High times for low-cost carriers

 
As budget airlines around the world feel the pinch of the credit crunch, Middle East low-cost carriers are flying high. What was started by the region’s first budget carrier, Sharjah’s Air Arabia in October 2003, has now almost become a way of life for the region’s aviation sector.

Kuwait stock exchange-listed Jazeera Airways followed suit and launched operations exactly two years after DFM-listed Air Arabia, in October 2005. This was followed by the launch of Saudi Arabia’s NAS Air and Sama Airlines.

Now it seems that almost on a monthly basis either a new budget airline launches operations in the region, or existing airlines contemplate a low-fare strategy to tap the lucrative market.

“Low-cost carriers are a fact of life. Convenience will be the key to compete with them,” says Giovanni Bisignani, Director-General and CEO of the International Air Transport Association (Iata).

Clearly, the influx of low-cost airlines has created a stir in the Middle East aviation industry. And it is only going to take to new heights when a dedicated low-cost terminal opens mid next year at the upcoming Al Maktoum International airport in Jebel Ali’s Dubai World Central development.

The Dubai Government recently announced the launch of a new low-cost carrier in the region, to be operational in a year’s time, which will be based out of Dubai, with support from Emirates Group.

And soon to join the bandwagon is India’s Jet Airways, which told Emirates Business last week that it plans to launch its budget arm, JetLite, into the region by the middle of 2008.

“The budget carrier sector is something that was waiting to happen for a long time. And now it has happened said Shakir Kantawala, Jet Airways’ regional manager for sales and marketing.

“With Al Maktoum International airport’s dedicated low-cost terminal facility coming up, the future of budget carriers in the region looks promising.”

Another UAE budget carrier scheduled to launch operations from Fujairah sometime this year is Kang Pacific, with $10 million (Dh36.7m) in capital it has plans to offer flights to the Philippines, Bangladesh, India and Sri Lanka.

The company also said it plans an IPO in 2008 with a listing on the Dubai Financial Market (DFM), which would make it the second publicly listed airline in the UAE after Air Arabia.

However, Kang Pacific, originally scheduled to launch operations in 2007, deferred its launch plans to March 2008, but has not yet started operations.

According to the Centre for Asia Pacific Aviation (Capa) forecast, Asia Pacific and Middle East low-cost airlines will expand their seat capacities by more than 230 per cent by 2012 over current levels or around 40 per cent capacity growth each year over the next five years.

Let the figures do the talking. Market leader, Air Arabia, started to turn a profit only in its second year of operation and posted a $76.2m net profit for the first nine months of 2007, up 331 per cent compared to the same period the previous year.

Jazeera Airways’ spokesperson Fawaz Al Sirri said: “That Jazeera has continued its profitability in 2007 should display how strongly the Middle East low-cost carrier market is growing.”

Saudi low-cost carrier NAS Air, on the other hand, said last month it plans to open 12 international routes in a bid to break even by the end of this year and will lease at least five aircraft to meet expansion.

The airline, one of two budget carriers in Saudi Arabia, plans to invest “several hundred million dollars” to lease planes and expand ahead of receiving its first batch of 20 Airbus A-320 single-aisle aircraft in 2012, according to its Chief Executive Ed Winter. 

PRICE, A PREMIUM

Even though low-cost carriers account for a meagre five per cent of the total air traffic in the Middle East, compared to 30-odd per cent in Asia Pacific, industry experts expect budget carriers to survive and this is where price plays a key role. The challenge is to keep on offering the best rates in the market without sacrificing safety standards and services.

Price will always be the fundamental factor when a customer is buying an air ticket, according to Air Arabia’s Chief Executive Adel Ali. “Price has always been the key factor when a customer books a flight. A flight is not a key purchase – it is not something you keep – once you land, the money is gone, so you want a cheap price. Price will continue to be the key factor. Budget carriers will survive because they are the only ones who can provide low price to customers,” he said.

He added: “The low-cost segment will account for 10  per cent to 15 per cent of the total aviation market by 2012-2013. It is still a small segment in the Middle East. But internationally low-cost carriers account for about 25 per cent of the total airlines business. With the entry of new low-cost carriers into the region customers will have more options to choose from and low-cost carrier market penetration is set to grow bigger.”

Jazeera Airways’ Chief Executive earlier said: “What travellers want for their short- to medium-haul travel is an airline they can count on to be on time. They want a clean and comfortable cabin and they do not want to be ripped off by airlines, paying big bucks for a short flight.” He added internet sales allow budget airlines to keep a tight rein on costs, pointing out that more than 60 per cent of Jazeera’s customers book online.

“Traffic is not regional but essentially long haul. At the long haul growth slows and incomes rise across the region, so you should expect to see sharp increases in the number of smaller planes serving the region. And this will be mainly by low-cost carriers,” he said, adding that for the moment it is clear that the long haul skies in the Middle East are getting more crowded every year.

So has this growth reached a point where there is no longer any room for new players? Qatar Airways’ Chief Executive Officer, Akbar Al Baker, believes that is the case.

“There is no room for more airlines to fly into the Middle East. That is because our population base in the region is not large enough for that,” he said.

“Also, our region is not compatible with low-cost carriers. While in the short-term it seems like a fancy idea, but low-cost carriers will go through a painful period in the long term,” he added.

Countering Al Baker’s view, Schonland said: “When you have a family that owns a country, the airport and the airlines you can protect yourself from low-cost carriers up to a point. But what happens when a Saudi low-cost carrier or a Jordanian low-cost carrier request services? Do you deny them? If so, on what basis? In the end you cannot stop low-cost carriers.”

FUTURE POSSIBILITIES

The Middle East aviation market in the future will witness more alliances in the low-cost segment of the market, according to Schonland.

“With Dubai Government’s new initiative of launching a low-cost carrier with Emirates’ support, Dubai becomes an even more powerful hub. And that is going to irritate other airlines – Emirates’ competitors such as Etihad Airways and Qatar Airways – and force them to look at doing something similar,” he told Emirates Business.

“The other carriers may not start their own low-cost arms, but may form alliances with other low-cost carriers, which is actually a much cheaper way of doing the business,” he added.

Huge infrastructure growth and high regional GDP are all contributing to the boom in the low-cost carrier sector today and the sector is expected to expand more. Budget airlines are not only transforming the Middle East aviation sector, but also passenger expectations.

So while consolidation may be the buzz words in the global airline industry, the Middle Eastern carriers are just beginning to ride the low-fare wave that most aviation industry experts believe is simply unstoppable.

 

 
Globally, low-cost carriers seem to be facing the impact of rising oil prices, falling dollar and signs of a possible recession in the United States.

Irish carrier Ryanair recently confirmed that it is freezing the pay of its senior management for 2008 as part of a series of cost-cutting measures over the coming weeks as the price of oil rises to more than $100 a barrel.

The carrier, whose $68 per barrel fuel hedge expired on April 1, said it is reviewing all of its major costs, including airports, staff, fuel and currency exposures.

It also said it will shut dows its Dublin Telesales activity, which will result in 40 job losses.

Chief Executive Michael O’Leary said these kind of measures must be taken if Ryanair is to remain Europe’s cheapest airline in these difficult recessionary markets.

Yet another low-cost carrier, Oasis Hong Kong Airlines, crash landed on Wednesday when it went into liquidation after accumulating losses estimated at $128 million (Dh469.7m), barely 18 months after its inaugural flight.

Experts attributed the failure of the airline to the huge increase in fuel prices over the past year.