Jazeera will struggle to keep operating costs low: report

Kuwait-based Jazeera Airways has been hit by the inability to keep costs low, according to a report by Gerson Lehrman Group (GLG), which focuses on providing a platform for consultation and collaboration.

The Middle East’s low cost carriers are struggling to cope with a sharp drop in international passenger travel and they continue to drop airfares to attract passengers.

“With the Dubai Civil Aviation Authority pulling the rug from under Jazeera Airways’ feet on fifth freedom rights, the Kuwaiti carrier has to concentrate on competing from the ‘outside’ inwards, not vice-versa,” GLG said in the report.

It added that in contrast to the recent financial results published by rival Air Arabia, Jazeera Airways’ second quarter loss is “by no means a tragedy”. “That it failed to capitalise on the stagnant national airline, Kuwait Airways’ presence in the Gulf region highlights that expansion comes at a potentially high price,” it stated.

The report further said that even though Jazeera Airways may have overtaken Kuwait Airways as the bigger operator, that it fell into a loss for the second quarter of 2009 shows that the airline was “slow”, “if not outright motionless when it came to moving out of its squashed presence at Dubai International airport”.

Kuwait-based Jazeera Airways reported a loss of KD1.26 million (Dh16.1m) in the second quarter of this year, but predicted a turnaround in the latter part of 2009 as business travellers start turning to budget airlines. The airline’s CEO Stefan Pichler, who took charge of the airline recently, said last month that Jazeera Airways was on the acquisition drive to expand its network and was looking for a new second hub after stopping flights from Dubai this year.

Comparatively, Air Arabia, the region’s largest low cost carrier, posted a 10 per cent rise in its second-quarter net profit to $24.5m (Dh90m).

Jazeera Airways, which started operations in 2005, competes with Air Arabia and Dubai-based flydubai, which began operations in June this year.

If one were to consider Jazeera Airways’ limited appeal outside the GCC, he would see that “the low cost base that it boasted about is not so”, the report highlights. “It doesn’t have the fleet or capacity to suck feeder traffic as Air Arabia, Emirates or even Kuwait Airways.”

The quicker Jazeera Airways focuses on establishing its base in Kuwait City Airport at its dedicated terminal, the quicker the turnaround would be.

“Given its proximity to other neighbouring states such as Iraq, it is only a matter of time before Jazeera Airways executes an O&D [origin and destination] master plan that will see passenger traffic from as far south as Yemen and Oman transit through Kuwait for onward connections throughout key cities in Iraq such as Baghdad, Erbil, Basra and Najaf,” the report indicated.

Iraq alone is a huge untapped market and Jazeera Airways’ proximity to it means it has that segment to lose, it added. “This is precisely why last week’s announcement from Gulf Air that it would ply its trade to Iraq came as no surprise. One only need look to the other smaller Gulf Air rival, Bahrain, Air which is also starting its services to Iraq,” the report stated.

It added that while Jazeera Airways’ reluctance to occupy a single hub is what has undone the airline, Chairman, Marwan Boodai, is “probably the best man to steer the airline back to profitability”. He had recently told Emirates Business that Jazeera Airways plans to become a debt-free airline by as early as next year. “Jazeera Airways would be a completely debt-free airline by early 2010. We have been exploring innovative ways for raising finances. Finance is available out there in the market,” Boodai said.

He further said all of the airline’s funding is being currently raised by Jazeera Airways’ aircraft leasing unit, Sahaab Leasing launched in October last year.

“This means that we would not need any direct financing as our leasing company will take care of that,” Boodai said.

With Jazeera Airways as Sahaab’s kick-off customer, the leasing unit is to acquire between 40 and 50 planes sometime this year, in a deal worth between $2.5bn and $3bn at list prices, Boodai had said in March.

The airline currently operates a fleet of 10 Airbus A320s, offering the Jazeera Plus (J+) cabin, to cater for business travellers who prefer a higher standard of in-flight amenities.

“Rather wisely, Jazeera Airways scheduled delivery rates for its outstanding A320s. It is around eight aircraft per year. Increasing utilisation is key to driving revenues up. Like its Sharjah-based competitor, Air Arabia, Jazeera Airways has a fantastic product offering that frankly embarrasses the so-called full service airlines,” said the GLG report.

It added that the quicker Jazeera Airways “redoubles its efforts to grow its network”, suppress costs and augment business model by casting aside political pressure to operate overseas, the bigger its window of opportunity becomes.

Meanwhile, only about three to four per cent of the total air travel in the Middle East is accounted for by the low cost carriers at present as against about 30-odd per cent globally, according to industry experts. But that is set to change. “The budget carrier segment in this region could easily achieve up to about 20 per cent market share over the next five years,” said one of the industry experts.

At the same time, low cost carriers seem to be cashing in on the plummeting premium air traffic. According to the latest statistics revealed by the International Air Transport Association, or Iata, the “structural declines” in premium traffic are taking place at present, across the globe.

The aviation trade body indicated that this could be a good opportunity for the low cost segment of the market, as there was a further improvement in passenger numbers travelling between the Middle East and Asia.

Identifying further trends in the low cost travel, Iata said that the sales of economy tickets went up significantly, taking total passenger numbers up 14.6 per cent in June this year after a rise of 9.4 per cent in May. “This partly reflects the investment in tourism in the Middle East and direct travel to the region,” Iata pointed out.

However, while it seems low-cost carriers’ numbers are rising, analysts have warned that these figures are not only driven by cheap fares, but also summer traffic.

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