Abstract
The ambitions of the UAE government, led by Bin Zayed, the Abu Dhabi government has begun to look for places for its giant projects on Mars, such as a mini-village under Mars 2117 Project. The project also relates to building towers suspended in the sky without relying on the land, like Al-Khor Tower in Dubai. However, this ambition has not found a solution against the bankruptcy of foreign companies and deterioration of airlines affected by losses since the collapse of oil prices in 2014, and may also declare bankruptcy if the merger plans with other companies fail. Despite the concentration of local and foreign media, funded by Abu Dhabi to improve the image of its economy regionally and globally, the adverse wind appears stronger and increasing daily and was not covered this time by the media. The major government carriers struggle to face the world to survive, after it has been a reference in service, quality, and coverage across the globe, and has earned the title of “Great Delivery.” The Dubai Airshow, which took place on Sunday, November 12, 2017, promises to be bigger and better regarding aviation, space and defense than its predecessor in 2015. The economic, political and competitive contexts in which UAE companies are moving are very different.
The decline in oil prices has affected profits and trade in the region and has led to the cancellation of many routes as well as continuing diplomatic and trade crisis between Abu Dhabi’s allies (Riyadh and Manama) on the one hand and Qatar on the other. The rapid growth in the UAE carrier has raised concerns about energy and over-enthusiasm, which comes as competition for low-cost airlines. The announcement of Emirates Airline canceling the purchase of 36 Airbus A380 aircraft just minutes before the agreement signed at the Airbus pavilion at the Dubai Air Show underscores the depth of the financial crisis.
The Specter of Bankruptcy and Losses Haunts UAE Airlines
Introduction
The United Arab Emirates government focuses on ambitious projects to continue increasing the power while enhancing the Emirates’ economy. Hence, the government has previously supported efforts in various industries, including the airlines to achieve its developmental objectives. For example, under the leadership of Bin Zayed, the Abu Dhabi government has plans underway to look for places to locate its major projects on Mars. The government has unveiled plans to build on Mars by 2117, the pioneering inhabitable human settlement (Wam, 2017). Besides the mini-village under Mars 2117 Project, the government seeks to build towers suspended in the sky, in a similar project to the Al-Khor Tower in Dubai. Regardless of the appealing blueprint, the viability of the project is questionable considering the current financial situation in the airline industry due to the recent decline in oil prices in the region since 2014. Current evidence shows that the area has been experiencing significant financial problems in most of its airline companies, a reality that could affect the viability of the Mars 2117 Project.
The Ambitious Mars 2117 Project
For decades, governments across the world, especially in the economically developed countries, have competed to explore other human habitations outside Earth. Space exploration has always formed an essential part of the effort. The more recent determinations are evident in the UAE where the government plans the launch an ambitious Mars 2117 Project. According to His Highness Sheikh Mohammed bin Rashid, the Ruler of Dubai, space exploration is an old human dream. Hence, it would be a big achievement if the Mars 2117 Project succeeded. The government strives to ensure that the UAE is the leader in making the dream a reality, explaining the concerted efforts to realize goals of the Mars 2117 Project (Wam, 2017). The UAE has invested considerably in space sciences and aims at increasing the investment further to ensure speedy achievement of the objective to establish the space project within the anticipated timelines. However, the government concurs that the project is still in its initial stages and would require more time and efforts to succeed.
According to the UAE government, The Mars 2117 Project will be beneficial in the long-term. Hence, it is a futurist project beginning with the objective of developing the educational infrastructure to support future scientific research across different industries. Therefore, sectors such as the airline will play a central role in the achievement of the project’s objective. If successful, the project will have a positive contribution in various areas, including transportation, energy, and food. The government anticipates serving humanity through the successful implementation and completion of the project. The plan is an AED500 million establishment (around US$136 million) under the name Mars Scientific City, which will allow the simulation of Mars, supporting human habitation (Wam, 2017). The UAE, under the ambitions of its scientists, strives to make the city a reality by 2117. However, the viability of the project remains questionable, especially considering the current financial challenges affecting the airline industry in the country. The problem touches on the project since the sector will play a significant role in its successful completion.
