Unisys ScorecardObservations and Insights of a Changing Industry

A Unisys Transportation Thought Leadership Publication

Volume 6 • Issue 6 • March 2008

Editor-in-Chief

Ron Kuhlmann

Editorial Board

Olivier HouriJohn L. Strain

Managing Editor

Susan Hunter

Graphic Design

Creative Media Services

Publisher

Unisys Corporation

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Unisys Scorecard: Observations and Insights of a Changing Industry

Copyright © 2008 Unisys Corporation. All rights reserved.

Observations and Insights of a Changing Industry

Volume 6 • Issue 6 • March 2008

Unisys Scorecard

2

Editor’s NoteThe Arabian Gulf states have never been very populous

and yet their crucial position between Europe and

Asia has made them key trade and transit routes for

centuries. In the past decade, their prime locations

have given rise to the fastest growing and – perhaps

eventually – the largest airline in the world. Coincident

with airline growth is the establishment of hub cities

that will continue to act as magnets for tourism,

culture and business. And, it’s happening now.

Coming Up• Asian Carriers: Trusted and Loved

• What Did We Learn in Beijing?

3

A Widening Gulf?

Twenty years ago, the Gulf States, and the United Arab Emirates (UAE) in particular,

were way stations for flights enroute elsewhere. Passengers traveling from Dubai to

Bangkok had an eclectic choice of carriers1 with varying departure days and times.

If you were in Abu Dhabi and bound for Bangkok, you could fly Swissair, Romanian

Airlines, or JAL – provided it was a Wednesday or Friday. Going from Doha to London?

There were six nonstops a week, departing at varying times between 11.30 and 21.00,

with no flight on Saturday.

Given the global reach that has been developed by carriers in this region, it is hard to

believe that in 1988 one had to work (and carefully plan) to get to or from the Emirates.

While aviation has held a number of surprises, few have been as astonishing as the

development of not just one, but a number of mega-carriers in the Gulf. In twenty years

the UAE airports have gone from being essentially fuel stops for transiting carriers

to hosting airlines that are challenging the profitability of major European and Asian

carriers over some of their most important segments.

Furthermore, because the airports from which these carriers operate have no curfews

or limitations, they have established new routings and multiple connection peaks that

provide alternative pathways. Passengers from the UK and other European cities have

a virtual buffet of connection options to most points in India and the Asia Pacific region.

Newcastle to Singapore; Zurich to Sydney; Osaka to Milan; Bangalore to Sao Paulo:

all are possible with one rather short stop in Dubai.

So, when did all this happen? The answer is essentially, now. While there has been

an explosive increase in traffic routed via the Gulf, we have only had a foretaste of what

is yet to come. Emirates currently has a fleet of 114 aircraft with which it has blanketed

much of the globe. Still on the order books are 194 aircraft, including 60 A-380s.

Etihad has only been around for five years

and has an order book that will increase

its fleet by 50%. Qatar Airways currently

operates 61 aircraft with 149 yet to arrive.

So, in the oft invoked English idiom,

“you ain’t seen nuthin’ yet.”

“Our catchment area

is not just the regions,

it is the whole world.”James Hogan, CEO, Etihad

1 Including Cathay Pacific, Sabena, Philippine, KLM, and Yugoslav Airlines.

5

Rapid GrowthTable 1 records the number of direct flights2 from three Gulf gateways, Abu Dhabi (AUH),

Doha (DOH), and Dubai (DXB) operated by the home carrier. As noted in the table,

in 1998 and 2003, Abu Dhabi and Doha were served by Gulf Air, the flag carrier for

a number of Gulf States. In 2008, Etihad and Qatar Airways have been ensconced as

carriers for these destinations with Gulf Air being based in Bahrain.

Clearly, the growth in the five years since 2003 has been astonishing, especially on

long-haul routes. While services to Delhi show the smallest increase, this has been

offset by a vast increase in the number of Indian cities served, and with greater frequency.

For instance, in 1998 Bangalore had one weekly flight to Dubai. There are now eight.

