When Dubai’s second airport Al Maktoum International opened its doors in October 2013, only three airlines—Wizz Air, Kuwait Airways and Gulf Air—chose to operate from there in the initial year. They were followed by Qatar Airways, which began flights in 2014, while flydubai started services a year later. From its remote location in the still developing Dubai South area, Al Maktoum International Airport has seen traffic grow steadily. Currently it is served by 17 passenger carries operating over 175 flights to 34 destinations. Passenger traffic rose about 95.4% year on year in the first half of 2016, prompting plans to expand further. The airport is currently earmarked for an extension that will help increase its capacity to 26 million passengers per annum by 2018, ahead of another massive $32 billion expansion that would ultimately aim to accommodate about 200 million passengers when complete. This would make it the world’s biggest airport.

With Middle East carriers posting strong growth in passengers, airports are trying to keep up. Dubai International Airport, home to Emirates, recently underwent a $7.8 billion expansion that saw it building a new concourse that raised its capacity to 90 million passengers annually. The U.A.E.’s other hub, Abu Dhabi, is not left behind in terms of expansion. The authorities are erecting a new midfield terminal spanning about 700,000 square metres. The $2.9 billion project will double the capacity of U.A.E. flag carrier Etihad’s home base to reach 30 million passengers annually and is set to be completed by 2017.  Ajman, an emirate in the proximity of Sharjah, is also investing about $600 million in building a new airport which will have a capacity to handle one million passengers every year.

According to a report released by Centre for Asia Pacific Aviation (CAPA), the U.A.E. alone has  airport investments worth $32.7 billion. Globally, the report noted that the amount spent on airport construction in 2015 was about $441 billion, with a considerable chunk happening in the Middle East. Aside from the U.A.E., countries such as Qatar and Saudi Arabia too have invested massively in their airside facilities. Bracing to see a surge in religious, business and family tourists, Saudi Arabia is working on a $1.5 billion phased expansion in King Abdulaziz Airport in Jeddah. Following the first phase of the upgrade, the facility will cater to about 30 million passengers annually while it is forecast to accommodate about 85 million passengers once the expansion is fully completed in 2035. Meanwhile other GCC countries such as Oman and Bahrain have planned capacity expansion across their airports. The Sultanate has set aside about $6.1 billion for a number of aviation projects in the country but a bulk of it is being used to upgrade the international airports in Muscat and Salalah. The tiny island country of Bahrain is undertaking a $1 billion expansion of its airport—set to be completed by 2018—as it looks to raise capacity to 13.5 million passengers annually.

But with oil prices halving since the summer of 2014, Gulf countries are facing difficulties in plugging a budget deficit. Although airport projects have yet to feel the heat, it might not escape the impact for long. “Low oil prices have a major impact on large capital projects, both in the U.A.E. and across the GCC countries, both in terms of speed of development and in the type of funding,” says Diogenis Papiomytis, Director – Aerospace & Defence, Frost & Sullivan. “Of course some large developments were completed prior to the onset of low oil prices. Nonetheless there are a multitude of airport projects, valued at over $20 billion, due to be delivered by 2020. What we are seeing is that rather than freezing development, phased deliveries are been drawn out to later dates.” Indeed some airport projects, especially in countries that are feeling a stronger pinch due to lower crude prices, have breached their deadlines. Muscat International Airport expansion was pushed back to end of 2016 from an earlier planned date of 2014 while enabling works of expansion in Al Maktoum International Airport reportedly saw some delays before momentum picked up this year.

Papiomytis notes that governments are also becoming smart enough to pick alternate methods to fund these developments, which are in a way integral to the economy. “Governments are recognizing for the first time the benefits of Public Private Partnerships (PPP), with Saudi Arabia leading the way and other countries only recently signing laws that enable PPP.” Gulf countries are looking at privatizing airports to save costs, but experts are not optimistic on how successful such strategies are. Papiomytis says: “Saudi Arabia has led the way in both privatization efforts, by privatizing aviation assets, and airport PPP, with Madinah Airport. However, governments in the region are still unsure of what the right type of partnership is, as PPP can take many different forms. They will naturally be reluctant to pursue models that relinquish ownership of facilities and will also require partners that have a record of completing similar projects in other regions. Most importantly, the use of PPPs necessitates a change in mindset and excellent communication between private and public partners. These partnerships have to account for the particularities of the region and link, for example, with the development of national airport management capabilities, local airport suppliers and local talent in GCC countries. Finally, foreign private partners have to be aligned with the vision and ambitions of the main users of the airport, i.e. the national carriers. As an example, when Abu Dhabi Airports Company (ADAC) awarded contracts to Aer Rianta and Lagardere Travel Retail to operate the duty free section of the new Midfield Terminal, apart from meeting technical and commercial requirements, the companies were evaluated on their ability to deliver on both the ADAC and Etihad Airways vision for the future passenger experience.”

