Mideast low-cost carriers' capacity rises 8.3%

Low-cost carriers in the Middle East provided 8.3 per cent of seat capacity in the region in 2009, up from 2008's 7.4 per cent, according to the latest figures released by aviation market research provider Centre for Asia-Pacific Aviation and flight solution company OAG.

In terms of international capacity to and from the Middle East, budget carriers held a capacity share of six per cent, up from 2008's 4.8 per cent.

These figures are expected to rise in 2010, as the domino effect of last year's economic downturn continues to make passengers more price conscious, while new entrants in the budget carrier arena vie for a bigger share of the pie with new joint ventures and traffic rights.

Lion's share

The regional low-cost carrier segment is relatively a young one, compared to Europe and the United States. In 2003, the Sharjah-based Air Arabia was the first to take off in this market, followed by Kuwait's Jazeera Airways, flyDubai, the Saud-based Nasair and Sama and Bahrain Air.

Air Arabia also launched a joint venture, with a second hub in Morocco and a new subsidiary on the cards for Egypt.

Between them, these low- cost carriers operate 66 aircraft, with a further 150 on order, of which 31 are scheduled for delivery over the next two years. Servicing 92 destinations, their route map takes them to 37 places in the Middle East, along with Europe, Africa and India.

Of the carriers, Air Arabia's growth has been the most prominent in its aggressive expansion plans. Last week, the listed company announced a net profit of Dh452 million for 2009, sustaining 2008's performance of Dh454m, excluding exceptional items. For the full-year 2009, the company registered a turnover of Dh2 billion, a 4.5 per cent decline from Dh2.066bn recorded in 2008. The airline served 4.1 million passengers in 2009, an increase of 14.2 per cent compared to 3.6 million passengers in 2008.

"We are glad to share Air Arabia's success with our shareholders by distributing a 10 per cent cash dividend of the company's share capital for the second consecutive year," said Sheikh Abdullah bin Mohammad Al Thani, Chairman of Air Arabia, at the time. "Last year represented serious challenges to the global aviation sector and led to the industry's highest loss ever. With the pressure on yields increasing significantly due to continuous overcapacity and volatile oil prices associated with the world's financial crisis, the year 2010 remains uncertain."

Air Arabia's Director of Finance and Administration Paul Suckling said the market is still "challenging", and although the carrier was starting to see some improvement at the end of 2009, it still expects Q1 2010 and Q2 2010 to be "depressed".

However, the airline still has firm plans to expand its operations in Morocco, while going ahead with its third hub in Egypt.

Air Arabia Maroc COO Rohit Ramachandran has said the group may now require further aircraft for the launch of operations from its third hub in Egypt and expanding Casablanca and Sharjah operations. Consequently, Ramachandran expects demand to outstrip capacity over the next couple of years, at least, stating the carrier "might even have to go outside" to acquire new aircraft.

Air Arabia has outstanding orders for 46 A320s, ordered in 2007. According to Ascend, the carrier will take delivery of five aircraft from this order in 2010, with another 11 to follow in 2011. Air Arabia Maroc plans to take delivery of two aircraft this year and, if market conditions are suitable, will receive three aircraft per annum to reach a fleet of 17-20 aircraft, similar to Air Arabia's Sharjah operations.

Air Arabia Egypt, from the group's third hub, is expected to launch operations mid-April according to insiders. The carrier is to be launched as a joint venture with the Travco Group, in which Air Arabia owns a 40 per cent stake. Air Arabia Egypt's hub is reportedly to be in Alexandria, after previously also considering Cairo as an option. The carrier plans to operate from as many as five Egyptian airports to destinations across the Middle East and North Africa, as well as Europe.

Home-grown competition

Meanwhile, flydubai is continuing to expand its operations, stating it is looking to launch services to "niche markets where there is no existing competition", including destinations in India, the CIS and Russia, as well as Pakistan and Saudi Arabia. Assisting this expansion, are the carrier's plans to take delivery of seven new B737-800 aircraft this year.

Flydubai CEO Ghaith Al Ghaith revealed last year the carrier plans to "grow as fast next year [2010], as we have done since we launched, and even faster in 2011". By 2014, the LCC plans to operate to 70 destinations within five hours flight time from Dubai.

According to Al Ghaith, a "strong" GCC network is "at the heart of flydubai's strategy", thus making Kuwait and Oman natural choices.

Flydubai deferred plans to launch services to India in August 2009 due to regulatory delays, but has sought permission for services to Chandigarh, Coimbatore and Lucknow, with other destinations, including Goa, to be added at a later date.

The carrier aims to report operating profits in three years and has been achieving load factors of 70 per cent on some routes. The carrier also plans to start hedging fuel costs from 2011, stating it is still not large enough to commence hedging just yet.

Following in its heels could be the newest player in the market – an Abu Dhabi-based budget airline. Arabic daily Al Khaleej reported in December 2009 that an undisclosed Abu Dhabi-based investment company has announced firm plans to launch a new low cost carrier in 2010, operating short and medium haul services to regional cities. More details could be forthcoming soon.

Regional contenders

Kuwait's Jazeera Airways plans to expand its reach through the acquisition of another carrier from a non-GCC country, rather than launching a second hub on its own, to increase its network to 82 routes over the next five years. Jazeera Chairman Marwan Boodai said the carrier is in the process of talking to a number of companies, and is likely to close a deal this year. After being forced to close its Dubai hub due to regulatory issues, the carrier expects to report a profitable outcome for 2010, after reporting losses in the first half of 2009. Losses for the nine months ended September 2009 totalled KD1.5m (Dh19.03bn).

The carrier now plans to focus operations on Kuwait and hopes to launch at least three new routes in 2010, potentially including services to Iraq, which it stated was a market it is interested in entering "very soon". Jazeera also expects to handle 2.2 million passengers in 2010.

The airline has announced firm orders for an additional 29 aircraft, scheduled for delivery from 2011 to 2016, to both expand its fleet and replace ageing aircraft.

This year, the Saudi-based nasair also plans to expand its network internationally, launching services to 11 cities by the end of March 2010, including the launch of scheduled India services, after previously only operating Haj services to the market.

Nasair CCO Maria Aangelika Hanne stated the Indian services will target religious passengers and migrants from Kerala and tourists from the GCC. Nasair will be the first low-cost carrier to operate from Riyadh to the state, with Air India currently the only carrier operating on the route. The other Saudi carrier, Sama Airlines has its own problems, stating at the start of the year that it would discontinue its Public Service Obligation (PSO) operations from February 2, due to a "long-running delay in the formulation of a comprehensive aviation policy" within the country.

Sama CEO Bruce Ashby said the carrier has incurred more than SR50m (Dh48.93m) in losses related to PSO operations since its startup in March 2007, and receives no subsidies or fee waivers for the services, unlike government-owned Saudi Arabian Airlines.

Bordering country, Bahrain's budget carrier is faring well, with plans to break even in 2011. Bahrain Air plans to handle one million passengers in 2010, as its adds new destinations, including Pakistan, later this year.

Long-term growth

While passengers can benefit from this competitive outlook for 2010-2011, industry insiders apply caution to the equation.

John Leahy, Airbus' Chief Operating Officer for customers, told Emirates Business earlier that launching additional budget airlines in the Middle East could result in an overkill in the segment.

The representative from the European plane manufacturer said: "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."

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.


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