Lest anyone think that all of this traffic growth is solely due to the home carriers, it must be

noted that as the Gulf destinations have grown and modernized, they have created a similar

increase in flights by other carriers. Emirates’ interest in the U.S. has prompted Delta

to inaugurate the first nonstop flight to Dubai by an American carrier, operating from Atlanta.

Service to Munich prompted Lufthansa to counter with a daily Munich-Dubai nonstop.

“We are building both a

hub and a destination.” James Hogan CEO, Etihad, on the growth of the airline and Abu Dhabi.

Table 1. Route and Frequency Development by

Gulf Carriers – 1998-2008.

NYC BKK LON** DEL SYD JNB FRA

2008

AUH* 7 14 19 7 7 7 10

DOH* 5 14 26 6 0 4 10

DXB 21 19 56 7 14 21 14

2003

AUH* 0 4 18 4 0 0 3

DOH* 0 7 11 0 0 0 4

DXB 0 14 35 7 7 14 14

1998

AUH* 0 2 8 4 0 0 2

DOH* 0 2 13 0 0 0 1

DXB 0 4 21 7 0 7 7

Source: OAG.

* 1998/2003 AUH and DOH operated by Gulf Air

** LHR/LGW

2 Virtually all were nonstop.

6

Table 2 reflects this increase. The traffic is roughly doubling every five years,

with the 2007 total, the most recent figures available, indicating that in 2008

we will see another doubling in the five years since 2003.

Abu Dhabi airport reported a 31% increase in passengers and a 15% aircraft

movement increase in 2007. While the actual numbers pale in comparison to

Dubai, the rate of increase is actually greater.

There is no likelihood that this kind of passenger growth will diminish any time

soon. Table 3 depicts the Airbus aircraft demand forecast by aircraft size and

region. The anticipated order books from carriers in the Middle East will

continue to be heavily weighted in favor of larger, long-haul aircraft, consistent

with a high volume, long-distance network.

Table 3. Aircraft Demand by Type Through 2026 (as a percentage of total orders).

North Latin Asia/America America Europe CIS Africa Pacific MidEast

Single Aisle 83 84 73 82 74 60 49

Twin Aisle 15 15 22 16 23 30 38

Very Large 2 1 5 2 3 10 13

Source: Airbus.

Table 2. Statistics for Dubai International Airport.

Year Total Passengers Aircraft Movements

1998 9,732,202 123,352

2003 18,062,344 168,511

2007 34,240,000 260,530

Source: Dubai Airport.

7

How Many Can We Fit?This map shows a relatively small chunk of global real estate,

but is home to the following full service airlines:

• Kuwait Airways

• Saudi Arabian Airlines

• Gulf Air

• Qatar Airways

• Etihad Airways

• Emirates

• Oman Air

Additionally, we have:

• Al-Khayala – premium class, Saudi Arabia

• Air Arabia – low cost, Sharjah, UAE

• Jazeera Airlines – low cost, Kuwait

• Nas Air – low cost, Saudi Arabia, domestic

• Sama – low cost, Saudi Arabia, domestic and mideast

• RAK Airways – Ras Al Khaimah, UAE, regional

• Bahrain Air – premium low priced3, Bahrain, regional

The region’s population is estimated to be in the range of

30-35 million with almost three-fourths of that number in Saudi Arabia. The population

of the UAE and Qatar, the long-haul heavy hitters, is between 3 and 3.5 million. Probably

without peer, these two nations have the highest concentration of available seats per

resident anywhere on earth. Depending on the seating configuration, the 64 A380s

currently on order could alone provide a seat for every resident in 30-35 departure cycles.

By another measure, Southwest, the largest U.S. domestic airline by passengers has

a fleet of about 525 737s with an average seating of 135. This fleet, fully employed,

offers 70,875 seats at any given moment. Given current aircraft and pending orders,

Emirates may assemble a fleet of about 2504 aircraft, given retirements, with an

average seating capacity of 325. With that fleet, available capacity for Emirates, at

any given moment, would be 81,250.

Source: United Nations.

