Air Arabia expansion held back by licence rules

Air Arabia says foreign ownership rules are preventing from becoming the Gulf's first truly pan-Arab airline.

Air Arabia wants to expand across the Mena region to become the first truly pan-Arab airline, but is being hampered by foreign ownership rules, its chief executive said yesterday.

The Sharjah-based budget carrier is considering a plan to open as many as 20 hubs throughout the region, a move that would allow Air Arabia to match the economies of scale that have made European budget giants easyJet and Ryanair so successful.

"Our counterpart airlines in Europe need to operate from 18 to 20 hubs," said Adel Ali, the chief executive and founder of the Saudi airline."They operate under one licence because the EU treats aviation as the whole of European countries under one policy, one regulation. That has helped them to expand very quickly in setting up hubs in different countries.

"We would like to do that," he added, while explaining that "we do not have the luxury of operating under a single licence. For Jordan, we have to respect the law of the country, and to apply for a fresh licence from a regulatory point of view as well as commercial point of view. That normally takes longer."

An expansion to 20 hubs would represent about a sevenfold increase from its current bases of operation in the UAE, Morocco and Egypt, with a fourth hub, in Jordan, slated to begin in June.

Local partners that have helped Air Arabia expand include Regional Airlines of Morocco, Tantash Group of Jordan and Travco Group of Egypt.

Europe's 490 million residents are served by 62 budget airlines, some of which operate from 20 bases of operation throughout the continent and have more than 150 aircraft. By contrast, the Arab world's 340 million residents are served only by seven budget airlines.

"While the smallest low-cost airline in Europe has 50 aircraft, the largest in the Middle East has 30 planes, and four carriers operate fleets in the single digits. So the market is there," Mr Ali said. "If there are 18 countries in the Arab world that offer us [to set up a subsidiary there] and the customer wants it, then we will consider it."

Scott Darling, an analyst at Nomura Securities in Dubai, believes Air Arabia would likely target additional hubs in North Africa and Levant, which complements existing developments. However, he added that several challenges stood in the way.

"The political issues in some north African countries does not seem to be that attractive for tourism and/or business passenger demand," he said.

Additional challenges include the region's slow roll-out of liberal, open-skies policies, which would allow Air Arabia subsidiaries unfettered access into opening commercially viable routes.

"The GCC is not totally open," Mr Ali said, and he called Pakistan's aviation framework "conservative". He acknowledged, however, major improvements to the regulatory environments in Saudi Arabia, Egypt and India.

Nomura has forecast Air Arabia will post net profits of Dh118 million (US$32.1m)) for the fourth quarter of last year, down from Dh135m from the same period in 2009 on the back of higher jet fuel costs. The results are expected to be announced in mid-March. "Air Arabia should see robust earnings growth in 2011," the securities firm said in a note.

The airline plans to increase its number of routes to 75 by the end of this year from 67, Mr Ali said, adding he expected passenger numbers to increase 13 per cent annually until 2014.