Fledgling aerospace business finds firm footing in Dubai

 - June 14, 2007, 6:34 AM

In Dubai, the temperature never gets anywhere close to freezing but that hasn’t stopped the Arabian Gulf state from building an artificial ski slope. As the emirate has sought to re-invent itself as a center for tourism and commerce to ensure its economic future as oil revenues dwindle, projects like this have earned it a reputation for money-no-object spending. So why shouldn’t it add an aerospace industry to its wish list?

Dubai Aerospace Enterprise (DAE) emerged in February 2006 with a mission to develop a portfolio of interests spanning manufacturing, finance, education and management. The company is backed by six leading local investors: real estate group EMAAR Properties; the Dubai Airport Free Zone Authority; and investment groups Istithmar, Dubai International Capital, AMLAK Finance and Dubai International Financial Center.

The group undoubtedly has very substantial funds at its disposal for investments, but has insisted that it aspires to more than simply splashing cash around to buy an aerospace future for Dubai. “The perception [that DAE will spend any amount on acquisitions] is going away as we say no to various deals,” chief financial officer Michael Allgood told Aviation International News. “We don’t just want to own bricks-and-mortar assets,” he added. “We want to add value and manage the assets ourselves.”

DAE’s first big deal was the acquisition last year of Europe-based maintenance, repair and overhaul group SR Technics (SRT), which is now the bedrock of the group’s engineering division. It now wants to develop its five other divisions, namely DAE Capital, DAE Manufacturing, DAE Airports, DAE Services and the DAE University.

“SRT is a high quality, high reputation business with an established customer base,” said DAE incoming chief executive Bob Johnson, who is now on the maintenance firm’s board. “We believe that we can improve its assets and cycle times, and grow its market share.”

So does Dubai aspire to become the new Toulouse or Seattle–a major global hub for aerospace industry? “No, we won’t have huge factories here,” said Johnson. “We want to be a smart center, a control tower, a center of gravity for aerospace–a focal point for best practice and this could potentially make us a research-and-development center.”

DAE is now in the process of spending $1.8 billion to buy Landmark Aviation from private equity firm The Carlyle Group. It has indicated to the U.S. Securities and Exchange Commission that it intends to sell Landmark’s chain of 30 fixed-based operations at various North American airports. It will retain Landmark’s Standard Aero repair and overhaul business, which alone is valued at just over $1 billion.
Within a decade, DAE expects to employ some 30,000 people at various strategic locations around the world and only a small minority of those in Dubai itself. That said, the company does have a declared policy of employing citizens of the United Arab Emirates.

But apart from its plentiful supply of money, on what other foundations does Dubai stake a claim as a 21st century aerospace hub? After all, many western manufacturers are now looking further east to emerging markets like India and China as locations for low-cost production partnerships. And Dubai can no longer lay claim to having a low-cost economy, with prices for just about everything spiralling skywards at a breathtaking pace.

Well, arguably geography is in Dubai’s favor since it is well positioned as a junction point between the current aerospace producers in the West and their main prospective consumers in the East. The city has successfully established itself as an efficient and competitive hub for both air and sea transport, and is attracting aviation firms seeking customer and product support bases.

“Dubai is close to the main center for [air transport and aerospace] growth over the next 25 years,” stated Johnson. “It is a crossroads and we can leave the expertise there to complement our activities in other places.”

Of course, the Middle East itself is a major air transport growth market. DAE Capital, in particular, will be looking to tap the demand the region generates by offering a new source of aircraft and infrastructure financing, including leases, and it has just appointed former Boullioun Aviation Services president and CEO Robert Genise as its chief executive. Similarly, DAE Airports sees ripe opportunities for its role as a developer and operator of new and expanding airports in the region, as well as in neighboring Asia.

Johnson, a former president of Honeywell Aerospace, believes DAE can generate annual revenues of $15 billion within the next decade. In his view, a key to its success lies with the fact that the company has attracted a world-class team of proven leaders from their respective fields and has freed them to pursue lofty ambitions in a corporate environment unconstrained by past practice and policy. But DAE also has local leadership in the shape of managing director Dr. Mohammed Al Zarouni (formerly director general of Dubai Airport Free Zone and CEO of Dubai Silicon Oasis) and project director Rashid Al Malik (a former pilot with Emirates Airline).

“We realize that we now have the chance to get it [an aerospace business plan] right from the start,” he told AIN. “We are not hung up on corporate sensibilities, there is no political agenda, we all hate bureaucracy and there are no ‘have to do’ issues here.”

