The Wings of Dubai Inc.

Politics in Dubai is a family affair. And sometimes so is business. Take the case of His Highness Sheik Ahmed bin Saeed Maktoum, chairman of the Emirates Group, a travel conglomerate wholly owned by the state of Dubai. He counts three recent rulers of the tiny gulf state among his close relations. Connections won't guarantee a job, but they help. By his own admission he owes his appointment to the present ruler, Sheik Mohammed--his nephew. As Sheik Ahmed observes, with a self-deprecating smile: "It was His Highness's decision to place me here."

Call it nepotism, local custom or shrewd hiring: it works. The conglomerate managed by Sheik Ahmed controls a commercial prodigy, the world's fastest-growing long-haul carrier, known simply as Emirates. In two decades the interlocking interests of state and business have helped to build an airline that's won the admiration of industry watchers and the jealous suspicion of rivals. The company's revenue growth has never fallen below 20 percent a year, and Emirates now ranks as the world's second most-profitable carrier, after Singapore Airlines. Despite soaring oil prices, its profits rose 48 percent last year (to $637 million on revenue of $4.9 billion), while the global industry was racking up $6 billion in losses. Meanwhile, Emirates' passenger count climbed to 12.5 million, more than double the 2001 figure, a record that mirrors the rapid rise of Dubai as the commercial hub of an oil-fired boom in the Middle East. Says Sheik Ahmed: "What has helped Emirates to grow is the growth of Dubai."

Indeed, Dubai is a leading case study in successful state capitalism, which is entering an unexpected heyday. For all the Western worship of private enterprise, many of the world's hottest companies are owned by governments. That includes most big companies in China, major oil companies from Venezuela to Russia, and the increasingly acquisitive state of Singapore, widely seen as the model for Dubai Inc. Dubai, however, is a little different, in that the state is tiny (population: 1.2 million) and almost wholly owned by the royal Maktoum family.

Their city-state has been aptly described as a family conglomerate run by Sheik Mohammed as ruler and CEO. He is the visionary behind the leading enterprises in Dubai, including investment, media and hotel holding companies, as well as Emirates air. He has transformed this coastal desert into a man-made mirage of artificial islands and spiraling skyscrapers. Dubai's economy grew more than 16 percent last year. Multinationals, including Siemens, Oracle and Dell, have set up regional bases in this city, an efficient oasis amid the strife and commercial disorder that afflict much of the Middle East. Yet Dubai's cosmopolitan appeal did not forestall the congressional uproar that recently forced Dubai Ports World to sell its newly acquired U.S. port facilities. Such is the suspicion of state ties, and perhaps Arab state ties in particular, in an era ruled by free-market ideology but haunted by bouts of terror.

State companies that push aggressively across borders are bound to attract attention, and there is no airline expanding more rapidly than Emirates. Dubai is pushing to increase its role as a regional hub; the number of visitors rose from 1 million in 1992 to 5 million last year, and Sheik Mohammed wants to triple that number to 15 million by 2010. As the state's flag carrier, Emirates is the main vehicle to bring them here: it already flies to 81 airports in 56 countries, from Accra to New York, with plans for new destinations, including California. It plans to more than double its fleet with 125 planes on order, including the largest order (45) for the new double-decker A380 superjumbo from Airbus, which is due to hit the world's runways next year. At an estimated cost of $250 million each, the A380 is also the kind of colossal financial gamble that is a lot easier to take if a company has state and royal support behind it.

Or so rivals have grumbled. At a meeting of airline CEOs last summer, a clutch of leading companies, including Qantas and Air France, launched a public attack. Surely, they said, such close ties between state and airline--Emirates is wholly owned by the government--meant Emirates was pocketing subsidies. Hardly, respond Emirates executives. Their books have been audited by PricewaterhouseCoopers, bolstering the company's claims that it has received no government aid since an original investment of only $10 million by Sheik Mohammed back in 1985. Sheik Ahmed puts the matter plainly: "It has never happened because we have never had any problems on the financial side."

A recent report by UBS poked no holes in that claim of financial independence, yet rival airlines continue to mutter about unfair advantage. If nothing else, they suspect Emirates must be getting oil at cut-rate prices. (Dubai's own limited oil reserves are drying up, but it is one of the seven emirates of the United Arab Emirates, and the leading emirate, Abu Dhabi, is still oil-rich.) Emirates executives deny the charge, insisting they are just as squeezed by high oil prices as any rival, and have imposed a partial hiring freeze as a result.

