Will Saudi move really be a licence to thrill?

With the largest population of any country in the Arabian Gulf and an expanding middle class that wants to fly, Saudi Arabia should be prime territory for any airline.

But long-standing restrictions on the amount airlines can charge for domestic flights, together with substantial fuel subsidies for Saudia, have hobbled carriers seeking to challenge the state-owned flag-carrier.

Most notably, low-cost carrier Sama closed its doors in August 2010 after just three years, with CEO Bruce Ashby commenting that it had been awaiting “a significant aviation relief package with respect to fuel subsidies, subsidies for PSO routes [and] a gradual lifting of domestic fare caps”. That package had failed to arrive in time, he lamented.

The regulatory situation had remained unchanged since then, with surviving budget carrier Nas Air having to cope with fare caps on domestic routes and Saudia’s fuel subsidy.

Now, the Saudi authorities plan to allow one or two new operators into the market. Qatar Airways has acknowledged it is interested, while Gulf Air is supporting a bid from Saudi trading company Abdel Hadi Abdullah Al-Qahtani & Sons. Also in the running are Bahrain Air in alliance with the Saudi Private Aviation company (SPA); HNA Airlines, a Chinese airline with more than 129 aircraft in alliance with the Saudi Mazaya youth company; The Islamic Development Bank (IDB) in alliance with the Egyptian International Aviation, a company which already operates regular flights from Egypt to a number of the kingdom’s airports; Saudi-owned Nesma Holding that owns Nesma Airlines, which operates regular flights from Egypt to Saudi Arabia; and finally, Falcon Express Cargo.

Saudi’s civil aviation authority GACA said there could be more than one licence granted. The winning contenders were due to be announced around the time Arabian Aerospace was going to press.

Saj Ahmad, airline analyst with London-based StrategicAero Research, believes there are certainly opportunities for new entrants to the Saudi market and they will probably pull customers away from Saudia and Nas Air, particularly if those customers are from the professional classes that have previously experienced airlines like Qatar Airways, Emirates Airline and Etihad.

If the Saudi government allows a third party to enter the domestic market, it must ensure there is a level playing field, as the two current incumbents would undoubtedly come under pressure, he believes.

A level playing field, says Nas Air CEO François Bouteiller, is all he wants.

Bouteiller made the point that GACA’s move is not deregulation, as some have described it, but the more modest introduction of one or two new players into the kingdom’s aviation scene. Deregulation “would be more interesting”, but too many aspects of Saudi Arabia’s airport infrastructure could not cope with the strains that would create.

“We wouldn’t necessarily want complete deregulation. The country is not ready,” he said. An airport such as Taif, for example, although classed as an international facility, struggled to handle more than three flights at a time. Nas Air was keen to open up a network based on secondary airports but conditions had to improve.

Part of the problem was that too many aspects of airport infrastructure – ground handling, catering and particularly fuel supply – were monopolies. “These [factors] need to change.”

Fuel has been a particular bugbear. Nas Air does not receive subsidised supplies: “The price of fuel for me is more expensive here than in Europe because of the monopoly of Aramco,” said Bouteiller.

Nas Air began existence as a largely domestic carrier, but had found itself forced by economic necessity to expand externally, so that fewer of its routes were subject to fare caps. “In 2009 it was obvious there was absolutely no way we could make money,” he said. Over the following year, there was a wholesale shift in Nas Air’s route network to mainly foreign sectors.

“I don’t think I could survive if I didn’t have international routes,” said Bouteiller. Even in peak times, with 100% load factors, he was making “just a very little money” from domestic services.

This may be about to change. In September GACA appealed for fuel costs to be reduced to players in the domestic market. According to the newspaper Al-Eqtisadiah GACA vice-president Faisal Al-Sugair called on monopoly provider Saudi Aramco to cut its price and create fair competition for airlines.

“Aramco is charging airline companies prices higher than international prices, even in neighbouring countries with lesser potential. For instance, Sudan is supplying fuel to all airline companies at a lower price than Aramco,” Al-Sugair was quoted as saying.

According to the newspaper, Al-Sugair added the higher fuel prices led to airlines avoiding refuelling at Saudi airports. “It is unreasonable that the world’s top oil producer demands a higher price than other countries with lesser oil resources,” he was reported as saying.

Nas Air has previously said it can refuel in India cheaper than in its own country.

