Riyadh must end two-tier market

20 March 2008
In many respects, Saudi Arabia's liberalisation of its aviation industry has surpassed that of other countries in the region.

Two low-cost carriers, Sama and Nas Air, launched in 2007, and there has been talk among senior officials of as many as four more airlines taking to the skies in the coming years.

Yet the experience of Sama over the past 12 months suggests that transport officials have been too hasty in granting airlines new licences when distortions in the market have not been ironed out.

The government has not followed through on its commitment to ensure a level playing field for the new entrants. Sama and Nas have found themselves buying fuel at global market rates, five times those incurred by Saudi Arabian Airlines.

At Sama, the ensuing losses have been so dramatic that shareholders are now threatening to close the airline if it is not granted the same discount as the national carrier.

Liberalisation was primarily intended to boost travel by Saudis around the kingdom. Instead, Sama finds itself ramping up its operations abroad to counter the losses at home caused by the government-imposed fare cap on domestic routes.

Despite the warning by its shareholders, Sama's closure remains highly unlikely. The company has strong financial backers and the fuel issue is expected to be resolved in its favour soon.

However, the airline's difficulties should serve as a warning to Riyadh and other Middle East countries.

Governments must do the groundwork thoroughly when they are preparing to end decades-old monopolies and set a realistic framework for long-term competition. Liberalisation does not begin and end with the granting of licences.

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