Introduction
Dubai’s aviation sector is one of the most successful in the world and the most important in Dubai’s economy. The sector is made up of the fast-growing Emirates Airline and other foreign carriers, Dubai Airports Company and the Ground Handling Company. Currently, the sector supports 125,000 jobs which are related to the aviation industry.
It also supports another 134,000 jobs which are mainly related to the country’s tourism industry. This accounts for 22% of Dubai’s total employment. The aviation sector also contributes 28% of Dubai’s GDP. Generally, the sector plays an important role in stimulating economic growth in Dubai through various linkages and multiplier effects.
This paper not only sheds light on the factors contributing to the success of the sector but also analyzes the contributions of the aviation sector to Dubai’s economy. The future of the industry in the next decade will also be discussed alongside recommendations for maintaining the current high growth rate.
Success Factors
The Role of the Government in Dubai’s Economic Development
The government’s commitment to economic development is explained in “Dubai’s strategic plan to 2015”. The plan prioritizes the development of world-class infrastructure that suits the needs of all its users. The plan also aims at promoting a free market economy, innovation in taking initiatives, execution of projects within the shortest time possible and effective partnerships with the private sector.
The aviation industry has particularly benefited from its partnership with the government. The partnership is consensus-based, thus enabling the authorities to make important decisions quickly and effectively. Consequently, the number of passengers travelling through Dubai in the last decade has increased by almost four-fold.
The success of the partnership is attributed to the government’s realization of the importance of the sector to its economy. The small number of stakeholders also facilitates quick decision making.
Dubai Airports Ownership and the Emirates
The government owns various aviation organizations indirectly through the Investment Corporation of Dubai (ICD). Several other aviation-related businesses are owned by the Emirates Group. These include the Emirates Airline, the Ground Handling Company and hotels.
The aviation industry is regulated by the Civil Aviation Authority of Dubai in collaboration with the General Civil Aviation Authority of UAE. Even though the government owns the Emirates Airline through the ICD, the Airline independently publishes its audited financial results.
The company does not receive any direct support from the government either in the form of subsidies or capital injection. This has enabled the company to focus on efficiency and high profitability. The company has been able to pay dividends consistently to ICD since 2002.
Openness
Dubai pursues liberal aviation policies. The government promotes fair competition among airlines. Consequently, there are as many as 150 airlines operating from Dubai International Airport. These airlines benefit from the country’s infrastructure as well as the competitive landing fees.
The Emirates airline operates as a profitable commercial firm despite being owned by the government. While ‘open sky’ policy promotes a high threat of new entrants, it also promotes efficiency among the airlines. Besides, the industry benefits from the revenue generated from the landing fees charged to foreign airlines. In most countries, competition in the aviation industry is restricted through regulation and high taxation.
The regulators of the industry also promote freedom among airlines. Thus airlines are able to operate without any interference in their commercial decisions. In order to reinforce the performance of the airlines, the government of Dubai regularly negotiates with other governments on air access rights.
The overall effect of a liberal policy and free competition has been increased growth and profitability in the industry.
Consensus-Based Investment Approach
In many countries the national airlines and airports are owned and supported by the governments. In Dubai, the government owns the Emirates Airline and most of the country’s airports. Unlike other countries, the government of Dubai recognizes the importance of its aviation sector to its overall economic growth.
Consequently, the government has formed partnerships with the aviation sector in order to enhance effective result-oriented decision making. Few officials are engaged in the partnership thus allowing them to maintain close contacts and make quick decisions.
Focus on Underserved Markets
The Emirate’s fleet has been expanded four-fold in the last decade. Consequently, the number of its passengers has doubled in the last decade. As the company expanded, it targeted destinations or routes that have long been neglected by other players in the industry.
This has enabled the Emirates to increase its profits by taking advantage of the untapped markets. The Dubai airports have also been expanded inline with the Emirates expansion plans. As the airports expand, the Emirates Airline has been able to comfortably increase its fleet and passengers.
