Merger could bestuck on taxiwayUS watchdog hasacted to stop aproposed tie-upPage 2

Inside »

Gulf statespush aheadDubai, Abu Dhabiand Qatar seek toincrease capacitiesPage 2

Manufacturersjostle for leadBoeing andAirbus focus onwidebody jetsPage 3

Satellite saleoffers insightUAE agreement tobuy French kitcould be revealingPage 4

Emissions dealhard to reachHow much andhow fast arestill at issuePage 4

FT SPECIAL REPORT

AerospaceFriday November 15 2013 www.ft.com/reports | @ftreports

The great and the good of theaviation industry gathered inDoha last month to celebratean unusual event.

With much ceremony,Qatar Airways became the first of thelarge Gulf-based carriers to enter aglobal airline alliance by joining One-world, led by American Airlines andBritish Airways.

“Becoming a member of Oneworldis one of the most significant land-marks in Qatar Airways’ history,”declared Akbar Al Baker, the airline’schief executive.

This move highlights how the fast-expanding, state-controlled Gulfcarriers – Emirates Airline, EtihadAirways and Qatar Airways – are nolonger viewed with universal hostilityby western airlines.

But Emirates and Etihad areunlikely to be joining one of the threeglobal airline alliances – Oneworld,SkyTeam and Star Alliance – in thenear future. These two carriers, basedin Dubai and Abu Dhabi, respectively,are pursuing their own partnerships –actions that are destabilising the alli-ances and could play an influentialrole in reducing the importance ofthese groups.

The alliances were establishedin the 1990s because foreign owner-ship rules often prohibited carriersfrom combining via cross-bordermergers. Even the biggest carriersknew they could not fly to all bigcities, so airlines formed alliancesthat in effect bolted their networkstogether to offer destinations world-

wide – notably to business travellers.These alliances were supposed to be

clubs that looked after their respec-tive interests, but last year Qantas – afounding member of Oneworld – sentshockwaves through the industry byagreeing to form a far-reaching part-nership with Emirates.

Founded in 1985 and now flying tomore than 130 destinations with theworld’s largest fleet of wide-body pas-senger jets, Emirates has inflictedfinancial pain on long-haul carriers inthe US, Europe and Asia – includingQantas. But the Australian carrier ishoping the collaboration with Emir-ates will play a key role in restoring

its international operations to profit.At the heart of the partnership is a

code-share that gives Qantas passen-gers a much greater choice of routesbetween Australia and Europe, theMiddle East and Africa because theycan fly on Emirates’ jets.

The main casualty of the deal wasQantas’ 17-year-old partnership withBritish Airways although the Austral-ian carrier, which is still a Oneworldmember, continues to fly to London’sHeathrow airport.

Tim Clark, president of Emirates,says the Qantas partnership is provid-ing the Gulf carrier with additionalrevenue, because it is now flying more

higher-spending business travellersbased in Australia and New Zealand.He adds that Emirates has no interestin joining one of the global alliances,because it does not want to be“beholden” to some of the most pow-erful carriers within these groupings.

“Emirates, if it wants to make itsway against a very strong competitiveforce, must be smarter . . . It waswithin our DNA to chart our owndestiny,” says Mr Clark.

Etihad, the youngest of the big Gulfcarriers, also has no plans to join oneof the alliances – and arguably isdoing more than Emirates to destabi-lise these groupings.

For the past two years, Etihadhas been assembling its own mini-alliance by buying minority stakes infive airlines, including Air Berlin,Germany’s second-largest carrier,which is a Oneworld member. It isclose to finalising the purchase of a 24per cent stake in Jet Airways, theIndian airline.

More than $750m will have beenspent on equity stakes in these part-ner airlines once the Jet deal takeseffect, and Etihad is also providingsome carriers with loans to supportnetwork expansion.

Continued on Page 3

Gulf carriers destabilise alliancesTraditional groups areunder threat fromfast-growing players,writesAndrewParker

Global links: dignitaries gather at Hamad International airport to celebrate Qatar Airways’ membership of Oneworld, which connects it to 883 destinations AFP/Getty

2 ★ FINANCIAL TIMES FRIDAY NOVEMBER 15 2013

The opening of Al MaktoumInternational, Dubai’s sec-ond airport, to passengertraffic in October laid downanother challenge to theglobal aviation market.

The trade and tourism-focused emirate has beenjoined by Abu Dhabi andQatar in expanding airportcapacity, as the trio posi-tion themselves as globalhubs for air traffic.

Dubai’s government willsoon announce plans for asecond phase of develop-ment at Al Maktoum Inter-national, as the projectedvolume of passengersat Dubai Internationalairport in the city centrerises rapidly towards the90m mark it was designedto accommodate.

Less than 80km awayfrom Al Maktoum, AbuDhabi International airport

in the capital of the UnitedArab Emirates is increasingcapacity from 12.5m to 47mpassengers by 2017.

The $15.5bn airport near-ing completion in Doha,Qatar’s seat of government,is 15 times bigger than thenearby airport in the city,where passenger numbersincreased last year by 17per cent to 21m.

The new facility, with acapacity of up to 55m pas-sengers, is scheduled toopen in 2014 after years ofdelays.

This would allow it to beoperational before fast-growing Qatar Airwaystakes delivery of its firstA380 aircraft in spring. Theolder airport is notequipped for the Airbussuperjumbo.

Regional airports aregrowing to meet thedemands of the oil-richeconomies, which want toposition themselves asintercontinental hubs link-ing Asia, Africa, Europeand the Americas.

As airports in westernEurope and North Americahave difficulty expanding,the Gulf airports seek tomeet the rising demand forintercontinental flights.

John Strickland, directorat JLS Consulting, says:“All these airports are hubairports. In the early 21stcentury, they are perfectlypositioned geographicallyfor the growth economies.”