Economic Trends in the UAE
The UAE has enjoyed considerable growth in the past even as the world economy experienced adverse effects from the global financial crisis. However, things have not worked well for the region in the last few years due to the decline in the prices of oil. Notably, oil is the primary source of revenue for the countries in the Middle East. Low oil prices and related financial austerity initiatives have continued to affect the growth of the UAE. The reduction in growth rate since 2014 has led to the lowest level of 2.3% in 2016, a significant decrease when compared with the previous 5% on average between 2010 and 2014. The decline in the prices of oil and the austerity measures have further affected enterprises’ and consumers’ confidence, which is another factor for poor economic performance (UAE Ministry of Economy, 2017). Regardless of the anticipations that things might change after 2018, the adverse effects of the decline in oil prices are already evident in various sectors of the economy, with significant impact on the region’s major initiatives, such as The Mars 2117 Project.
The economy of the UAE largely depends on the exports of oil as the leading commodity. After the decade-long rise in oil prices, the region experienced a considerable decline in the cost of the product. The area had been performing well in the decade before 2014. However, the downward trend in fuel prices also marked a decline in the economic performance of the UAE and the Middle East in general. The rates increased from about $30 per barrel at the beginning of the 2000s, while prices peaked to approximately $130 in the middle of 2008. The oil sector is one of the few that were not greatly affected by the 2008 global financial crisis. The prices dipped slightly before picking up again and continuing on an upward trend until 2014. By January 2016, the oil prices were at the lowest considering the trend in the past 12 years (ALAFCO Aviation Lease and Finance Co. K.S.C.P, 2016). Although the performance of oil in the region remains unpredictable, the market trend shows that the prices of oil might remain at the lowest for the next few years. Hence, the financial challenge might continue to affect the economy of the region as well as the financial performance of industries and companies operating in the Middle East.
Current Situation in the Airline Industry
The airline industry in the UAE has made substantial efforts to expand and grow to become the leader in the global arena. However, the sector is experiencing a difficult economic reality in current times. The austerity measures implemented by the UAE government to revive the economy from the adverse shocks of the decline in oil prices have not achieved any positive results in tackling the situation. Evidence from economic analysis reveals that economic reality has been getting worse since 2014 (UAE Ministry of Economy, 2017). The adverse effects have been experienced by the leading government carriers, which are merely surviving to remain in operation. Although, Emirates airline that has been a model in service, quality, and coverage around the world, the firm has not been spared from the financial storm being experienced in the country (Kerr, 2017). The media is no longer able to conceal the reality facing the carriers in the region since their operations are evidently affected by the financial problems.
Major carriers in the UAE, including the Emirates, are facing serious economic crisis due to the financial problems in the region. Emirates reported its initial decline in full-year profit for the first time in a decade in 2016-2017. One of the reasons for the downward trend has been the decrease in demand as the region continues to face economic challenges. During the same period, its profits declined by 82% to Dh1.3bn ($340m) (ALAFCO Aviation Lease and Finance Co. K.S.C.P, 2016). Consequently, the carriers in the Emirates continue to experience economic and political challenges after years of excellent economic performance. The fiscal challenges are affecting ambitious fleet as well as airport expansion projects. Any efforts by the airline to grow using mergers are unsuccessful since such strategic decisions are negatively affected by the dynamic economic and political trends. The challenges for the airlines are worsened by the unresponsive regional economy caused by decreasing oil prices. Consequently, the regional carriers have to face the complex fiscal realities to continue operating profitably in the future or face imminent bankruptcy.
