New Saudi entrants prepare for take-off

09 September 2015

Special Report Contents

  • Despite having the largest population and economy in the GCC, Saudi Arabia’s aviation sector has failed to live up to its potential
  • The two existing airlines have been struggling to cope with rising demand for travel
  • Unless vital adjustments are made to make the environment more competitive, analysts say the smaller and newer carriers will struggle to operate

The first attempt by Saudi Arabia to open up its aviation sector and end the monopoly of its national carrier, Saudi Arabian Airlines (Saudia), in 2007 met with limited success.

Sama Airlines halted its operations in August 2010, three years after the launch of its first flight and after incurring $300m in losses. Privately owned low-cost carrier flynas, the other airline that launched in 2007, has sustained its operations, but has yet to record an annual profit. Factors that hampered success for the new airlines included regulatory obstacles such as fare caps, and high oil prices.

In numbers

28 per cent Increase in international air passengers to the kingdom in the first half of 2015

200 Estimated number of private or chartered jets in Saudi Arabia

Source: MEED

A highly similar environment will welcome two new airlines by the end of the year. This is provided they comply in time with all the safety and regulatory requirements of the General Authority of Civil Aviation (Gaca) for the release of their Airline Operators Certificate (AOC). The two start-up airlines are Qatar Airways-owned Al-Maha Airways and SaudiGulf Airlines, backed by local conglomerate Al-Qahtani Group.

Al-Maha Airways had received four Airbus A320s as of early 2015, while SaudiGulf Airlines expects a similar number of aircraft to be delivered in the final quarter of 2015.

Both carriers were issued a licence to operate domestic and international flights in Saudi Arabia in 2012, in what may be seen as the second wave of a long-drawn liberalisation programme for the kingdom’s aviation sector. It is also the first time that foreign-owned airlines are being allowed to operate domestic flights in the kingdom.

Long awaited

Despite having the largest population and economy in the GCC, Saudi Arabia’s aviation sector has failed to live up to its potential. The two existing airlines have been struggling to cope with rising demand for travel. The number of passengers taking domestic flights increased by nearly 8 per cent in the first half of 2015 compared with the same period in 2014, while international flight passengers grew 28 per cent, driven by growth in religious tourism.

In-service fleet of selected GCC carriers, 2015
ManufacturerAircraft modelEmirates Saudi Arabian AirlinesQatar Airways
 A330-200 19-16
 A340-300 4--
 A340-500 1--
 A380-800 63-4
 777-200LR 1022-
 777-300 12-28
 777-300ER 10616-
 777-F 13--
 747-400ER F24-
EmbraerEmbraer 170-15-
Source: MEED

The opening of airports in previously underserved regions of the country such as Jizan, Al-Jouf and Tabuk ensures domestic demand will continue to rise while increasing the network the two existing airlines have to service.

Nonetheless, internal connectivity remains limited; there are no direct flights from Jizan in the south to Tabuk in the north of the kingdom, for example, so flights have to stop in either Riyadh or Jeddah.

This has contributed to the popularity of private chartered services among the kingdom’s affluent population. It is estimated there are more than 200 private or chartered jets in Saudi Arabia.

Huge market

The size of the market in itself justifies an increase in the number of domestic airlines. Saudi Arabia has a population of about 29 million and just two local airlines, while the UAE, which has a population of 9 million, has four.

John Strickland, director at UK-based JLS Consulting, says the UAE success story in deregulating its aviation sector is something Saudi Arabia could aspire to replicate. “The addition of two new low-cost airlines in the UAE in recent years, both of which have shown strong financial results, is a major success indicator,” he says.  

The rapid growth in passenger numbers combined with structural weaknesses in the kingdom’s aviation sector represent major opportunities that firms are keen to exploit. Akbar al-Baker, CEO of Qatar Airways, says he is keen to be able to compete fully on price and services in the Saudi market.

The challenges

The path to full-fledged liberalisation within the kingdom’s aviation sector, however, might take longer than hoped.

