Taking A High Flier

For the Gulf States, building a luxury tourism infrastructure is only half the battle. Then they need to get visitors to come and enjoy it. Located so far away from many of the world's wealthiest consumers, Middle Eastern countries—especially the United Arab Emirates and Qatar—are recognizing the need for aerospace industries to feed their tourist trades. The story of their top-of-the-line carriers is well chronicled.

What is less well known is just how radically their efforts are changing the global airline industry. These carriers are making plays for the lucrative first- and business-class markets by spending lavishly on shiny new planes, terminals and lounges—gambles they might not be able to make without the security of (tacit) government support. What's more, their enormous aircraft orders have bought them enough leverage with Airbus to dictate the design of new planes, which will affect every other buyer worldwide.

Part of the U.A.E. plan is to make its largest city, Dubai, a destination rather than a stopover; it wants people to fly there—and not on British Airways. That means building Emirates Airline into a titanic carrier with global reach, with airplanes at every major international hub. To that end, the airline accounts for 30 percent of global orders—58 planes—for the Airbus A380, a new widebody. Chasing a similar strategy, Qatar Airways ordered 80 A350s, a smaller craft built to compete with Boeing's 777; Emirates bought 70 of those, too. Together, these two airlines make up 42 percent of global A350 orders.

In fact, Gulf airlines now account for such an enormous share of Airbus's revenue that they're keeping the company—and its parent, EADS—afloat. That makes EADS beholden to the Middle Easterners, which is exactly how the carriers want it. For one thing, they get to dictate design changes to Airbus—something unusual in the company's 37-year history. To save maintenance costs, Emirates and Qatar demanded that Airbus build the fuselage as a single piece, baking the carbon composites on a mold (the way Boeing now does) rather than riveting together different sections. They also requested wider planes (for higher fuel capacity) with greater range.

Gulf business is so essential to the future of EADS that when the sovereign wealth funds of Abu Dhabi and Doha offer cash for a stake in the traditionally European company—as they have openly suggested—its board is likely to accede. That may undermine the notion of EADS, and its aerospace expertise, as a strategic European asset. But the Emiratis see no need to spend decades amassing the skills and infrastructure that built the U.S. and the EU industries; they can simply buy into an existing one that needs their cash. That rankles the Europeans, according to Doug McVitie, the chief consultant at Arran Aerospace and a former director at Airbus, but they don't have much choice. "The simple expression 'money talks' has never been more appropriate when discussing these guys," he says. Boeing may envy the size of the orders these carriers have placed with Airbus, but it surely wouldn't want to be so dependent on just two companies for such a large share of its revenue.

Yet for all their growing clout, the Gulf airlines represent an anachronism in the tourism business: state-backed companies. To be sure, Emirates, Qatar Airways and another U.A.E. competitor, the flag carrier Etihad, don't hew to the stereotypes erected in the 1980s by British Airways and Air France—slow-moving, reactive, anemic money holes—because they actually operate in the black. And technically, they are distinct from their governments. But if their profits dry up, governments can bail them out. In the Gulf, says McVitie, unspoken guarantees allow the carriers to take huge risks and make extraordinary capital expenditures—like aircraft and airports—that responsible Western managers would never brook.