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in Air Transport / Features

Bridging the Gulf

Posted 2 March 2018 · Add Comment

Facing stronger than expected competition in its home market, SaudiGulf Airlines is turning its gaze abroad while re-evaluating a stalled order for the Bombardier CSeries. Martin Rivers talked to president Samer Majali.

When SaudiGulf Airlines applied for an operating licence in the Kingdom of Saudi Arabia in 2012, owners Al Qahtani Group believed that a winning bid would grant them access to a heavily under-served duopolistic market.
By the end of the year, it was clear that SaudiGulf would not be the only company emerging from the tender process with flying rights.
Al Maha Airways, a subsidiary of Qatar Airways, was also approved to launch operations. And, while its plans ultimately came to naught, two other market entrants were waiting in the wings – Nesma Airlines, a regional carrier formerly based in Egypt; and Flyadeal, a low-cost subsidiary of flag-carrier Saudia.
Together with privately owned Flynas, five separate carriers now ply routes across the kingdom. Though fantastic for passengers, this explosion of competition has left SaudiGulf re-evaluating a business model that presupposed rapid growth and untapped demand.
“We were surprised when Al Maha was given the second licence (which has recently been frozen) and, subsequent to that, two additional carriers were licenced, fast-track, while we took the long route,” said SaudiGulf president, Samer Majali, referring to the airline’s three-year delay in launching, which most observers blamed on foot-dragging by the General Authority of Civil Aviation (GACA).
“Many studies by different companies have said that the Saudi Arabian market can only take three domestic carriers. Now there are five, and obviously everybody is adding capacity.”
Oversupply is particularly damaging for SaudiGulf because of its focus on high-yield premium traffic. The airline’s on-board product features leather seats, in-flight entertainment systems and free meals – and that’s just in economy. Its extravagant first-class cabin is best-in-class for the Saudi domestic market, matching even Al Bayraq, Saudia’s all-business-class shuttle service. Yet Saudi customers now have access to “some of the lowest fares in the world”, dragging down the airline’s pricing power.
“The biggest problem now is that people are undercutting [airfares],” Majali explained. “This very low pricing is partly due to the Saudi market itself – with the five carriers – and it’s partly due to the overall revenue dilution that’s happening in the region and globally.”
Disruption to SaudiGulf’s fleet development has also been a major headache. The airline had planned to launch with the Bombardier CSeries CS300, having ordered 16 firm units plus 10 options. But delays to the programme forced it to begin operating with four Airbus A320s instead.
“We’re very unhappy with them, because of what happened,” Majali said of the Canadian aircraft-maker. “The programme delays have caused us some big damage and big costs, because we have an overhead sized for an operation several times the size of what it is today. We were severely damaged by the inability for us to grow in the second half of 2016, and 2017, and now 2018.”
Although he described the CS300 as a “good aeroplane” with impressive seat costs, the president said that Bombardier had fallen short of its contractual obligations and that “all options are open” to the airline as a consequence. No date has been set for the deliveries.
While those commercial talks continue, management have decided to wet-lease between two and four narrow-bodies to give SaudiGulf a sorely-needed “capacity bump” in 2018. That will allow the Dammam-based company to spread its wings beyond Jeddah, Riyadh and Abha, taking in some smaller domestic points and – critically – venturing overseas.
“The civil aviation [authority] wanted us to really get some experience domestically for the first year of operations. That’s why we didn’t go international [before],” Majali noted. “Now that we have established ourselves – we finished one year of successful operations at the end of October [2017] – we are moving on to re-deploy some of the aeroplanes in international operations.”
The airline will start by linking Dammam with Dubai in the UAE, before also branching out to unspecified Pakistani points and, potentially, Cairo in Egypt and Khartoum in Sudan.
Regional expansion had always been in the business plan, but Majali admits that challenging conditions at home have forced him to scale up the overseas strategy faster than expected. Worryingly, he is not the first airline boss to lose faith in the kingdom’s domestic market.
In 2010, Simon Stewart, the then-chief executive of Nas Air (later rebranded Flynas), cut back domestic operations in favour of growing flights to India and Pakistan. Stewart also complained that the local market had become financially unviable, blaming a domestic fare cap that stopped airlines raising ticket prices above a level deemed “predatory” by the authorities. But Nas Air’s narrow-bodies struggled to match the seat costs of its competitors’ wide-bodies, forcing a complete withdrawal from the sub-continent.
Majali, at least, can take comfort from on-going reforms to that controversial fare cap. GACA started dismantling it in 2014 by allowing carriers to lift ticket prices within 10 days of departure. Further steps towards free-market pricing are planned for this year, before the mechanism is dropped entirely in 2019.
“The fare cap is being removed gradually,” Majali confirmed. “But the civil aviation [authority] still feels that it has to intervene at the moment, which is a bit of an issue, bearing in mind that there are now five airlines.”
Although greater commercial autonomy should boost profits in the sector, higher ticket prices are only achievable when paired with capacity discipline – something the market clearly lacks.
Flynas has outstanding commitments for 80 aircraft – more than double its current fleet size – while Saudia and Flyadeal are both negotiating large orders. Majali’s plan to add eight jets in 2019 and eight in 2020 seems modest by comparison. Without rationalisation, all Saudi carriers can expect losses in the years ahead.
The stakes will be raised even higher for SaudiGulf in 2021, when it could take delivery of its first twin-aisle aircraft. Majali confirmed last year that he is negotiating a purchase of up to 16 Boeing wide-bodies – part of a package of mostly military deals unveiled during US President Donald Trump’s visit to the kingdom.
Asked for an update, he said SaudiGulf will likely place a firm order for “eight to ten aeroplanes, with some options to make it up to 16”. Both the 787 Dreamliner and the 777 are being considered.
“We’ll be using those wide-bodied aeroplanes initially on short-to-medium-range routes, where passenger demand is high,” the president explained. “We will do long-range eventually, but the primary [aim] is [sourcing] a large people carrier that helps us [add capacity] in slot-restricted airports. Plus, we need an aeroplane with very low seat mile costs.”
He described the 787-10 – a stretched variant of the Dreamliner capable of seating up to 330 passengers – as an “ideal aeroplane” to compete with Saudia’s A330-300 Regional, a variant of the Airbus wide-body that is designed for high-capacity, short-haul routes.
By up-gauging to twin-aisle aircraft on regional flights, SaudiGulf could avoid the difficulties encountered by Nas Air at the turn of the last decade. But the experience of one of Stewart’s successors, Raja Azmi, offers another cautionary note from the kingdom. Azmi also took Flynas down the wide-body path – albeit targeting long-haul destinations such as London and Kuala Lumpur – only to abandon the strategy within months due to heavy losses.
If Majali has one thing working in his favour, it is undoubtedly the strong brand recognition that SaudiGulf has cultivated during its short time in the skies. “The feedback has been very good,” he said. “We are currently rated the highest [of any Saudi carrier] in terms of service offering and general quality of service – on-time punctuality, reliability and so on.”
He conceded, however: “Translating that into people being willing to pay is a different act. Even though we are priced very competitively in the market, only a subset of people are willing to pay additionally for our services.”
 

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