April 30, 2008
Emirates Airline’s 62% profit hike is a proxy for Dubai
The performance of Emirates Airline is an excellent guide to the underlying performance of business in Dubai. The airline is worth around $6 billion to the local economy. The announcement of record profits, up 62 per cent to $1.4 billion in the year to end of March, is a reflection both of the oil boom in the Gulf States and the dynamism of Dubai as a destination.
Emirates is also an extremely well managed airline, and now ranks among the top five most profitable in the world, giving the carrier an enviable ability to expand its fleet to become one of the world’s biggest long-haul carriers, perhaps one day the largest of them all.
For Emirates has a total of 182 aircraft on order costing $58 billion, including 58 of the giant new super jumbo A380s from Airbus. The global financial crisis has apparently had ‘no impact’ on funding this acquisition program, Gary Chapman, President of Group Services and Dnata told me this morning.
Indeed, to use an unforgivable pun, there has been a flight to quality with financial institutions as keen as mustard to fund hard assets with a ‘solid’ airline.
‘Solid’ was the word Emirates Chairman and CEO Sheikh Ahmed bin Saeed Al Maktoum used to describe the financial condition of his airline. ‘Those on the edge will go down’ he said of the prospects for certain financially less well endowed competitors: business-class only Eos went yesterday. Emirates has $3.8 billion in cash and is paying its shareholder Dubai government $275 million as a dividend.
It is only too true that if the Emirates business model was failing then that would mean the whole aviation industry stood on the verge of annihilation. But with 80 per cent seat capacity it is often impossible to find a seat on many Asian routes, given that the spare capacity tends to only be for newer destinations.
‘No decision’ has been made about an initial public offering for Emirates Group, except that an indication that around 25-30 per cent of the company would be sold in an IPO if it happens, said His Highness.
He even brushed off a question about the possible impact of $200-a-barrel oil on Emirates: ‘It will affect some airlines - a solid airline can absorb high fuel prices.’
Emirates will launch eight new destinations this year, introduce the A380 and expand capacity on many routes. There will be 163 aircraft in the fleet by 2010.
‘I believe the threat of a global economic downturn will be offset for Emirates by the boom in the Middle East, especially in the thriving travel industry of tourism and commerce,’ noted High Highness. None of this must be very happy reading for his competitors but this is also a proxy for the strength of the Dubai economy.
McDonald’s faces Middle East crisis
A 40 per cent increase in costs and surging local rental inflation means that McDonald’s will shortly be unable to contain the prices of its burgers in the Middle East and hike prices for the first time in two years.
McDonald’s empire in the region is strongest in the UAE where each of its 5.1 million residents eats an average of five sandwiches per annum. The local chain has 52 outlets and rings up over a million transactions a month.
But food price inflation is now rampant in the UAE where the local currency is pegged to the US dollar despite being in an economic boom rather than a slump. That means imports from non-dollar countries are rising in price as the US dollar falls in value.
However, McDonald’s is not slowing its expansion and local franchisee Emirates Fast Food Company told Gulf News it will open ten new restaurants this year and invest a total of around $7 million.
Indeed, the food inflation crisis is apparently not going to stop expansion to between 100 and 150 restaurants in the country which is already suffering a diabetes epidemic among nationals.
Hopefully McDonald’s will continue to develop healthy eating options such as the McArabia sandwich, featuring Arabic flatbread, chicken or lamb and salad.
UAE rents still going up, higher inflation inevitable
A recent survey by the Dubai Chamber of Commerce showed that rising rents are the biggest concern for local business, both for their retail or commercial premises and for staff accommodation.
The five per cent rent cap applies only to existing tenancies. So when tenants move then landlords can hike rentals to reflect market conditions.
That is why a survey from local blue-chip property consultant Asteco has Dubai office rents up by 22 per cent between the end of Q1 2007 and Q1 2008.
The selling price for commercial property over the same period jumped by 54 per cent, so you can not say that landlords are being greedy: rental yields are actually falling.
But clearly rents are still going up, across the board. Average office rentals on the Sheikh Zayed Road, which commands the highest rents as the Mayfair of Dubai, are up from $89 per sqft to $110 per sq ft.
