Conflict could permanently impact air traffic

Less than two weeks of war in the Middle East has already disrupted world energy markets, but a prolonged conflict could impact more permanently the pattern of air traffic distribution and hence the economic development model adopted by the largest of the Gulf monarchies.

Three large connecting hubs in the region have emerged in the last few decades, first in Dubai and then in Abu Dhabi, two adjoining provinces of the United Arab Emirates, and finally in Doha, capital of Qatar.

The three dominant carriers, all state-owned, are Emirates in Dubai, Etihad in Abu Dhabi and Qatar Airways in Doha. All three represent diversification bets by the Gulf monarchies that a heavy reliance on oil and gas can be offset with tourism and a strong aviation business, in addition to earnings from accumulated asset holdings around the world.

On a smaller scale, Bahrain and Kuwait, further north in the Gulf and Oman to the south, have pursued the same strategy and Saudi Arabia has more recently embraced ambitions to expand in both aviation and inbound tourism.

For the three first movers, the strategy has been successful thus far despite brief interruptions, for example during the COVID-19 pandemic, but a longer conflict would bring the diversification bets into question and Dubai is now the most vulnerable.

In 2026, Dubai’s main airport would have expected around 100m passengers making it one the world’s largest, busier than London’s Heathrow, Charles de Gaulle in Paris or Schiphol in Amsterdam. Doha is about half the size, Abu Dhabi smaller again but as busy as many large European airports, including Dublin. The diversification risk is that both connecting traffic and the origin and destination (O and D) component will suffer if there is an extended conflict.

Connecting traffic at Doha is estimated at 74% versus about 50% at Dubai and Abu Dhabi, very high figures on international comparisons. Heathrow has about 22%, a few European airports even more, but many are not so vulnerable to diminished connecting traffic – their business is mainly O and D.

Dublin’s connecting traffic, despite the success of Aer Lingus in building transfer traffic connecting Europe to North America, is about 6 or 7%. The three main Gulf carriers have built networks reflecting the favourable location of their hubs on routes well-placed to connect Europe and north America to destinations in Asia and the antipodes.

Since 2022 European Union carriers have been banned from Russian airspace which has given the Gulf operators a further advantage. The O and D volume at airports like Dubai is partly driven by their popularity as holiday destinations, unlikely to recover easily from a prolonged conflict. There are numerous alternatives for European winter holidays, including destinations in the Caribbean, the Canaries and north Africa. Some of the O and D traffic into Dubai, Abu Dhabi and Doha also reflects the expatriate composition of the workforce.

Estimates of the south Asian component range up to 50% and their travel needs support a wide range of connecting flights by domestic and foreign carriers to the principal cities of India, Bangladesh, Pakistan and Sri Lanka (their numbers also explain the dominance of cricket as the most popular weekend pastime).

Expatriate permanent residents from Europe and Asia are also important, attracted by generous tax treatment – between south Asians and those seeking refuge from the taxman, an estimated 90% of the active workforce in Dubai consists of foreign nationals.

As a result, any weakness in tourist traffic could be accompanied by declining volumes in the origin and destination business – many south Asians are employed in the hospitality industry and help sustain the connections to the east. The tax-driven permanent residents have alternatives in EU countries including Italy and Portugal, less generous but also less likely to attract missiles, drones and flight cancellations.

The transit traffic through airports like Dubai complements the O and D business, both tourist and expatriate, but is vulnerable to any enduring perception that a short stopover in the Gulf hubs could be dangerous and liable to involuntary extension.

For Emirates there is a further and long-running vulnerability. The carrier was the principal purchaser of the double-decker Airbus A380 superjumbo and operates over 100 of the type out of a total still flying of only about 180.

Airbus backed the wrong horse with this supersized airliner and ceased manufacturing in 2021, but Emirates miscalculated too and is now saddled with an orphan fleet that may no longer fit its traffic composition.

Second-hand values are weak, dozens of A380s have been retired by other airlines and parts are no longer available other than through cannibalising relatively young aircraft.

During the COVID-19 emergency the less busy and drier airports around the world attracted parked-up aircraft from, amongst others, Emirates. They could be repeat customers.