GLOBAL DEFENSE MARKET
Middle Eastern Military Aviation Market Expanding
Despite collapsing oil prices, the future is bright for contractors looking to sell military aircraft to allied nations in the Middle East, analysts said.
Countries across the region are signing deals for new and used aircraft as they modernize aging planes or bulk up their fleets, said Derek Bisaccio, an analyst focusing on Eurasia at Forecast International, a Newtown, Connecticut-based market consulting firm.
Over the past few years, the price of oil has about halved, he said. It is expected to stay that way for the foreseeable future. That has forced many governments in the region to reassess their budgets, and in some cases even cut them.
“Nevertheless in terms of aircraft purchases, especially the military aspect of it, they’ve … increased a lot of their orders,” he said.
Many of the countries have foreign currency reserves that they can tap into, or have substantial sovereign wealth funds that have been built up over years, he said.
Additionally, they can look for external financing through banks if they need to get loans to help with their acquisitions, he added.
The market is “definitely growing,” and the region is expected to increase its overall defense expenditures by five to 10 percent over the next few years, Bisaccio said.
Growing security risks are the biggest driver, he said.
“There’s no shortage of threats across the Middle East right now … and a crucial part is these are very diversified threats,” he said. There has been a significant rise in threats from non-state actors, including the Islamic State, al-Qaida and local militants in places such as Yemen.
“That has made a lot of these governments uneasy, because they see even if it’s happening next door … it [has the] possibility of spilling over into their own borders,” he added.
The Gulf Cooperation Council — a political and economic alliance of countries that includes Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman — has had a longstanding rivalry with Iran. That will continually be a driver of military acquisitions, he noted.
Following the Iran nuclear deal that was brokered in 2015, “threatened Arab states undertook military buildups and a flood of arms purchases,” according to a 2017 Index of Military Strength report by the Heritage Foundation, a Washington, D.C.-based think tank.
Countries in the region generally prefer buying American products, the report said.
“U.S. military hardware — and, to a lesser extent, British and French hardware — is preferred across the region because of its effectiveness and symbolic value as a sign of a close security relationship, and much of it has been combat tested,” it said.
Many countries in the region are known for having a robust inventory of advanced fighter jets. Kuwait, the UAE, Jordan and Saudi Arabia have over 400 F-15, F-16 and F/A-18 aircraft, the report noted.
One of the biggest spenders in the Middle East is Saudi Arabia, Bisaccio noted.
“They’ve been leading and they’re going to keep doing so for the coming years,” he said. “They’re buying a lot of fighter jets, transport, surveillance aircraft, combat helicopters, lift helicopters.”
Saudi Arabia and the United States recently reached a $29 billion deal for new and remanufactured F-15s, he said. As part of the agreement, U.S. firms would work with local Saudi companies and establish an aircraft remanufacturing facility to provide some of the upgrades and complete much of the work within the country, he said.
Bolstering their local industry is part of a goal under Saudi Arabia’s new Vision 2030 strategy, a wide-ranging blueprint that the country’s leadership hopes will build its global stature.
“Their goal is to have 50 percent of their defense needs sourced locally,” Bisaccio said. “At present, it’s nowhere close to that. … This is a very ambitious goal for Saudi Arabia, but the U.S. — through programs like … the F-15 — is looking to assist Saudi Arabia with that and help them develop their industry as well.”
The United Arab Emirates is also investing significant funds into its military aircraft fleet, he said.
“Their force structures aren’t as big as Saudi Arabia’s so they don’t have as big of a requirement, but their mission profile over the last two years … has raised significantly,” Bisaccio said.
The nation is purchasing fighter jets, transport aircraft and combat helicopters, he added.
While allied Middle Eastern nations have traditionally favored U.S. and other Western aircraft, that may be changing.
“One of the main reasons that keeps them buying U.S. besides quality is … to keep compatibility with the aircraft that are already in their inventory,” he said. However, “sometimes there are systems that they can’t buy from the United States that they could buy from elsewhere.”
Russia, for example, could be a source of competition.
“Often times with American deals, there are strings attached — humanitarian strings.
And Russia offers an alternative that they don’t make as many stipulations in that regard,” Bisaccio said.
