Riyadh moves on liberalisation in the aviation sector

17 October 2012

Saudi Arabia’s growing aviation sector holds huge potential and efforts to speed the opening of the market to foreign carriers will only heighten its appeal

Interest in Saudi Arabia’s aviation sector continues to grow as more GCC airlines announce new routes into the country or increase the frequencies of their flights. As Saudi Arabia’s oil-driven economy expands and a greater proportion of the population has the means to travel, demand for flights is only likely to rise.

Bahrain Air was one of the first to raise its stake in the market last year, when it selected Dammam as its second hub. Services from the city to Beirut and Khartoum began in June.

In early October, Kuwait and Saudi Arabia signed an agreement to increase flight frequencies between the two countries to 77 a week. The low-cost Kuwaiti airline Jazeera Airways is expected to seek to capitalise on this agreement. “Jazeera Airways will be aiming to get more frequencies to the Saudi market,” says Samir Murad, an analyst at Kuwait-based investment bank NBK Capital, who tracks Jazeera Airways. “Jazeera’s allowance to Saudi Arabia was on the low side, so this is a good opportunity for them.”

Abu Dhabi’s Etihad Airways has also entered the Saudi market, after signing a code-sharing agreement in October with the kingdom’s domestic low-cost airline Nasair.

Rising air passenger numbers

An increase in business and religious travel has further heightened the appeal of the Saudi market to Middle East-based airlines seeking to expand their networks.

In 2011, the number of passengers passing through Saudi Arabia’s international and domestic airports passed 54 million, an increase of 13.6 per cent compared with 2010. These are some of the strongest figures posted by the country in over a decade, and potentially signal a change in fortune for the aviation sector after several years of stagnating growth.

Although international traffic is the central driver of the kingdom’s aviation sector, the domestic market is also experiencing growth and piquing the interest of regional airlines as the country moves towards liberalisation.

At the end of 2011, the General Authority for Civil Aviation (Gaca) announced that it would allow foreign airlines to bid for licences to operate domestic and international flights from Saudi Arabia’s airports. Presently, only state-backed carrier Saudi Arabian Airlines (Saudia) and low-cost airline Nasair operate domestic flights.

To date, 14 regional bids have been received for domestic aviation licences, with seven shortlisted. Bidders have included Qatar Airways and a consortium of Saudi-Chinese companies. Gulf Air has also confirmed it is supporting the local Abdel Hadi Abudullah al-Qahtani & Sons in the bidding process.

Successful bids were initially expected to be announced this year, but have now been delayed. Licences are likely to be awarded around February or March 2013, with the first flights expected in April. However, analysts have tempered this prediction, suggesting airlines are more likely to commence operations towards the end of 2013.

Domestic potential of Saudi Arabia

Saudi Arabia has a vast network of 23 domestic and four major international airports, supporting a population of 28 million. The aviation sector represents 1.8 per cent of the kingdom’s gross domestic production (GDP), equal to SR30.2bn ($8.1bn) annually, and supports some 152,000 jobs.

“It is the biggest domestic market in the region and it is significantly underdeveloped,” says Simon Elsegood, senior analyst, Middle East and Africa at the Centre for Aviation (Capa).

Domestic travel has begun to pick up after the lulls witnessed during the 2009 financial crisis. Total passenger traffic passing through the country’s domestic airports increased 18.9 per cent in 2011, compared with 2010. Total domestic traffic across Saudi’s 27 airports arose to a lesser degree, with 6.8 million passengers recorded in 2011, a rise of 13.7 per cent over the previous year.

Domestic passenger traffic passing through the kingdom’s international airports increased by 8.2 per cent in 2011, although the number of domestic flights departing from these airports fell by 2.7 per cent.

Data published by Saudia, the kingdom’s largest airline, showed it carried more than seven million passengers domestically in the first half of this year, marking a 23 per cent increase on the same period last year. The airline operated 55,203 flights, compared with 47,622 flights during the same period in 2011.

While the results are encouraging, it raises doubts as to whether there is enough existing capacity to support future domestic growth.

The kingdom’s domestic air travel market is currently dominated by Saudia, which has a market share of 94 per cent. The remaining 6 per cent is covered by the low-cost airline Nasair. A third national carrier, Sama Airlines, went out of business in 2010.