Paul Griffiths, chief exec-utive of Dubai Airports,says Dubai, Doha and AbuDhabi are competing for the“world market”.

He says: “We [Dubai] areemerging as the world’spre-eminent interconti-nental hub. And, as otherssuch as Hong Kong andFrankfurt run out of theability to service connectingtraffic, we will take on thatmantle.”

Dubai, where about halfof passengers are in transit,is seeking to realise itsambition of becoming thefirst true “aerotropolis”, anurban centre focused in airtraffic.

Since 1960, its airport hasgrown at 15.5 per cent ayear. Traffic reached 57.7mpassengers last year and isforecast to hit 65.4m by theend of 2013.

Dubai, which hosts 140airlines flying to 260 des-tinations, has leapfroggedHong Kong and Parisand its international pas-

senger traffic could surpassslower-growing Heathrow,London’s leading airport,next year.

As Dubai Internationalexpands its city-centre air-field, the emirate mightattract 100m passengers,the “absolute limit” of itscapacity, earlier than theoriginal forecast of 2020 –hence the expansion of AlMaktoum International.

Mr Griffiths says: “Weneed to come up with amaster plan to stop airportsbecoming ‘ex-growth’.

“That’s a perilous situa-tion . . . When other airportshave spare capacity, and ifwe can’t accommodategrowth, it will go some-where else and be difficultto get back.”

Options being consideredin the plan for Al MaktoumInternational’s second

phase include a rise incapacity to 100m passengersby 2020 to accommodate awholesale move of EmiratesAirline and Flydubai to thedesert location.

A significant challenge isthat air traffic control hasemerged as a serious bottle-neck to growth, Mr Griffithssays. The UAE will needmore co-ordination amongits seven emirates andgreater co-operationbetween civil and militaryaviation to minimise hold-ing delays as flightsincrease.

Tony Douglas, chief exec-utive of Abu DhabiAirports, says the region’sstrategic location is drivingdouble-digit growth in pas-senger numbers in the Mid-dle East, specifically thecountries in the Gulf Co-operation Council – UAE,Bahrain, Saudi Arabia,Oman, Qatar and Kuwait.This growth allows theexpansion of multiple hubs,he says.

Bernardo Gogna, projectdirector of the new Dohaairport’s steering commit-tee, says: “The focus is ongetting the airport compli-ant as per Fifa’s [football’sgoverning body] require-

ments for hosting the 2022World Cup Finals.”

The concentration ofswelling airport capacitycould become exposed toregional or internationalrisks.

Mr Strickland at JLSwarns: “At the end of theday, it is important to real-ise you can’t count on fore-casts. There are surprisesupward and downward,such as 9/11 or Sars or thefinancial crisis.”

The only time that Dubaihas seen passenger trafficfall on a cumulative basiswas in the aftermath of the1990 Gulf war, which brokeout seven years after thelaunch of Emirates Airline.“Random acts do tend tohave a big impact on thegrowth graph,” Mr Strick-land says.

The long-term patterns ofrising middle class traveland increasing regional low-cost flying remain strong,as does the need for con-necting flights.

“All things being equal,given the region’s geogra-phy, modern aircraft, goodnetworks and serious pric-ing”, Mr Strickland says,“we expect these trends tocontinue”.

Gulf states push ahead with growth plansto realise potential as global passenger hubsMiddle East

Dubai, Abu Dhabiand Qatar are allseeking to increaseairport capacities,writes Simeon Kerr

It has been quite a decadefor Turkish Airlines. In2003, the carrier, still a rela-tive unknown, flew 65 air-craft, racked up less than90m air miles, and carriedabout 10m passengers to 104destinations, 76 of theminternational.

Today, its fleet hasincreased to 233 aircraft,overall passenger numbershave more than quadru-pled, and the number ofinternational destinationson its departure boards hasreached 197. Turkish Air-lines now flies to morecountries than any othercarrier – 104 at last count.

At the 2013 Skytrax WorldAirline Awards, passengersalso voted it the best airlinein Europe for the third con-secutive year.

With much of Europewithin three hours by airfrom Istanbul, Turkish Air-lines has traditionally beenwedded to the continent.Yet that, too, is changing.

Over the past decade, theshare of European passen-gers on its internationalflights has dropped from70 per cent to below 60per cent. The share of Afri-can and Middle East passen-gers, meanwhile, has risenfrom 4 to 8 per cent, andfrom 11 to 16 per cent,respectively.

The foray into new mar-kets has paid off. With a2012 operating margin of7 per cent, Turkish Airlineshas become Europe’s thirdmost profitable carrier,behind Ryanair andeasyJet, according to theCapa Centre for Aviation, athink-tank.

Turkish Airlines expectsrevenues of $9.8bn thisyear, a 17 per cent increaseon 2012.

However, with a host ofnew destinations on theway, including long-haulflights to the US and Asiathat will drive up competi-tion with Gulf carriers,Turkish Airlines is rapidlyoutgrowing its Istanbulbase. For an airline thatexpects to carry 120m pas-sengers by 2023, AtaturkInternational airport, whichlast year handled 45m trav-ellers, simply will not do.

That is where the Turkishgovernment, keen to boostIstanbul’s status as aninternational hub, is lend-ing a hand.

Istanbul’s third interna-tional airport, which offi-cials expected to reach acapacity of 90m passengersby 2018, is in the pipeline.According to BinaliYildirim, Turkey’s transpor-tation minister, construc-tion is due to begin in thenext few months.

Where governmentsmight sometimes get in theway of a carrier’s growthambitions, Turkey’s admin-istration, which owns 49 percent of Turkish Airlinesshares, is doing its best tostoke them.

Take Africa. Here, Tur-key’s economic and diplo-

matic expansion has beenin step with that of itsnational carrier. In 2009,Turkey had 12 embassiesacross the continent. Today,that number is 35.

