SaudiGulf has to navigate tough environment

14 June 2016

Fair regulatory framework needed if new airline is to succeed

Most countries push to liberalise a closed industry to foster competition, improve services and products and lower prices or fees in favour of consumers.

Saudi Arabia’s push to liberalise its aviation sector also aims to foster competition and improve services, but unlike in most industries, opening up the kingdom’s aviation industry to new airline operators will require bringing artificially low domestic air fares to a more commercially sustainable level.

The fare cap was introduced in Saudi Arabia to encourage the local population to travel while ensuring state-backed Saudi Arabian Airlines (Saudia) did not abuse its monopoly.

However, it remained largely in place even after the industry began its liberalisation process, which took hold in 2007 when two privately-owned budget airlines – Sama and Flynas – were awarded licences to operate flights and compete with Saudia.

The fare cap has worked against the private, budget airlines and has been blamed, among other factors, for the early demise of Sama in 2010, and for the eight-year struggle of Flynas to achieve profitability.

Apart from low domestic fares, it is understood that airports in Saudi Arabia continue to charge airlines prohibitive fees for the use of facilities.

Experts and analysts have also strongly advocated for the withdrawal of alleged state subsidies extended to Saudia to create an even playing field among the airline operators.

Despite this challenging environment, Flynas achieved profitability in 2015. “They [private stakeholders] have been very, very patient,” Flynas CEO Paul Byrne told MEED in early 2016.

Investors also continue to see huge potential in a market of 29 million people served only by two local airlines. They insist it is possible to replicate the UAE model – where a population of 9 million is served by four successful airlines – in Saudi Arabia. Consistent growth in passenger traffic at the kingdom’s airports has only supported this theory.

Signs of improvement are under way. A key executive with Saudi Arabia’s General Authority of Civil Aviation (Gaca), the country’s aviation regulator, said there will be competition between the two new airlines and Saudia and Flynas, and that Gaca is prepared to let market forces interact freely.

Unless Gaca delivers on these promises, similar patience exhibited by Flynas will likely be required of SaudiGulf Airlines, the privately-owned budget carrier that recently received its air operator certificate (AOC) and is due to start operating domestic flights from its base at Dammam’s King Fahd International airport by 22 June.

Samer Majali, former CEO at Royal Jordanian and Bahrain’s Gulf Air, is heading SaudiGulf. His rich experience in the industry is expected to inform the new airline’s business strategy.

Apart from Majali’s management skills, however, a more friendly or fair regulatory framework is desirable if SaudiGulf – and indeed Saudi Arabia’s goal to liberalise its aviation industry – is to succeed.

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