By William Patalon III
Money Morning/The Money Map Report
Oil and jet-fuel prices are in the stratosphere, many of the world's top airlines have ordered severe cutbacks, and passenger traffic is falling, so why is Dubai funneling 82 billion of its petrodollars into an aerospace project that includes plans for the world's largest airport?
The answer is simple. Dubai isn't concerned about the near-term turbulence that has sent global investors diving for cover and induced airline-industry executives to hanger portions of their jetliner fleets. The leaders of that Middle Eastern country have taken a long and studious look at the powerful global trends that are destined to play out over the next 20, 30 or even 40 years, and have crafted their plans accordingly.
In a broad sense, that focus on the long term is a lesson U.S. investors would be very smart to follow.
So, let's take a close look at how well Dubai's financerati have thought this through. We'll look at some moves you can make to profit alongside Dubai. And I'll even let you in on a surprise conclusion about this project that we've reached here at Money Morning – that I can virtually guarantee you've yet to hear anywhere else. Perhaps you'll be the enviable "person in the corner surrounded by a crowd" at the next dinner party you attend.
The Lowdown on a High-Flying Nation
Dubai is situated on the Southwest Coast of the Persian Gulf and is one of six jurisdictions that make up the United Arab Emirates, a member of the Oil Producing and Exporting Countries (OPEC).
Although Dubai built its economy on a foundation of petro-gusher dollars, "black gold" has become an increasingly smaller component of its market muscle. Right now, in fact, oil and natural gas account for only about 6% of Dubai's estimated $40 billion economy, and some experts predict that its crude-oil reserves will be exhausted in about 20 years.
As ominous as that sounds, Dubai leaders apparently don't see that as a catastrophe in the making. Today, the biggest pieces of this emirate's economic might are based on foreign trade (16%), seaport or airport-located duty-free trade zones known as entrepot (15%), and financial services (11%), although real-estate development, construction and tourism are closing the gap quickly.
"Dubai had less oil than [neighbor] Abu Dhabi [and needs] to create jobs for the population," Richard Aboulafia, an industry consultant with the aerospace-management company, The Teal Group, told MarketWatch.com. "This is them saying: 'Let's convert our oil money into something tangible'."
Said Keith Fitz-Gerald, investment director for Money Morning: "What we're seeing here is the emergence of an entirely new economy where the world least expected it. This is absolutely progressing much faster than anyone ever expected. And, to borrow an expression from an old movie, 'There may be a new sheriff in town'," as global sovereign wealth funds potentially supplant Wall Street as the primary financing vehicle for the world markets.
Consulting giant McKinsey & Co. estimates that Persian Gulf economies will have to create more than 4 million jobs for its own citizens in the next 10 years. The aerospace sector could account for as many as 350,000 new positions by 2015, McKinsey says.
In very recent years, the country has gained a reputation for doing things in a big way, sometimes even past the point of excess. Dubai is already home to the world's largest mall, biggest indoor ski resort and tallest building – as well as the world's only "seven-star" hotel, the boat-sail shaped Burj Al Arab, a luxury hotel built on an artificially created offshore island, and a building whose reach of 1,053 feet makes it the tallest structure being used as a hotel anywhere on earth. And don't forget "The World" itself, a much-ballyhooed manmade archipelago of 300 islands (situated in the shape of a world map). Most of the individual patches of land were to fetch $15 million to $50 million – although one of the islands was reportedly priced at $250 million.
Currently, an estimated $300 billion in construction-and-development projects are under way in Dubai.
Dubai Takes to the Skies
Dubai's aviation vision reaches back several decades. But it's only really reached a critical mass in the past couple of years. Dubai-based Emirates Airlines is currently the world's fastest-growing carrier. And that fast-climbing rate isn't because Emirates is growing from a small base.
Indeed, with 180 jetliners, worth an estimated $58 billion, on order, Emirates has become such an industry heavyweight – especially when other top carriers are cutting their fleets – that U.S.-based Boeing Co. (BA) and pan-European aerospace giant Airbus SAS have actually catered elements of multi-billion-dollar airliner-development programs to the needs and demands voiced by Emirates execs.
