Eastern Dawn Lightens the Gloom

Video report How will aircraft makers and airlines cope with the AEROSPACE economic crisis? FINANCIAL TIMES SPECIAL REPORT | Monday November 14 2011 ft.com/dubaishow www.ft.com/aerospacenov2011 | twitter.com/ftreports Eastern dawn lightens the gloom

Emerging markets are the Inside this issue best hope for makers of Emissions civil and military aircraft, Rivals dig in over EU carbon report Andrew Parker trading scheme and John O’Doherty Page 2 he aviation industry’s recov- Fractional ery in 2010 after two years of NetJets pullout recession-induced losses dissolves a quiet relationship looks as if it will be short- Page 2 Tlived. Many airlines are braced for reduced full-year profits or losses Etihad UAE carrier works hard again in 2011 and 2012 because of to soar Page 2 slowing economic growth or stagna- Emirates Dubai airline’s bid to tion in western countries. be biggest takes off Page 3 This may have negative repercus- sions for the commercial aircraft mak- Qatar Airways Expansion plans ers, led by Boeing and Airbus. Their hinge on growth of the region as healthy order books could be damaged a hub Page 3 if airlines respond to the deteriorating economic environment by cancelling Fighter procurement Fast jet aircraft or pushing back their delivery makers lock on to ageing aircraft dates. fleets Page 4 The manufacturers are part of larger groups that are already adjust- Stealth fighters India and ing to reduced defence spending by Russia form groundbreaking western governments focusing on partnership but American rival repairing budget deficits. Both the tries to muscle in Page 4 commercial and the defence sides of these groups are likely to find some of Military transport US prepares their best business in emerging mar- to lose its lead on the heavy kets in the coming years. lifters Page 4 At the Dubai air show, which runs On FT.com Our from November 13 to 17, one of the big reporting team talking points will therefore be the at the Dubai prospects for the airlines and aircraft show will add to makers amid a combination of weak this report with economic growth and high fuel prices. video interviews Investors were alarmed by the Sep- and further tember 20 profit warning from exclusive Lufthansa, Europe’s largest airline by content revenue. That was blamed on disap- www.ft.com/ pointing passenger bookings. One aerospacenov2011 week later Cathay Pacific, the world’s Holding pattern: the airlines, and therefore the aircraft makers, are waiting to see the full effect of economic slowdown Reuters third largest air cargo carrier, said freight volumes may fall by more Airline profit margins against global growth Jet fuel price Aircraft backlog than 10 per cent in the fourth quarter Net post-tax profits as a World GDP growth, US cents per gallon Airliners on order but yet to be delivered, end-year compared with the same period last % of revenues (%) year. a European consortium involving Then, on October 3, shares in AMR, 3 5 400 3000 EADS, Finmeccanica of Italy and UK- parent of American Airlines, plunged 2 4 based BAE Systems – has already 33 per cent on fears the airline may Airbus been delivered to its four launch cus- file for bankruptcy because of operat- 1 3 300 Boeing tomers in Germany, Italy, Spain and ing costs higher than at rivals. So far 2000 the UK. So far, 285 jets have been 0 2 this year, the Datastream index of glo- delivered to those countries, with a bal airlines is down 27 per cent. -1 1 200 further 187 to come. “The industry is brittle,” says Tony But as European governments grap- -2 0 Tyler, director-general of the Interna- 1000 ple with large budget deficits, they tional Air Transport Association, the -3 -1 100 are cutting back defence spending. It main representative body for the air- now looks all but certain that no new -4 -2 lines. “Any shock has the potential to orders will come for the Typhoon put us in the red.” -5 -3 0 0 from its four launch partner coun- The airline industry made a com- 2002 04 06 08 10 12 2000 02 04 06 08 10 11 2000 01 02 03 04 05 06 07 08 09 10 tries, leaving the fighter dependent on bined net profit of $16bn in 2010, Sources: IATA; Thomson Reuters Datastream; Ascend winning export customers. according to Iata, but the airline body This explains why aerospace compa- expects this figure to fall to $6.9bn in nies are intensifying their search for 2011 and $4.9bn in 2012. benberg. He adds that the weak eco- ued to add capacity is that they don’t kets, which have better growth pros- adverse impacts on revenues are deals in emerging markets, where While air travel continues to rise on nomic environment will act as a spur want to lose market share to Gulf pects than western countries. Further- likely to be very limited, unless the some countries have military ambi- a long-term basis – there were 2.7bn to further consolidation between air- rivals.” more, many of the orders from air- economic downturn deepens and goes tions to match their fast-growing eco- passengers last year – it is closely lines. “As economic conditions deteri- These Middle East companies – lines in developed markets are for on for several years.” nomic clout. The Eurofighter consor- correlated to gross domestic product. orate, we expect consolidation to rise Emirates of Dubai, Etihad of Abu more fuel-efficient narrow-body air- Defence manufacturers, meanwhile, tium is on a shortlist of two suppliers In September the International Mone- up the agenda,” he says. Dhabi and Qatar Airways – are threat- craft that will replace ageing gas guz- are adjusting to the prospect of of 126 combat aircraft to India, which tary Fund cut its global growth fore- Tie-ups between US carriers over ening to inflict as much pain on Euro- zlers. reduced orders for combat aircraft could be worth $20bn, while Boeing is casts for this year and next, citing the the past three years have meant that pean flag carriers on long-haul routes from their traditional customers in hoping to secure orders for its F-18 EU sovereign debt crisis and the weak they are responding to high fuel costs to Asia as low-cost airlines have western countries. Super Hornet fighter jet in Brazil, in a US economy. this year by cutting seating capacity, inside the EU. ‘I think it’s likely the Development of the F-35 joint strike deal that could be worth $5bn. Andrew Lobbenberg, analyst at in a move that has given them the But for the aircraft makers, the Mid- Pentagon will cut the fighter – by Lockheed Martin of the If Boeing and EADS can keep a Royal Bank of Scotland, predicts that opportunity to raise fares. dle East airlines are extremely impor- US – has been hit by delays, leading tight rein on the cost of their develop- European flag-carrier airlines will in In Europe, by contrast, where there tant customers. Emirates, for exam- number of F35s. to predictions that the Pentagon will ment programmes – which both the coming months see a fall in are still too many airlines, flag carri- ple, is the biggest operator of the My feeling is that one cut the planned US order of 2,443 air- companies do not have a distin- demand for business – so-called pre- ers are still planning to increase seat- Airbus A380 superjumbo, with 17 craft. One option would be to axe the guished history of doing – they can mium – travel, particularly on long- ing capacity. already in its fleet and a further 73 on version will get the chop’ jump-jet version of the F-35. look forward to a period of rising haul routes over the north Atlantic. Geoff van Klaveren, analyst at Deut- order. “I think