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to Dubai and then another leg to the long-haul networks of Asia, the Indian Subcontinent, Africa and Australia/New Zealand," he says. The airline's other CEE routes, to Prague and Moscow, have already been paying dividends. Emirates began a daily passenger/cargo route to Prague in 2010 and has already upgraded the daily flight from an Airbus 330 to a Boeing 777, which has an extra 86 seats to take the total to 364. Moscow from December 1 will have one of its two daily flights upgraded to an A380 – the double-decker, wide-body, fourengine jet airliner that along with the 777 is becoming the backbone of Emirates' fleet.
Flying high in CEE Nicholas Watson in Prague
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ne has learnt that Emirates intends to start a new route from its Dubai hub to Poland and grant Russia the ultimate accolade of putting Moscow on its Airbus 380 route list. While such an expansion by the world's largest airline is a vote of confidence in the Emerging European market, it's less good news for the region's struggling flag carriers that are desperately looking to be rescued by such global airlines. According to Richard Jewsbury, Senior Vice President Commercial Operations of Europe and the Russian Federation, Emirates will begin from February a new daily route to the Polish capital of Warsaw, and is the process of hiring local staff and setting up a call centre there. The Emirates number-crunchers regard Poland as a definite growth market for both passenger and cargo traffic (Emirates is also the world's second biggest cargo airline after Fedex) given its relatively strong economic performance since the 2008 crisis. "Poland never went into recession following the crisis and while the recession in Europe is having and will have a broader impact on Poland, we still see it very much as a growth market," Jewsbury says. "There's a lot of investment going into Poland, so there's good cargo potential both inbound and out, as well as strong passenger demand inbound and outbound from business and tourism." Jewsbury adds that Emirates can also take advantage of the fact there's currently little eastbound long-haul competition out of Poland. "Most of traffic travels over the European hubs, so we bring in a fresh new offering in that it is non-stop
Trading places Emirates' expansion in CEE is an acknowledgement of the better growth potential of the emerging part of Europe than in Western Europe, as well as the shift in trading patterns toward the emerging markets that has become more marked since the 2008 crisis. HSBC’s latest Global Trade Forecast released earlier this year predicts that while overall trade in Europe is expected to grow 80% by 2026, most of that growth will come from CEE countries. Slovakia and Poland, for example, feature in its top three fastest growing exporters in the EU27, increasing activity by 6.37% and 5.93% a year respectively over the next five years. Poland's overall volume of trade is expected to grow at a rate of 110% to 2026, compared with the world average of 86%, while Russia’s overall trade is expected to grow 166% by 2026. Since the global crisis hit, there's also clearly been a trend of emerging markets trading more between themselves and less with developed markets. China, for example, has already become Brazil’s biggest consumer of raw materials, and will soon be the biggest for Africa too. A 2011 report by Citigroup predicts intra-emerging market trade to overtake trade within the advanced economies by 2015 and to exceed trade
"For the foreseeable future, I don't think you will see us doing any M&A"
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Emirates' profits in the six months to September 30 may have soared 68% on year and taken its cash pile to $4.1bn, but it has no intention of using any of that to rescue any of the region's struggling airlines. Czech Airlines (CSA), LOT Polish Airlines, Serbia's JAT Airways, Romania's Tarom, Latvia's airBaltic and others are all trying to avoid a similar fate to Hungary's Malev, which collapsed earlier this year. "The short answer is that in my view, for the foreseeable future, I don't think you will see us doing any M&A because we have to focus all our efforts on our organic growth, whether that be new routes or aircraft upgrades, and that takes all our time and energy," says Jewsbury.
This view appears to be shared by other global airlines. In June, Turkish Airlines halted its interest in LOT, while Emirates' close competitor Etihad in neighbouring Abu Dabi appears to be in no rush to take up Serbia's offer to take control of JAT. CSA, which the Czech government said on November 9 it was going to make another stab at selling, looks equally forlorn, with the CEO of Cesky Aeroholding, the parent of CSA, saying bluntly on television in November that the risk of not being able to find a strategic investor at the moment "is higher than 70".
Russian FDI – not very foreign, but very profitable
CHART:
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ussia has a terrible record of attracting foreign direct investment, but what little arrives tends to be extremely profitable.
Most of the investment that Russia has received has been returning flight capital. Cyprus has long been the biggest investor into Russia, accounting for 28.3% of the total investment stock of $455.9bn over the two decades to the end of 2011. However, if you add in the other offshore havens favoured by Russians such as the Netherlands or British Virgin Islands, then Russians account for a staggering 64% of Russia's entire stock of FDI, according to a report released by Aton Capital in November. But even if the bulk of the investment is Russian, it is still good for the economy and extremely profitable. "Money is money, and investment is investment, and its source is not necessarily the issue. Even if the bulk of FDI is not genuinely foreign, but rather Russian, it still represents funds being spent," says Peter Westin, Chief economist with Aton.
Westin says that the change in the total stock of FDI (that includes reinvested profits) between 1995 and 2011 was $454.2bn against the cumulative inflow of $353.2bn over the same period. "This suggests a return of 28.3% for FDI into Russia. Only seven other emerging markets in the world have done better," says Westin. "If we instead look at the average annual appreciation of inward FDI, we see that Russia, with 90%, is second only to FDI into South Africa." And Russia is in a league of its own when compared to its BRIC peers: China’s FDI has lost money over the same period and investors also saw their investments depreciate in both Brazil and India. Even during the crisis years, FDI is still doing very well, returning an averaged 46% between 2009 and 2011 – considerably higher than the 9.3% average return for the other countries of Central and Eastern Europe and a lot more than equity investors earned.
Average annual appreciation of FDI 1995-2011 (%) 140% 120% 100% 80%
between advanced economies and emerging markets by 2030. "There's been a changing face of traffic patterns since the crisis," says Jewsbury, "We're seeing heavy trade between Asia, Africa and South America, many more 'cross flows', and that's driving an increasing amount of our growth." Emirates' expansion in CEE is certainly a vote of confidence in the region, but offers less hope for the region's struggling flag carriers.
60% 40% 20% 0 -20% -40% -60% -80%
in Pe a Ph B ru ili raz pp il i Al nes b M an al ia Th ays a ia Ta ila jik nd is t Ky Me an rg xic yz o Ar Re m p en ia Co Ch lo ile m bi a Bu Ind lg ia Ge aria or g Az Taiw ia er a ba n i Sl L jan ov at ak via R Ka E ep. za gy kh pt Be sta la n Po rus Uk lan d Ro rain m e Hu an Cz n ia ec ga h r Li Re y th p ua . Es nia to Tu nia M rke or y oc K co Sl ore ov a e Ru nia S. ss Af ia ric a
I Perspective
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Source: UNCTAD, Aton estimates