Sama calls for end to fare cap as fuel prices force surcharges

13 June 2008
International travellers pay seven times the premium of domestic passengers.

Low-cost carrier Sama has increased its calls for Saudi Arabia’s aviation regulator to end the fare cap on domestic routes, after being forced to raise the fuel surcharge on its most lucrative international routes to cope with high oil prices.

The low-cost carrier has imposed a fuel surcharge on its overseas flights that is seven times higher than those on its internal domestic flights.

The fare cap imposed on economy class tickets within the kingdom by the General Authority for Civil Aviation (Gaca), means that it cannot spread the burden of higher costs across its network.

The airline can only place a SR10 ($2.70) surcharge on domestic routes. To compensate, it is charging an extra SR70 on its international flights, which are not subject to the restriction.

Sama has seen its expenditure on fuel leap to around 40 per cent of its total costs, compared with 15-20 per cent when the airline launched in March last year. As with most airlines around the world, it is seeking to pass some of this extra cost on to its passengers through a surcharge.

However, Sama can ill-afford to risk driving away customers with higher fares on its international routes. Several of its domestic routes are already loss-making as a result of the fare cap and a requirement by the government that it flies certain routes which are unprofitable because of low demand from passengers.

To offset this, the airline has been expanding its profitable international network and it now flies to the UEA Egypt, Jordan, Lebanon and Syria. As yet, it does not have flights outside the region.

“We are charging SR70 on international flights which we earn most from, but can only charge SR10 on domestic flights because of the fare cap. We are stuck between a rock and a hard place at the moment,” says Andrew Cowen, chief executive officer at Sama.

The situation is compounded by the fact that Sama, and its fellow low-cost carrier Nas Air, are paying the market rate for fuel, while the national airline, Saudi Arabian Airlines (Saudia) enjoys a huge discount (see Agenda, page 26).

Saudia pays around $0.60 per gallon for its fuel, while Sama and Nas Air pay more than $2. Both low-cost airlines have been lobbying Gaca to resolve this anomaly, either by granting them the same discount or by making Saudia pay for fuel at the market rate (MEED 25:1:08).

There has been speculation that Gaca is in favour of making Saudia pay the full market price for its fuel and that a resolution may be close. Officially however, the regulator says it is continuing to discuss the issue with all interested parties.

“We are focusing on the fuel issue. We want to recommend the best solution for all three carriers and are working with them to find a win-win solution,” says an official at Gaca. “The fuel and fare cap issues are still under discussion. Nothing has been finalised.”

Most of Sama’s $80m start-up capital has now been used and shareholders are becoming increasingly frustrated by the lack of movement on the two issues by Gaca (MEED 20:3:08).

“We must resolve the fuel and fare issues,” says Cowen.

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