it’s likely the Pentagon will earnings. This would particularly hit the flag sche Bank, says: “The European carri- Such deals are a sign of how Boeing cut the number of F-35s,” says John This underlines how the aircraft carriers’ profitability because, unlike ers still focus too much on empire- of the US and Airbus, owned by Nick Cunningham, an analyst at Louth, an analyst at the Royal United makers have much greater control low-cost airlines, they generate about building rather than shareholder EADS, the European aerospace com- Agency Partners, the equity research Services Institute. “My feeling is that over their prospects – in stark con- 50 per cent of their revenue from busi- value, and should be more conserva- pany, hope to be insulated from company, says: “[Boeing and Airbus] one version will get the chop.” trast to the airlines. ness passengers. tive with capacity – especially with another aviation downturn by their are likely to see an increasing number Europe is also wrestling with politi- With few signs of relief in western “Our caution towards flag carriers low economic growth and high oil large order books. of aircraft delivery deferrals, but their cal and budgetary challenges of its economies, many airlines are braced is based on a view that premium traf- prices. Perhaps one of the reasons Much of the backlog consists of long backlogs and the ramp-up of own. for a hard rather than a soft landing fic is going to tumble,“ says Mr Lob- why European airlines have contin- orders from airlines in emerging mar- delayed programmes means that The Eurofighter Typhoon – built by over the coming year. Dreamliner ushers in fresh rivalry Gulf states start to call

The embarrassing series increasing aircraft produc- seduced by the prospect of Manufacturers of delays has removed tivity. trumping Airbus with an the shots on fighter jets much of the competitive Boeing says the 787, all-new aircraft. But by the Boeing and Airbus edge that the US aircraft helped by new engines from summer, faced with the are aiming high, maker had hoped to gain Rolls-Royce and General potential desertion of key ments, some leading figures to success. First and fore- over Airbus when the 787 Electric, burns 20 per cent customers including Ameri- Middle East in the defence industry most is how technologically writes Kevin Done programme was officially less fuel than other similar can Airlines which was believe the going will grow advanced the aircraft are. launched in early 2004. sized aircraft. close to ordering hundreds Manufacturers in much tougher. The British certainly The first 787 delivery took However, both Airbus of new aircraft, it matched the west are having “There is certainly an believe, for instance, that It has been a long time com- place in the second half of and Boeing say that while Airbus and announced a interesting sustainability the Typhoon – which has ing, but the recent delivery 2011 rather than in the first the new materials technol- revamp of its 737. to rethink their issue for the UK,” says Sir recently performed well in by Boeing of its first 787 half of 2008, as initially ogy works for long-haul air- This month, Boeing said strategy, explains Brian Burridge, vice-presi- UK operations in Libya – Dreamliner has finally ush- promised. craft, it is not yet ready for that it had already received dent for strategic marketing has a competitive edge. ered in a new era in com- This allowed Airbus to use in their smaller short- more than 600 order com- James Blitz at Finmeccanica. “Thanks to Libya, we mercial aviation – Airbus, close some of the gap with haul jets. mitments from eight air- “Saudi Arabia has bought know that Typhoon is the the US group’s European its A350, which is now due They have faced an acute lines for the 737 Max, which two products – Typhoon best fourth-generation, competitor, is in hot pursuit to enter service in the first dilemma over the timing of it promises will have a 10-12 The Middle East has long and Tornado [built by the medium-range combat air- with its delayed A350. half of 2014. With the extra the replacement of their per cent lower fuel burn been a prized region for UK-German-Italian Panavia craft on the market,” says a The much-heralded step delay of up to six months B737 and A320 families of than current 737s. aerospace manufacturers Aircraft consortium] – in senior UK ministry of change in long-haul jets announced on November 10, single-aisle, short-haul jets, It will use the CFM Inter- wanting to sell combat jets numbers. But if we leap for- defence official. promises much improved this could represent a slip- the workhorses of the glo- national Leap-1B power and trainers. ward nine years, that part “If you are serious about fuel consumption, reduced page of a year from the pre- bal airliner fleet. Both have More comfort: Boeing 787 unit, which Boeing says But the competition to capability, you have to buy emissions and lower operat- vious timetable. been very successful and will offer a 4 per cent lower sell to the leading potential ‘There is a Typhoon. France and the ing costs for airlines. Boeing started the latest still have enormous order option). It is offering a fuel burn than the A320neo. buyers in the region – most sustainability US will compete strongly, It also offers passengers a product development battle backlogs. package of improvements Deliveries are not scheduled notably Saudi Arabia, issue for but if you buy the [Das- better experience, with fea- with a greatly increased use However, faced by surg- to its existing A319, A320 until 2017. Oman and the United Arab the UK’ sault] Rafale or the F-18 you tures such as cleaner cabin of composites in the 787. ing fuel bills and rising and A321 family of single- As orders for newer, fuel- Emirates – is set to become – Sir Brian want to be certain you will air, higher humidity and Composites account for environmental pressures, aisle aircraft, including efficient jets rack up, Air- increasingly fraught in the Burridge not ever be in combat bigger windows. 50 per cent by weight of the airlines have been urging much more efficient bus and Boeing again next few years. against a country deploying But development of the 787, and aluminium has the aircraft makers to engines – Pratt & Whitney’s appear well-protected by Western defence compa- Typhoon.” 787, billed as the first plas- shrunk to only 20 per cent – modernise the jets. PW1100G geared turbofan their big order books from nies have had a great deal of the export market will A second factor influenc- tic airliner, has not been compared with 12 per cent The multibillion-dollar or the Leap-X offered by further weakness in the of success selling to these have changed.” ing sales is the broader easy for Boeing. Carbon composites and 50 per cent gamble facing both Airbus CFM International, the GE/ world economy. states. The consortium that Another leading figure in industrial benefit that can fibre composites have been aluminium in the Boeing and Boeing was whether to Safran joint venture. The last recession took a produces the Eurofighter the European defence be given to the country buy- employed for the first time 777, the US group’s last press ahead and develop all- Entry into service is due heavy toll of the airlines, Typhoon fighter – the pan- industry agrees. “There is ing the aircraft. in an airliner for the major- new aircraft before the 787. new products or to re-en- in October 2015 and Airbus but Airbus in particular has European EADS, UK-based certainly a lot of modernisa- All purchasers are ity of the