The nation’s exports toAfrica, which were roughly$2bn in 2003, reached $13bnlast year and Turkish Air-lines’ growth has been simi-larly rapid. From four desti-nations in 2003, the carrierhas expanded to 34 today,including 15 last year, saysAli Genc, a company repre-sentative.

In March 2012, followingon the heels of Turkish aidorganisations, the airlinebecame the first Europeancarrier to launch directflights to Mogadishu inSomalia. Ten further Afri-can destinations are in theworks.

“It’s been something of arule of thumb,” says SerhatGuvenc, an associate profes-sor at Istanbul’s Kadir HasUniversity, “that whereverthere are Turkish schools,Turkish investments andinterests, Turkish Airlinesshould fly to that destina-tion.”

(The opposite alsoappears to be true. WhileTurkish Airlines flies tothree destinations inAzerbaijan, two in Georgia,and six more in Iran, in thecase of Armenia, withwhich Turkey is yet torestore normal diplomaticrelations, it has none.)

Temel Kotil, TurkishAirlines chief executive, isthe first to acknowledgethe overlap.

“[Our] strategies andoperations are strongly cor-related with Turkey’s for-eign and trade policy. Weare working in great har-mony with our governmentto realise our growth strat-egy,” he says.

With a few exceptions,Turkish businesses havefollowed where theirnational airline has led.

“Turkish Airlines hasopened the doors of newmarkets to business peo-ple,” says Rizanur Meral,president of the TurkishConfederation of Business-men and Industrialists.

Without Istanbul’s back-ing, Turkish Airlines wouldprobably have had to charta more moderate course,says Jonathan Wober, sen-ior analyst at Capa, thethink-tank.

“It’s only a governmentthat would initiate thatkind of aggressive, poten-tially high-risk expan-sion . . . because a govern-ment may choose to takelower returns on its invest-ment . . . if it is generatingeconomic benefits else-where for the nation.”

Kadir Has university’sProf Guvenc adds: “Most ofthese flights to these unor-thodox destinations havebecome profitable.”

The “if you build it, theywill come” approach, hesays, “seems to haveworked”.

National carrierexperiencesrapid expansionTurkey

Growth is in step withdiplomatic aims,writes Piotr Zalewski

Strategy:Temel Kotil,chiefexecutiveof TurkishAirlines

Source: Airport Council InternationalPhoto: Bloomberg FT graphic

Taking off

Europe and MiddleEast airport traffic

Number of passengers (m)

Jan -Jun 2007 Jan-Jun 2013

Heathrow(London, UK) 5 32.7

34.4

Dubai International(UAE) 101 16.2

32.6

Charles de Gaulle(Paris, France) 3 28.5

29.5

Frankfurt(Germany) 6 25.7

27.1

Amsterdam Schiphol(Netherlands) 10 22.4

24.7

Atatürk International(Istanbul, Turkey) 105 11.9

24.4

Madrid Barajas(Spain) 23 24.5

18.9

Munich(Germany) 16 16.0

18.6

Roma-Fiumicino(Italy) 11 15.3

16.9

Gatwick(London, UK) 1 16.1

16.2

Barcelona(Spain) 5 15.4

16.1

King Abdulaziz International(Jeddah, Saudi Arabia) 101 6.2

12.4

King Khalid International(Riyadh, Saudi Arabia) 71 5.6

9.5

Abu Dhabi International(UAE) 159 3.1

7.9

Ben Gurion International(Tel Aviv, Israel) 34 4.6

6.2

Kuwait International(Farwaniyah, Kuwait) 37 3.4

4.6

Muscat International(Oman) 84 2.2

4.1

Bahrain International(Muharraq, Bahrain) 14 3.3

3.8

Doha International(Qatar) n.a.

n.a.11.2

% changeJan-Jun 2007

to Jan-Jun 2013

Aerospace

As Doug Parker, US Air-ways chief executive, andTom Horton, his counter-part at AMR Corporation,the owner of American

Airlines, negotiated plans for amerger last year, they mostly keptquiet.

But they were voluble on onepoint: that by reducing cut-throatcompetition, previous US airlinemergers had hugely benefited theindustry.

Yet there were those who did notagree. The US Department of Justice(DoJ) cited the executives’ argumentsfor a combination of the two compa-nies when it filed a legal action inAugust seeking to block the merger,arguing it would push up fares.

The DoJ’s action is currently at acritical stage. With the legal actiondue in court this month, talks about apossible settlement are under way.

The outcome of the talks – or thecourt case, if it goes ahead – could

dictate whether the steady consolida-tion of the industry, which has beencruising along for the past decade,can continue or whether it will beforced into an emergency landing.

Events in the US are critical to howthe market develops worldwide. TheUS remains the world’s largestcivil aviation market. There has alsobeen a significant amount of mergeractivity there.

In the European market, mergersare complicated both by political sen-sitivities and rules that demandcontrol of each country’s flag-carrierairline must lie within the countryconcerned.

Experts believe the DoJ has assem-bled some impressive arguments.“Based on the publicly available infor-mation, I think the odds arein the DoJ’s favour,” says JonathanLewis, antitrust partner for Baker-Hostetler, the law firm.

Michael Carrier, a professor in anti-trust law at Rutgers University in

New Jersey, agrees. “I think the DoJhas a strong case and I believe theDoJ has worked at its complaint, dot-ting Is and crossing Ts,” he says.

The core of the dispute betweenthe airlines and the DoJ is theoutcome of a recent series of mergersof other airlines.

Among the largest were the 2008merger of Delta and Northwest Air-lines and the 2010 merger of Unitedand Continental Airlines. Those twomergers created the US’s two biggestairlines by sales.

US Airways and AMR have arguedthat they need to merge to provide astrong counterbalance to those twobehemoths of the airline scene. Somelabour unions backing the deal haveargued there is a fairness issue – ifthe other mergers were allowed, whynot this one?