Just as Singapore, another ambitious city-state, built up its own carrier to meet its aspirations as a world trading center, so Dubai uses Emirates to pull in business. Aware that the idea of the global hub has clear limits (why stop en route from the United States to Asia, in an era of direct transcontinental flights?), Dubai is working hard to become a destination city for tourists, real-estate investors and corporate headquarters. Its relaxed regulations and religious rules--this is the only city in the region that allows non-Muslim houses of worship--make Dubai unique in the Middle East. It offers 35 shopping malls, a "seven-star" hotel with a butler for every suite and recently opened a 32,000-square-foot indoor ski slope to attract new visitors. That means more passengers, and perhaps controversy, for Emirates. "If other airlines are complaining now, they are going to be complaining a lot more in the future," says Tim Coombs of Aviation Economics, a consulting firm based in London.

Emirates likes to ascribe its growth to its position as flag carrier for an Arab success story, and simple merit. Beneath the rank of Sheik Ahmed, many of the airline managers are Western professionals, including company president Maurice Flanagan, a Brit. They cite a pattern of innovation and pampering that endears Emirates to the high-spending elite who can make an airline's fortune. Emirates was the first to offer first-class passengers the chance to cruise the skies in the seclusion of their own mini-suites, complete with dining tables and "massage enabled" leather seats. At the same time, Emirates has cannily marketed itself as a global and Western-leaning brand, for example, by signing on as an "official partner" of this summer's soccer World Cup in Germany.

There are also inherent advantages in launching a global brand from an emerging market, where costs are low and the immediate neighbors are not yet serious rivals. Think of Singapore, without competition from Hong Kong or China. Dubai has no income tax, no corporate tax, no unions, and a blue-collar work force made up largely of job-hungry immigrants, including many from South Asia. The result is that Emirates faces none of the health- or pension-cost burdens that have helped drive many Western rivals into the red. Though specifics are hard to come by, UBS estimates, for example, that unit costs at Emirates have been as much as 40 percent lower than at KLM (before its merger with Air France). "Whether you call all this a subsidy or societal advantages are up to you," says Damien Horth, a Hong Kong-based analyst with UBS.

Still, state ownership does appear to help explain Emirates' uncannily steady performance in a turbulent industry. Sheik Mohammed, the state's de facto ruler since 1995, is a keen pilot who takes an active interest in the airline. Back in 1985 it was his desire to launch a national carrier--prompted by a canceled flight--that put the first planes into the sky within five months. To this day the government not only owns the airline, it also controls aviation policy.

Sheik Ahmed wears two hats: chairman of the airline and minister in charge of the civil aviation department, which also runs the airport. Most airlines contemplating the purchase of the Airbus A380 have to think carefully about where and how they can land and unload a double-decker plane, given that existing airport terminals are built for only one deck. For Emirates, Dubai is building a new terminal at its international airport to handle the coming fleet of A380s. It is also building a second airport with six runways and more double-deck terminals, with a total capacity of 120 million visitors a year, to handle the projected boom in coming years.

Yet no one accuses Dubai of using its influence over airport policy and planning to undercut Emirates' rivals. The government operates an "open skies" policy that allows more than 100 other airlines to operate from Dubai. Many Western analysts say that Dubai stops well short of giving Emirates an unfair advantage. "Emirates is insulated from risk. They can cease being profitable without ever having to worry about investors' pulling out," says Richard Aboulafia, an aviation analyst with the U.S.-based Teal Group. But, he adds, "There is nothing wrong in what they are doing. An industrial policy is by no means the same as a subsidy."

The result: a low-cost juggernaut with luxurious infrastructure and huge advantages in its own region. Due in part to the run-up in oil prices, the economies of the Middle East have been growing at the fastest pace in decades. The biggest danger to Emirates may be that others in the region are starting to envy, and emulate, the Dubai model. "Other city-states have seen what Emirates has done, and now they are out to emulate them," says Andrew Lobbenberg, an aviation-industry analyst at ABN AMRO bank. Intriguingly, one of the biggest competitive threats comes from a fellow member of the United Arab Emirates, Abu Dhabi, which three years ago launched its own airline, Etihad Airways, and aims to reach 70 destinations by 2010. But for now, this royal-family company poses a far bigger competitive threat than it faces.