And that's not just because of the major petro-bucks Emirates has at hand. It's also because of how well the many pieces of Dubai's growth strategy fit together.
Right now, globalization is the single most important business-and-economic trend unfolding in the world today. And thanks to that globalization – as well as advances in aerospace technology – the sheikdom whose proximity to India and willingness to slash trade taxes made it one of the Gulf region's key trading outposts back in the 19th Century, once again finds itself at an opportune geographic nexus: From Dubai, it's now possible to fly nonstop to the West Coast of the United States, or to the Far East – making it the logical stopping-off point for travelers flying between those two points.
"They have a geographic advantage that no one else has," Diogenis Papiomytis, a commercial-aviation consultant with Frost & Sullivan, told MarketWatch.com. "Within 8,000 miles, they can reach something like 80% of the world."
Emirates Airlines is reaping the benefits – and in a huge way. Last year, its profits soared 54%, reaching $1.45 billion. Sales jumped 32% as the airline carried more than 21 million passengers – an increase of 21% from the year before.
Right now, the Dubai carrier is watching its business grow at an annual clip of 15-18%. At that pace, and with the help of the passenger and cargo growth other carriers are experiencing in Dubai, Emirates Chief Executive Officer Maurice Flanagan says Dubai International will eventually overtake some of the world's top airport hubs.
Overall, the existing Dubai International Airport had 34 million passengers – just about half that of the Global Top 3 of Atlanta's Hartsfield-Jackson (85 million), Chicago's O'Hare International (77 million) and London's Heathrow International (67 million).
That's why Dubai has decided to shoot for the moon and build the world's biggest airport. A $33 billion development itself, the new Al Maktoum International Airport at Jebel Ali will have six parallel runways and will be able to handle 120 million passengers a year when it's finished in 2015.
Holding Out For New Opportunities
But the airport itself is only a part of this $82 billion initiative. Dubai wants to become a global aerospace leader. And it's deploying the Middle East's favorite business weapon to do so – the holding company.
Middle Eastern players such as Dubai, Kuwait, Abu Dhabi and others use holding companies – financed by government-controlled sovereign wealth funds – as the investment-and-acquisition vehicles to achieve their economic objectives. Dubai, through its holding company has been especially adept at using the holding-company strategy as an economic-development vehicle. And the emirate has created a new company, this one called Dubai Aerospace Enterprise, or DAE, which is to focus on the air-transportation sector.
DAE has already shifted into high gear, first recruiting former Honeywell Aerospace CEO Robert Johnson as its top executive and then establishing a number of operating subsidiaries – such as DAE University for training some of the 24,000 pilots the Gulf region will need in the next decade, and DAE Capital, which is buying and leasing aircraft to carriers throughout the world.
Dubai's grand vision calls for the new airport to become an aerospace metroplex: It will be bigger than all of Hong Kong, and will consist of six different "zones," each with a different focus. Operations will include service and storage facilities for aircraft and cargo, production and assembly operations for aircraft components, and venues in engineering, training, and airport operations.
Though some analysts expressed concern about the risks and the poor timing, you can bet that this venture won't fail. It's not a profit-and-loss situation, given that its "investors" include the government-run Dubai International Capital sovereign fund, Dubai construction heavyweight EMAAR Properties PJSC, and the Dubai International Financial Centre, a 110-acre free-trade zone and international financial exchange.
Said the Teal Group's Aboulafia: A lack of profitability "doesn't matter. They are not a profit-and-loss-operation. They will scream until they're blue in the face that they are not subsidized, but all the working capital comes from the government."
Here's the surprising fact: Long-term, this project may turn out to be more than an airport. There's actually been some conjecture that Dubai could well have plans to devote part of this project to space transportation, either as a commercial-satellite launch facility, or as a recovery area for returning reusable space vehicles – making this one of the first commercial spaceports on earth.
Whatever the ultimate plans are, it's very clear that Dubai is determined to succeed. But many of the Dubai-based companies are private, and not publicly traded, and those that are public have their shares listed on Middle East bourses, and don't have U.S.-listed American Depository Receipts (ADRs). And though we'd all love to ride along as investors in one of the big sovereign funds that are spreading billions around the planet, that's not likely either.