Promises made during the Dubai Airshow that took place on Sunday, November 12, 2017, to enhance the industry regarding aviation, space, and defense than its predecessor in 2015, are challenged by the economic, political, and competitive contexts of the UAE companies. Hence, it remains unclear how the airline industry will manage the current challenges and remain competitive, as has always been the case. At the same time, the airlines are not economically strong to continue ordering for new airplanes, especially those carriers that are fuel-efficient. In the coming years, the airline companies are most likely to give up acquiring new aircraft due to the unpredictable economic situation. For example, in the recent past, a major announcement by Emirates Airline to cancel the purchase of 36 Airbus A380 aircraft just minutes before the agreement was signed at the Airbus pavilion at the Dubai Air Show was initiated. Such important decisions are a clear indication the airline industry in the UAE is not operating optimally, and hence, the sector might experience productivity concerns.
The Collapse of Oil Prices in 2014
The airline business is highly dependent on the oil industry, which is the main source of revenue for the UAE. Hence, the decline in oil prices since 2014 has been negatively affecting the performance of the leading airlines in the UAE. The collapse of the prices affected the UAE’s budget with adverse effects on those industries that depend on the commodity, including the airlines. The current low fuel price situation in the region means that any further effort to use older and less fuel-efficient aircraft is no longer working for the airlines. The collapse of oil prices in the area has affected the economic performance of the involved countries as well as the financial strength of the leading carriers (Kerr, 2017). As a result, the companies are unable to perform optimally, a fact that negatively affects their productivity and profitability. Hence, the companies are incapable of operating and initiating new projects because of the fiscal limitations.
The collapse in the prices of oil has affected the productivity and profitability of airline companies since much of their economic performance depends on the fuel. The decline in oil prices has affected profits and trade in the region and has led to the cancellation of some of its routes. For example, the Emirates Airline has in the recent past indicated the possibility of reducing its freight frequency to Africa. It is also possible for the carrier to cancel its operations on some routes if the current financial and economic challenges are not addressed adequately. Before the financial crisis in the region, the airline had increased its freights to the region to take advantage of diplomatic relations between Africa and the Middle East (ALAFCO Aviation Lease and Finance Co. K.S.C.P, 2016). However, substantial changes are about to be initiated as the airline is no longer capable of sustaining some of the routes due to the fuel challenges. Such severe measures might further affect the performance of the companies and even cause bankruptcy for those that cannot deal with the financial crisis.
New technology promises considerable changes in the performance of the airline carriers already affected by economic and fuel challenges. Besides lower fuel costs of the fuel-efficient aircraft, new technology promises a decrease in emissions and lower cost of maintaining the aircraft. Consequently, it would be beneficial for companies to order and use the new airplanes with advanced technology to improve productivity. However, this might not be economically feasible at the moment when the companies are facing severe economic challenges that might hinder their ability to acquire such improved aircraft in terms of technology (ALAFCO Aviation Lease and Finance Co. K.S.C.P, 2016). Thus, the companies might still use older aircraft to meet the current demand and help in addressing the current financial problems before the situation is effectively addressed. By continuing to use the older aircraft, the carriers might not be able to effectively compete with global airlines that are using new technology and advanced fuel-efficient airplanes. Consequently, the financial performance of the airline companies might continue to decline.
Bankruptcy
Some major players in the airline industry, including some of the leading foreign airline companies, have filed for bankruptcy while others are on the verge of becoming bankrupt due to the current economic challenges. The primary hope for most of the companies include mergers, but it is still uncertain whether the efforts will again become effective in saving the fate of some of the leading airline companies in the UAE. Regardless of the economic and political challenges being experienced by the airline companies, they are also under intense competition locally and internationally, which is not a conducive environment for their recovery from the fiscal issues. The rapid growth in the UAE carrier has created serious concerns about energy and over-enthusiasm, accompanying competition for low-cost airlines (Bose, 2018). Hence, the short- and long-term effects of these problems are detrimental to the continued sustainability of the airline companies. Most of the carriers that are not capable of dealing with the economic situation might be forced out of operation.
