Saudi airlines get ready for competition

24 August 2015

New entrants face double effect of low oil prices and strong dollar

  • General Authority of Civil Aviation likely to release air operator’s certificate before end of the year
  • Recent easing of fare cap a good start
  • Saudi Arabia has double-digit passenger movement growths in recent years

Barring a delay in final regulatory approvals, two new airlines – Qatar Airways’ Al-Maha Air and Al-Qahtani Group’s SaudiGulf Airlines – are to begin offering domestic and international flights in Saudi Arabia before the end of 2015.

A source familiar with the industry says the General Authority of Civil Aviation (Gaca) is coordinating closely with the two carriers to ensure they meet the required safety standards before they are granted an air operator’s certificate (AOC).

“This process takes an average of six months to more than a year even in more mature markets,” the industry source tells MEED.

The introduction of two new carriers could not have come at a more interesting time. Low oil prices and a strong dollar are likely to have a negative effect in terms of the travel demand growth, which has been registering double digits, over the past few years.

However, cheaper oil also means significantly lower operating costs, which could only bode well for the new aviation sector entrants as it could expand the financial cushion they require during the early stage of operations. Jet fuel is estimated to account for between 20 and 50 per cent of an airline’s operating costs.

Unlike most GCC states, Saudi Arabia’s aviation sector presents unique challenges. Until 2007, state-backed Saudi Arabian Airlines (Saudia) had a monopoly of the market. Furthermore, a fare cap has been put in place to encourage residents to travel by air domestically and to ensure Saudia does not abuse its monopoly position. Such low fares have been blamed, among others, for the failure of domestic carrier Sama LelTayaran Company in 2010.

While the fare cap policy has recently undergone some changes, which has enabled the kingdom’s low-cost carrier Flynas to charge up to $150 for some destinations, the domestic fares in the kingdom remain considerably low.

Al-Maha Airways and SaudiGulf Airlines are effectively entering a market served by one dominant player, Saudia, and a small domestic player, Flynas, both of which charge very low fares. Ideally, competition is introduced in markets primarily to drive prices down while improving products and services.

It is not all gloom for the kingdom’s airline sector, however, according to the industry source. “The objective is to improve the quality of service, introduce different [fare] charging mechanisms and allow market forces to determine the appropriate price for the service,” he says.

Saudia and Flynas operate 119 and 26 active aircrafts respectively, translating to a per capita of 0.48 aircrafts per 100,000 population.

SaudiGulf Airlines has four Airbus A320 on order while four similar aircrafts have been delivered to Al-Maha.

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