A race between low-cost and legacy carriers

The airline industry in this part of the world is undergoing dramatic changes as a result of the underlying economic growth and the changing demographics in the Middle East. Governments understand that the airports [and ports] are the heart of any economy and airlines are the veins to pump up GDP. But they take a very different individual approach towards aviation industry. Some are there to protect or shelter their national legacy carriers against market competition, some boost their national carriers into global players and some governments try to stimulate traffic by deregulating the sector and allowing free competition. In reality, we find a mix of these options and motivations in almost any Middle East economy. And this shows in the different supply levels, having around 28 per cent of the Middle East population living in GCC countries, which enjoy around 80 per cent of the airline seats – and on the other hand 72 per cent of the region's population, but only 20 per cent of airline production.

The airline model

The next question then is what kind of airline business model does fit the purpose of sustainable economic growth best. But, are there really any different philosophies on how to run an airline? The airline business is a fixed cost driven business – any Boeing 737 or Airbus 320 aircraft at a value around $45 million (Dh165.28m), and any long-haul aircraft at a multiple of that.

So, buying and operating aircraft is a risky business, you play with a high asset gearing in volatile consumer markets. Safest option to do that is operating those aircraft at the lowest cost possible, at least lower than your competitors'. That's why every airline should strive to be a low-cost airline. It is just business sense. And then the markets … well, all of the competitors try to get the highest revenue per flight. So everyone offers "full fares" and discounts unsold inventory as long as the discounted price still makes a positive contribution to the fixed cost. Everyone in the end wants the lowest costs and the highest revenue. That's why "low cost versus legacy airline" is as far away from reality as it can be. The real difference is between new entrants and established carriers as start-ups don't have the legacies of others who have been around for many years.

Consumers in this part of the world have slightly different expectations to their counterparts in the US, Australia and Europe. So, the import of a pure "no-frills" philosophy does not necessarily work here. Hospitality beats technology. Customers feel that space, catering, excess baggage allowance, are as important as on-time performance, connectivity and a frequent flyer programme.

Expectation

Frequent travellers have a strong "all inclusive" expectation. There are in general high levels of discretionary income, but the "expat" market (to and from India, Sri Lanka, Philippines, Egypt etc) is very price sensitive. So, short-haul flights of up to three-four hours are a commodity and airlines will not be able to generate sustainable price premiums in this part of the market. That's why cost focus and high asset utilisation are important. In the short-haul market, consumers drive airlines to be lowest cost in order to be able to afford lowest fares. It's a different game on long-haul flights, where the product and service experience together with the network, drive purchasing behaviour. So, how will the future for airlines shape up in our part of the world? Well, as markets tend to get more and more deregulated, in the long run there might be two camps.

The first one will be the government-backed network airlines like Emirates, Etihad and Qatar Airways, that are able to invest in their infrastructure and are seen to be the growth vehicles for their respective economies. They will compete in a global market place for global traffic streams, but as well drive regional and local traffic growth. The other camp includes the regional airlines who operate their networks on a low cost basis, with high asset and staff utilisation, fighting for the lowest cost position. Those are the likes of Air Arabia and Jazeera Airways. They might swallow some of the smaller players, as the only way to grow in a foreign protected market environment is to own or set up a regional aircraft operator certificate. This scenario also means that some of the famous regional airline brands, stuck with high cost and exposed to shrinking revenues, might not be able to make it to the new world.


- The author is CEO of Jazeera Airways. The views expressed are his own

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