Arab low-cost carriers challenge majors

Dubai Air Show » 2009
November 13, 2009, 6:57 PM

Continued eastward migration of low-cost carriers (LCCs) from North America and Europe to regions such as the Middle East and Asia arguably has established the credibility of this air transport business model. “As LCCs continue to ‘grow’ their fleets and their geographic footprints across the Middle East and throughout Asia and Africa, it is clear that we are competing on a global platform,” said Adel Ali, chief executive of Sharjah-based LCC Air Arabia.

“Despite extremely challenging conditions facing airlines worldwide, low-cost carriers in the Middle East and North Africa (MENA), with their revived focus on commercial sustainability, are seizing the opportunity to increase their market share. Importantly, this is happening at a time of increased regional competition and rapid deregulation,” he told September’s World Low-Cost Airline congress in Barcelona, Spain.

Consequently, major Arab airlines must adapt to remain competitive with low-cost carriers, concluded business research company Terrapinn, following a recent survey of passenger attitudes in MENA countries. “LCCs are now a viable option for most travelers, with pricing strategies and second hubs blurring the [dividing] lines,” said Matthew Wallhead, general manager at Terrapinn Dubai, organizer of next April’s Aviation Outlook MENA 2010 conference to be held in Cairo, Egypt. “LCCs will put increasing pressure on traditional airlines to look at their operational efficiency and will continue to diversify to compete for market share.”

One major carrier heeding the low-cost trend is Dubai’s Emirates Airline, whose “if you can’t beat ’em, join ’em” strategy has been to set up FlyDubai, its own low-cost carrier operation. FlyDubai chief executive Gaith Al Gaith advocates open skies as a policy that is “vitally needed in the Middle East to help airlines grow.” He said overflight restrictions in the region and visa requirements that differ between countries are inhibiting the growth of the fledgling LCC sector.

Walter Prenzler, chief executive of Riyadh-based Nas Air, Saudi Arabia’s first low-cost carrier, echoed Al Gaith’s call for liberalization with a specific example. “A key route [to be deregulated] would be to Cairo, but the authorities have a policy that does not allow LCCs into the Egyptian capital. We have to change that policy or find a way around it,” he stated.

Though still resisted in some Arab airline circles, there is nevertheless creeping deregulation, as seen in last month’s agreement between the United Arab Emirates (UAE) and Serbia, under which the emirates have designated Air Arabia and FlyDubai, among others, to serve the market. Likewise, Jazeera Airways should benefit from similar October deals between Kuwait and seven broadly European countries.

Prenzler believes long-established state-owned Arab flag-carriers need to compete more directly with low-cost carriers if they are to retain passengers’ loyalty. “Airlines are under immense pressure from some customers and are losing their traditional business clientele as customers become more price-sensitive,” he said.

But the Nas Air executive also recognized the magnitude of change required. “It all depends on the passenger and the culture. Many of the legacy carriers are more suited to the long-haul, connecting-traffic market,” he said. “Focusing on regional traffic using aircraft suited for the purpose is the logical step.”

According to the Centre for Asia-Pacific Aviation (CAPA), the MENA and Gulf low-cost carriers markets have spawned six new operators in six countries in six years. “Commencing with the launch of Air Arabia [in Sharjah and subsequently in Egypt] in 2003, the model has started to bloom, with five more LCCs joining Air Arabia over the past four years,” the private research company said.

Together, Air Arabia, Bahrain Air, FlyDubai, Jazeera Airways, Nas Air and Sama account for about 7 percent of total intraregional airline seats, and a smaller 6 percent of seats going to points outside the region, according to CAPA. An indication of the popularity of low-cost carriers and their ability to stimulate markets is the fact that all six such Arab operators serve Jordanian capital Amman to the tune of 80 flights a week.

Their regional share will increase to 12 percent by 2015, according to Japanese investment bank Nomura Securities. The low-cost carriers’ current share has fallen slightly since last year because many larger Arab operators have increased short-range activity following reduced long-range market demand since the onset of recession. CAPA analysts believe this pause will prove temporary in the face of aggressive fleet and network expansion by the new airlines: Middle East low-cost carriers have quickly developed a fleet of 44 aircraft: 38 narrowbodies and six regional jets. Between them they have around 150 narrowbodies plus a few regional jets on order.

Nomura said it expects more airlines to enter the budget market, attracted by high passenger growth and yields on selected routes. Waiting in the wings, although perhaps not truly an LCC, is Alwafeer Air, Saudi Arabia’s first airline for Hajj pilgrims, which was granted a license in October and could start flying this month. Saudi Arabian Airlines was the kingdom’s sole carrier until 2007 when Nas Air and Sama were established.

Meanwhile, normal market evolution is starting to take place. Kuwait’s Jazeera Airways, which expects Arab low-cost carriers to rationalize, was last month looking for acquisition targets as it prepared to post a likely full-year profit for 2009. “There will be some consolidation in the Middle East, especially in low-cost airlines,” said chief executive Stefan Pichler. “We are keeping our eyes open.”

Paradoxically, Arab low-cost carriers are beginning to acquire service frills. Jazeera is launching business-class fares under plans to boost premium traffic. The first A320 four-seat rows will have the center position of each triple-seat unit dedicated to providing workspace. Business-class travelers will get complimentary lounge access, onboard food and a generous 60-kg (132-pound) baggage allowance.  

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