primary structure, Composite materials – the gine the existing aircraft to is promising a 15 per cent weathered the storms suc- BAE Systems and Finmec- tion of air forces taking looking to reach offset the fuselage and wings. A350 will have a similar take advantage of develop- reduction in fuel burn, up cessfully and by carefully canica of Italy – has sold a place in the Gulf states and agreements that secure The aircraft’s entry into share to the 787 – allow ments in engines. to 500 nautical miles of juggling the order book has significant first tranche of that will continue,” he says. additional benefits beyond commercial service with lighter, simpler fuselage A wrong move could have extra range and 8 per cent managed to raise output to jets to Saudi Arabia. Among “But it will be at the pace the provision of the Japan’s All Nippon Airways and wing structures, reduc- left either player at a severe lower operating costs. record levels in each of the US manufacturers, Boeing that purchasing countries fighter. Such terms could last month was more than ing weight and fuel con- competitive disadvantage The Airbus launch in past three years. has sold its F-18 combat jet want to run at, not one that include the buying country three years late. Boeing still sumption. for more than a decade. December caught Boeing on However, the other threat in the region, while Lock- can really be dictated by striking a deal to maintain holds more than 800 orders The promise is also that Airbus moved first late the hop, with the A320neo is from outside the duopoly. heed Martin has notched up the defence companies. “ or make part of the for the 787, but it has also the materials will not last year by announcing winning more than 1,000 By the end of the decade, sales of its F-16. In all of these sales, lead- aircraft, or even securing lost customers frustrated by fatigue or corrode, reducing the launch of the A320neo orders and commitments. the two will face new rivals However, after a long ing defence figures say that the long wait. scheduled maintenance and (standing for new engine Boeing was initially from China and Russia. period of sales achieve- several factors are crucial Continued on Page 4 2 ★ FINANCIAL TIMES MONDAY NOVEMBER 14 2011 Aerospace UAE carrier works hard to soar

gested area, but to have a of a group of industries that the growth of airlines such Etihad Airways commercial hub it must are helping put Abu Dhabi as Etihad. have its own airline, he on the map. Mr Hogan, previously A crowded market says. “It’s really more than Like Dubai, Abu Dhabi is with Bahrain’s Gulf Air, makes it difficult just an airline; it’s more of expanding its airports with has argued that western air- a service industry that multibillion dollar plans for lines are falling behind, to stand out, says helps brand Abu Dhabi.” a midfield terminal that has because they are not so well Camilla Hall And it is not just through excited contractors as other placed to serve a booming purchases that Etihad has projects flag. Asia, and have the burden drawn attention. The com- The emirate is also of ageing fleets, not because For Etihad Airways, the pany has also become a big increasing the number of of preferential financing of national carrier of the international sports spon- hotels and is building muse- the Gulf carriers. United Arab Emirates, the sor, signing up Manchester ums, including a venture Etihad has a less diversi- hardest job is to establish City, the English football with the Louvre, as part of fied funding base than that fact. club, in a somewhat contro- its plans to attract visitors. Emirates and relies largely At just eight years old, versial deal this year, as That plan is bearing fruit, on export credit agencies to Abu Dhabi’s Etihad well Harlequins, the Lon- with passenger numbers up fund its fleet, bankers say. remains in the shadow of don rugby union team. It is 15 per cent in the third Unlike Emirates, it has Emirates, the highly suc- also a supporter of the For- quarter compared with last not chosen to tap the bond cessful government-owned mula 1 Grand Prix hosted year. However, Abu Dhabi markets as a means of rais- airline of neighbouring by the emirate. is yet to offer the same vis- ing funds, which can prove Dubai. Etihad, does not see it as more expensive and To create its own space in a case of catching up. In its It’s more of demands more transpar- the market, Etihad has had view, it is already surpass- a service ency from the company. to spend billions of dollars ing its Gulf rivals. industry than Despite the global eco- to get noticed. “Where it took Emirates an airline – nomic downturn, Etihad It came to the fore in 18 years to carry 7m passen- Mohammed reported a 39 per cent 2008, when it placed one of gers a year, and Qatar Air- Ali Yasin increase in its third-quarter the largest orders in the ways 13, it took Etihad Air- revenue, as it expanded history of commercial avia- ways seven years,” says routes and boosted passen- tion. The order, worth James Hogan, the chief iting or stay-over experi- ger numbers. The company about $20bn, sent a signal executive. ence as its neighbour. expects to break even for An American in Europe: the Emissions Trading Scheme could cost US airlines more than $3bn by 2020, it is estimated Getty that the airline was serious This year the airline Mandagolathur Raghu, the first time this year, Mr about becoming a global added destinations includ- head of research at Markaz, Hogan says. force, and made not just its ing Shanghai and Banga- a Kuwait-based investment Over the next 10 years, Gulf rivals, but also its lore, and increased capacity bank, says: “While it is true Etihad, which in March had western competitors, take on several European routes. that Etihad and Emirates, a fleet of 57 passenger and Rivals dig in over EU note. Whether through acquisi- both being UAE-based, will cargo aircraft, plans to take This year, the Abu Dhabi tion or organic growth, Eti- have to fight it out to delivery of nearly 100 air- government-owned com- had’s global reach is central obtain traffic rights in craft, including 10 Airbus pany caught the attention to the emirate’s long-term unserved markets, there is A380s, the company says. of its rivals again, after plan to attract tourists, still enough space for them The airline continues to reports linked it to big boost commerce and diver- to operate profitably.” target the luxury market carbon trading scheme investments in European sify the state finances away And they have been pre- and launched flights to the airlines such as Aer Lingus, from oil. pared to fight. Seychelles this month. The ATA estimates the of ransom to the Barbary clearly says that if a coun- the Irish carrier, and BMI, Dubai, without the luxury As the airline has grown, Though the management Emissions scheme would cost US air- pirates for safe passage.” try outside the EU takes the lossmaking subsidiary of Abu Dhabi’s oil reserves, so has its relevance to team is largely expatriate, lines more than $3.1bn This effort does raise the ‘equivalent measures’ to that Lufthansa has since was forced to do this years the international industry. Sheikh Hamed bin Zayed Al Pilita Clark finds between 2012 and 2020, intriguing prospect of a US reduce aviation emissions, decided to sell to IAG, the ago; its airline was founded With that has come criti- Nahyan, a senior royal, is the row over an though some analysts say airline being unable to fly all incoming flights from owner of British Airways. two decades earlier. cism. the airline’s