There is plenty of anecdotal evidence from property agents that residential property values will rise by 10-20 per cent this year in Dubai. The only good news is that rent rises are slowing a little, and may fall slightly behind as in the commercial sector.
All this can only continue to stoke higher inflation levels in the UAE, and the Central Bank’s hope for lower rental inflation looks almost as unlikely as lower food prices.
April 29, 2008
Bin Laden wins $373m Emaar, The Economic City contract
Emaar, The Economic City has awarded the $373 million contract to build 16 residential towers in Bay La Sun Village to Bin Laden Group. This will be the first residential phase of the King Abdullah Economic City.
Although its name is forever associated with the estranged terrorist of the same family, Bin Laden Group has a strong reputation through-out the GCC States and has been very active in Dubai.
The King Abdullah Economic City is Dubai-based Emaar Properties most significant project in Saudi Arabia, and bigger even than the $20 billion Downtown Dubai which includes the world’s largest shopping mall and the world’s tallest building, the Burj Dubai.
The letting of the Bin Laden contract brings to an end speculation as to when the construction of the King Abdullah Economic City might actually start. The 16 ten-storey towers are to be delivered in September 2009 and comprises 1,000 apartments with Red Sea views.
UAE stocks look a great buy after Ramadan
The oil-rich UAE’s stock markets – and there are three of them, have followed a different path to the inexorable rise of the oil price. The markets crashed in 2006, unable to sustain their initial euphoria, drifted sideways in 2007 and have rebounded since last October. Now they look set to drift through the hot months. But get set for an exciting autumn.
By the fall we should also see a measure of irrational exuberance in global markets as the US presidential reaches its dizzy climax in November. No doubt great hope will be vested in the new President, whoever he or she might be, and US investors will momentarily lose touch with reality, giving all global capital markets a lift.
My view is that hope springs eternal and that the forces driving the US economy into recession will actually accelerate into 2009 with US housing prices not set to bottom until at least mid-year, and unemployment and foreclosures mounting in the meantime. This will likely take its toll on Wall Street and other global stock markets by the spring.
However, one person’s loss is another person’s gain. The high oil prices produced by the lax monetary policies of the Federal Reserve are crippling for the US economy but wonderful news in the UAE. And the Fed is unlikely to be able to tighten up on interest rates anytime soon without crippling its economy even more.
With more than three million barrels a day flowing out of the ground, the UAE is earning $360 million every day or an annualized $131 billion from oil revenues.
This money supply growth is causing inflation locally. It is supporting an ongoing real estate boom which is growing bigger. And logically share prices ought to be a good deal higher than they are now, particularly for local real estate, construction and banking stocks. But the crash of 2006 hangs over market sentiment, restraining prices.
Expect that sentiment to finally lift this fall as UAE nationals and residents realize that those who own property or earn bonuses have never had it so good and foreign buyers return to the market. Also a feeling of being immune to global economic problems should lead people to want to invest in the UAE.
Burj Dubai, amazing nightime animation video
By the middle of next year the world’s tallest building will be completed. The Burj Dubai is to be around 750 metres or 2,325 feet tall, the equivalent of stacking London’s three Canary Wharf towers one on top of the other. This video gives a fascinating glimpse into what this amazing skyscraper will look like at night.
UAE market scams typical sign of a booming economy
The alleged embezzlement at listed Dubai real estate firm Deyaar has prompted a third arrest, the Lebanese head of sales whose not been named. Meanwhile, a 36-year old Emirati has been arrested for a reportedly swindling 2,500 people in Abu Dhabi out of $550 million in a Ponzi scheme which offered interest rates of 30 per cent per month.
It is astonishing that nobody had noticed that the scam artist had no legal status or that nobody seems to have conducted anything resembling due diligence into this scheme.
Yet economic booms have fallen prey to such scandals since mankind first started living in urban communities. People lose touch with reality in a boom and become sucked up in the excitement to the extent that they end up becoming suckers. There is also a strong element of collective greed at play.
The Ponzi scheme is named after a New York con-man Charles Ponzi (pictured here after his arrest) 
but I doubt he invented this scam. It is so simple. You promise high returns on investment, and achieve it for a few months by paying out the first investors with money from later investors, and this goes on until you have amassed a capital sum, and then you flee with the money.
