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Monday, April 7, 2014

Navigating $550 Billion: The Middle East Market

When the President of Boeing Middle East Jeffrey Johnson moved into the first of four company headquarters in United Arab Emirates, Qatar and Saudi Arabia in 2005, he wasn’t sure how, exactly, he was going to successfully penetrate the market. But he understood the regions’ visions for the future, and led Boeing to the fore of this $550 billion aviation industry.

by Chelsea Bryan

“It’s one of the biggest.” That’s what Boeing Middle East President Jeffrey Johnson says about the Middle East’s $550 billion aviation market. But it seems like an understatement.

The Middle East market exploded at the Dubai Airshow with a record-breaking $192.3 billion on the books opening day. Boeing led those sales claiming $100 billion the first morning, and then finished in the lead at close of show, with $101.5 billion for 342 airplanes — almost half of the show’s total $206.1 billion order book. In comparison, Airbus captured 160 total orders and commitments.

The process for Boeing started five years ago, according to Johnson, when the likes of Emirates, Etihad and Qatar Airways decided to ramp-up their investments in new aircraft and technology. “About five years ago we changed the way we did business,” he says. Johnson describes a time where Boeing had been in the Middle East for years, but was having trouble taking off in the market. “It was a competitive landscape.... We were having some success but we weren’t getting the penetration that we wanted, literally, across both commercial and defense.” That is, until 2008.

The Turning Point

Johnson describes that year as the birth of Boeing’s big footprint in the Middle East as leaders in Abu Dhabi and Doha started to dream big and look forward into the future. Though rich in oil and gas, the United Arab Emirates (UAE) and Qatar did not see their future in such resources. Instead, in a window spanning 2008 and 2009, the hot word was market diversification. Johnson noticed this in the “Qatar National Vision 2030,” issued in 2008 by Sheikh Hamad bin Khalifa Al Thani, emir of Qatar, as well as in “The Abu Dhabi Economic Vision 2030,” by Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE. Johnson reacted immediately.

“Five years ago we saw we had the right technology, the products, we just had to show the leadership that we were committed to the long run. In that 2008-2009 timeframe is where you really saw [the strategic visions] … so we looked at all those and said, ‘Hey, these are long-term visions that have got sectors that we match up in. Let’s go start the path of investment.’” Johnson says.

After that turning point, local engagement became much more than keeping a local office. Boeing partnered with Khalifa University to hold an electric engine-to-glider conversion competition, and more university relations and internships followed. Johnson says this local investment was the first step in gaining trust.

“We said, ‘OK, we’ve been in the Middle East about 60 years; with all the sales we’ve got, we’re going to be here 60 more … let’s behave like we’re going to be in this market a long time.’ We wanted to weave ourselves into the community, and so it was very important that we start really showing the leadership that Boeing’s going to stay around,” he says.

With the foundation of an active community presence, Boeing Middle East began to approach what Johnson calls “tech transfer partnerships.” In line with Qatar and UAE visions to diversify from oil strategies, Boeing approached Abu Dhabi about their desire to develop an aerospace industry, and also partnered with the Qatar Foundation for machine learning and big data analytics and research. While Boeing upgrades its health maintenance algorithms through the partnership, the Qatar Foundation and Abu Dhabi’s leaders benefit from Boeing’s commercial manufacturing expertise.

Following initial partnerships, Boeing Middle East approached UAE’s Tawazun Precision Industries, a production surface treatment facility, and made plans for the Tawazun Industrial Park for a 2016 opening in Abu Dhabi. Boeing also partnered with Mubadala and subsidiary Strata Manufacturing PJSC, a metal supplier, to purchase $2.5 billion in advanced composites and machined metals for the 787 and the 777X, 50 percent of which are made of metal. It wasn’t long before the partnerships yielded carbon fiber development and manufacturing capabilities in Abu Dhabi.

The government took notice of the relationships forming across the industry and the changes Boeing had effected. “I think what we’ve done is we’ve really started to show the leadership we’re there for a long time and I think they’re very comfortable with working with us now on their future architecture of their airlines and their aviation infrastructure,” says Johnson.

With roots put firmly down locally, Boeing Capital Corp. then approached Middle East financiers and banks, including the National Bank of Abu Dhabi, to finance airplane growth in the region. “We’ve gone up now into the billions of financing from Middle East sources for the airline deliveries and we’re on a steady pace to keep working with the financial institutions,” says Johnson. Boeing scored the deals by virtue of expertise and experience financing commercial airplanes, even though there weren’t yet any firm orders. “The philosophy was ‘if we build it, they will come,’” says Johnson. The banks bought in.

Defense Modernization Is Coming

Boeing’s 777x, launched at the Dubai Airshow, has been very popular among Middle Eastern airlines. Courtesy of Boeing.
Complete integration between the leadership, the Air Force and the airlines in the Middle East make for a flat-line decision making process that Johnson cites as a key advantage allowing the region’s exponential growth. As Boeing continues to build capability and capacity around the Middle East aviation industry, Johnson speaks of plans to develop defense and security modernization in Qatar. “Defense and security modernization” is coming, Johnson says, “I think air and missile defense on the defense side has become very big, where can you modernize there, you look at cyber security, we continue to play in that market, and that will only get more important.

“I think the countries are recognizing [the importance of modernization]....We’ve got a small subsidiary and several different products that we offer that really allow you to monitor and protect your critical infrastructure information as well as run forensics if you find you had a hack or some kind of intrusion,” he adds.

Johnson says more is coming from such partnerships with Strata, Tawazun Precision Industries, and the Qatar Foundation, in addition to new ventures in Saudi Arabia and Iraq. But U.S. relations with those countries are more tenuous than those of UAE and Qatar. Besides Boeing planes arriving in the more stable Kuwait next year, the delivery of two 737s to Iraqi Airways show that Boeing’s newest, and what Johnson calls its most exciting, regional markets are also the more politically tenuous. “The challenge in the Middle East is just to make sure you have a risk mitigation strategy.... I don’t see anything on the horizon right now but you’ve got a lot of political, economic strife in some of the local countries,” Johnson says, adding that his best strategy is to remain vigilant and keep in close touch with both U.S. and Middle Eastern governments.

While such world tensions may ebb and flow, Johnson was listening when, only weeks after the Dubai Airshow, Secretary of Defense Chuck Hagel told Gulf Arab leaders in the Manama Dialogue that U.S. security commitments to the Middle East would not relent. “The United States has strong relations in that theater. … he’s right on the cover of the paper, he says ‘The U.S. will not retreat.’... I think on the defense side what you’ve seen is the U.S. really working to build capacity and capability in the coalition partners,” says Johnson.

From the perspective of UAE, Qatar, Saudi Arabia, Iraq and Kuwait, Johnson says there is reciprocal goodwill regarding defense efforts. “I think it’s received very well; it’s a highly, highly competitive market today. You see leaders from other countries coming into countries, so I think the U.S. understands the importance of supporting their industry.”.

Independent of policy, the Middle Eastern airliners’ affinity for what’s new means demand will only go up. “There are strategies in the airlines around always keeping their products and technologies on the forefront of what’s available and they’re very much newer fleets... they tend to swap airplanes out considerably earlier than other airplanes.... [and] in Dubai in particular, I think they’ve talked about aviation and aerospace being as much as 25 percent of the GDP,” says Johnson. “So again, where there’s pockets of expertise like that, Boeing wants to partner and be part of that in the long term.”

 

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