chairman. the costs will be lower. to Europe without breaking that country can be “They are trying to catch “You’ve got to see the Mr Hogan has hit back in “Having the Abu Dhabi environmental At today’s relatively low either a US or an EU law. exempted from the EU sys- up,” says Mohammed Ali whole thing as a set,” says a feud over export financ- government behind your move heating up carbon prices, the cost of This month the US joined tem.” Yasin, chief investment Michael Tomalin, chief ing, as western airlines name, you’re going to have the scheme should be small forces with more than two Ms Hedegaard may be officer at CAPM Investment executive of National Bank accused export credit agen- market share,” says Mr compared with other indus- dozen other countries, waiting some time. in Abu Dhabi. It is a con- of Abu Dhabi. Etihad is part cies of unfairly subsidising Yasin of CAPM Investment. he history of avia- try charges, the Bloomberg including China, India, Rus- tion is littered with New Energy Finance serv- sia and Japan, to take the rows between the ice has calculated. fight to the International US and Europe, It says out-of-pocket costs Civil Aviation Organisation Tlong the world’s two most will be less than a quarter (ICAO), the UN agency that important airline markets. of a per cent of revenue sets airline standards. But the latest one has the from the routes covered by In total, 26 countries told added excitement of threat- the ETS in 2012, and about the 36-member governing ening to turn into one of half a per cent in 2020. council of the ICAO that the first big carbon trade The airlines’ legal chal- the EU measure “violates wars. lenge, still awaiting a final the cardinal principle of The dispute arose because ruling from the European state sovereignty” and will the European Union has Court of Justice, is not look- “curb the sustainable decided that from January 1 ing promising. Last month, growth of international avi- 2012, any airline flying into an adviser to the court cast ation”. or out of the EU will be aside most of the US air- The council voted to charged for its carbon pollu- lines’ arguments, saying the adopt a declaration oppos- tion. EU legislation did not ing the EU’s inclusion of That is due to aviation infringe the sovereignty of foreign airline flights in its being brought into the EU’s carbon scheme. six-year-old emissions trad- But environmental cam- ing scheme (ETS), a system A US airline might paigners dismissed the that obliges companies to be unable to fly to move, claiming it amounted pay for permits (or allow- to little more than political ances), each equal to one Europe without posturing. tonne of carbon dioxide, to breaking either “The airlines may try to cover their annual emis- claim this is a council ‘rul- sions. a US or an EU law ing’,” said Pamela Campos, A company with emis- a lawyer for the Environ- sions below a certain level mental Defense Fund, a can sell its excess permits other states and was com- non-profit organisation, to others with high emis- patible with relevant inter- who attended the ICAO sion levels. national agreements. meeting. “But the ICAO Thousands of European Undeterred, both Republi- president made very clear companies have been cov- cans and Democrats in the this morning that the ‘dec- ered by the scheme since it US House of Representa- laration’ is simply that – a started, from power stations tives a few weeks later political expression of a to oil refineries; steel works approved a measure that group of countries that to cement factories. would make it illegal for US their airlines aren’t happy But the decision to extend airlines to comply with the about having to comply it to companies outside the EU scheme. with pollution controls.” bloc – foreign airlines – is “This scheme is an arbi- So far, despite the politi- the EU’s most ambitious trary and unjust violation cal pressure, Brussels is move yet to force the rest of of international law that standing firm. the world to comply with disadvantages US air carri- As the ICAO meeting its environmental rules. ers, threatens US aviation ended, Connie Hedegaard, The first shot came from jobs, and could close down the EU climate commis- the Air Transport Associa- direct travel from many sioner, said: “This decision tion, the US industry body, central and western US air- will affect neither the EU’s and two airline groups – ports to Europe,” said John commitment to working United and American Air- Mica, a Republican con- within ICAO to agree on a lines. They launched a legal gressman and chairman of global solution, nor our challenge, now before the the transportation and adopted legislation to EU’s highest court, to what infrastructure committee. include aviation in the EU they said was an “astonish- Chip Cravaack, his party ETS. If the other countries ing” step that breached colleague, was even want to reduce aviation international law and blunter: “The ETS scheme emissions differently, that would cause legal “chaos”. is equivalent to the paying is fine. Our legislation

Fractional NetJets pullout dissolves a quiet relationship

rather than shares.” operations in emerging NasJet, as the NAS regions such as China and operation will now be India. known, will be freed by the NAS has found the ending of the agreement to fractional model – in which Rohit Jaggi FLIGHT LINES concentrate on aircraft owners buy shares in a jet management and charter – giving them the right to fly more fertile markets in the a certain number of hours a The decision by NetJets region than fractional year, plus monthly fees and Europe, the fractional ownership – as well as fees for flights – a difficult operator, to call an early serving its existing owners sell in the Middle East. halt to its affiliation with of aircraft shares. Elsewhere in the world, National Air Services (NAS) NetJets Europe, an arm of the global financial crisis has of Saudi Arabia ends an Ohiobased NetJets Inc, a also taken a toll. NetJets 11year experiment with company owned by was hit by shareholders taking the world’s leading billionaire investor Warren flying fewer hours or fractional jet ownership Buffett’s Berkshire leaving, and was forced to brand into the Middle East. Hathaway, will continue to lay off staff, park aircraft It is one that has failed, in fly into the Middle East. and cancel orders for new large part, to take off. NetJets Europe says: “The jets. The US group suffered NAS, known while the 11yearlong franchise a $711m loss in 2009, agreement with NetJets agreement with NAS in However, Mr Buffett told Europe was in place as Saudi Arabia has been a Berkshire Hathaway NetJets Middle East, is the great way for NetJets to shareholders this year that largest private jet operator understand and venture into NetJets had $207m pretax in the region, with 70 the Middle East market. earnings in 2010. aircraft. NetJets has decided to end NetJets Europe, “The fractional model its franchise agreement with meanwhile, which saw flight wasn’t working in the Middle NAS. In the meantime, hours fall by a fifth in 2009, East,” says one industry NetJets will provide has seen activity rise since observer. alternative solutions to our then. And in the past 13 “There were a number of owners who need to fly into months NetJets as a whole reasons, including the lack the region.” has placed two big orders of tax benefits and a culture For NetJets, the decision for up to 250 aircraft, worth that favours outright allows it to concentrate on as much as $7.7bn, to purchase of an aircraft setting up and expanding its refresh its fleet. FINANCIAL TIMES MONDAY NOVEMBER 14 2011 ★ 3 Aerospace Dubai airline’s bid to be biggest takes off

