Insight: Significant airport expansion planned by 2025 in MENA region

Significant airport expansion planned by 2025 in MENA region

Ciara Walker, economist at MACE, looks at the progress of airport projects in the region. 

As the MENA region economies boomed after the millennium, significant investment was put into developing transport infrastructure and connectivity as countries increasingly opened to international markets and visitors.

Evidence of this investment can be seen now across the region, with many gateway airports either fully operational and driving economic and tourism traffic growth, or in the final stages of implementation. Close to $38 billion of airport expansion and modernisation contracts were awarded in MENA during the period 2010-2017: of these an estimated $22 billion are still under construction. With this rush to update infrastructure to meet growing passenger and economic demand, aviation in the region has become very competitive.

However, there is still more airport expansion to come: with ongoing passenger and cargo growth comes ongoing demand for more capacity. An estimated$92bn airport schemes are planned in the region, driven by this strong demand. Many airports in the Middle East reached or exceeded capacity in the past decade, including Oman, Kuwait, Sharjah, Abu Dhabi and Saudi Arabia. Capacity is so constrained in Kuwait, with nearly three times the passenger traffic than design capacity should allow, that a temporary passenger terminal has been implemented to deal with short term demand, until the new terminal 2 is completed in 2022. Between the projects currently under construction  and planned and un-awarded schemes the region’s existing airport capacity is expected to more than double by 2025.

One of the most significant of the airport projects will be the multi-phase implementation of the overall masterplan of Al Maktoum International airport, planned to be the biggest airport in the world and will carry 225 million passengers per year when complete. The $45bn investment will be made over the next 17 years, and is considered necessary to meet forecast passenger demand.

Dubai International Airport is now approaching maximum capacity and facing space constraints, despite expecting to become the world’s busiest hub over the next decade, overtaking Beijing and Atlanta.

The current wave of investment in airports is not going towards the large, international airports of the last wave: with an increasingly mature international aviation market, many countries are now looking to develop their domestic and regional travel connections. For example, Saudi Arabia is leveraging its increased use of the PPP model to fund the construction of airports mainly targeted at domestic travel, with 12 planned and three confirmed. With the PPP model generally seen as commercially viable for airports, and the Saudi government guaranteeing revenue projections, we can expect to see significant growth in the domestic aviation market in Saudi Arabia over the next decade. This model has not, however, been adopted by the wider region, with use of PPP for building airports still relatively modest.

Similarly, the domestic and regional market is being developed with the introduction and maturing of low cost airlines such as Air Arabia. With the UAE’s low cost carrier squeezing profit from a market in which the more mature companies are struggling, its main hub, Sharjah, is to undergo a $500 million expansion. The project includes numerous facilities as well as the expansion of the passenger terminal building, and increasing surface access capacity to and from the airport to alleviate current vehicle traffic constraints.

This underlines the growing importance both of domestic and regional airport infrastructure and ‘low cost’ in the MENA aviation market.

UAE and Saudi Arabia dominating the airport project market in 2018

The planned $38bn investment in Al Maktoum International Airport over the next eight years makes the UAE the largest market, accounting for more than a third of estimated total project value across the region. Saudi Arabia is a distant second, with $26.4 billion of planned projects, including phase 2 and 3 of the $20 billion Riyadh airport development bumping capacity to 80 million passengers by 2035. Bahrain and Iraq are expected to be among the most active other markets in the short to medium term.

Do mixed growth results support the level of planned expansion?

With overall passenger traffic growth across the MENA region dropping slightly in 2016, and some targets not being met in 2017, will some of the additional capacity being brought on stream go under-used in the short term?

Airports across the region are registering mixed growth, with some seeing double-digit expansion in passenger traffic, such as Kuwait (17.1%) and Muscat (17%) (they have benefited from increased traffic as flights are rerouted following the GCC diplomatic crisis). Given many of the airport expansion plans were drawn up in a more positive economic environment, and airports have since missed passenger growth targets, there are concerns across the region about under-utilisation of infrastructure, and of commercial viability challenges where PPP models, predicated on incremental growth, are used.

Shifting business models as the industry adjusts to a new economic reality

As the international travel market in the region becomes increasingly mature, opportunities for returns and growth will increasingly come from regional and domestic travel instead, and we are beginning to see investment in airports follow this trend.

In spite of the undeniable long-term growth prospects for aviation in the region, Middle Eastern carriers do face some short term challenges. Events of the last year have added to pressures faced by the industry, from challenging US policies to regional political issues. The developments coincided with a new economic reality in the MENA region, of low oil prices and unpredictable USA policies towards the region. However, the region is innovating and collaborating to respond to these challenges.

The Emirates and FlyDubai collaboration for example has seen them come together to codeshare across their combined networks, and allowed them to begin rationalisation of their destinations. FlyDubai will now provide reduced capacity on previous Emirates routes with low load factors. This will allow Emirates to better utilise their wide bodied fleet on high load factor routes and their premium travel product. Due to innovations and collaborations such as this, the region’s airport traffic is expected to grow at 7.7% annually to 2040, taking its share of global traffic to 9%, double that of the current share.

This increased traffic will be split by an ever busier market: the entry of more low cost carriers can only add to the downward pressure on prices, with two new carriers, Flyadeal backed by Saudi Arabian Airline’s and Oman’s Salam Air, joining the fray. Both aim to compete with the Sharjah based Air Arabia, who are holding up better against the market forces in 2017 and 2018 than many of the more established airlines, seeing 30% profit growth in 2017. With the codesharing deal, FlyDubai are also seeking to consolidate their position in this market.

Outside the difficult macroeconomic realities, there are also some challengers to the MENA airlines super connector status.

Turkish Airlines have made it an explicit ambition to become a super connector airline, directly challenging MENA airlines with both a geographic advantage over GCC carriers and a more versatile business model. With the new “Grand Istanbul” airport opening in Istanbul in 2018 offering almost unconstrained capacity, MENA airlines will be watching this aggressive competitor closely.

Despite these challenges the largest GCC carriers are likely to continue dominating the sector for the foreseeable future, playing off their economies of scale, super connector status and reputation for luxury. New aircraft orders, often the most reliable indication of growth in this sector, support this, with these carriers seeing the most planes on order.

The last 20 years have seen rapid growth that puts MENA aviation truly on the map and has raised the global aviation game in a way that no other region could contemplate. But the growth model developed to date is changing. Airlines, airports and all those involved in the aviation and aerospace industry need to adapt to survive, and adopt a more commercially astute outlook to thrive over the next twenty years and beyond.

Ciara Walker is an economist at MACE and leads the international market intelligence and strategic research functions. She has previously worked as a senior strategic research analyst at Arcadis and an Innovation Consultant at Mintel. She holds a BA in Economics and Management from the University of Oxford and an MSc in Development Economics and Emerging Markets from the University of York.


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