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While legacy airlines fight back with their own aggressive pricing, they have also complained that Emirates receives “unfair” subsidies ranging from cheaper fuel to lower airport fees. In fact, Emirates pays slightly more for fuel at home (DXB) than abroad, because of the lack of refining capacity in the Gulf. It and 129 other airlines at DXB pay the same airport fees. True, neither Emirates nor its employees pay taxes. But the upshot is that Dubai’s social services are poor for expatriates. Emirates ends up spending $400 million a year to provide accommodation, health care, and schools for its staff—a huge expense that rivals do not have to cough up.

From an institution-based view, Emirates thrives on treaties that permit flights between two countries by an airline from a third country. The model works best on long-haul flights requiring refueling at DXB. As the chorus of complaints from its rivals grows, in theory, if these rivals mobilize enough political muscle, they can convince European governments to deny route applications from Emirates. But chances are slim because such a political decision would hurt Airbus and European jobs. So Emirates is in an advantageous position in its dog fights against legacy airlines.

Emirates does face emerging competition from two regional rivals, which have realized that geographic advantage is not a Dubai or Emirates monopoly. Doha, Qatar, is only 200 miles from Dubai. Imitating Emirates, Qatar Airways was founded in 1992. It now has 82 aircraft plus 180 on order (including five A380s and 50 all- new A350s—Airbus’s answer to the Boeing 787). Qatar Airways will be the launch customer of the A350. Replacing its aging Doha International Airport (handling 15 million passengers in 2010), Qatar will open a brand new international airport in 2012 with a capacity of 24 million and an expanded capacity of 48 million by 2015.

Closer to Dubai, Abu Dhabi (a fellow emirate in the UAE) launched Etihad Airlines in 2003. It quickly became the fastest-growing airline in the history of commercial aviation. Now with 64 aircraft, it has another 100 on order. Only a 45-minutes drive from DBX, Abu Dhabi International Airport currently serves a total of 11 million passengers. It is also aggressively expanding its capacity to reach 20 million in 2012 and 40 million a few years later.

Not to be outgunned, Dubai has upped the ante in the arms race in airport building. Starting in 1950, DXB has experienced an annual growth rate of 15%. Today, it is already the world’s third busiest international passenger airport (after London Heathrow and Hong Kong) and the seventh busiest cargo airport, and is being expanded (as noted earlier). Yet, Dubai is building an even larger airport, Dubai World Central-Al Maktoum International (DWC), which partially opened in 2010 (with one runway and for cargo flights only). When completed, this new airport will be the largest in the world, with five parallel runways and an annual passenger capacity of 160 million (!).

By 2015, the expanded DXB, the new DWC, Doha’s new airport, and Abu Dhabi’s expanded airport—all within “spitting distance” of each other (according to the