Budget airline flies on through the storm

Few airline executives can afford to smile just now, but Adel Ali is one who can as his company announces its best performance yet.

The Sharjah-based low-cost operator banked a net profit of Dh510 million (US$138.8m) last year, while worldwide airline coffers were $5 billion lighter from collective losses

Few airline executives can afford to smile just now, but Adel Ali is one who can. Revenues are declining for many airlines as the world enters what could be a prolonged recession. With companies and individuals finding ways to preserve cash, the International Air Transport Association (IATA) has called it "the worst revenue environment in 50 years". But in the industry's darkest hour, the chief of Air Arabia has announced his airline's best performance in its five-year history. On Sunday, it released full-year financial results that strongly bucked industry trends.

The Sharjah-based low-cost operator banked a net profit of Dh510 million (US$138.8m) last year, while worldwide airline coffers were $5 billion lighter from collective losses. Worldwide passenger traffic grew just 1.6 per cent last year, but in Sharjah, the airline posted a 33 per cent rise in passengers carried, to a total of 3.6 million. Airlines were forced to ground aircraft in the US and Europe, due to record fuel prices in the first half year and then falling demand in the second half.

But the Sharjah operator added eight cities to its list of destinations last year, and when the world appeared to be in crisis mode last November, it added 10 new Airbus A320s to its order book in a deal valued at $770m. Perhaps most surprising from Air Arabia's financial success last year was its record fourth quarter. As passenger demand was declining worldwide, the company saw revenues grow 53 per cent in the quarter, to Dh571m. Net profits increased 45 per cent, to Dh136m. "It was a difficult year, but an excellent achievement," Mr Ali concluded yesterday.

How did Air Arabia do it? One reason is that recessions generally favour budget airline operations. In an era of downsizing and retrenchment, price is king, and some corporate travel accounts moved to budget carriers. Air Arabia carried nearly one million passengers in the fourth quarter, at a time when the world economy was at its depths of suffering. "It's too early to call, but the results could indicate people are moving from flag carriers to low-cost carriers," said Robert Ziegler, an analyst with AT Kearney in Dubai.

More than most airlines, Air Arabia has been able to reap the benefits of lower fuel prices. Because of their stripped-down model, many budget airlines do not "hedge" fuel, or buy the rights to purchase fuel in the future for a set price. While Air Arabia suffered as the price of oil reached record highs last summer, it enjoyed the benefits when oil slumped $100 from those levels later on. By contrast, many of the big network carriers such as Emirates Airline and British Airways hedged at prices higher than today's market.

Air Arabia also still reaps the rewards for being first to market. It became the first budget airline in the Middle East when it launched in 2003. This "first-mover" advantage benefits the carrier to this day. Despite the entry of other low-cost outfits to Dubai, such as Jazeera Airways in 2007 and FlyDubai later this year, Air Arabia remains the largest and most established, serving 44 destinations. The region is still under-penetrated for low-cost travel compared with Europe and the US.

There are other factors explaining the growth of Middle-Eastern airlines. The region has no viable option to air travel, and passenger rail lines are still more than five years away. A five-year regional economic boom fuelled by record oil prices attracted hundreds of thousands of expatriate workers. Aeroplanes flew them in and then out again as they visited friends and relatives back home. The UAE also has the good fortune to have a neighbour of Saudi Arabia to the west, with its religious pilgrimage traffic, and India, to the east, with a travel-hungry middle class of several hundred million.

But it is becoming apparent that in the Gulf, the days of booming population and economic growth are on the wane. For Air Arabia, this could mean a new phase it its history. Although it plans to build other hubs around the region, Sharjah is still its main business. Its packed planes carrying labourers into the UAE could be replaced by those carrying labourers on one-way tickets home as construction projects stall. The boom times could give way to more modest growth, just as it prepares to take on a worthy rival in FlyDubai.