Although the economic performance of major airlines in the region is affected by the financial crisis resulting from the decline in fuel prices, the region is also experiencing diplomatic and trade crisis due to the oil-related problems. One of the imminent situations is the issues associated with the relationship between Abu Dhabi’s allies (Riyadh and Manama) on the one hand, and Qatar on the other. Such challenges are no longer suitable for the profitable operations of the airlines, considering the economic problems the region is already experiencing. Business has not been productive in the area for many sectors, especially the airline industry (Bose, 2018). As a result, many airline companies in the region have been struggling to survive, especially due to the increase in the prices of oil. Consequently, many local and foreign companies that are incapable of enduring the financial problems might be out of business in the future if the current trend does not change.
Effects on Mars 2117 Project
One of the most affected areas by the current financial problems includes potential bankruptcy of airline companies and the dip in fuel prices is innovation. The UAE cannot effectively innovate in the face of such challenges because the process requires a functional and profitable industry. Mars 2117 Project is a big project that requires considerable investment and the input of various players in the economy of the UAE (Wam, 2017). However, the ambitious project is yet to find a solution to overcome the current economic challenges facing the region, especially the effects on the airline industry. The bankruptcy of foreign airline companies and deteriorating of airlines caused by losses since the collapse of oil prices in 2014 are the primary hindrances to the success of the project. The challenges affecting the airline sector in the region extend the need to improve the quality of transportation. The problems are experienced in all plans that depend on fuel and the transport industry, including Mars 2117 Project.
The challenges experienced in the airline sector impact on the environmental compatibility, and reduce the economic strength that would sustain such expensive projects as Mars 2117 Project. Hence, looking at the current economic reality of the airline industry, many questions remain unanswered, including the viability of an over-ambitious project such as Mars 2117 Project (Wam, 2017). According to the current analysis in the airline industry, the financial situation is not stable enough to support a high-cost and ambitious project. The government and airline industry lacks the technological capabilities to achieve the objectives of the project. Furthermore, the UAE government is yet to indicate the necessary steps to address the current problems and create a productive environment for the implementation of the Mars project by 2117. The project requires a strong economy to provide the necessary investment as well the required capacity to build and sustain the Mars city. However, at the current financial position, the required resources may not be available, and hence, the project might not be prioritized. Therefore, if the current challenges persist, the UAE government might have to rethink the viability and the expected economic value of the project.
Conclusion
As it is evident from the analysis, UAE is one of the leading economies in the Middle East. The country has enjoyed economic growth over the last few decades. The economic leader in the region and an important competitor with leading economies across the world has initiated some of the most ambitious projects in the history of humanity. One of the recent efforts has been to achieve one of the oldest human dreams, to explore the space, and potentially create a habitation for human beings. The objective is to be achieved through successful completion of the ambitious Mars 2117 Project. However, while the venture appears a reality in the minds of the government and the leading scientists, there remain minimal indications of success in addressing the current economic challenges that might hinder its successful implementation. It is worth noting that the government is yet to discuss issues relating to the bankruptcy within the airline industry and the adverse economic effects of the collapse in oil prices since 2014. Hence, without solutions to these problems, the project might be challenging to implement currently or in the future.
References
ALAFCO Aviation Lease and Finance Co. K.S.C.P. (2016). Special Report: Impact of low oil prices on the aviation market. Retrieved from http://www.alafco-kw.com/upload/media_library_july_2016___impact_of_low_oil_prices_on_the_aviation_market__july_2016__923.pdf
Bose, I. (2018). The Strategic Environment of the Aviation Industry in UAE: A Case Study on Etihad Airways. Retrieved from http://journals.iium.edu.my/ijcsm/index.php/jcsm/article/view/33/16
Kerr, S. (2017). The challenges ahead for Emirates Airlines, Financial Times. Retrieved from https://www.ft.com/content/780665f6-3629-11e7-99bd-13beb0903fa3
UAE Ministry of Economy. (2017). Annual Economic Report 2017 25th Edition. Retrieved from http://www.economy.gov.ae/EconomicalReportsEn/MOE%20Annual%20Report%202017_English.pdf
Wam. (2017). VP, Mohamed bin Zayed unveil ‘Mars 2117 Project’. Retrieved from https://www.emirates247.com/news/emirates/vp-mohamed-bin-zayed-unveil-mars-2117-project-2017-02-15-1.648145