3 Their own, interesting designation.

4 Currently operate 114 with 194 on order including 60 a-380s.

8

Are They the Same?After that regional overview, let’s once again refocus on the three carriers most dedicated

to establishing transfer hubs: Emirates, Etihad, and Qatar. Looking at their fleet plans and

current networks, they are operating with somewhat different business plans.

Emirates is intent on being the premier long-haul to long or medium-haul carrier. Their

smallest aircraft is the A-332 which, in a three-class configuration, still seats 193 and

has intercontinental range. Nonetheless it is used, along with 777s, to cover segments

of less than 500 miles. Nor does the airline have any single-aisle types on order. This

implies that the primary markets exist outside of the immediate Gulf region and that the

trade-off of having shorter-range aircraft does not fit the business plan. Thus, a large block

of A-380s is fully consistent with the long-term strategy.

Etihad, the newest of the three5, has not only fewer aircraft in operation, but also the

smallest order book. Its fleet, while currently harboring five 777s is primarily dependent on

Airbus machinery. While it does have four A-380s on order, that is a rather modest number

and does not indicate a desire to achieve anything approximating the passenger potential

anticipated by Emirates. Furthermore, while it has a far-flung group of intercontinental

destinations, it also serves quite a few cities in the 1000-1500 mile range, segments

ideally suited to its A-320s. In both its network and fleet planning, the carrier reveals

a more restrained long-term vision.

Qatar, with the smallest population, appears to have taken a middle road. Its current fleet

has the largest proportion of single-aisle aircraft (a third) and uses these aircraft to feed

its long-haul network. It operates eight frequencies to Dubai

as opposed to four by Emirates and offers six connections to

Abu Dhabi against two by Etihad. Much of its current network

is built around points in South and West Asia. Unlike the

other two it operates with numerous code-share partners and

its service to New York, rather than being nonstop, operates

via Geneva. They too, have an A-380 order but for only five

aircraft, again indicating a somewhat different future strategy.

However, with 80 A-350s and 30 787s in the pipeline they will be ideally positioned to offer

more intercontinental flights, but with less capacity than will be found in Dubai.

Nonetheless, irrespective of the ultimate size of each individual airline, the assembled

group of carriers, all geographically nearby, will pose an ever more viable threat to the

European and Asian carriers and their networks.

Qatar Airways plans to start

all-premium flights out of

Doha on medium-haul routes. ITB announcement, March 2008

5 According to the airline, it has had the fastest ever expansion for a commercial airline.

9

Flying on the CheapThe extraordinary building and expansion in evidence across

the UAE requires a very substantial workforce, resulting in

the fact that perhaps up to 85% of the residents are non-

citizens. With huge demand from the construction and

service sectors, most of these jobs are filled by foreigners,

many from neighboring countries in South and West Asia.

These guest workers form a very large pool of travelers for

whom air transport is the only viable option for a trip home.

Seeing a need for low-cost transport, Air Arabia was formed

in 2003 as a low cost alternative for this market. Its fleet

is entirely composed of A-320s and its network is designed

to meet the needs of those traveling to/from the UAE as

workers. Based in Sharjah, its flights fan across the sub -

continent and North Africa. In 2007 the carrier recorded

a profit of 272 million and completed a successful IPO.

In Table 4 we see the steady growth seen at the airport

as Air Arabia and other carriers, notably Air India and

Air India Express, have begun to develop the potential

of this vast market.

ConclusionsThe astonishing growth of this region, and in particular the

three Gulf carriers attempting to establish and then engrain

new travel patterns can not be dismissed. As the region and

sub-continent pick up the pace of economic development,

demand for travel will see similar increases and the Gulf

carriers have made it their goal to provide those consumers

with one-stop service between a wide variety of city pairs.

As their routes expand into China, they will provide more

direct routes to Africa, a growing market.

One-stop links have been forged between most European

cities and Australia/New Zealand. Traditional connecting

points like Singapore probably face the greatest threat,

but all incumbent carriers face some network incursion,

especially when the lure of a stopover in Dubai or

Abu Dhabi gains more cache. Any competing airline that

ignores their presence does so at its own peril.

