Riyadh is refusing to guarantee a quick resolution to the dispute over the fare cap on domestic flights, despite one of the kingdom’s low-cost airlines, Sama Airlines, being forced to cut routes from its network to stem losses.
Private sector airlines Sama and Nas Air had been hoping for a swift resolution to the dispute over the removal of the fare cap and the fuel subsidy enjoyed by the national flag carrier, Saudi Arabian Airlines (Saudia).
The subsidy means Saudia pays one-fifth of the market rate for fuel, while the private sector, low-cost airlines Sama and Nas Air pay the full price. Riyadh had been reviewing the subsidy and fare cap for more than a year prior to either airline launching in early 2007.
But despite Sama cutting routes from its network in September and warning that it could slash domestic flights further, regulators are refusing to accelerate the decision-making process.
“We hope to resolve the situation soon but there is no timeframe,” one official at the aviation regulator, the General Authority for Civil Aviation (Gaca), tells MEED. “It has been three years [since talks were launched].”
The fare cap was imposed by Riyadh to ensure that cheap air travel was available to all. However, as fuel costs have soared in the past year, the Saudi low-cost carriers have been unable to pass these on to customers through a surcharge, as has become common in other markets around the world.
The two airlines launched early last year with an understanding that the situation would be resolved swiftly. However, 18 months later, they are still waiting.
“We are appealing to Gaca to sort the situation out,” says Andrew Cowen, chief executive officer (CEO) of Sama. “We have been flying for 18 months now and the playing field is still not level.”
“We cannot take the damage these fluctuations in the fuel price are doing to the balance sheet. One option is to cut our domestic service back to just the [six] obligatory routes. We cannot get any sort of return on the domestic network.”
“It did not seem too problematic at the time [launch of the airline], but clearly now, two years on, it is out of order,” says Taher Agueel, CEO of National Air Services, which owns Nas Air. “We are being squeezed between the fare cap and the fuel price. Gaca and the government are coming to see that a subsidised operation [for Saudia] and social responsibility do not rest solely on the shoulders of commercial entities. It does not work.”
Sama says it will halt flights from Riyadh and Dammam to Medina and is halving the frequency of services between Dammam and the capital.
Airlines operating in Saudi Arabia are obliged by law to fly several domestic routes under a system known as public service obligations (PSOs). Many of these routes connect remote parts of the country and attract low numbers of passengers, making them heavily loss-making.
Gaca recently reorganised the number of these routes flown by each carrier, with Saudia shouldering a much larger share. Sama and Nas Air will now fly about six of the routes each, down from about 20 (MEED 17:7:08).
Cowen has previously warned that Sama could halt all domestic services except the PSO routes until the situation is resolved (MEED 23:9:08). He says were it not for the support of Sama’s shareholders, led by Prince Bandar Ibn Khaled al-Faisal, the airline could have been forced into bankruptcy.
The company’s investors recently approved a cash injection of SR200m ($53.2m) into the business after the airline’s $80m start-up capital was used up by fuel costs (MEED 20:3:08).
“I do not think [Sama] will [halt all domestic services],” says the Gaca official. “It still has its PSO obligations to serve certain routes, and these have been reduced to make the system fairer. It should be easier for Sama.”