But could the Dubai group find itself constrained by external hurdles? After all, when government-backed Dubai investors tried to buy a major U.S. ports group it provoked what some saw as a hysterical backlash from U.S. politicians who were able to scupper the deal, supposedly on grounds of national security. The episode calls into question whether an Arab venture like DAE will ever be permitted to buy any corporate asset that might be construed as having U.S. national security implications. And given the widespread overlap between civil and defense activities in aerospace firms, this obstacle could apply to all sorts of acquisition targets that DAE might have in its sights.

Johnson and his colleagues–many of whom are fellow Americans–are not unaware of this dilemma but also do not show undue concern about it. “There are some investments in the U.S. that could provoke those sorts of concerns, but not the kind that we are planning to make,” said the DAE chief executive. “There are probably no national defense issues [associated with DAE’s prospective acquisitions], but we are not blind to these sensitivities and we believe that the situation has improved [since the furor over the U.S. ports].”

DAE’s six financial backers undoubtedly have deep pockets but they also have plenty of other investment options (including Dubai’s super-charged real estate market). Allgood explained that all possible deals are closely scrutinized by the investors and the board is determined not to pay excessive prices for aerospace assets that are currently inflated by strong order backlogs and a wave of takeover speculation.

He said that DAE will use a variety of financial mechanisms along the acquisition trail, including co-investments with other new partners, mixed equity/debt packages and IPOs (initial public offerings). Beyond the group’s existing five-year plan, the existing investors will likely provide further capital to fund growth and it is not inconceivable that new investors will join the consortium.   

DAE University Takes an Innovative Approach

The Middle East and Asia account for major new sources of demand for aerospace products, but they are also home to significant numbers of people craving aerospace knowledge. It is to meet this appetite for professional development that the DAE University was conceived–offering a credible and convenient alternative to higher education available in Europe and North America.

The university opened in the fall of last year and already offers a number of undergraduate and graduate programs in the following fields: aerospace vehicle design, airport planning and management, air transport management and logistics and supply chain management. It also offers short courses in air transport and aerospace engineering.

The Dubai-based university stands on the foundation of a partnership with the UK’s Cranfield University, which provides academic staff for its initial master’s degree programs. Dr. George Ebbs, formerly head of the U.S. Embry-Riddle University, leads the school.

According to Ebbs, the university has a clear mandate to provide the skills that will drive the growth of the aerospace and air transport industries in the Middle East and Asia. “Relying on expatriate experts is a costly option for companies in these regions,” he said, explaining the imperative to nurture home-grown talent.

Ebbs believes that the fresh-start environment at DAE University presents an opportunity to take an innovative approach to teaching, tapping technology as much as possible to make the process more efficient and, for instance, allowing reduced course durations of just 12 to 18 months (instead of three or four years).
In September, the school will begin a new five-year aerospace MBA program, to be taught by teams of professors. It will include integrated courses incorporating periods of industry experience.

The university is also preparing to offer a bachelor’s degree in business. For the last 12 months of the program, students will move into the school’s flight academy to earn one of the new multi-crew pilot’s licenses to expand their career horizons. It also intends to launch courses for aircraft mechanics and others focusing on aviation safety.   

DAE Manufacturing Eyes Consolidation Niche

While Dubai Aerospace Enterprise doesn’t expect to make the fast-growing city-state an Arabian answer to Toulouse or Seattle, the new company does harbor ambitions to see some manufacturing done close by, or at least by its subsidiary operations around the world. “We could certainly be an OEM or build big bits of equipment for others, perhaps at the tier-one or -two level,” predicted Robert Mionis, chief executive of DAE Manufacturing & Engineering. “We are talking to one acquisition target that may run out of [manufacturing] capacity and may be looking to split production between existing locations. We definitely want to be part of the industry’s consolidation process.”

Mionis also revealed that DAE has talked with Boeing about the prospect of helping the U.S. airframer with supply chain responsibilities. It argues that Dubai’s location at the junction between Asia, Europe, Africa and the Middle East makes it well placed for a logistics role.

DAE has acknowledged that leading international aviation authorities could raise issues over production quality and certification standards for hardware manufactured in Dubai, but it believes these are not insurmountable. “In the worst case, we could build parts in Dubai and then take them to a certified center for test and certification, as Singapore has done,” suggested Mionis.

The new Dubai World Central airport at Jebel Ali will serve as a key hub for DAE’s manufacturing and engineering activities. The group has earmarked space for a potential maintenance facility at the site and is working closely with Abu Dhabi-based overhaul, repair and maintenance provider Gamco.