Sheikh Ahmed reported: “Emirates Emirates remained focused on its long-term strategy despite global instability, Simeon Kerr reports ever-climbing fuel prices (which that the Gulf carrier resulted in Emirates paying $1bn more in fuel costs over the same continues to grow rapidly period last year), and fluctuating exchange rates.” Revenues rose 15 per cent; passen- t started out with a stipend of ger load factor remained high at 79 $10m from Dubai’s ruler in 1985. per cent, close to last year’s first-half Now, Emirates, one of the fast- record-breaking 81 per cent; and reve- est-growing airlines in the world, nue per passenger kilometre also rose Iis knocking on the door of global dom- 5.7 per cent. ination. Analysts wonder whether Emirates Other airlines fret about projections can keep its long-haul strategy on that Emirates is on track to become track in the coming years, as it faces the largest long-haul carrier by 2015, increasing regional competition from as its relentless growth in passenger Qatar Airways and Abu Dhabi’s Eti- numbers continues to underpin had, as well as the established carri- Dubai’s recovery after its damaging ers from Asia and Europe. property crash in 2008. Stephen Furlong, equity analyst at Over the past five years, the airline the research division of Davy, the has tripled capacity and revenues, Irish stockbroker, says “The greatest and is set for a 9 per cent increase in challenge is, I believe, persuading capacity through 2015, says a recent time-sensitive business passengers report by Boston Consulting Group. from areas such as China and north During that time, cash margins Asia – that are not as time- have declined from 28 per cent to 23 efficient as Australia and southeast per cent, but they still compare Asia – to travel via Dubai.” favourably with competitors at a time A conundrum for the airline, says when the global industry has come BCG, is that its margins weaken as it under intense pressure. comes into more direct contact with Emirates’ fleet of 159 aircraft is set global competitors in the areas that to be enlarged by an order book of are driving traffic the fastest: Europe, almost 200. The city-pairing strategy – Asia and Africa. linking the Middle East with Asia, BCG has calculated that the most Africa, Europe and the Americas – profitable passengers are those whose continues to define the airline’s strat- journeys originate in the Middle East egy. Its large Chinese and African net- Far from a straightforward task: Emirates faces increased competition from local carriers as well as pressure on margins AFP/Getty and travel via Dubai. International works are expanding to include a passengers transiting through the thrust into the Americas. desert near the border with Abu An uncle and close aid to the ruler, to raise the carrier’s profile globally. ers say that tacit sovereign backing region’s hubs are less profitable. The Throughout the emirate’s 2009 Dhabi, has already opened to cargo Sheikh Ahmed’s political star has Emirates’ rapid growth has bene- ensures low borrowing costs. airlines’ global expansion is thus recession, Dubai airport remained and could start to receive passenger risen as fast as the airline has grown. fited from Dubai’s low-cost environ- However, the airline remains vul- partly subsidised by regional passen- busy. It is now lifting the broader flights next year. He is increasingly involved in the day- ment: it is free of corporation tax, and nerable to the vagaries of the oil mar- gers. economy as tourism recovers. Sheikh Ahmed bin Saeed Al Mak- to-day business of digging Dubai out offers cheap labour. This extends to ket, despite having delivered profits Further expansion will therefore The airport is forecast to become toum, who has guided the airline of its $110bn debt hole. airport fees at its Dubai airport hub – for its shareholder, the Dubai govern- suggest a “significant allocation of the world’s second busiest this month, since its formation, also runs the civil The airline’s aggressive sports the envy of many other international ment, over the past 23 years. capacity to unprofitable passenger leapfrogging Paris, Hong Kong and aviation authority, nurturing the sym- marketing drives – from sponsorship airlines that have to pay much more Its interim results for the six segments”, BCG argues. Frankfurt, according to a report by biotic relationship between the two of the stadium of Arsenal, a UK for access to airport infrastructure at months to September 30 saw profits But as Sheikh Ahmed says, Emir- the Centre for Asia Pacific Aviation. entities, as the airport tries to over- football club, to Real Madrid’s shirts – their home bases, according to BCG. tumble 76 per cent to some $225m, hit ates remains focused on its long-term The new Dubai World Central-Al take London’s Heathrow as the has combined with a reputation for Though Emirates says it receives no by high oil prices and foreign- strategy. Many have bet against it Maktoum airport, located in the world’s busiest by 2015. service and onboard entertainment subsidies from the government, bank- exchange volatility. before; fewer would do so now. Doha’s f lag carrier plans big expansion

across Asia, Africa, Europe Spain, across Europe and Qatar Airways and the Americas, in an into west Africa. attempt to take on the leg- Africa, a fast-growing It hopes to benefit acy carriers, as a corner of travel segment for many as the region the Gulf – spanning Doha, airlines, is also on the hori- Dubai and Abu Dhabi – zon for Qatar Airways. emerges as a hub, seeks to emerge as a global The airline continues to says Simeon Kerr aviation hub. add a new destination on Whether the region can average once a month, the accommodate so many latest being Benghazi and “megacarriers” is open to Entebbe, Uganda, making Qatar Airways is growing debate, but Qatar is on the Africa the location for 16 of fast, seeking to boost its march globally. the airline’s 100 destina- fleet almost 20 per cent to Its sovereign wealth tions. 120 by 2013. Yet it is based a funds have grown to an Akbar Al Baker, chief mere 240 miles from Dubai estimated $80bn-plus in executive since 1997, airport, another fast-ex- assets, via a collection of recently said the airline panding hub. corporate stakes across the would continue to open up The parallels between world, along with a diversi- destinations in the under- Qatar Airways and Dubai’s fied funds portfolio that served continent. Emirates just will not go aims to underwrite the com- The next big challenge for away. fort of future generations. the carrier comes with the Qatar Airways, which Qatar’s wealth and bold- opening of Doha’s new started operations in 1994, ness, meanwhile, allows the international airport, is 50 per cent owned by the small state to punch above located near the existing emirate’s government, with its weight on the world facility in the capital. the other half owned by stage, as it mediates in Already subject to several members of the ruling fam- regional disputes and delays and an estimated ily. projects soft power via the The national carrier of state-funded Al Jazeera tele- the tiny peninsula, which, vision network. thanks to its oil and gas, is Qatar Airways can serve one of the world’s richest as an adjunct to this maver- countries on a per-capita ick foreign policy while also basis, wins many awards pursuing a commercial for quality and service. long-haul strategy