Like any bold initiative, the expansion of the region’s

carriers is a strategy with considerable risk. While the

growing airlines are based in secure locations, the UAE

sits in the midst of a politically volatile region with the

probability of long-term instability. Likewise, the patronage

of its carriers hinges on the continued economic ability

of other nations to sustain adequate disposable incomes

for their populations. However, with the world as their

catchment area, these airlines have created the ultimate

diversification plan. The risk/reward balance may be in

their favor.

Table 4. Sharjah Passengers and Movements – 1002-2007.

Passengers Increase Movements Increase

2002 1,028,624 Year on Year 24,803 Year on Year

2003 1,247,458 21% 28,017 13%

2004 1,661,941 33% 32,334 15%

2005 2,237,646 35% 38,699 20%

2006 3,064,396 37% 44,182 14%

2007 3,864,615 26% 45,978 4%

Source: Sharjah Airport.

At the outset, 60-70% of all Air Arabia

passengers were first timers:

now more are repeat customers.Adel Ali, CEO, Air Arabia, CAPA conference 2008

Last Call for BeijingBy the time the next issue of Scorecard appears, the

34th Annual Unisys Travel and Transportation Conference

will be history. Dr. Larry Ponemon’s exclusive research

on the Trust Index for Asian carriers will have been

presented and the conclusions emanating from that

work will be in the hands of those who were present.

The presentations and discussions that could be critical

to success will have been presented and discussed

and those in attendance will have gone back armed

with those conclusions and insights. But if you weren’t

there, none of this will be yours.

Fortunately, it is not too late. Visit us at

http://www.unisys.com/transportation/solutions/

transportation__conference

for full information and registration details so that

you will be one of the ones “in the know” as you leave

Beijing with ideas to energize your business.

Beijing, April 21-23: the place to be.

10

Around the Industry

(E)merging TrendsOn Wednesday, February 6, 2008, The Wall Street

Journal, predicted that a merger between Northwest

and Delta was likely to occur within a week. The two

SkyTeam members were seen as ideal mates with

networks that complemented rather than competed

in most markets as well as having other synergies.

Bold statements were offered regarding their combined

strength and the consequent need for other U.S.

carriers to join in a defensive strategy, reducing the

current six legacy carriers to three in short order.

A month later, these predictions (again) seem to

have been premature. The advantages have been

judged insufficient by the pilots of both carriers, and

the ultimate fate of this, or any merger, is once again

veiled in labor uncertainty. Mechanics at United have

stated that there will be no merging at United without

their approval.

To make matters even more interesting, economic

realities are shrinking the disposable income of

potential customers, creating an environment in

which the profits of 2007 may be a one-time event.

And then we have the unrelenting rise in the cost

of fuel, diminishing yields and making higher fares

necessary in a market ill-suited to accepting them.

The brave new world recently envisioned for U.S.

carriers appears to be devolving into a familiar and

problematic place. This, and most other publications

constantly dwell on the radical changes that

continue to overtake the global aviation marketplace.

A Delta/Northwest combination, or any proposed

merger, may or may not be the correct answer

for the U.S. market but it is equally certain that

maintaining the status quo may make successful

outcomes equally elusive.

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11

Unisys Travel and

Transportation

Conference

21 - 23 April, 2008

Shangri-La Hotel

Beijing, China

You’re Invited!

Building customer value and trust

Solutions that fly

Join us in the most rapidly expanding market in the world – China – as we examine an international marketplace that is ripe with opportunity, yet uncertain about successful strategies and technologies. We invite you to join industry experts, analysts and your colleagues in air transportation to create and share a vision of the future.

Our 2008 conference will focus on new ideas and new ways to heighten consumers’ and shippers’ perceived value of services, including:

• Customer-centric solutions that build customer satisfaction and loyalty

• Next-generation loyalty solutions for passengers and logistics operations

• Reducing cost while increasing satisfaction and trust

• Customer value: know it and use it – or lose it

• Trust: how to measure it and increase it

Visit the conference website for additional detail: www.unisys.com /go / uaua

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