But PPPs are not the only way that authorities in the Gulf are looking to fund airport developments sustainably. In a landmark move, Dubai announced this year that it would start levying an airport fee of AED35 per passenger in order to fund ongoing developments in the airports. The introduction of an exit tax was soon replicated by Abu Dhabi, Sharjah and Doha—all of which are hubs to flourishing airlines. It was the first sign that oil rich Gulf countries have turned to sustainable funding in the aviation sector after being roiled by subsidy allegations from competitors in the U.S. and Europe. Experts presumably see this as a more straightforward solution than PPP deals. “Certainly, airport fees and passenger charges have evolved as revenue sources for airport operators in the region,” says Papiomytis. “There are three main fee ‘buckets’ that airports in the U.A.E. and Qatar use—these are service fees, security fees and airport fees. The sum of these is $20-30 or about 5-10% of an average one-way ticket for a short-haul destination, which is still well below the levels seen in some of the biggest European hubs. What needs to be acknowledged, however, is that these fees apply mainly to passengers flying to and from GCC hubs; not to people transiting via GCC hubs. With over 75% of airline traffic in the region being transit, fees will not have a major impact on traffic growth in the short-term.” But as the Gulf airlines compete for hub traffic and regional traffic, the long term impact of the fees might need to be monitored. “As countries like the U.A.E. and Qatar expand their tourism infrastructure and become important tourism destinations, they will have to look more closely at the economic impact of these fees.”

The International Air Transport Association estimates that the Middle East will be one of the fastest growing regions in terms of passenger traffic, expanding 4.6% per year on average by 2034. With such potential in mind, the stakeholders are continuing to invest in more wide body aircraft and are improving hub facilities across the region. But the industry is not without challenges. The issue of congested air space and the impact that conflict in certain geographies would have mar the growth prospects. However, industry observers are confident that gray skies in the horizon will indeed clear and prospects will shine through all the more strongly for the region’s aviation sector.

When Dubai’s second airport Al Maktoum International opened its doors in October 2013, only three airlines—Wizz Air, Kuwait Airways and Gulf Air—chose to operate from there in the initial year. They were followed by Qatar Airways, which began flights in 2014, while flydubai started services a year later. From its remote location in the still developing Dubai South area, Al Maktoum International Airport has seen traffic grow steadily. Currently it is served by 17 passenger carries operating over 175 flights to 34 destinations. Passenger traffic rose about 95.4% year on year in the first half of 2016, prompting plans to expand further. The airport is currently earmarked for an extension that will help increase its capacity to 26 million passengers per annum by 2018, ahead of another massive $32 billion expansion that would ultimately aim to accommodate about 200 million passengers when complete. This would make it the world’s biggest airport.

With Middle East carriers posting strong growth in passengers, airports are trying to keep up. Dubai International Airport, home to Emirates, recently underwent a $7.8 billion expansion that saw it building a new concourse that raised its capacity to 90 million passengers annually. The U.A.E.’s other hub, Abu Dhabi, is not left behind in terms of expansion. The authorities are erecting a new midfield terminal spanning about 700,000 square metres. The $2.9 billion project will double the capacity of U.A.E. flag carrier Etihad’s home base to reach 30 million passengers annually and is set to be completed by 2017.  Ajman, an emirate in the proximity of Sharjah, is also investing about $600 million in building a new airport which will have a capacity to handle one million passengers every year.

According to a report released by Centre for Asia Pacific Aviation (CAPA), the U.A.E. alone has  airport investments worth $32.7 billion. Globally, the report noted that the amount spent on airport construction in 2015 was about $441 billion, with a considerable chunk happening in the Middle East. Aside from the U.A.E., countries such as Qatar and Saudi Arabia too have invested massively in their airside facilities. Bracing to see a surge in religious, business and family tourists, Saudi Arabia is working on a $1.5 billion phased expansion in King Abdulaziz Airport in Jeddah. Following the first phase of the upgrade, the facility will cater to about 30 million passengers annually while it is forecast to accommodate about 85 million passengers once the expansion is fully completed in 2035. Meanwhile other GCC countries such as Oman and Bahrain have planned capacity expansion across their airports. The Sultanate has set aside about $6.1 billion for a number of aviation projects in the country but a bulk of it is being used to upgrade the international airports in Muscat and Salalah. The tiny island country of Bahrain is undertaking a $1 billion expansion of its airport—set to be completed by 2018—as it looks to raise capacity to 13.5 million passengers annually.