that Like Emirates, the airline could receive a boost in the – based in Doha, Qatar’s run-up to the Gulf state’s Qatar Airways will capital – is also launching hosting of the football continue to open an extensive network World Cup in 2022. Doha, one of the biggest up destinations in backers of the rebels who underserved Africa ousted the late Libyan Contributors leader, Colonel Muammer Akbar Al Baker, Gaddafi, is now set to play Chief executive Andrew Parker a central role in state for- Aerospace Correspondent mation and rebuilding of the north African state’s expanding budget of up to James Blitz economy. $15bn, it is now scheduled Defence and Diplomatic Editor Little surprise, then, that to open early next year, the Qatar Airways is this company says. John O’Doherty month set to operate the The airport, built by Defence Industries first regular scheduled Bechtel, the US construc- Correspondent international flight into tion group, will underpin Benghazi, the rebels’ base. Qatar Airways’ expansion Rohit Jaggi The main thrust of the plans. It will be able to han- Aircraft Columnist airline’s expansion, how- dle three times as many ever, is the short-term passengers as present air- Pilita Clark Environment growth of its long-haul busi- port. Correspondent ness to 120 destinations Like Emirates in Dubai, with a fleet of 120 aircraft, where first-half profits tum- Simeon Kerr with even more on order. bled this year, Qatar Air- Gulf Business Stephen Furlong, equity ways is facing headwinds in Correspondent analyst at the research divi- the global economy. sion of Davy, the Irish The airline’s much antici- Camilla Hall stockbroker, says: “I would pated initial public offering Gulf Correspondent say, given the level of this year, with a planned James Lamont growth and aircraft listing in Qatar and possi- South Asia Bureau Chief required, the superconnec- bly London, was pulled this tors are looking at all ave- autumn because of adverse Kevin Done nues of passenger flow to market conditions. FT Contributor fulfil this.” However, tapping interna- “Qatar Airways seems tional capital is not neces- Rohit Jaggi more ready to look at sarily a priority for Qatar Commissioning Editor acquisitive, as well as Airways, given the wealth Steven Bird organic growth.” of its parent. Designer This year, the airline took Qatar’s domestic invest- a 35 per cent stake in Car- ment drive – from industry Andy Mears golux, the Luxembourg- to arts, sports to banking – Picture Editor based carrier. This move is enough to keep the car- bolstered its small freighter rier busy for decades to For advertising contact: fleet. come. Liam Sweeney Rumours have also sur- However, as with Emir- +44 020 7873 4148 faced of a bid for a minority ates, its international ambi- [email protected] stake in Spanair, the trou- tions will keep global air- bled Barcelona-based car- lines looking over their rier with a network within shoulders. 4 ★ FINANCIAL TIMES MONDAY NOVEMBER 14 2011 Aerospace Gulf Sellers of fast jets target ageing aircraft f leets starts to The two largest pro- The US and the leading The biggest prize for stages of the competition Brazilian joint venture Japan is another market Procurement grammes for fighter jets in European powers have western jet makers at with the F-18 and an AMX. Boeing is offering the that is also looking attrac- call the the US and Europe are the generally decided which present is the Indian multi- updated version of the F-16, F-18 Super Hornet, while tive for defence groups. Defence companies F-35 Joint Strike Fighter aircraft will feature in role combat aircraft compe- respectively. Dassault is offering the Long the preserve of US may have found a built by Lockheed Martin, their air forces in 15 years tition, which will see an However, the US may Rafale. Saab of Sweden’s is manufacturers, the country shots and the Eurofighter time. $11bn order for 126 fighter have been hobbled by not offering the Gripen, which has said it is open to buying sweet spot, says Typhoon, made by a consor- But this picture of delays jets to replace India’s age- offering its more advanced is seen as a lower-perform- Typhoons. Tokyo wants John O’Doherty tium of UK-based BAE Sys- within a broader context of ing Russian-built MiG-21s. aircraft, whose technology ance but lower-cost option. about 42 fighters, with a Continued from Page 1 tems, Finmeccanica of Italy certainty over the type of European industry is in is closely guarded. The assiduous courting of decision due to made by and the pan-European aero- aircraft being chosen con- the lead, after a decision in Given that India is Brazil by Nicolas Sarkozy, December. investment by the vendor It is a curious time for the space group EADS. trasts with the rest of the already collaborating on an the French president, very But regardless of which in other industries. makers of fighter jets. Their The F-35 has been subject world, where several coun- A decision on advanced aircraft with Rus- nearly meant that the con- jets are bought by Japan, There is a third factor, traditional markets in the to several delays and cost tries plan to buy jets but fighters will sia, and US-India relations tract was a done deal for Brazil and India, the ulti- however, which plays to US developed world are hit by overruns, while European have yet to decide which. be pushed have improved in recent the Rafale, which has yet to mate significance of the strengths and which could delays and cash-strapped governments have long Analysts reckon these back to 2012 years, some analysts say secure an export customer. purchases may lie less in prove decisive. customers, yet a boom in been wrangling over the emerging markets represent – Dilma the decision to select only But Dassault’s hopes were which defence group wins The Gulf states will demand for defence equip- number of Typhoons they a great opportunity because Rousseff European aircraft was an dashed when the newly the contract, and more in always view any purchase ment from emerging mar- will buy. a fleet of existing fighter attempt to maintain a stra- elected successor of Luiz the shift in the overall mar- as an opportunity to under- kets is throwing up a host Most observers expect jets is coming up for tegic balance. Inácio Lula da Silva, Dilma ket for jets to the south and pin the broader security of opportunities. that no new Typhoon con- replacement. April by the Indian govern- Brazil is also in the cross- Rousseff, stated that any east. relationships they have Such opportunities are tract will be signed by the Craig Caffrey, an aero- ment to select the Typhoon hairs of the jet-makers. decision would be pushed “Western requirements with western governments, being chased the more four existing partner space analyst at IHS Janes, and the Rafale, made by Its air force is now ten- back until 2012. seem to be shrinking at the especially the US. Saudi eagerly by defence groups, nations of Germany, Italy, says: “Several nations are France’s Dassault, for fur- dering for 36 fighter jets as The subsequent appoint- same time as those in Arabia looks to the US to be because many countries, Spain and the UK. flying [Lockheed Martin] ther evaluation before part of a deal worth about ment of a new defence min- emerging markets are grow- a key ally in the event of including Brazil, India and But perhaps the most F-16s and others are flying reaching a final decision $5bn, but that could grow ister in August this year – ing,” says Mr Caffrey at IHS any conflict with Iran. This Japan, are still open to com- important