The other main problem facing carriers wanting to tap into the growing demand for domestic air travel is the fare cap imposed 17 years ago. Designed initially to encourage air travel within the kingdom, it has become a seriously limiting factor on carriers, as it has not kept pace with inflation. “It costs SR150 – around $40 – for a flight of 70 minutes,” said Bouteiller. “How can you do that? It’s impossible under the existing fare cap to make money.”

Saudi Arabia was a country full of opportunity, he said, but it was a complex place in which to do business and new processes would be needed to support a fully open market.

How to solve the fare cap problem? “It’s a very sensitive topic,” admitted Bouteiller, who said there was a lot of pressure on the government but, so far, no sign of a change in policy. “My approach is: ‘Let the market decide’. If you let competition deal with this, you will naturally have a fare cap.

“If you’re serving secondary destinations, the wages are very different to those in Riyadh and Jeddah, so you can’t charge prices that are too high.

“I welcome competition. Competition can only bring benefits to the country because you will bring more pressure for improvements in the infrastructure and for lifting the monopolies.”

He questioned how new entrants would make any profit if they had to accept the current restrictions of high fuel prices and capped fares. And he was wary of foreign airlines using a foothold in the Saudi market to draw passengers to their own hubs for onward connections. Such a development would not help the kingdom develop its domestic air market.

[BOX 1]

The idea of issuing new licences to foreign as well as local airlines in Saudi Arabia “was done mainly to broaden the horizons of the travelling public and give them more options when it comes to many of the local routes”, said a spokesman for the country’s aviation regulator, the General Authority of Civil Aviation (GACA).

“We believe the competition will help improve the quality and the quantity of the services provided. With the unprecedented increase in air traffic inside the kingdom, there was an obvious need to introduce new players into the game.  Fourteen companies applied for the licenses, seven of which qualified for further vetting and these seven companies were invited to submit their proposals. 

“Once the decision is made, the winning companies will be given a choice to pick the hub airport which they want to operate from and the possibility of adding international routes to their destinations. The final decision will be handed in the coming few months.”

[BOX 2]

Saudi low-cost carrier Sama fell by the wayside in 2010 after racking up substantial debts as it attempted to compete in the Saudi domestic market.

The airline’s former chief commercial officer (CCO), Sudeep Ghai, now a partner in London-based airline and airport consultants Athena Aerospace, explained some of the reasons behind its failure.

“I was the founding CCO and took the airline to launch. And the key critical constraints at launch was the effective subsidisation of fuel at Saudi Arabian Airlines, the public service obligations (PSOs), the domestic fare cap, which applied to economy travel, and the initial view that international services would have to be held off for 18 months.”

The percentage of PSOs was, he said: “Significant enough when a small airline is building up from scale and trying to square away client expectations of flying routes with smaller aircraft on a commercial basis.

“It was our expectation that the [fare cap] constraints would be relaxed. They weren’t. Partly because of politics, the influence wielded by Saudi Arabian Airlines and a failure to grasp that low fare travel would present more customers with choice and encourage travel.”

Ghai believed that both subsidised fuel and the ability to set ticket prices at a more realistic level would have been needed if Sama was to have survived. “But you also needed a government and regulator that would actively pursue the development of bilateral relations with other countries in the region and the development of a support infrastructure – ground handling, maintenance and engineering, airport management and catering.”

Adding to Sama’s problems, it “picked old 737-300 aircraft that struggled in the hot-and-high environment of Saudi Arabia. Sama also did not scale up operations fast enough to build economies of scale: the fleet never got beyond six units when it needed to approach 15 before the airline had critical mass”.

Ghai added: “At present the introduction of foreign operators could force a positive change but this may be at the expense of underdeveloped local operators. The risk is without this being clearly thought through any initial negative impact could persuade the authorities to retrench, not because liberalisation is bad but more because the execution might be suboptimal.”

He believed that the following changes have to be made to the air transport scene in Saudi Arabia to allow newcomers to prosper:

·        Saudi Arabian Airlines to compete on a level playing field – no fuel subsidies;

·        Development of an aviation support infrastructure with healthy suppliers – catering, fuel, ground handling, maintenance etc;

·        No restrictions on domestic pricing;

·        No PSO routes – run aviation on a commercial basis;

·        Development of a proactive regulatory framework that focuses on developing new bilaterals;

·        Investment in training and developing a workforce capable of competing with the best in the world;

·        Development of a strong and positive reputation for tourism in the holiest country for 1.6bn Muslims worldwide.