Soaring Through Overcast Skies 1
The U.A.E. and Qatar have started levying airport fees as oil prices strain government coffers. Peter Gudella/Shutterstock.com

But with oil prices halving since the summer of 2014, Gulf countries are facing difficulties in plugging a budget deficit. Although airport projects have yet to feel the heat, it might not escape the impact for long. “Low oil prices have a major impact on large capital projects, both in the U.A.E. and across the GCC countries, both in terms of speed of development and in the type of funding,” says Diogenis Papiomytis, Director – Aerospace & Defence, Frost & Sullivan. “Of course some large developments were completed prior to the onset of low oil prices. Nonetheless there are a multitude of airport projects, valued at over $20 billion, due to be delivered by 2020. What we are seeing is that rather than freezing development, phased deliveries are been drawn out to later dates.” Indeed some airport projects, especially in countries that are feeling a stronger pinch due to lower crude prices, have breached their deadlines. Muscat International Airport expansion was pushed back to end of 2016 from an earlier planned date of 2014 while enabling works of expansion in Al Maktoum International Airport reportedly saw some delays before momentum picked up this year.

Papiomytis notes that governments are also becoming smart enough to pick alternate methods to fund these developments, which are in a way integral to the economy. “Governments are recognizing for the first time the benefits of Public Private Partnerships (PPP), with Saudi Arabia leading the way and other countries only recently signing laws that enable PPP.” Gulf countries are looking at privatizing airports to save costs, but experts are not optimistic on how successful such strategies are. Papiomytis says: “Saudi Arabia has led the way in both privatization efforts, by privatizing aviation assets, and airport PPP, with Madinah Airport. However, governments in the region are still unsure of what the right type of partnership is, as PPP can take many different forms. They will naturally be reluctant to pursue models that relinquish ownership of facilities and will also require partners that have a record of completing similar projects in other regions. Most importantly, the use of PPPs necessitates a change in mindset and excellent communication between private and public partners. These partnerships have to account for the particularities of the region and link, for example, with the development of national airport management capabilities, local airport suppliers and local talent in GCC countries. Finally, foreign private partners have to be aligned with the vision and ambitions of the main users of the airport, i.e. the national carriers. As an example, when Abu Dhabi Airports Company (ADAC) awarded contracts to Aer Rianta and Lagardere Travel Retail to operate the duty free section of the new Midfield Terminal, apart from meeting technical and commercial requirements, the companies were evaluated on their ability to deliver on both the ADAC and Etihad Airways vision for the future passenger experience.”

But PPPs are not the only way that authorities in the Gulf are looking to fund airport developments sustainably. In a landmark move, Dubai announced this year that it would start levying an airport fee of AED35 per passenger in order to fund ongoing developments in the airports. The introduction of an exit tax was soon replicated by Abu Dhabi, Sharjah and Doha—all of which are hubs to flourishing airlines. It was the first sign that oil rich Gulf countries have turned to sustainable funding in the aviation sector after being roiled by subsidy allegations from competitors in the U.S. and Europe. Experts presumably see this as a more straightforward solution than PPP deals. “Certainly, airport fees and passenger charges have evolved as revenue sources for airport operators in the region,” says Papiomytis. “There are three main fee ‘buckets’ that airports in the U.A.E. and Qatar use—these are service fees, security fees and airport fees. The sum of these is $20-30 or about 5-10% of an average one-way ticket for a short-haul destination, which is still well below the levels seen in some of the biggest European hubs. What needs to be acknowledged, however, is that these fees apply mainly to passengers flying to and from GCC hubs; not to people transiting via GCC hubs. With over 75% of airline traffic in the region being transit, fees will not have a major impact on traffic growth in the short-term.” But as the Gulf airlines compete for hub traffic and regional traffic, the long term impact of the fees might need to be monitored. “As countries like the U.A.E. and Qatar expand their tourism infrastructure and become important tourism destinations, they will have to look more closely at the economic impact of these fees.”

The International Air Transport Association estimates that the Middle East will be one of the fastest growing regions in terms of passenger traffic, expanding 4.6% per year on average by 2034. With such potential in mind, the stakeholders are continuing to invest in more wide body aircraft and are improving hub facilities across the region. But the industry is not without challenges. The issue of congested air space and the impact that conflict in certain geographies would have mar the growth prospects. However, industry observers are confident that gray skies in the horizon will indeed clear and prospects will shine through all the more strongly for the region’s aviation sector.