The fares for domestic flights are still capped at an artificially low level. The price cap was originally introduced to encourage the local population to travel and to ensure Saudia did not abuse its monopoly. This monopoly should have been removed by the introduction of two new carriers in 2007, but the fare cap remains in place today.

The same policy has to apply across all the players, otherwise the costs will not be comparable

John Strickland, JLS Consulting

Although some level of flexibility has been observed fairly recently, industry players say the fare cap has to go altogether if the kingdom is to make its liberalisation programme sustainable over the long term. This means domestic air ticket prices should reflect the true cost of providing aviation services.

Ultimately, the liberalisation must aim to improve the quality of service, introduce different fare charging mechanisms and allow market forces to determine the appropriate price for services, according to an executive working with one of the airlines.

Fuel subsidy

A further issue that has persistently dogged Saudi Arabia’s liberalisation programme is the apparent fuel subsidy extended by the state to Saudia. “A level playing field is crucial for the new airlines to succeed,” says Strickland. “The same policy has to apply across all the players, otherwise the costs won’t be comparable.”

Equal and fairly priced access to capacity at airports is the other element that makes up a liberalised aviation sector. It is understood that in Saudi Arabia, little to no negotiations take place between the airports and airlines when it comes determining the fees to use airport facilities, and that these charges remain relatively prohibitive.

Aircraft on order, July 2015
AirlineAircraft on order
Emirates 273
Qatar Airways340
Saudi Arabian Airlines45/90*
*=Various sources place Saudi Arabian Airlines’ on-order fleet at 90; half of these are confirmed to be with Airbus, but no specific number can be confirmed from Boeing. Source: MEED

Unless these vital adjustments are made to make the environment more competitive, analysts say the smaller and newer carriers will struggle to operate successfully in the domestic market.

However, positive changes may be imminent if statements made to local media in 2014 by Gaca director-general Sulaiman Abdullah al-Hamdan are anything to go by.

The executive promised that there will be competition between the two new airlines and Saudia and Flynas, and that Gaca is prepared to let market forces interact freely. “Specifying the air fares is not the responsibility of Gaca, but is directly related to the prices charged by operating companies,” Al-Hamdan said.

Saudia’s growth

Opening up the domestic aviation sector could potentially support the expansion of Saudia’s international operations. Nearly half of the airline’s in-service fleet is currently allocated to domestic flights, some of which could be freed up to cater to more lucrative and fast-growing international routes.

Only then could Saudia attempt to compete head-on with regional airlines such as Dubai’s Emirates airline and Qatar Airways, as well as international carriers such as British Airways, for long-haul flights.

Rapid growth in demand for international travel prompted Gaca to allow Egypt’s Nile Air to launch regional flights between Al-Jouf and Cairo in August, and the UAE’s Air Arabia to start services from Prince Sultan bin Abdulaziz airport in Tabuk to Sharjah from July.

British Airways has upgraded its services to the kingdom by increasing the frequency of flights and capacity to Riyadh and adding a Boeing 777 to its Jeddah route. The Philippines’ Cebu Pacific is also set to start operating direct flights to Riyadh to cater to some 1.5 million migrant Filipinos in the kingdom.

Phased privatisation

Analysts say changes in Saudia’s operations will be the strongest barometer of how successful Saudi Arabia’s liberalisation programme for its broader aviation sector will be. In recent years, the carrier has begun a phased privatisation programme. Shares in two of its six operational units – catering and ground-handling services – have been sold through initial public offerings (IPOs). The IPOs raised $347m and $746m respectively, and the funds will be used to finance the airline’s expansion. Saudia’s cargo division is set for a listing in 2016, while shares in its maintenance unit are to be offered to the public in 2017.

Saudi Arabia’s well-articulated policy of prioritising the domestic market will likely remain in place, but by allowing all airlines to compete on a level playing field, the true benefits will be passed on ultimately to consumers who pay for the service.

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