“From what I can see, domestic demand is really outstripping the potential of the two carriers in the market to supply it,” says Elsegood of Capa.

The high level of fuel subsidies granted to Saudia has played a role in stagnating the market, as rival carriers have struggled to compete. Even when Saudia lost its domestic monopoly in 2007 in the first attempt to open up the aviation market, the airline continued to dominate due to government subsidies.

Need for reform

The uneven playing field is said to have led to the bankruptcy of Sama Airlines. Nasair continues to find it difficult to compete against Saudia and has made the strategic decision to move away from serving the domestic market.

“Nasair has a good model and a young fleet of aircraft, but they are beginning to shy away from the domestic market, and starting to move into international high-yield markets where they can get a better return on their money,” says Rob Shaw, director of analytics, at UK-based OAG Aviation.

Competition has also suffered as a result of the fare cap imposed on domestic routes. This regulation has made it hard for new airlines, particularly those running a low-cost model, to become profitable. Typically, low-cost airlines will discount flights significantly in advance and raise fare costs closer to the departure dates of flights.

Liberalisation does need to be encouraged. It should be pushed ahead anyway even if it is damaging to Saudia

John Strickland, JLS Consulting

Regional airlines looking to acquire domestic licences in Saudi Arabia are calling for large-scale reform of the sector to ensure the success of the liberalisation process. During a meeting with the Gaca president Prince Fahad bin Abdullah al-Saud in July, Qatar Airways chief executive officer Akbar al-Baker argued that fare caps and excessive fuel charges were not in the interest of the travelling public or airline operators.

Although noting that Qatar Airways was keen to invest in the Saudi domestic aviation market, he said this would be dependent on a “fundamental rethink” by the government on high fuel costs, subsidies and domestic fare caps. 

Al-Baker’s thoughts are echoed by aviation analysts. “If the government insists on putting a cap on what prices can be charged in the domestic market, it could mean that this market is not viable. It has to be a complete liberalisation,” says John Strickland, director of UK-based JLS Consulting.

It has been suggested that foreign airlines successful in securing licences to operate in the kingdom will receive some form of financial support, perhaps through fuel subsidies.  There has been no clarification by Gaca, however, and any agreement is still likely to ensure Saudi receives preferential fuel prices.

Given the entrenched policies governing the domestic aviation sector, the process is likely to take some time and meet with a certain degree of resistance, not least from Saudia. “Certainly, Saudia would prefer to keep its protected position,” says Strickland.

“You see a lot of resistance already, a lot of bureaucratic resistance and Saudia has very close ties to the government. It is a big airline, employs a lot of nationals and carries a lot of political clout,” says Elsegood.

Still, there is a growing feeling that the Saudi government is taking the liberalisation process seriously. Elsegood cites the creation of Gaca as a “driver in the liberalisation push”. If successful, it is hoped that a more open market will drive increased traffic and tougher competition, and force existing Saudi airlines to offer a better service to their customers. It will also offer more choice to Saudi consumers.

Strickland argues that governments that insist on protecting their airlines often do so to the detriment of their economies. “Liberalisation does need to be encouraged. It should be pushed ahead anyway, even if it is damaging to Saudia,” he says.

It could also be a step in the direction of creating a European-style open-skies agreement across the GCC region. “[The successful liberalisation] will have a strong positive trend,” says Shaw of OAG Aviation.

“It will allow the freedom for those airlines to operate in the GCC area and that will help improve the domestic market within the Middle East, which is historically tepid when compared with the domestic market in Europe or North America where the market is strong and there is a lot of inter-regional travel.”

Open skies policy

But progress on an open-skies policy is likely to be drawn-out. “These things can be slow and painful. It all depends on how keen of each of these countries is to progress,” he says.

Elsegood agrees. “There has been talk for at least a couple of years of an open-skies agreement across the GCC, but the problem is that the GCC governments can’t agree on any standard format. It is a nice idea, but it will be a long time before any unified market is created.”

Given the current and projected growth in domestic and international passenger traffic in Saudi Arabia, the government would be well-served in playing a leading role in driving aviation liberalisation at home and across the GCC region. 

In numbers

77: Planned weekly flights between Saudi Arabia and Kuwait after October deal

54 million: Number of passengers that passed through Saudi Arabia’s airports in 2011

Source: MEED

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