feature of these [Dassault] Mirages. possibly late this year. ultimately to 100 fighters. whose predecessor had been Janes. is particularly significant petition, whereas most of two programmes is that in “As both of these aircraft The selection of two Euro- The country currently defence minister in both the “The growth within the given Iran’s possible ambi- the developed countries spite of the delays and argu- approach the end of their pean options came as a operates a mixture of US- Lula and Rousseff adminis- fighter market is almost tion to develop a nuclear that are in the market for ments, the final decision of lives, everyone is looking blow to the US, as both Boe- made Northrop Grumman trations – is now seen as a completely coming from weapon. aircraft have already who will buy which aircraft for a new jet at the same ing and Lockheed Martin F-5s, Dassault Mirages and further reducing the outside Europe and North “The US guarantee of decided what they will buy. has largely been settled. time.” had competed in earlier A1s made by the Italian- chances for Dassault. America.” security is a significantly strong card,” says a leading defence contractor. “It is not implausible that Presi- dent Obama would phone King Abdullah of Saudi Arabia to press home his points on any arms sale. In US prepares to other markets that doesn’t apply. But here, that can have resonance.” ‘Each procurement lose its lead on justifies itself in its own right. But it always takes the heavy lifters place in a wider diplomatic context’ on the C17 production line by political wrangling and Military transport by 1,100 people. technical problems in its Graham Chisnall of ADS The company says it has development phase, but the Group, a defence industry The Airbus A400M enough orders to keep the aircraft is completing test- trade body, agrees. “Clearly is just the first of line going until 2014, but ing and France will take all big defence purchases most analysts say that, delivery of the first batch in are diplomatic gestures and many, reports even with some orders from 2013. mostly government-to- John O’Doherty India, production is likely While the A400M should government arrangements. to come to an end by about benefit from the phasing “Each procurement justi- 2016. The parsimony of belt- out of the C-17, it will not fies itself in its own right. elatively unglam- tightening governments is be able to replace the older But it always takes place in orous they may unlikely to be able to pro- aircraft completely. The a wider diplomatic context be, but military long the production run A400M, which has turbo- and that can be important.” transport aircraft much further. prop engines, can land on In the years to come, Rare vital workhorses for “The C-17 is the platform unprepared airstrips. But it aerospace manufacturers modern armies. of choice, but governments cannot carry as much as may well be looking to Now the world of these just don’t have the money the C-17. other states for sales. India delivery trucks of the sky is at the moment to buy any This gap could be a boon has opened the final sealed set for a shake-up, as the more,” says Elizabeth Quin- for transporters made by bids in its fighter jet tender, production of long-domi- tana, senior research fellow other countries. These the biggest in the world this nant aircraft winds down in air power at the Royal include Russia’s IL-476, and year. and new competitors come United Services Institute, possibly Ukraine’s An-70, Japan is undertaking a to market. the UK think-tank. which is under development tender exercise for the One of the transporters She adds: “So, by 2020 by Antonov. replacement of its Phantom facing an uncertain fate is there will be a gap in airlift The part of the industry jets, while South Korea is the Boeing C-17, the work- capability, certainly in the that caters to smaller pay- also looking to revamp its horse of the US Air Force – UK if not across Europe. load requirements is also On the defensive: even the most extensive military countermeasures are unlikely to save the C17 fast-jet fleet. which has more than 160 of Everybody knows that they facing in a shake-up. Meanwhile, defence com- the aircraft. don’t have enough, and the Here again, the dominant traditional market space,” the C-130 has enjoyed for anything but a small planners – designs have panies may have to think Australia, Canada and the operations in Libya have incumbent is American – explains Craig Caffrey, an the past 50 years.” impact on the global mar- been put forward that can harder about what kinds of UK also operate C-17s – it is highlighted this.” the Lockheed Martin aerospace analyst at IHS Even as the A400M and ket for military aircraft, as theoretically carry more equipment to sell to the used by the Royal Air Force The production run of C-130J, the latest version of Jane’s. KC-390 move to occupy a the country’s pacifist con- than 10 times the 77-tonne Gulf states. for the “air bridge” between Lockheed Martin’s C-5 Gal- the long-lived C-130 Her- “Argentina, Chile, Colom- larger share of airlift fleets, stitution prohibits exports payload of a C-17. But in “The Gulf will always be the UK and Afghanistan, axy has already ended, so cules, which is smaller than bia, the Czech Republic, other countries are also of almost all types of conflict zones, a slow and a market for defence aero- transporting troops, when production of the C-17 the A400M. and Portugal have all stated defence equipment. unmanoeuvrable airship space,” says Sir Brian at armoured vehicles and med- stops, the largest western The C-130J is not facing an intent to join the Brazil- However, a transport air- would be extremely vulner- Finmeccanica. “But in the ical evacuees. transporter will be the any imminent end to pro- ian programme to, in most ‘If Embraer can craft with greater export able to attack. years ahead, sales of com- But orders for the big jet newly launched A400M duction, but analysts cases, replace ageing C-130 keep the unit cost potential may in due course However, says Joel Hay- bat ships may be the kind are winding down, and in from Airbus, the subsidiary reckon that could come in fleets. come from China. ward, dean of the UK’s of area that compensates January Boeing cut the of the pan-European EADS. 2020. “If Embraer can keep the low then it should While the number of sup- Royal Air Force College: “In for declining jet sales.” number of people working The A400M was plagued Even before that, though, unit cost low, then it should be a genuine rival’ pliers of military transport- terms of moving stuff and the C-130J is facing competi- be a genuine contender for ers looks set to grow in the people over long distances tion from Embraer, the Bra- many countries that require next 20 years, one type of in a safe, benign environ- zilian aerospace group. It is a 20-tonne-payload trans- building up capacity in technology looks likely to ment [the airship] has tre- developing the KC-390, port aircraft. transport aircraft. remain on the sidelines: the mendous potential,” . which is similar in size to “It will be extremely diffi- Kawasaki is working on airship. “But it sits in the realm the C-130J. cult for any new US trans- the C-2 for the country’s air The merits of a military of futurism. There’s no “The KC-390 has already port aircraft to obtain the self-defence forces. How- airship have long been of credible development of any begun to affect the C-130’s kind of market dominance ever, it is unlikely to have potential interest to defence airship at the moment.”

