Embraer’s Saudi Arabian sale opens the door to Middle East

 - October 16, 2006, 8:08 AM

Never a hotbed of activity for the West’s two regional jet makers, the Middle East market for RJs has long seemed as barren as the Arabian Peninsula’s Empty Quarter. But like the oil riches that lie beneath the desert sands, the need for smaller, more efficient airplanes has finally surfaced with a little coaxing, as Embraer proved in late April. After a one-year courtship of Saudi Arabian Airlines, the Brazilian company finally consummated its first regional jet sale in the region–an order for 15 Embraer 170s.

As always, Embraer CEO Mauricio Botelho seemed genuinely enthused, not only about the deal’s effect on his balance sheet, but also about the prestige associated with a sale to such a high-profile customer. But just how much significance the sale carries will depend largely on whether or not other airlines in the region follow Saudi Arabian’s lead.

“I think it is important for us, our introduction in the Middle East, [with] a well known airline,” said Botelho, speaking with AIN from Riyadh on the day of the signing. “We believe this operation will be watched closely by a lot of other airlines.”

For varied reasons, regional airplane salesmen have struggled to place airplanes in the Middle East. Overwhelmingly government owned, Middle Eastern airlines haven’t always had to follow strict rules of economics, leaving many routes perhaps best served by small airplanes the province of bigger machines. For example, travelers from Dubai to nearby Muscat, Oman, may find themselves aboard a sparsely populated Airbus A330 and served a meal during a 250-mile, 40-minute flight.

Meanwhile, the region remains subject to rigid rules governing ownership and control that work against a move toward market freedom. Of course, the lack of “Open Skies” in the region also stifles competition, along with the need for varied service options. But in a twist of fate, European rules that now require bilateral agreements to embrace the entire EU membership could force Middle East countries to allow more liberal access to their airports.

Increased Competition Likely

Although slow in coming, more regional cross-border competition appears likely, perhaps opening a market in need of more airplanes in the class of Embraer’s 170/190 or Bombardier’s CRJ and C Series lines. “It has not actually happened, but it is in the process of happening,” said Botelho.

“Now with the development of the area, the requirement for medium routes has increased a lot,” he added. “This event with Saudi Arabian Airlines is important because it will be the first experience of handling a regional operation, not only domestic but short-haul to other countries in the region. And they were keen in saying we are willing to exchange capacity for frequency.”

Nevertheless, most of Saudi Arabian’s Embraer 170s will fly domestically, to 26 airports in all. So, in this case, Embraer commercial vice president Fred Curado dismissed any notion that anticipation of open skies drove the decision. However, Saudi Arabia hopes to privatize the airline this year, a move that could lead to more competition domestically as well.

“I don’t have any explanation other than common sense, really,” said Curado. “To our knowledge there’s no event triggering their decision other than sound network planning. We do hope that this will become an event to call attention to other airlines, to get more interested in the concept.”

Scheduled to take the first Embraer jet in December, the airline plans to establish a pair of new mini-hubs, in Ha’il, located in northern Saudi Arabia, and in Abha, near the southern Red Sea coast. Configured in a two-class, 66-seat layout, the airplanes will cater to high-yield business passengers as well as vacationers, offering three rows of three-abreast seats with a 40-inch pitch in first class.

Now flying a fleet of 139 Boeing 747s, 777s, MD-90s and Airbus A300-600s, the airline plans to start retiring its aged Airbuses right around the time it introduces the Embraers, allowing it to add frequency to existing routes, open new routes and shuffle its fleet to better match airplanes with markets.

Financed with the airline’s own assets, the sale establishes Embraer in what Curado described as a market ripe for development. “I think it is clear; the region is economically growing strongly, so I think there is a lot of potential,” said Curado. “In Saudi Arabia alone, there are 26 airports that will be served by this airplane. So if you consider the whole region this number goes up to around 200 probably.”

Other targets of opportunity will not include the ultimate prize, Dubai’s Emirates, whose chairman, Sheik Ahmed bin Saeed Al-Maktoum, has as much as dismissed any mention of regional airplanes in his fleet. In 2003 Gulf Air issued an RFP for 70-seaters, but it too has soured on the idea after other airlines saturated many of the markets on its wish list. However, Egyptair has surfaced as a strong candidate for a 70- to 90-seat acquisition, as has ATR 42 operator Oman Air, one of the few airlines in the Middle East that has already embraced regional airplanes.