Mr Lewis points out, however, thatthe previous transactions havealready considerably consolidated theindustry.

The DoJ says that, if the latestmerger goes ahead, only four airlines– Delta, United, the new Americanand Southwest, the budget carrier –will account for 80 per cent of USpassenger journeys.

Mr Lewis says: “It is always betterif you are going to do a transactionto be one of the first movers, ratherthan being at the end of the line,when the industry has become moreconcentrated.”

The chief executives also regularlydiscussed, before the mergerannouncement in February, how pre-vious mergers had made the airlineindustry healthier by preventing thevicious undercutting that they said

had marked earlier periods of weakdemand and high fuel prices. Theimplication was that the US Airways-AMR merger was necessary to com-plete that process.

Prof Carrier points out thatarguments on this point could becomplicated by the scope under anti-trust law for a “failing firm” defence –that a merger should be allowedbecause one party is so financiallyweak it will otherwise leave the mar-ket, reducing competition.

AMR could have some scope to usesuch a defence since it has beenin bankruptcy protection sinceNovember 2011. However, accordingto Prof Carrier, AMR has insistedthroughout that it could emerge frombankruptcy as a viable independentcompany.

It has also turned robustly profita-ble in the past year, as new staff andleasing and financing arrangementsnegotiated during bankruptcy haveturned round its fortunes.

“When you look at how well AMR isdoing in terms of profits, I do notthink that argument would work,”Prof Carrier says.

After Eric Holder, US attorney gen-eral, said on November 4 that hehoped to resolve the issues “short oftrial”, the most likely outcome is thatthe DoJ and the airlines will agreesignificant divestments of routes, pri-marily at Washington’s ReaganNational Airport.

Nevertheless, Mr Lewis callsthe DoJ’s effort to block theUS Airways-AMR deal a “significantdevelopment”.

Anyone seeking a merger in futurewould have to be able to argue con-vincingly that their deal would pre-serve or strengthen competition in theairline market.

Even if US Airways and AMR arenot the last big US airlines to pursuea merger, they may well be the last todiscuss its advantages in the frankterms they used.

Airlines merger could be stuck on the taxiwayRegulationUSwatchdog has taken legal action to prevent a proposed tie-up betweenUSAirways and American Airlines, saysRobertWright

Labour unions ask: if othermergers were allowed,why not this one?

Dubai’s passengertraffic couldsurpass Heathrow,London’s leadingairport, next year

FINANCIAL TIMES FRIDAY NOVEMBER 15 2013 ★ 3

Aerospace

Andrew ParkerAerospace correspondent

Jane WildTransport reporter

Robert WrightUS industry correspondent

Simeon KerrGulf correspondent

Carola HoyosDefence correspondent

Piotr ZalewskiFreelance journalist, Istanbul

Sash TusaPartner, Echelon

Adam JezardCommissioning editor

Andy MearsPicture editor

Steven BirdDesigner

For advertising details,contact: Tom Shepherd, +44(0)207 873 4406 andtom.shepherd@ft.com, or yourusual FT representative.

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Contributors »

In part, Etihad benefitsfrom some of the six air-lines’ passengers helping tofill its jets, because the AbuDhabi carrier has codeshares with those airlines.

James Hogan, Etihadchief executive, says itsstakes in other airlineshave put the 10-year-old car-rier on a stronger competi-tive footing. “The only waywe can build the scale weneed to compete effectivelyis through strategic part-nerships. These enable useither to access markets wedo not serve in our ownright or to build our pres-ence in areas where ourcompetitors have advan-tages,” he adds.

So, against this backdropof Emirates and Etihad pur-suing bespoke partnershipstrategies, why is Qatarjoining Oneworld?

Qatar, which flies to 131destinations, highlighted atlast month’s joiningceremony how it would beable to offer its customersaccess to Oneworld’s globalnetwork.

The 13 airlines in One-world, and their affiliatecarriers, fly to 883 destina-tions in 151 countries.

Qatar’s choice of One-world seems partly basedon the strong working rela-tionship between Mr AlBaker and Willie Walsh,chief executive of Interna-tional Airlines Group, par-ent of British Airways.

Mr Walsh highlighted lastmonth how British Air-ways’ customers would ben-efit from the opportunity tofly with Qatar to smallercities in India and otherparts of Asia that the UKcarrier does not reach.

“Qatar has a fantasticnetwork from Doha . . . into

Continued from Page 1

areas we would not be ableto serve directly,” he said.

Mr Walsh’s self-confessedadmiration for the Gulfcarriers contrasts withconcerns expressed byLufthansa, which last yearcomplained that it was notcompeting on a level play-ing field with these airlines,partly because they benefitfrom government-fundedairport infrastructure.

Mark Schwab, chief exec-utive of Star, the alliancethat Lufthansa helped tofound, says the groupingdid not seek to woo Qatarbecause of the risk that theDoha carrier would end upflying passengers currentlywith its member airlines.

“We can see lots of valuebeing transferred from ourmembers to one of the Gulfcarriers, but it’s really hardto see what they get back inreturn,” he adds.

In truth, it is not justEmirates and Etihad thatare putting pressure on theglobal airline alliances.

There is the potential forsignificant tension insidethe alliances, because, inrecent years, some of theirmembers have formed jointventures. For example,American Airlines and Brit-ish Airways began a trans-atlantic partnership in 2011that is broadly similar tojoint ventures involving AirFrance-KLM and Delta AirLines, and Lufthansa andUnited Airlines.

These partnerships aremore important than thebroader alliances, becausethey are focused on themost lucrative long-haulmarkets and the partnersshare profits. Airlines inthe alliances but outsidethese joint ventures there-fore risk being reduced tominnows.

But Bruce Ashby, chiefexecutive of Oneworld,insists the alliances are notfacing obsolescence becauseof the quasi-industry con-solidation unleashed byjoint ventures.