Stealth fighters India and Russia form groundbreaking partnership but US rival tries to muscle in

Fighter pilots who train alongside the although India prefers to call it the high potential for the global market. generation fighters to India. their peers in the Indian Air Force FGFA, for fifth generation fighter “The joint programmes in the area The Pentagon recently told the US (IAF) are left in little doubt of their aircraft. The two sides agreed to of combat and transport aviation are Congress that it was prepared to tactical pedigree, writes James build up to 300 over 10 years in a a launching pad to develop civil provide information to India about Lamont. deal estimated to be worth $35bn. aircraft.” the F35 Lightning II, produced by Indian pilots are among the best The T50, the equivalent of the US Bangalorebased Hindustan Lockheed Martin and viewed as a in the world, with lightningsharp F35, is expected to join the Russian Aeronautics Limited (HAL), which heavy, cheaper version of the F22. reactions and the deft handeye air force in operational trials in five already assembles MiG, Sukhoi and European defence companies have coordination essential to notch up years, and India’s four years later. BAE Systems Hawk jets, has sought expressed concern that the US “kills” in aerial exercises. So far, prototypes of the T50 have at least a 25 per cent share in the authorities might try to shortcircuit However, western counterparts completed 100 test flights. The production of a twoseat version of the bidding process with a new, say their instincts are still moulded aircraft has a range of 2,000km and the aircraft. The fighter would also more attractive offer outside the by Sovietstyle training manuals a cruising speed of Mach 1.8. It will be equipped with BrahMos cruise terms of the competition. based on mass formations to cost less than $100m – far cheaper missiles, which have been developed Ajay Shukla, the defence dominate European airspace dating than US rivals such as the F22 and tested jointly by the two correspondent for India’s Business from the cold war, when the two Raptor and the F35, according to countries. Ashok Nayak, a former Standard newspaper, has urged the were close, rather than the freer its Russian makers Sukhoi and chairman of HAL, describes the Ministry of Defence in Delhi to flight of smaller missions over the United Aircraft Corporation. abandon the purchase of Himalayas. Indian participation puts High profile stealth aircraft: one of the names “overpriced” fourthgeneration The influence of Russia, which is Asia’s third used by the Russians is PakFA – but India is fighters and immediately leap to the still India’s largest arms supplier, is largest likely to press for a different name Getty stealth capabilities offered by the unlikely to wane soon. economy at the F35 in a singlevendor contract. Forming the bedrock of India’s air forefront of “Lockheed Martin has signalled in strike capabilities are Sukhoi30MKI military multiple ways it would supply the and MiG21 fighter jets. And the aircraft project as fighter at a flyaway cost of $65m country’s military planners are now design “more daunting” per aircraft with deliveries beginning banking on an IndoRussian stealth and than any of the by 2015,” he says. fighter joining their ranks within a upholds a initiatives India’s But other Indian defence analysts decade to match the capabilities of longstanding aeronautics industry has say the process to choose the China’s J20 fighter. Russian embarked on in the medium multirole combat aircraft is While two European rivals, the promise indigenous development of too far advanced for a Uturn, and Eurofighter Typhoon and Dassault’s to share aircraft such as the Teja, Kiran current needs are too pressing. Rafale, scrap over supplying fourth the most or Marut. A sudden departure from the generation combat aircraft to India advanced At a stroke, the agreement has process would dent India’s in a contract that India says could technology – given India the kind of credibility, they say, at a time when be worth as much as $20bn, something the US technological partnership – to match the conduct of its bureaucracy is Moscow has already secured a has not been ready to do. its space programme – it craves, under greater scrutiny after a partnership with India in military Mikhail Pogosyan, president of and the promise of defence exports. number of corruption scandals. aviation lasting well into the future. UAC, says: “We are not simply Potential customers for an Indo One defence expert says that the The prize of a visit by Dmitry offering our Indian colleagues the Russian stealth fighter include US offer of stealth technology puts Medvedev, Russia’s president, to best prototypes of our aviation Algeria, Brazil, Venezuela, Vietnam the T50 partnership at risk. New Delhi last year was an technology as a finished product, we and Egypt. Indonesia and Iran are The expert, who is close to the agreement to develop jointly a fifth are dedicated to sharing engineering also possibilities. negotiations for fourthgeneration generation stealth fighter, called by resources in the development of the But the US may still fight back on fighters, asks: “What would India the Russians the T50 or PakFA – most modern aviation facilities with the current tender to supply fourth want with two stealth fighters?”