Why Dubai's plan to build the world’s largest airport is facing turbulence

Recently, news broke that construction work on the $36 billion project to create the world’s largest airport has been suspended. Named Dubai World Central (DWC), the airport was to have five parallel runways and a handling capacity of up to 250 million passengers a year. The completion date for the first phase had already seen a five-year delay and was pushed to the latter half of 2030. The fact that the suspension of work happens in Dubai is extremely significant. After all, Dubai is a city that was fast emerging as the global connectivity hub. It has made the aviation industry take notice. What factors are contributing to a rethink of the world’s largest airport project?

 With US overtaking production of oil, slowing demand and the fall in crude prices, the impacts have slowly but surely started to show. Amongst the six member states in the Gulf Cooperation Council growth is stalling. The highest projected growth rate is that of Qatar at 3 percent. The United Arab Emirates' economy has grown slower than projected. 2018 growth was a miniscule 1.94 percent and 2019 forecasts call for the economy to grow at 2.6 percent.

Within the UAE, Dubai has been an economic engine. This is inextricably linked to traffic flows and indeed the city relies heavily on revenue from trade, tourism and property. Each of these is facing its challenges and as these changes are structural they cannot be dismissed as short-term changes.

Non-oil trade flows for 2018 were AED 1.3 trillion which is flat growth over 2017. More importantly these trade flows have been trending flat for the greater part of five years. Compare this with the trade volume which grew 1.5 times from 2005 to 2009 and then again by 1.4 times from 2010 to 2015.  Tourism is impacted by challenges in key source markets of India, Saudi Arabia, the UK, China and Oman. While volumes from these markets may be up, the nature of the traveller is changing and a shift towards more value-conscious travellers (read: lower spend) is evident. And if this was not bad enough, the property market, a huge attraction in Dubai, has also been hit severely. Average home prices including rentals are down by 10-15 percent and with more supply coming onto the market not matched with equal demand, additional downward pressure is all but certain.

 Dubai emerged as a global aviation hub mainly due to the success of Emirates Airlines. Starting with just two aircraft in 1984, it is now an airline behemoth with 256 wide-body aircraft in operation. The core strategy: the ability to connect any two major cities in the globe with a connection in Dubai. This was enabled by the hub airport at Dubai that worked wonderfully due to its geo-strategic location and the product Emirates offered. And Dubai simply offered more connections to more cities than any other airline. This was reflected in the healthy passenger volumes which in contrast to other airports was entirely international traffic.

Change started once aircraft manufacturers focused on aircraft that could fly ever greater distances. And to top this, passengers also have become increasingly accepting of longer flights with narrow-body aircraft such as the Boeing737 and Airbus320s. With the launch of aircraft like the 787s and more recently the A321LRs with even lower operating costs per seat and expanded ranges, airlines are able to offer more direct flights essentially bypassing the hub. The hub concept continues to be challenged. The latest development is the launch of ultra-long range flights on wide-body aircraft such as the Airbus350 and Boeing777, and the all but certain long-range flights on narrow-body aircraft such as the A321XR and A321XLR. These will further impact Dubai as the premium travellers opt for non-stop flights as opposed to connecting via a hub. This is a shift in demand patterns and also affects the quality of revenue.

 Airports are long-term projects. Traffic projections are made thirty to fifty years out and then incorporated. Looking at demographics the source markets of the future are India and China. Both have their own carriers that are growing and developing their own large airports.

Additionally, in markets such as India and China the total cost of packages are key determinants of demand. The behavioural trends are interesting with a definite shift towards budget travel. In Dubai the 5-star and 4-star hotels combined have about 60 percent of the total inventory. While flights have become cheaper, after adding the cost of the hotel, the currency depreciation and the increase in other costs (such as the price of gold and consumer electronics – both huge drivers of demand), the consumer often looks to other options. And increasingly destinations such as Vietnam, Cambodia, Sri Lanka, Malaysia and the Philippines are honing in.

Finally, all of the key source markets are building their own global hubs and expanding their own airlines. In China one saw the inauguration of a mega airport -- Beijing Daxing International Airport supported by extremely robust Chinese airlines; in Malaysia airport expansion continues and AirAsia continues to expand globally; in Vietnam, VietJet is expanding rapidly and two new airlines are likely to come up; and in India several airport projects are underway and carriers such as Vistara and Indigo are expanding rapidly.

Overall the trends point to the fact that the travel patterns have changed and with developments in the airport and airline segment in key source markets, these will almost certainly impact traffic to Dubai.

 Dubai positioned itself as connecting hub for the world’s traffic. In the last ten years, the current airport grew from 47 million passengers in 2010 to 89 million passengers in 2018 connecting a total of 222 destinations. This traffic is now being impacted by geopolitical trends. Overall, demand has started to slow and while traffic volumes may be flat or even higher the margins are compressed. Growing populism in Europe and anti-immigrant and anti-tourist sentiment has exacerbated the situation. To make matters worse several source markets are facing their own political and economic challenges impacting traffic flows.

A key issue is that of Brexit. This will have significant impact. Indeed, at a recent aviation conference in London, Sir Tim Clark, President of Emirates, shared an interesting nugget. Specifically, that the UK accounts for 25 percent of the capacity of Emirates but over 50 percent of profits. While the route still performs strongly, the Brexit impact is likely to be significant and sustained. The situation with Qatar and the fall in oil prices have also impacted core feeder markets from the GCC. Both issues are not expected to ease anytime soon.

In looking to markets in Asia, traffic from India is also likely to see a slowdown as the country grapples with a declining rupee, a liquidity crunch and a demand slowdown. China is also a similar story. Russia is also a similar story.

— Eliel SaarinenThe airport is a key driver for cities and this was the vision for DWC. Designed to serve as many as 250 million passengers, the mega-hub likely underestimated the number of changes that would hit all at once. From trade wars to technology, from Brexit to bear markets and from the ultra-value-conscious to the ultra-longhaul -- to name a few. And as technology is increasingly integrated, as passengers tolerate even higher levels of discomfort, as flying large aircraft is fast becoming obsolete there is a shift in the nature of traffic forcing planners to revisit the hub-concept.

The official press release indicates that “Dubai Airports is currently reviewing its long term master plan to ensure infrastructure development takes full advantage of emerging technologies, responds to consumer trends and preferences and optimises investment to grow its already significant contributions to Dubai’s economy. The exact timelines and details of next steps are not as yet finalised” (Khaleej Times, 31-Aug-2019).

A rethink of the world’s largest airport project is underway.