“Two airlines may merge,but you are not going tomerge with all of the One-world partners into somesort of mega-Godzilla air-line,” he says. “There’s stilla pretty big role for the gen-eral concept of alliances.”

However, Rigas Doganis,visiting professor at theUK’s Cranfield Universityand a former head of Ath-ens-based Olympic Airways,says the global alliances are“very unstable” because ofthe airline joint venturesand the strategies of Emir-ates and Etihad.

“The partnerships beingmade by the Gulf carriersare destabilising the alli-ances by changing loyalties;and loyalties within the alli-ances are being underminedby joint ventures which cre-ate a two-tier membershipstructure,” he says.

Gulf carriers destabilise alliances

Agreement: IAG boss WillieWalsh (left) with Akbar AlBaker of Qatar Airways AFP

Airlines in thealliances butoutside jointventures riskbeing reducedto minnows

For many in the aerospace industry,one of the most memorable images of2013 will be January’s television foot-age of firefighters rushing to dealwith a blaze inside a Boeing 787Dreamliner at Boston’s Logan airport.

Boeing was rocked by the batteryfire on the empty Dreamliner, oper-ated by Japan Airlines. In a raremove, regulators ordered thetemporary grounding of the world-wide fleet of 787s while Boeing fixedthe problem.

The Dreamliner, Boeing’s newestand most sophisticated passenger jet,is setting new standards in fuel effi-ciency – it is made mainly from light-weight carbon composites rather thantraditional aluminium.

But Boeing’s first-time use of lithi-um-ion batteries resulted in two casesof overheating – including the one atLogan airport.

Will 2013 end on a better note forBoeing, with the launch of a planned

upgrade to its twin-engined 777 long-haul jet at the Dubai air show thatbegins on Sunday? And will this dem-onstrate that Boeing has made betterbets than Airbus, its arch-rival, in thelucrative widebody jet market?

Boeing is proposing a new versionof its popular 777 jet, featuring morefuel-efficient engines and carboncomposite wings, in a project dubbedthe 777X.

Emirates Airline is consideringbecoming a 777X launch customer bybuying as many as 100 of thesejets – a deal that could give Boeinga $30bn-plus record-breaking order.

“I think, whatever happens, therewill be a substantive order for thenew 777,” Tim Clark, Emirates Air-line’s president, said last month,although he stressed at the time nodeal had been finalised.

Boeing’s plans for the 777X high-light how it is trying to outmanoeuvreAirbus in the widebody, twin-engined

market by having more next-genera-tion models than its European rival.

The US manufacturer aims to havefive such jets: three versions of theDreamliner plus two 777X models, car-rying between 210 and 400 passengers.

By contrast, Airbus is only propos-ing one new widebody jet – the A350,with plans to make it available inthree versions, which will carrybetween 270 and 350 passengers. TheA350 will compete with both theDreamliner and the 777X, suggestingthe European manufacturer would nothave Boeing’s breadth of coverage.

However, Fabrice Brégier, Airbus’chief executive, said last month thecompany could potentially build afourth, enlarged version of the A350by stretching its fuselage.

Analysts say Airbus’ notable suc-cess last month in securing its firstorder from Japan Airlines for 31A350s, worth $9.5bn at catalogueprice, might partly have been the

result of problems with the Dream-liner – although the Japanese carrier’smanagement insisted the deal hadnothing to do with the 787 issues.

Jim McNerney, Boeing’s chief exec-utive, said last month the Japan Air-lines order with Airbus was “a cam-paign we did not want to lose”.

“We will take it as a sign to dobetter and work harder,” he added.

He tempered Boeing’s disappoint-ment in Japan by highlighting thatLufthansa had, in September, placedits first order for widebody,twin-engined aircraft with the USmanufacturer, by proposing to buy 34777X jets.

Airbus is playing down the threat ofthe 777X by making an unflatteringcomparison with its initial proposalfor the A350.

The original plans for the A350involved attaching the aluminiumfuselage of an Airbus A330 widebodyjet to new carbon composite wings –but airlines did not rush to buy theaircraft because its operating costswere inferior to those of the Dream-liner.

“The modified older aeroplane like[the original A350 proposal] can neverhave the same economics as the cleansheet of paper aeroplane,” says JohnLeahy, Airbus’ chief operating officerfor customers, adding pointedly: “Andthat is what [Boeing] are running intoright now [with the 777X].”

The final proposal for the A350 wasa new design made principally fromcarbon composites. Airbus is aimingto deliver the first A350 to Qatar nextyear.

While keeping the A350 plans ontrack will be a big challenge, the mostglaring issue for Airbus this year hasbeen the lack of orders for the A380superjumbo – which entered servicein 2007. Doric Lease Corp has made apreliminary commitment to buy 20A380s, and Airbus is hoping this willconvert into an order before the endof 2013.

Randy Tinseth, a Boeing marketingexecutive, says Airbus overestimatedthe size of the market for large wide-body jets with four engines, such asthe A380. Last month, Boeing reducedproduction of the 747-8 – the latestversion of its 44-year-old jumbo jet –for the second time this year, blamingthe move on reduced demand.

Zafar Khan, analyst at Société Géné-rale, the bank, says: “The A380 has afuture, but more as a niche player inthe market, and the A350, the 787 and777X are likely to be the workhorsesin the widebody segment.”

Manufacturers jostle for lead with widebodied jetsRivals Setbacks have doggedBoeing andAirbus, which both hold hopes for their latest offerings, the 777X and theA350. AndrewParker reports

Boeing’s plans highlighthow it is trying tooutmanoeuvre Airbus

Incident: emergency workers attend a fire in a 787 Dreamliner at Logan airport in Boston. There were no passengers on the aircraft, but the blaze had serious implications for Boeing Getty

4 ★ FINANCIAL TIMES FRIDAY NOVEMBER 15 2013

A global agreement onlimiting airline carbonemissions has been 16 yearsin the making but, evenafter a definitive step for-ward last month, the goalstill seems far off.

