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29 March 2024

What Sama's fate means for low-cost carriers

Sama suffered a loss of SR1 billion between October 2009 and March 2010. (SUPPLIED)

Published
By Bindu Suresh Rai

Ring Sama’s customer helpline even today and the bright and cheerful voice that welcomes you is a far cry from the state of affairs that has seen Saudi Arabia’s budget airline cease operations last week, during the peak Umrah season.

Deferring at a time that where high passenger load factors are almost guaranteed for even full-service carriers, Sama’s SR1 billion (Dh0.97bn) loss between October 2009 and March 2010 has shifted focus once again to the maturity of the Middle East aviation market and its means to support a low-cost carrier.
 
Full service advantage

If there was any speculation on a dipping demand curve, recent developments have put those to rest, what with almost a week after Sama’s declaration to cease operations with immediate effect, regional juggernaut Emirates announcing plans to launch daily flights to Madinah from October 31, increasing its capacity to the kingdom by 15 per cent or 28 weekly flights.

Ahmed Khoory, Emirates’ Senior Vice-President Commercial Operations, Gulf, Middle East and Iran said in a statement: “Saudi Arabia is an important market for Emirates and our new daily service to Madinah is key to our continued growth there. There is significant demand for travel in and out of Madinah from across our network and we are confident that these new flights will be well received by our customers.”

While Emirates sidestepped the question if this increase in frequency was a direct result of Sama’s freeze, in a statement to Emirates 24|7, an airline spokesperson attributed this to Ramadan demand, saying: “Overall there has been a marked increase in travel when compared to Ramadan last year. This is primarily attributable to increased frequencies and a number of new route launches.”

Analysts, however, say Emirates’ rapid first-mover advantage into Saudi was only possible due to its unparalleled fleet and its strong capital base.
 
Saudi Arabia - a tough market

Sama, up until now, has competed with the Riyadh-based National Air Services and state-owned Saudi Arabian Airlines in the kingdom.

The 2007 launch of LCC operations in Saudi Arabia by Sama and Nasair transformed the national aviation market. However, since their launch LCCs have struggled in the market, dealing with the monopoly legacy of national carrier, Saudi Arabian Airlines, and regulatory policies that include a domestic fare cap and a requirement to cover operations to main domestic airports, not designed to accommodate a new era of competition.

The LCCs have also complained that they are not on an equal footing with Saudi Arabian Airlines, especially in fuel costs, which the national carrier obtained at subsidised prices.

The carrier stated in late 2008 that the combination of fare caps and mandatory domestic routes to smaller destinations risked “having an enormous amount of capacity tied up in routes that had no economic value”.  The carrier, in a dramatic move in Sep-2008, also stated it could end Saudi domestic operations altogether unless “the [domestic] situation improves and a reasonable return can be made”.
 
Growth for LCCs

The LCC market in the Middle East is just six years old, commencing with the launch of Air Arabia in 2003. Since then, the model has started to bloom in the region, with a total of five more LCCs joining Air Arabia over the past four years.

Last year, Middle East LCCs accounted for approximately seven per cent of total intra-regional seat capacity, a slight dip on 2008, as many of the region’s larger carriers have turned their focus back on the region in response to weaker demand in long-haul markets.

As a staunch supporter of the low-cost carrier market in the region, flydubai CEO Ghaith Al Ghaith has always maintained there is room for growth in the Mideast.

He told the website earlier: “Demand for low-cost carriers in this region remains at five per cent, unlike Europe, which stands at approximately 20 per cent. As a market, we still have to reach that maturity, and I do believe there is enough demand in the UAE and this region for another budget airline to enter the foray.”

Meanwhile earlier this month, a report by industry body, Centre for Asia Pacific Aviation (Capa), indicated that Sharjah-based Air Arabia, Mena’s first LCC, reported net profits throughout the global financial crisis and in 1H2010, emerged as one of the best-positioned carriers worldwide.

So was Sama a one-off phenomenon?

The airline’s problems were not just domestic. Aside from Saudi Arabia, Sama has been flying to Egypt, Jordan, Syria, Sudan and the UAE. International routes accounted for 70 per cent of weekly seat capacity.

But as Sama sought to establish itself, it faced competition from regional competitors that were not subjected to the same restrictions.

In a statement, the airline said that although revenues were up during the summer, it was not sufficient to offset heavy winter losses.

“Sama, and all other airlines throughout the region, experienced very low fares and somewhat slow demand for regional travel during the winter season,” the company said.

The added burden was the heated competition since 2008’s economic bust, which prompted industry analysts say the recession had turned nearly every regular fare carrier into a budget airline.

However, Al Ghaith believed such a scenario has always existed in the industry.

“This is happening more so because regular-fare carriers have noticed a drop in their revenue predictions, and a price war of sorts erupted. But this occurs every time there is a market fluctuation; we just notice it more now,” he said.