Usually the scam artist gets too greedy and does not run in time. However, anybody who thinks that the revelation of market scandals like this will damage the economic boom in progress is probably misguided. The economic forces of oil at $120 a barrel are beyond the control of governments let alone con-men.
But it is a warning to investors in the UAE to remember to do their homework when making investments. Economic booms attract the bad guys as well as creating genuine business opportunities.
The UAE central bank governor Sultan bin Nasser Al Suwaidi told the Arabic media that informal fund management or pooling of resources among friends and family is also illegal and dangerous. This may be true but for many investors ignorant of finance it is likely the only channel open to them.
But be careful who you trust in a boom, and if schemes seem too good to be true then they probably are. Be careful too about the ‘asset class’ you choose. Speculating in mobile phone numbers, as the article below explains, is probably unwise.
April 28, 2008
UAE mobile phone numbers valued higher than a Porsche
If you are the lucky owner of UAE mobile phone number 050 888 8889 congratulations, you could sell your number for $134,000.
I had heard of car number plates selling for high prices before, and in the UAE the licensing department donates the proceeds to charity. But mobile phone numbers, that does seem excessive!
A young national friend showed me his mobile number, which I will not repeat, which is apparently worth twice as much as his turbo-charged Porsche 911. Apparently a man had recently offered to buy it, seemingly for his own use.
Yet this trade reminds me very much of the dot-com names in 1999-2000 when you could trade in a good name with .com after it, and people made money by registering and trading names.
In economic boom times value is often attached to things that have no practical value. One thinks of the Dutch tulip mania of the 1650s, for example, or stamp collections in the 1970s. I was a victim/participant of the latter and still have my worthless collection of mint UK stamps.
So mobile numbers should be seen in the same context, and the investment rationale is there. The concept is the one of always being able to sell to a greater fool (than you!).
In the case of the UAE phone number buyer he is probably a trader, and sells the numbers on to somebody richer than himself with an eye for a nice number, perhaps a man who is so rich that he has nothing better on which to spend his money.
But this sort of phenomenon is normally relatively short lived and signals a booming economy in extremis. Nationals buying numbers should beware, they could end up with a worthless number one day, just like my stamps!
Will the WSJ follow the FT to Abu Dhabi?
Will the now Rupert Murdoch-owned Wall Street Journal be able to resist the challenge thrown down by the Financial Times this week by announcing that its first Middle East edition will launch on April 29?
CEO John Ridding told Reuters: ‘The economic dynamism of the region is striking. It’s not just the rate of growth. It’s the nature of growth. Unlike the previous sort of oil booms, I think what we’re seeing this time is a substantial investment in the foundations of sustainable economic development, infrastructure and education’.
Apparently the English-language paper’s editorial staff will be based in Abu Dhabi. The paper will be produced in London and printed in Dubai. In fact, the Financial Times has been printing its Asia edition in Dubai for more than a year.
You can find the unread copies stacked up in the local Spinneys supermarket, alongside unsold copies of the The Times and Sunday Times, also locally printed versions of London newspapers.
The plain fact is that the Gulf does not want to read London newspapers, and adding a few more local stories is not going to help improve this editorial reality.
If you live and work in the Gulf you have some good local newspapers - Gulf News, Emirates Business and now the new National - why would you want to read the incredibly dull and often behind-the-times Financial Times?
But in this sort of media frenzy then should we not expect to see the venerable Wall Street Journal on the streets of the GCC States? Its format is at least less-wordy, with small paragraph items and easier to read for people with English as a second language.
And what of the advertising petrodollars that presumably attracts the big media to these shores? Well, local advertisers tend to like to appear in papers that are read or at least glanced at, but they may try a new media for novelty value.
So desperate for attention are property companies amid intense competition that they increasingly wrap the local papers in four-page adverts which you have to throw away without looking in the morning before you can get to your news.
It is quite obviously self-evident that the region is seeing ‘substantial investment in the foundations of sustainable economic development, infrastructure and education’. But whether that means every newspaper in the world can turn a local edition into a profitable enterprise remains less sure.
What I have to ask is do they know anything about this region or really add value to local editorial content?