After the assembly of theInternational Civil AviationOrganisation in Montreal inOctober, the UN agencyresponsible for standards inaviation hailed a break-through: its 191 membercountries had endorsed thecreation of a globalmeasure to tackle airlineemissions from 2020.

Yet that commitment – towork out a deal overthe next three years – wasnot enough for thosewho said it merely deferredreal action.

“We have to temperenthusiasm with a heavydose of scepticism,” saysBill Hemmings, programmemanager for aviation andshipping at Transport &Environment, a lobbygroup.

“All the hard questions –which mechanism, when(and indeed whether) toimplement, who to exempt,how to measure and, lastbut not least, who pays andwho receives – are still to beaddressed.”

The other key resolutionto come out of Montrealwas controversial, in that itlimited the EU’s own avia-tion emissions scheme, cre-ating uncertainty over that.

Observers present at themeeting said the mood hadbeen tense and there hadbeen much resentmenttowards the scheme.

Developing countriessuch as China, India, Braziland Russia, and some devel-oped countries, includingthe US, argued that flightslanding within the EUshould not be caught by itsscheme.

They say that the Euro-pean plan to make airlinespay for their carbon pollu-tion, even if the interna-tional flight originated faraway, is a unilateral breachof their sovereignty.

Some have raised fears ofa trade war. Last year, Air-bus said that it was unableto complete orders with Chi-nese airlines because of Bei-jing’s opposition to the EUscheme.

However, despite theweakening of its scheme,the EU painted the decisionpositively.

Siim Kallas, EU transportcommissioner, said that theagreement avoided “a dam-aging conflict among trad-ing partners”.

But, in revised proposalsfor its scheme a few weekslater, the European Com-mission again caught for-eign airlines within its net,prompting them to hit back.

The International AirTransport Association, theglobal aviation industrybody that represents 240 air-lines, said that it was con-cerned the commission waspursuing action that hadthe potential to underminethe goodwill that achieved aconsensus in Montreal.

It has pushed for a globalresponse to aviation emis-sions, to avoid distortionscreated by a patchwork ofpolicies.

Achieving a global systemto regulate emissions is pos-sible, agrees WWF, the con-servation group. Neverthe-less, the Montreal deal was“the smallest of tiny stepsforward”, says Jean Leston,WWF transport policy man-ager, and the progresswould be problematic.

“It could be quite a diffi-cult few years ahead, and itwill depend on the goodwillof aviation industry, ifwe’re going to see anythingemerge in a few years’time,” she says.

The ICAO’s governingcouncil is now working toformulate plans for a globalmarket-based mechanismby 2016. That could takeshape as an offset scheme,whereby airlines can buypermits for carbon that isoffset elsewhere.

Steven Truxal, lecturer inaviation law at City Univer-sity in London, says: “It’sbeen a long time, but thereis now a global consensus,which is that somethingneeds to be done.” The vari-ety of backgrounds andlegal frameworks of thecountries coming togetherat the ICAO table high-lighted how complex a proc-ess reaching an agreementwill be, he says.

The EU had moved fasterand its emissions tradingscheme had “effectivelygiven the US and others agreen ultimatum, by saying‘the global aviation sector,anyone who uses our air-ports, will have to play byour rules’”.

After Montreal, the EUscheme could be viewed asan interim measure beforeglobal action was achieved,he says.

But Mr Hemmings, ofTransport & Environment,says the “rush to crush”Europe, supported by theUS, has seriousimplications. “The G77[group of developingcountries], with Americansupport, has clearly shownit has the votes in ICAO,”he says.

He warns that the balanceof power could tip furthertowards countries thatwanted to constrain the EUscheme with forthcomingchanges of leadership – anew council president willtake over from January andthe next secretary-generalwill come in 2015.

“With a new Nigeriancouncil president and thenext secretary-generalpotentially coming fromChina, the chances of anyICAO outcome having ameaningful impact on avia-tion emissions would seemto be receding,” Mr Hem-mings says.

“The whole of the ICAOnegotiations remain verydifficult and I think it’sgoing to take a completerethink of established posi-tions if we’re going to seeanything constructive comeout of it,” says Ms Leston.

Agreementon emissionshard to reachEnvironment

There is consensusthat action is needed,but how much andhow fast are at issue,writes Jane Wild

EU scheme hadeffectively given theUS and others agreen ultimatum

In 2012, global militaryspending fell for the firsttime in 15 years to $1.7tn.

The main drivers were thewinding down of the wars inIraq and Afghanistan; thecontinued decline in Euro-pean spending and the startof budget restraint by theUS, the world’s biggestdefence spender by far.

All three factors hit west-ern defence groups and haveprompted executives todevise strategies for copingwith what most believe willbe a 10-12 year downcycle.

The problem is that com-panies are adopting verysimilar solutions, making itdifficult for all to succeed.

Defence company execu-tives have set three objec-tives: to grab a bigger sliceof the service sector; move

more aggressively into cybersecurity; and expand intodeveloping markets.

Almost all of them confi-dently assert these three fac-tors will make up for thedeepening cuts in defencespending in the US andEurope. Few observers areconvinced.

Defence services involveshelping governments out-source what men andwomen in uniform havedone in the past – from run-ning bases and training heli-copter pilots to equipmentmaintenance, even at war.

The margins are strong,risks low, the work predicta-ble, and the chances ofadding business during adowncycle good.

With less new equipmentbeing bought, the argumentgoes, there is more to main-tain and service.

Half of BAE Systems salesalready come from this area,and smaller companies,such as Babcock of the UK,are also benefiting.

