demand, especially if slackening local labor demand reduces local aviation demand.
5. The weakened financial base from local and regional political instability, loss of oil dominance, overflight opportunities and the Turkish alternative would probably make it impossible to economically employ all of Gulf airline aircraft in service and on order; major overcapacity will result.
6. This overcapacity will lead to glut of used widebody aircraft on the world market, which has side-effect implications for Airbus (especially, given the mix of orders) and Boeing.

Little of this is certain, but all of it is possible and at least some of it, perhaps much of it, probable. It will present a major challenge, not only to Gulf carriers and governments which will be profoundly affected if even a fraction of all this occurs, but to other airlines as impact of widebody overcapacity ripples through markets. Other markets will grow, but this growth is already accounted for to some extent in order books. Further orders may take up some of the slack, but the aircraft mix required for European and North American markets is for smaller aircraft, except for intercontinental service). Aviation growth elsewhere in Asia is the most likely home for this capacity, but that would transfer “rest of world” effects of overcapacity from airlines to manufacturers as existing orders and aircraft substitute for new orders and deliveries. 

Interesting times are ahead.

Michael E. Levine
New York University School of Law, former senior airline executive

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