But there are two very clear profit plays here, and one – pardon the pun – flyer.
Fly in Formation on an $82 Billion Project
Boeing is the most-obvious play here, given that it's one of only two remaining successful jumbo-jet makers on earth (as I reported here a month ago, China just announced plans for a jumbo-jet company of its own, but that's at least a decade away).
Boeing will reap billions in airliner orders from the Middle East (England's China alone is projected to require $340 billion worth of commercial airliners over the next 20 years.– when billions of dollars worth of airliners are often ordered by carriers and leasing firms during flush times – is scheduled for mid-July) over the next several decades. And that market is dwarfed by the massive demand that's expected to emanate from Asia:
The company's defense business is sound, and it just won a favorable ruling from the U.S. General Accountability Office on a protest it lodged over the loss of a U.S. Air Force aerial tanker deal worth an initial $35 billion – and with a potential ultimate value of $100 billion.
At yesterday's close of $68.21, Boeing's shares are down 37% from their 52-week high of $107.83. The shares are trading at about 12 times current earnings and 17.5 times projected profits, and carry a dividend yield of nearly 2.4%. What's more, Boeing has been buying back its own shares, which is often a good sign for shareholders.
Emirates CEO Flanagan – and others involved with the Dubai aerospace project – say the dour outlook for airlines is only temporary and will eventually work itself out. When that happens, we believe Boeing's shares will definitely move higher – if not before.
MGM Mirage (MGM) is the other key play here. We like the shares of this Las Vegas-based casino-resort operator a lot for several reasons. First, the company is actually a high-profit play on China. And for followers of major global trends, that's a huge plus.
But MGM also has a very strong tie-in with Dubai, because it already has in place a financing deal from the state-run Dubai World. Last summer, when MGM shares were trading in the $80 range, Dubai World said it would invest $5 billion in MGM.
The goal: Help MGM execute its China strategy, which the Vegas gaming firm has been pursuing since the middle 1990s.
And China is far from MGM's only target market overseas. It's working with the Mubadala Development Co. in both Dubai and Abu Dhabi on some similar luxury-level [non-gaming] projects. Mubadala is an investment arm of the Abu Dhabi government.
MGM is on the verge of becoming a top global brand in the hospitality sector, and Dubai wants a piece of the action. You can bet that as Dubai develops its airport property, and throttles up its global tourism strategy, MGM will be a key participant, given that Dubai already owns part of the company.
"Dubai is getting in on the ground floor of some very powerful trends," Money Morning's Fitz-Gerald said.
U.S. brokerage houses are downgrading the shares because of a big drop-off in traffic in Vegas. But, to borrow a phrase, that's not where the action is – or, at least, isn't where the future action is going to be.
At yesterday's close of $36.60, MGM's shares are down 64% from their 12-month high.
If you want one highly speculative play – based almost solely on the hope for takeover – make a study of out-of-favor aircraft leaser Genesis Lease Ltd. (ADR: GLS). The Ireland-based firm has seen its shares drop about 64% from its 12-month high as the credit crisis and the airline-industry downturn savaged the sector. But some experts wonder if DAE Capital might not take this opportunity to grow a bit faster by picking up assets at a discount.
"The level of ambition and the money and willingness to support [the airport project] is staggering," David Stewart, a consultant with AeroStrategy, told journalists.
News and Related Story Notes:
- Money Morning Analysis:
10 Global Trends to Follow for the Next 18 Months.
- Money Morning Economic Forecasting Series:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
Dubai's seven-star hotel; Silly or sublime? Regardless, the Burj offers exceptional service.
Developments in Dubai.
Dubai's $82 billion aerospace gamble. Center of gravity of aerospace industry is shifting east
Undaunted by oil, Emirates won't slow expansion.
- Money Morning Financial Analysis:
China's Growth Will Clear $340 Billion Worth of Airliner Sales for Takeoff Over the Next 20 Years.
- Money Morning Financial News:
Boeing Buying Back Shares, Announces Dividend Payout.
- Money Morning Financial Analysis:
China Seeking Superpower Status With Jumbo Jet Deal.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.