Biz aviation recovers with demand from Gulf

High prices for the region’s oil exports, long distances between its major cities and mediocre surface transportation all help to support the business aviation industry in the Middle East, as does the fact that scheduled airline services in the region tend to focus more on long-haul routes than on shorter ones.

In a bid to make the most of opportunities in the Middle East, most of the world’s major aircraft manufacturers, as well as many smaller ones, are showcasing their products in Dubai this week at the Middle East Business Aviation show, a trade fair held every two years.

Boeing is displaying its Boeing Business Jet, which is based on its 737 series; Airbus is showcasing its A318 Elite and A319 jetliner executive models; and Bombardier is showing five aircraft ranging in size from the long-range Global 5000 to the Learjet 60XR.

Embraer is at the Dubai trade show with its top executive model, the Lineage 1000 — which is based on the E-190 airliner — and with the Legacy 600 and its new 650 units. Gulfstream is showcasing three aircraft, including the long-range, large-cabin G 550, while Dassault’s offerings include the Falcon 7X trijet. Cessna is fielding eight different planes, including four variants of the popular Citation model and a Bell helicopter, while Hawker Beechcraft will have four aircraft on display.

The market slump two years ago drove a sharp divide between the market for higher-end business aircraft — like the Bombardier Global 5000 or the Gulfstream 550 — and smaller models. The middle and top-level markets have continued to flourish, while values are depressed for smaller aircraft.

While the region’s governing families can easily afford luxurious cabin fittings, their counterparts in the private sector have different goals. They often need to reach remote areas — for instance, where oil, natural gas and other mineral reserves are located — that commercial flights do not serve or to which airlines can not offer route or timetable flexibility.

The potential for upper-tier business aircraft was on display in mid-October on a Legacy 650, the latest offering from Embraer. Taking off from Dubai with eight passengers on board, the Brazilian-made plane flew nonstop to Farnborough Airport, near London, in 7 hours and 42 minutes. The journey represented a distance of 5,500 kilometers, or 3,400 miles, roughly the same distance that separates Dubai from Singapore.

Richard Aboulafia, a vice president at Teal Group, an aviation consulting firm in Fairfax, Virginia, describes the current market in the Middle East as “unusual.”

“Oil prices have remained stubbornly high, so spending by corporations and high net worth individuals has followed suit,” Aboulafia said. “They tend to take larger executive aircraft. The Middle East represents just 2 to 3 per cent of business aircraft sales, but probably 5 to 8 per cent in total dollars spent.”

That, Aboulafia added, was one explanation for what he termed an unprecedented split in the business aircraft market over the past two years, with the value of sales of less expensive “bottom half” jet types falling by more than half relative to their peak in 2008, “while high-end jets are still pretty close to that peak.”

Some airlines in the Middle East see this as an opportunity to venture into the top-end business aviation market while continuing to operate their regularly scheduled flights.
Qatar Executive, for example, a unit of Qatar Airways, operates a fleet of four Bombardier executive jets, including a Global 5000, and has one more on order. Saudia Airlines has also established a business jet unit, Saudia Private Aviation, that has started taking delivery of four Dassault Falcon 7X long-range trijets.

Gama Aviation entered the Gulf market two years ago. Founded 27 years ago as an aircraft charter and management firm, Gama, which is based in Farnborough, received its United Arab Emirates Air Operators Certificate last February, the only certificate awarded this year in the Emirates.

The company has its main Gulf operations base at Sharjah International Airport, northeast of Dubai, with two express highway links from the airport to the center of Dubai.

Gama regional director Dave Edwards estimates that it will take four to five years for the business aircraft market “to recover to pre-crash levels” in the region.

“The large private aviation companies are getting still larger, creating economies of scale,” he said. “There has not been a mass exodus, but this crisis was a revelation. Lots of business aircraft are parked, unlike what we have seen previously.”

Edwards assesses the region as being about five to six years behind Europe in business aviation development. “The biggest challenge for the UAE’s General Civil Aviation Authority is to keep up with the demand for certification of operators, as aircraft and their operators arrive,” he said. Gama’s Middle East operations are expected to almost break even this year, earlier than the company had expected, Edwards added.

Gates & Partners, a law firm based in London that specializes in civil aviation financing, has recently seen rising activity in the Middle East. It closed 25 transactions in the region in 2009 and says it already exceeded that level by the end of November this year. The firm’s Middle Eastern clients include banks that are financing aircraft headed for the United Arab Emirates, high-net-worth private buyers and a growing number of corporate buyers.

Aoife O’Sullivan, a partner at Gates, said she had seen an emphasis on higher end interior fittings on new aircraft being ordered or delivered. But at the same time, she added, several banks have shut down financing after the collapse of a property bubble, leaving a trail of financially distressed business aircraft deals.

“There used to be 30 to 35 European banks involved in aviation in the region,” O’Sullivan said, “now there are seven to 10.”

But the property bubble is not the only concern. “Many banks are leery of problems in the region with Shariah law,” she added.

Shariah, the legal code of Islam, forbids debt, posing a potential problem for contract enforcement in the case of default. “This remains an issue to some extent, but Saudi Arabia offers additional enforcement options under a Saudi Arabian Monetary Agency committee’s list of bad debtors, which is attractive to Western lenders,” O’Sullivan said. Still, “prospective transactions need to have a clear ‘must pay debts’ strategy and repossession insurance.” Commenting on the market’s profile, O’Sullivan, like Aboulafia of Teal, noted that buyers were primarily interested in the larger midlevel to heavy aircraft. “Entry level jets don’t really fit” the local style, she said.

“This is a problem for the very light jet market,” O’Sullivan added. “Buyers find it is better to spend their time aboard a Boeing Business Jet than in a Phenom 100 or a Citation Mustang,” she said, referring to models by Embraer and Cessna.

Reflecting a taste in the region for large business aircraft that are often derived from commercial airliners, business aircraft in the Middle East mostly share airports with the scheduled airlines, though they use discreet VIP terminals. Elsewhere, the business aircraft industry generally favors smaller, more conveniently located fields that are more suitable to small jets.