In outsourcing, the UKgovernment is ahead of itspeers. It has put out to ten-der the £4.4bn job of main-taining its facilities.

It is even consideringhanding over to the privatesector the £14bn a year taskof buying its weapons –although for conflict ofinterest reasons big defencesuppliers have not beenallowed to bid.

In the US, BAE is main-taining the navy’s ships, butthere is still room for moreservice business to bethrown the defence indus-try’s way, analysts say,especially as the fiscalsqueeze forces the Pentagonto find savings.

But while defence compa-nies have an advantage intaking over the servicing ofequipment that no otherindustry knows as well,cyber security is different.

Growth prospects aregood, but the base is small,the margins not particularlyhigh and other industries –especially security vendors– such as Symantec andDell SecureWorks – andsystems integrators – suchas Atos and Wipro – haveas much of a claim to theterritory.

AlixPartners, a consul-tancy, warns in a recentreport: “When targeting the

right applications, defencecompanies need to recognisethat they almost certainlydo not possess all the skillsand capabilities necessaryfor success.”

That is why BAE boughtDetica, a cyber securitycompany, in 2008. Analyststhought the £531m price tagwas high and other acquisi-tion targets in the sectorhave become dearer.

Defence companies’ bestclaim is that they alreadyhave the security clearanceto handle the most sensitivegovernment projects. Lock-heed Martin has been the

US government’s biggestcyber security provider foryears. But that will not beenough to capture the widercivilian market, includingbanks and utilities.

As AlixPartners puts it:“Companies must beware ofthe potential to take a me-too approach to strategy.Although first movers don’talways win, not all canapply the same strategy andsucceed at the same time.”

The same holds true forthe rush to find customersin developing countries.

Until now, US companiessuch as Lockheed Martin,Boeing and Northrop Grum-man, have had the luxury ofsupplying their government,whose defence spendingboomed after the terroristattacks of September 11,2001 and the subsequentIraq and Afghanistan wars.

BAE, which years agooutgrew its UK home mar-ket, and Raytheon, Amer-ica’s most internationaldefence group, are betterpositioned.

But with all the suppliersnow trying to captureinternational markets, thefield is crowded.

And defence sales have asmuch to do with politics asproducts.

Zafar Khan, an analyst atSociété Générale, the bank,says: “If I were a bettingman, I would put money onthe company with thestronger political connec-tions, rather than the onewith the superior, technicalproduct.”

In southeast Asia, UScompanies have the upperhand, while in the MiddleEast the UK is helped by itscolonial history. The Frenchand Italians enjoy betterluck in north Africa.

The next test of those tieswill probably be the UAE’s$10bn fighter jet purchase.

Dassault of France hasoffered its Rafale, chosen asthe preferred candidate toprovide India’s fleet. TheUK is touting Eurofighter’sTyphoon, built by a consor-tium of the BAE, EADS andFinmeccanica.

Whichever company wins,it will be nowhere nearenough to counter the deepcuts in the west’s militaryspending, for which no com-pany appears to have founda remedy.

Groups all choose the same alternative strategy

Can a military satellite saleoffer a glimpse into thefuture?

In July, the United ArabEmirates signed a deal

worth more than €700m to buy twohigh-resolution Helios military satel-lites from France. They will give theUAE the ability to look deeper intoIran than any of its Arab neighbours.

The deal, which was quicklyfollowed by a French radar sale, has asecond significance – it could heraldthe thawing of relations betweenFrance, the world’s fourth-largestmilitary exporter, and the UAE, one ofthe fastest-growing importers ofdefence equipment.

The win by Astrium, the satellitesubsidiary of EADS, the pan-Europeandefence and aerospace company, andThales Alenia, a partnership of Frenchand Italian defence contractors Thalesand Finmeccanica, has given Frenchanalysts and executives a shot of cau-tious optimism that France could stillwin a far bigger prize: the $10bn saleof 60 fighter jets to the UAE.

Jean-Yves Le Drian, France’sdefence minister, described thesatellite deal as having put his coun-try’s relationship with the UAE backon track after negotiations brokedown with the previous Frenchadministration over the priceand technical capabilities of DassaultAviation’s Rafale fighter jet.

“Trust was broken. Nothing washappening . . . This evening wereached a milestone, which is thebuilding of trust,” he told reporters onthe flight back from signing thesatellite deal.

Hints of whether the thaw will lastcould come as early as this month’sDubai air show. Statements byEmirati officials that Rafale was againin favour would suggest a bigturnround for Dassault.

In November 2012 – after years ofnegotiating with the UAE failed –French executives and politicianslooked on in dismay as DavidCameron, Britain’s prime minister,secured a “defence industrialpartnership that involves closecollaboration around Typhoon”, in thewords of the communiqué issued afterhis trip to mend shaky traderelationships around the Gulf.

Britain was more than happy toshare the details of its EurofighterTyphoon, which is made by EADS,BAE Systems and Finmeccanica andbacked – financially and politically –by the governments of Britain, Ger-many, Spain and Italy.

A win in the UAE would be sweetrevenge for Eurofighter, which lostthe last round of a similarly sizedIndian tender to Dassault’s Rafale lastyear, although that deal has yet to befinalised. More seriously, a win forEurofighter would extend work for thepartners building Typhoons wellbeyond 2017, when orders are expectedto dry up.

The UK hopes that securing theUAE as a customer could result insales around the Gulf. Britain hasalready won orders from Saudi Arabiaand Oman and interest from Bahrain.Optimistic executives believe a win inthe UAE could improve its chances inKuwait – a stronghold for UScompanies – and speed up a second

order from Riyadh. A loss would bemade less painful by the fact thatuntil recently not even BAE thoughtit stood a chance in the UAE.

Indeed, Dassault has been the clearfavourite in the UAE, especially afterFrance’s significant efforts to deepenits military ties.

For Rafale therefore, the potentialdownside from a loss is greater thanthe upside from a win.

