Geography and demographics have played pivotal roles for the Gulf region’s low-cost carrier (LCC) industry – a sector that is surviving the turbulence of a crisis-hit travel market.
While it currently comprises a minute portion of less than 5 per cent of the entire commercial aviation industry in the Middle East, the no-frills airline segment, particularly in the Gulf, is poised to create a “bush-fire effect” and become a change catalyst in the Middle East, according to the Sydney-based
Centre for Asia Pacific Aviation (Capa).
“Successful breeding grounds for LCCs have several ingredients. Most of the [necessary] demographic and geographic features are found in the Middle East and many of the operational requirements are again [being put in place],” the centre said in its Middle East Aviation Outlook Report for 2009.
Over the past two years, however, various challenges such as the global financial crisis, soaring fuel prices and the swine flu pandemic have resulted in the global aviation industry weathering waning travel demand and the associated decreasing revenues while some less fortunate players had to resort to shutting their operations down.
Budget airlines and the crisis
In June this year, the
International Air Transport Association (Iata) revised its global airline financial forecast for 2009 from $4.4 billion to $9bn (Dh16.2bn to Dh33.12bn), with Middle East carriers expected to shed $1.5bn from their annual margins.
Richard Aboulafia, aviation analyst and Vice-President of the US-based Teal Group Corporation, told Alrroya.com that the economic slowdown has cast its shadow across all travel sectors.
“Lower-cost airlines once had a guaranteed place in the market, but this downturn has been hard on many of them. Clearly, the stimulant effect you get from introducing low-cost service is a one-off event. As a market matures, the low-cost players are just as affected by a downturn as the legacy carriers,” he said.
Dr. Majdi Sabdi, Iata’s Regional Vice-President for Middle East and North Africa (Mena), agreed that financial constraints have placed a heavy burden on passengers.
“Economic pressure leads to tighter family budgets, which could affect travel decisions. This applies to all airlines regardless of their business model. It is not the business model (low-cost or full-service carriers) that makes the difference in the current difficult environment,” Sabdi said.
Growing competition
Global recession or not, the Gulf region alone has seen a mushrooming of budget carrier activity.
Since
Air Arabia pioneered the business model in the region in 2003, the number of no-frills airlines seeking to get a slice of the short-haul travel market has expanded to seven: Air Arabia (Sharjah, UAE),
Jazeera Airways (Kuwait),
Sama Airlines (Dammam, Saudi Arabia),
Nas Air (Riyadh, Saudi Arabia),
Bahrain Air (Bahrain),
flydubai (Dubai, UAE) and the soon-to-be-launched Air Arabia Egypt (UAE and Egypt), which is a partnership between Air Arabia and Egyptian travel group Travco.
LCCs account for about 7 per cent of seat capacity in the Middle East, a shy figure when compared with 10 per cent in Asia, 36 per cent in Europe and 29 per cent in the United States, according to Sabdi.
“It is impossible to say how the low-cost carrier segment will develop, especially with the relatively restrictive regulatory environment in many countries in the region,” he said.
However, Dheeraj Lakhwani, investment analyst at Prime Emirates, believes the figures themselves are proof that the market has substantial space for industry players to dip their hands into.
“When Air Arabia started in 2003, there were no Mena-based LCCs operating. Air Arabia [for example] has substantial goodwill behind its five years of operations,” he said.
With the launch of Air Arabia’s third hub in Egypt, some industry experts predict market saturation due to increased competition. Lakhwani was quick to debunk such notions.
“I don’t think the market will be saturated so quickly. It will take many more years. Eventually it will be crowded as the competition is there not only among LCCs but even with conventional airlines,” he explained.
Opportunities in the Middle East
Despite the prevailing economic condition, industry players remain optimistic.
Ghaith Al Ghaith, CEO of new entrant flydubai, says UAE’s predominantly expatriate population, many of whom come from neighbouring countries, and the growing popularity of short breaks have fuelled a market for short-haul travel.
“There were many reasons why we saw the potential [to launch a service], among them [is the fact] that this sector of the population relies on air travel to visit their home country and would benefit from a low-cost carrier making travel more affordable and accessible,” Al Ghaith told Alrroya.com.
He added that low-cost airlines remain competitive since they can offer more reasonable prices because of their lower operating costs.
“In times of a financial crisis, individuals might prefer to opt for a more economical option. So, in that respect, perhaps low-cost carriers have an advantage,” Al Ghaith said.
Faisal Al Duhaim, director of marketing at Saudi-based
Sama Airlines says more than 46 per cent of air travellers make their decision based on ticket price.
Taking this into consideration, Al Duhaim says the LCC segment can stimulate demand by “offering an opportunity to make air travel more accessible and affordable to a wide range of travellers, thus reducing the impact of the credit crunch on passenger traffic”.
Stefan Pichler, CEO of Jazeera Airways added that LCCs, particularly those that fly in the region, operate on a model that reflects excellent value for money, and supply a product which includes an eclectic range of services and amenities comparable to full service carriers; but all within much lower fare categories.
“This has definitely allowed for a cushioning effect to take place,” Pichler said.
Flydubai’s Al Ghaith mentioned that the lack of other travel alternatives, such as a high-speed rail network, within the Gulf and Middle East region provides an opportunity for budget carriers to succeed, an observation shared by Jazeera’s Pichler.
“When companies and individual passengers are faced with limited means of transport, a limited travel budget and the choice between a low-fare standard air ticket and a high-fare ticket with all the frills; then why pay more, financial crisis or otherwise? When consumers buy items in a supermarket, or businesses are planning to invest in new technology, they shop around and carefully balance the price compared to the product that they will be purchasing – even if it’s a lesser known brand at a lesser price,” he explained.
Lakhwani also noted that the Middle East’s demographic make-up offers a captive market, especially since Gulf-based budget carriers fly to destinations outside the Mena such as the Indian Subcontinent and Europe.
With various industries in the Middle East being reliant on workers for its construction and real estate developments, LCCs serve as a perfect mode of transport for the low- and middle-income class segments of the population, says Lakhwani.
Budget carriers flying high
In the first half of 2009, Air Arabia posted a net profit of Dh922m ($251m), a 6-per-cent climb from its 2008 revenue. It acquired an additional five Airbus A320 aircraft during the first six months of this year, expanding its fleet to 20 A320s flying to 57 destinations as against 41 in 2008.
Dubai-based flydubai, which launched services on June 1 this year, has expanded its operation to six routes in just over three months. The carrier plans to increase its network to 14 destinations within 4.5 hours flying time from Dubai by year-end.
Sama, which launched its commercial service in March 2007, plans to increase its fleet from six aircraft to around 25 during the next five years. The airline is tight-lipped about its near-future plans, but remains committed to adding new destinations as it expands its wings.
Meanwhile, Jazeera now flies to 28 destinations in 15 countries, an impressive development since it started operations in 2005. Interestingly, the Kuwait-based carrier says it has not seen a decrease in passenger traffic amid the financial slowdown. Both the increase in passenger traffic and the shift in the region’s flight-buying habits have worked to the industry’s advantage.
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