Abu Dhabi investors plan budget carrier by middle of 2010

Six months after Dubai launched its first budget carrier (flydubai), Abu Dhabi is mulling a foothold into the segment. An undisclosed investment firm in Abu Dhabi plans to a launch a low-cost airline in 2010, according to a report published yesterday by Arabic daily Al Khaleej, without naming the sources.

The prospective budget airline, to be based in Abu Dhabi, is expected to start operations in mid-2010 as per the report that did not divulge the name of the investment company in question.

The airline, when launched, will be the UAE's third low-cost carrier and compete with the existing Sharjah's Air Arabia and Dubai's flydubai, besides other budget carriers operating in the Middle East.

The low-cost carriers (LCCs) are set to fly into strong growth in 2010 given their robust performance in 2009. The region saw eight LCCs being established within the past six years, which have generally held close to their expansion plans despite difficult economic conditions in 2008.

This indicates a "strong sign of future growth", according to the recent report on budget carriers by Centre for Asia-Pacific Aviation (Capa), which covered more than 130 LCCs from around the world. The report revealed that the Middle East carriers maintained solid growth late into the decade, despite the global recession.

Budget carriers will increase their regional market share to 12 per cent by 2015 from seven per cent in 2008 on the back of "robust" passenger demand, Japanese investment bank Nomura said earlier this year.

The growth path

Kuwait's low-cost carrier Jazeera Airways said recently it is eyeing acquisitions among Middle East carriers in the first half of 2010 as against launching a second hub as it seeks to expand its network to 82 routes in the next five years. Sharjah-based Air Arabia saw its net profit soar to Dh193 million in first half of 2009, up 21 per cent from the same period a year earlier.

The airline's regional growth aspirations are evident in the recent establishment of joint ventures such as Air Arabia Maroc this year, and the launch of its third hub, Air Arabia Egypt, due to take off in March 2010.

Air Arabia's Chief Executive Adel Ali, however, recently said the airline does not see yields improving until the beginning of the first quarter of 2010.

On the other hand, in a short span, Kuwait Stock Exchange-listed Jazeera Airways has managed to replace Kuwait Airways as the largest operator from Kuwait Airport, as per the Capa report, which further said that despite high fuel prices, Jazeera Airways was profitable in 2008, having reduced costs per passenger and increased yield.

Dubai's flydubai, meanwhile, which started operations in June this year with two Boeing 737-800 aircraft (and orders for another 48), launched its 10th destination to Kathmandu, Nepal, with effect from December 15, 2009. The carrier also launched flights to Baku, the capital of Azerbaijan, the in November, indicating that the airline has been on a rapid expansion plan.

Flydubai had previously stated plans to concentrate on 12 undisclosed "popular, high demand destinations" in the six GCC nations, before expanding to other markets, according to the Capa report, with an aim to capitalise on more than two billion people living within five hours flight time from Dubai, serving 70 destinations by 2014.

Saudi Arabia's two budget carriers, Nas Air and Sama Airlines – both established in 2007 – also seem to be flying high. Nas Air, formed by National Aviation Services, currently operates to 11 domestic and five international destinations but is in the middle of an expansion programme intended to lift destination network to 20 and weekly services to more than 350 by the end of this year.

Sama Airlines, the second LCC established in the kingdom, is a short-haul carrier serving nine domestic destinations and seven elsewhere in the Middle East.

Furthermore, Bahrain Air, a joint venture between Saudi and Bahraini investors, is aiming to launch an initial public offering in 2010.

Clearly, budget carriers are increasing frequencies and adding routes besides boosting capacity with huge aircraft orders, in the hope of growth rebounding in passenger traffic.

The Middle East, which has established itself as a significant aviation hub, is set to extend this role, the Capa report pointed out, adding that LCCs may complement full service carriers (FSC) in the future and can be expected to be better placed to weather any resulting downturns than their FSC counterparts.

Room for caution

But while budget carriers in the Middle East may be showing signs of resilience in difficult times, there are also harsh steps being taken by some of these airlines.

For instance, Jazeera Airways said last week it was cutting services on certain routes to weather difficult times with no improvement in sight next year.

European plane manufacturer Airbus recently warned against launching additional budget airlines in the Middle East, fearing the overkill in the segment.

"I think a pause would probably be appropriate at this point of time. We are not encouraging anybody to start a new low-cost carrier right now," John Leahy, Airbus's Chief Operating Officer for customers, said at Dubai Airshow last month.

He further cautioned airlines of a danger of "too much capacity" flooding into the market in the frantic grab for market share.

"What we would like to see is stability in this new low-cost phenomenon in the Middle East. One has to be careful when all jump into the market at the same time that you don't put too much capacity and too much competition," said Leahy.

Even though a young sector in the Middle East, the low-cost carriers, pioneered into growth by the launch of Air Arabia back in 2003, has picked up steam at a significant pace in the last few years.

Leahy further said that the demand and capacity match is not in a bad shape now but if airlines keep adding new competitors in the market they will end up with overcapacity.

"You had a very similar situation a couple of years ago in India when everybody moved into the market very quickly and had over capacity in the market," he said.


LOW-COST CARRIERS

Flydubai though launched commercial operations in June 2009, it was founded in March 2008 by Ahmed bin Saeed Al Maktoum, Chairman of Emirates Airline and Group. The airline launched services to Beirut, Lebanon on June 1, 2009, and Amman, Jordan the following day, with additional destinations added since the launch.

Air Arabia started operations in October 2003 with the first flight from Sharjah to Bahrain International Airport. It was, however, established in February 2003, becoming the first low-cost airline in the region. It issued a successful initial public offering for 55 per cent of its stock early in 2007.

Jazeera Airways started operations on October 2005 with a fleet of brand new Airbus A320 aircraft. The Kuwaiti carrier raised its capital of KD10 million (Dh127.97m) through an initial public offering in Kuwait that was oversubscribed 12 times. The airline is the first privately-owned airline in Kuwait and the Middle East.

Nas Air is a subsidiary of the Saudi National Air Services (NAS) that is based in Riyadh. It is the first low-cost carrier to fly in Saudi Arabia and started its domestic flights in February 2007. The Nas Air fleet consists of 40 aircraft as of October 8, 2009.

Sama Airlines commenced commercial operations in March 2007. During 2008, the airline shifted focus from domestic intra-Saudi Arabian destinations to international flying. It currently serves destinations within Saudi Arabia as well as across the Middle East. The airline, founded by Investment Enterprises, is chaired by Prince Bandar bin Khalid Al Faisal.

Bahrain Air started operations in February 2008. It is the second flag carrier of the Kingdom of Bahrain, and its main base is Bahrain International Airport. The low-cost airline currently flies to 16 destinations in the Middle East, Africa and India. It plans to increase its destinations to 23 cities.

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