Finally, the success of Dubai’s aviation industry is attributed to Dubai’s strategic geographical location in the world. Dubai can be reached in just eight hours of flight from various parts of the world. Besides, Dubai is a major center for tourism and trade. This has led to the high number of passengers travelling to and from it. Thus the country’s aviation industry remains attractive to most airlines and investors.
Benefits Created by Dubai’s Aviation Sector to the Economy
Direct Benefits
These refer to the contributions made to GDP growth and employment as a result of the activities undertaken in the aviation sector. By 2010, the sector had employed 58,200 people. The sector contributed 6.2 billion US dollars to Dubai’s GDP in 2010.
The individuals employed in the sector received a value added of 93,700 US dollars per person which was above the average labor productivity by about 60%. The high level of productivity is attributed to the presence of highly skilled employees in the labor force.
Indirect Benefits
The aviation sector depends on goods and services produced by other sectors of the economy. By creating demand for goods and services from other sectors, the aviation sector indirectly supports jobs and economic activities in other industries.
The indirect benefits are measured in terms of the value added. The added value is normally embodied in the products purchased by the aviation industry from other sectors. In 2010, the aviation sector supported 43,000 jobs in other sectors of the economy.
Induced Effect
The induced effect refers to the contributions made to the GDP and employment as a result of the consumption or expenditure of the individuals employed in the aviation industry. The main beneficiaries of such expenditure include retailers, restaurants and leisure service companies. In 2010, the induced benefits of the aviation industry contributed to GDP growth to the tune of two billion US dollars. Besides, 23,900 jobs were supported by the induced benefits.
Catalytic Benefits
The catalytic benefits can be quantified in terms of the impact of the aviation industry in the tourism sector and the benefits associated with international airline connections through Dubai. Dubai is a major tourism destination and most visitors arrive by air. In 2010, the aviation sector promoted growth in the tourism sector to the tune of 7.9 billion US dollars. Besides, 133,000 jobs were supported in the country. Connectivity on the other hand contributed 2.5 billion US dollars in value added terms to Dubai’s economy.
The other benefits of improved connectivity include access to international markets by Dubai-based companies. This has enabled the companies to access cheap raw materials and access to large markets. In conclusion, the benefits generated by the aviation sector in 2010 totaled 22.1 billion US dollars which is equal to 28% of the country’s GDP.
Likely Impact by 2020
The impact of the aviation industry is likely to be as good as it is currently, based on the projections of air passenger growth and the industry’s strengths. The profitability of the industry is expected to increase as the airports and the Emirates Group expand. Consequently, the sector is expected to support 373,000 jobs in the country by 2020.
The sector’s contribution to GDP growth is expected to increase to US $ 45.4 billion. Thus it will account for 22% of Dubai’s employment and 32% of its GDP by 2020. The two catalytic effects, tourism and connectivity, are expected to generate more benefits than they do currently. They are expected to account for “over 60% of the total benefits generated by the industry by 2020”.
Recommendations for Achieving Greater Benefits by 2020
To begin with, operating costs are of great significance in determining the profitability of airlines. Most airlines are focusing on strategies of ensuring cost efficiency. It will thus be in the interest of the government of Dubai to pursue a cost leadership strategy in its aviation industry.
This means that the government should focus on operating the cheapest airports and airlines in the global aviation industry. Such a strategy will not only increase demand but will also increase profits and benefits associated with the industry. Second, the government should improve the performance of sectors that support the aviation sector.
For instance, developing the tourism industry will lead to an increase in tourists arriving by air. Finally, promoting a stable macroeconomic environment such as reducing inflation will stimulate growth in the aviation sector thereby increasing the sector’s benefits.
Conclusion
The aviation sector in Dubai remains the most significant contributor to economic growth. The success of the sector is attributed to the commitment by the government to promote economic growth by supporting the aviation industry.
The main factors leading to the sector’s success include partnership between the industry and the government, open competition, tapping underserved markets, deregulation of the industry and Dubai’s strategic location.
The benefits associated with the sector include creation of job opportunities, contribution to GDP growth and stimulating growth in other sectors of the economy through various linkages and multiplier effects. Due to the positive outlook of the industry, its benefits are expected to double by 2020.
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