For instance, Bahrain is interested in purchasing F-16s, but that deal has largely been held up because of concerns over the nation’s internal political situation, he said.
“Over time, those types of roadblocks for purchases can make countries frustrated and they can start looking elsewhere,” he said.
Both Kuwait and Qatar recently purchased the F/A-18 and the F-15, respectively. But as they waited years for approvals they purchased other aircraft in the interim. Kuwait bought Eurofighter Typhoons and Qatar acquired Dassault Rafales, he added.
Russia has noted this and is pushing its forthcoming MiG-35 as an option, he said. A two-seat version of the jet was unveiled in January and the nation is eyeing Egypt as a potential customer, he said.
“What Russia has looked for is other countries that have previously operated MiGs, especially MiG-29,” Bisaccio said. “They’ve made a point to point out that this is going to be very compatible. … [If your pilots] are used to a MiG-29 they can very readily learn the MiG-35, because it’s basically just an advanced variant of the MiG-29.”
The MiG-35 is what Bisaccio called a “four-plus-plus generation” aircraft.
“It lacks the stealth characteristics of a true fifth-generation fighter jet, but it’s still very capable,” he said. It “has a lot of advanced avionics on board.”
Exports of the aircraft could start around 2020, he added.
Egypt’s move toward Russian aircraft is an interesting one, said Richard Aboulafia, vice president of analysis at the Teal Group, a Virginia-based defense and aerospace market analysis firm.
“Egypt is the one cause for concern,” he said. “After the Camp David Agreement of 1979 … they had been Western all the way — purchasing lots of F-16s and other weapon systems. And all of the sudden in the wake of the Arab Spring fallout they’ve resumed acquisition of Russian weapon systems, which is a real change.”
The Camp David Agreement was a peace agreement signed by Egyptian President Anwar el-Sadat and Israeli Prime Minister Menachem Begin.
Egypt has purchased 46 MiGs and there is talk of more, Aboulafia said. “To be fair, they’ve also purchased a batch of [French] Rafales — deliveries of those started last year. Which represents the idea that maybe it’s not so much a move back toward the Russians [but] it’s a move away from the U.S. But still, 46 MiGs is significant.”
One of the most advanced jets on the market is Lockheed Martin’s F-35 joint strike fighter. Israel and Turkey are under contract for the fifth-generation system, but it will take some time for other Middle Eastern nations to be allowed to purchase it, Aboulafia said.
“Historically, Israel has been given a five year lead,” he said. That means that joint strike fighter sales to the region by 2023 can’t be ruled out, he added.
In the short term, the United Arab Emirates is most likely to purchase the F-35 when it is made available, he said. However, in the long run, the Saudis will likely purchase more, he noted.
There are some signs that the UAE is trying to prod the United States to speed up the timeline for when it can purchase the joint strike fighter, Bisaccio said.
Earlier this year, the UAE and Russian company Rostec Corp. announced they would begin development of a future light fifth-generation jet that was based on the MiG-29 in 2018, according to news reports. Development could take seven to eight years.
“Part of why I see the United Arab Emirates interested in that is [it is] a way to put pressure on the United States to agree to sell the F-35,” he said. “It’s largely seen that the United States is putting a block on sales to any other countries because of Israel.”
However, perhaps within the next decade, it is entirely possible that the UAE may get permission to purchase the system, he added.
The MiG-35 is not the best alternative for the joint strike fighter, Aboulafia said.
“The MiG-35 is still a MiG at the end of the day,” he said. “If you want the latest and best and can’t get the F-35 you buy an F-15 the way Qatar has purchased, the way Saudi Arabia has purchased. That’s unquestionably the best alternative.”
While the Middle Eastern market is booming, there are questions about how a trade embargo with Qatar will affect sales. Earlier this year, Saudi Arabia, the UAE, Bahrain and Egypt accused Doha of funding terrorism, which the nation denied. Since then a trade embargo and sanctions have been imposed by some of its neighbors.
Despite the disagreement, that didn’t stop the sale of F-15s from the United States to the country in June, noted Bisaccio. The deal was worth around $12 billion.
Overall, Aboulafia said, Qatar represents a big growth market unless there are long-term complications from the embargo.