Rafale has France as its only firmcustomer. The cash-strapped Frenchgovernment this summer slashed thenumber of Rafale jet fighters it wouldbuy and final contract negotiationswith India are proving difficult,prompting some to warn they couldtake a decade or more to conclude.

Charles Armitage, analyst at UBS,warns that a Eurofighter win in theUAE could lead to a spiral of unfortu-nate events by putting pressure onIndia over the Rafale fighters.

“Nobody likes being the only exportcustomer for a programme, as it tendsto reduce flexibility and increase theupgrade and maintenance costs,”he says, adding that this “could

bring Typhoon back into the picture”.Several analysts have suggested

that recent political developments,including Paris’s professed willingnessto hit Syria with a military strike andits continued hawkishness againstIran, may have helped it win furtherfavour in the UAE.

But Francis Tusa, an independentdefence analyst, warns that even cau-tious optimism surrounding Dassaultand Rafale may prove misplaced.

“Why would the UAE go back afterhaving very publicly backed off,unless there had been some incrediblelobbying behind the scenes,” he asks,suggesting that those who seeFrance’s recent satellite and radar winin the UAE as a predictor of goodnews for the Rafale, could be hope-lessly lost in translation.

“Actually, what the Emirates maybe saying is: ‘We won’t buy Rafale,but we will buy some satellites as aconsolation prize.’”

If so, French executives will have toaccept that Helios satellites may begood for spying on Iran, but do notoffer a view of the future after all.

Satellite salecould offermore than justa view over Iran

ProcurementUAEagreement to buy Frenchkit could be revealing, writesCarolaHoyos

Deal: Jean­YvesLe Drian (left) withAbu Dhabi crownprince SheikhMohammed binZayed AFP/Getty

Analyst Zafar Khan

An air show is not an idealplace for contemplation: astream of order andproduct announcements,the heady aroma of jet fueland the noise and sightsof a daredevil flyingdisplay are powerfuldistractions.

But the 2013 Dubai airshow is a better venuethan most from which toassess the shifts in theaerospace and defenceindustry.

And it is becomingapparent that, as globaldemand continues its drifttowards Asia, the two sidesof the industry haveradically different drivers.

In large civil aircraft, theMiddle East is the maingrowth market, along withthe Asia-Pacific region.Asian demand is driven bya combination of largepopulation centres andlong distances, whileMiddle East demandreflects the region’sestablishment as the hubcentre of choice for globalair travel.

Of the region’s fourpotentially world-scaleairlines – and theirassociated hub airports –only Turkish Airlines hasthe domestic population tosupport its ambitions. Theothers – Emirate Airline inDubai, Etihad Airways inAbu Dhabi, and QatarAirways – exploit theirgeographical locations.

But a paradox of thecivil aerospace market isthe degree to whichmanufacturing andresearch and developmentlook set to remain firmlyseated in North Americaand western Europe.

Attempts to developbroad-based aerospacemanufacturing and servicesin the Middle East havestalled, notwithstandingthe efforts of statechampions such asMubadala in Abu Dhabi.

And the travails of UACin Russia and Comac inChina, with their AirbusA320/Boeing 737 lookalikeprojects, emphasises thehigh barriers to entry inthe jet airliner market.

These barriers arecharacterised less by

“hard” aircraftcharacteristics, includingpassenger capacity, range,speed, and more by “soft”attributes, especiallyreliability, economicperformance, and ease ofmaintenance.

Decades of intensecompetition betweenAirbus, Boeing, and theirsuppliers, as well asproducing more than 1,000large jets annually, havehoned their capabilities.

But US and Europeanindustrial dominance indefence is by no means ascertain. The Dubai airshow coincides with theapogee of US defencespending: procurementoutlays are likely to fall byat least a third by 2016-17.

European companies

lacked the boost that theirUS competitors enjoyedfrom Afghanistan; theirrestructuring has beenaccentuated by thefinancial crisis.

For the leading US andEuropean defencecompanies, exports havebecome the priority, bothto keep domesticproduction lines flowing,and to part-fund thedevelopment of products.

The challenge is thatexport customersincreasingly not onlyrequire extensive “offsets”to accompany orders forwestern defenceequipment, but also arefocused on developingindigenous defenceindustries.

Nations with large and

educated populations andsufficient economic growthcan now consider domesticproduction of armouredvehicles, weapons, defenceelectronics and warships.

Turkey, Korea, Japanand India all have credibleambitions to join the US,western Europe, Russiaand China as producers oflocally developed combataircraft in the comingdecades.

Of the US companies,Lockheed Martin, maker ofthe F-35 Joint StrikeFighter, looks secure, asthat aircraft enters serviceand higher-rate production.The challenge for thecompany and its partnersis to make the F-35 farmore affordable than it isat present.

Elsewhere, the expansionof the US defence base thataccompanied programmessuch as the LittoralCombat Ship and MRAParmoured vehicles looksset to reverse; the LRS-Bbomber competition couldeven see NorthropGrumman squeezed out ofthe aircraft segment.

But it is Europeandefence companies thatprobably have the greatest

challenge: to retain, byexports and residualdomestic demand, acredible technologicalposition and manufacturingbase into and beyond the2020s.

A handful of exportcompetitions over the nextfive or so years is likely todecide which, if any, ofBAE Systems, DassaultAviation, EADS, Alenia orSaab survive to lead anynext generation Europeancombat aircraftprogramme, whethermanned or remotelypiloted, in the 2020s.

The author is aerospace& defence partner atEchelon, an independentresearch & advisorycompany

Dubai air show offers opportunity to assess the state of the industry

For the leading USand Europeandefence companies,exports havebecome the priority

Austerity tactics

As budgets are cut,suppliers’ attemptsto diversify lookremarkably similar,writes Carola Hoyos

OpinionSASH TUSA

Aerospace