UAE aviation in numbers

AED451: Air Arabia’s average revenue per passenger in the first half of 2010

750,000: Number of passengers carried by Flydubai in its first year of operation

Source: MEED

In early October, Rak Airways resumed flights following more than year’s hiatus. The Ras al-Khaimah-based carrier suspended scheduled services in late 2008, owing to commercial pressures brought about by the global economic downturn. The company had only been established in 2006.

People just won’t want to travel to Rak airport, even with all the services it is going to offer

Saj Ahmad, FBE Aerospace

The airline’s return brings the question of overcapacity in the UAE’s aviation sector to the fore once more. Despite having a population of up to 8 million, the UAE already has two major airlines – Dubai’s Emirates Airline and Abu Dhabi’s Etihad Airway, as well as two low-cost airlines – Flydubai and Sharjah-based Air Arabia. Having already failed once, industry analysts are sceptical of how Rak Airways will fare second time round.

Popular routes in the Middle East

The airline has relaunched with two destinations: Calicut in India and Jeddah in Saudi Arabia. Jeddah has been chosen for its role as the gateway for pilgrims wishing to visit the holy cities of Mecca and Medina. Calicut, meanwhile, is the major transport hub for the state of Kerala – home to many of the UAE’s expatriate construction workers. As such, the two routes, which will initially be serviced four times a week, are expected to enjoy strong demand.

Rak Airways is expecting to combine low price and full service … a strategy contrary to basic pricing models

John Siddarth, Frost & Sullivan

The risk is that Calicut is already served extensively by several airlines in India and the Gulf region. Jeddah might also prove to be a challenging route to service. The Saudi aviation industry is dominated by state-owned Saudi Arabia Airlines and Nas Air and the kingdom’s low-cost carriers have struggled to compete. Sama Air was forced to suspend its operations on 24 August due to heavy losses suffered earlier in the year. The firm had been holding out for a relief package from the government, including fuel subsidies and a lifting of domestic fare caps.

To build up a customer base, Rak Airways is offering extremely low fares – although the airline insists it is not a budget carrier. Tickets for a flight to Jeddah start at AED10 ($2.70) before taxes. “We are not a low-cost airline; we are a small-fares airline,” says Rak Airways’ chairman, Sheikh Omar bin Saqr al-Qassimi.

Destinations flown
  Air Arabia Flydubai
Mena 29 14
India 14 1
Asia 6 4
Europe 13 1
Africa 8 2
Russia & CIS 2 0
Mena=Middle East and North Africa; CIS=Commonwealth of Independent States. Source: MEED

The price also includes onboard meals and a baggage allowance of 30kg a passenger, as well as free transfers from Dubai and Abu Dhabi to Ras al-Khaimah airport. With such low prices, it is unclear how the airline plans to cover its operating costs. Furthermore, the two planes it operates are not particularly fuel-efficient. The airline does have a verbal agreement with Boeing to purchase up to six new aircraft, but negotiations are still ongoing.

Despite offering shuttles to the airport, industry analysts say Ras al-Khaimah’s location is a major disadvantage to the airline. “It’s going to be difficult … [Flydubai and Air Arabia] already fly to most places in the region and people just won’t want to travel to Rak airport, even with all the services it is going to offer,” says Saj Ahmad, aerospace and airline analyst at UK-based FBE Aerospace. “Tourists are interested in the UAE because of Dubai and Abu Dhabi.”

Budget travel in the Middle East

Air Arabia has been able to establish itself as the market leader in low-cost travel due to first mover advantage. Air Arabia began operating out of Sharjah in October 2003, catering predominantly to the expatriate community, but it has also managed to build up a loyal base among tourists wanting to travel around the Middle East and Asia. The carrier has been profitable since its first year of operation. In the past 12 months, it has opened new hubs in Egypt and Morocco to broaden its catchment area, and a fourth is planned for Amman. Its Casablanca and Alexandria bases allow the airline to access European markets and, today, Air Arabia flies to 65 destinations.

But it is feeling the heat from the arrival of a new player in the UAE aviation sector: Flydubai. Although Air Arabia carried 28 per cent more passengers in the first half of 2010, compared with the same period in 2009, its income has decreased. Average revenue per passenger fell from AED472 in the first half of 2009 to AED451 in the first six months of 2010.

This can partly be attributed to the impact of the global financial crisis, but growing competition from Flydubai on routes out of the UAE is also a major factor. The state-owned carrier operates from Dubai International airport and is now the second biggest generator of traffic at the airport. The airline was established in March 2008 and its first flight took off to Beirut on 1 June 2009. The airline opened more than 20 routes in its first year of operation and carried 750,000 passengers. By comparison, Air Arabia carried 650,000 passengers to 15 destinations in 2004 – its first full year of operation.

Flydubai has a geographic advantage over its Sharjah-based rival. Where the two airlines serve the same destinations, this has helped to lure customers previously loyal to Air Arabia. The carrier has also adopted a slightly different model to Air Arabia, in that it charges extra for baggage to be placed in the hold.

 “In less than two years, Flydubai will be the biggest low-cost airline in the region and that says a lot about the way they have managed to open, exploit and dominate the routes they serve,” says Ahmad. “Not many airlines can attest to the same.”

The outlook for budget carriers in the Middle East is positive, with demand for low-cost travel expected to show strong growth. According to Flydubai, the UAE is within a five-hour radius of 2.5 billion people.

“The low-cost travel segment is set for further growth. If we compare today’s low-cost carrier market share to the era before Air Arabia, and also with [the share it] represents in the EU and the US, we can determine the huge potential that exists,” says an Air Arabia spokesman.

But the question is how many carriers the UAE market can sustain. “Flydubai and Air Arabia compete in the low-cost segment and Rak Airways is expecting to combine low price and full service; this is a strategy contrary to basic pricing models, [so] it would be too early to comment if this would be successful,” says John Siddarth, an aerospace and defence industry analyst at US consultancy Frost & Sullivan.

The immediate impact of Rak Airways’ relaunch will be to put further pressure on prices on flights from the UAE to Calicut and Jeddah, which are already among the most price sensitive international routes.

Niche markets

Sheikh Omar says Rak Airways will also focus on charter flights between Ras al-Khaimah and the east coast of the UAE, but this is a niche business, dependent on generating sufficient demand. Some industry observers say a focus on cargo flights to Afghanistan – currently an underserved market – could be more profitable.

Air Arabia and Flydubai will continue to dominate the region’s low-cost carrier market in the years ahead, barring any decision by Abu Dhabi to launch its own budget airline. And with Emirates and Etihad monopolising long-haul routes, Rak Airways faces a huge challenge to turn its venture into a profitable operation, as history has already shown.