Budget airlines soar even higher

The Middle East offers plenty of potential and some of the most successful operators are expanding, even though some commercial challenges remain.

Cheap and cheerful carriers such as the Dubai-based flydubai now account for 7 per cent of the total intra-regional capacity.

Adel Ali never thought Nagpur would work. It was 2005 and the chief executive of Air Arabia, the Sharjah-based budget airline, was considering opening a route to the central Indian city of 2.4 million residents. But the project had its challenges: the city had only a domestic airport and no foreign airline had ever provided service there before.

"It had no immigration, it had no customs and no international business," he recalls. After much deliberation, Air Arabia went ahead. "We tried it and it worked," he says. Air Arabia has flown there ever since. The city is just one of a dozen the carrier helped pioneer from the Gulf, blazing trails into places that no full-service airline dared - Alexandria, Aleppo, Syria, Yerevan, Armenia, and Samara, Russia - to name a few. Its success made it one of the world's most profitable airlines in 2008, earning Dh510 million (US$138.8m) when airlines worldwide lost billions of dollars as the economic downturn unfolded.

Now, a number of operators have sprung up offering cheap tickets and no-frills travel, taking advantage of the liberalisation of bilateral air transport laws and the upgrade of small domestic airports in the region into international terminals. Five more airlines have joined the budget revolution in the past four years: Jazeera Airways in Kuwait; flydubai; Bahrain Air; Sama; and nasair in Saudi Arabia. As well, there have been reports of a budget airline in the works for Abu Dhabi.

The blooming of budget travel in the region wilted only slightly when the Malaysia-based AirAsia X announced earlier this week that it would suspend its service to Abu Dhabi after three months, citing insufficient demand. But the growth of locally based carriers was a development few could have predicted. "The growth of [low-cost carrier] traffic in the Middle East over the past five years has surprised most experts," says Peter Harbison, the executive chairman of the information provider, the Centre for Asia Pacific Aviation (CAPA) in Sydney.

"It is continuing to grow and will increase if regulatory barriers to international access are removed." Starting from nothing in 2003, Middle East budget airlines now account for about 7 per cent of total intra-regional seats, CAPA reports. Their combined fleet consists of 53 aircraft: 47 narrowbodies and 6 smaller regional jets, compared with a Middle East total of some 368 narrowbodies and 40 regional jets.

Its slice of the market is well below the global average share for budget airlines of 21.7 per cent and even further away still from the more mature markets for budget travel such as Europe (36 per cent of overall seats) and South Asia (46 per cent), CAPA says. In other words, it's a good bet that the Middle East market has much more room to grow. And indeed, some of the early movers are staking out an even larger claim and take advantage of such wide-open possibilities.

Last year, Air Arabia opened its second hub, in Casablanca, to offer budget flights for holiday seekers from Europe into Morocco. It also plans to continue to grow its business out of Sharjah, with plans for new routes this year to Central Asia and elsewhere as it receives new aircraft from Airbus. This year, it will open its third base of operation, using Cairo and Alexandria as hubs to reach into Europe, the Middle East and Africa.

Jazeera is also growing, eyeing acquisitions to open up hubs outside of Kuwait. "I wouldn't be surprised that out of every Arab country, there will be a budget carrier, be it a hub of another carrier or be it its own home-based airline," Mr Ali says. So why are budget airlines so successful? The easy answer is cheap fares and convenient flights. They keep costs low by running a simple operation: flying just one type of aircraft; furnishing one class of cabin; and outsourcing functions such as engineering and maintenance that would be too costly to have in-house.

"It's in the fleet, and its in the service; a major thing is personnel costs," says Walter Prenzler, the chief executive of nasair. "A budget airline may spend more on marketing, but does not have the distribution and sales costs and agency commissions because they focus directly on direct sales via the internet." As a result, budget airlines can often turn a profit after their first full year, while full-service airlines, which spend heavily on first and business-class entertainment, food and offerings, can take five years or more.

And as Air Arabia did in Nagpur, they open new routes that other airlines deem too small to land their big planes. Two recent examples are flydubai opening a service to Djibouti and Jazeera flying to Hurghada, Egypt. "Air travel is no longer luxury, it is a commodity and everybody wants to use it," Mr Ali says. "It's a transport service. Once you make that available, people will use it." But challenges still remain.

Foreign ownership laws make it difficult to set up subsidiaries in foreign countries. That's why Air Arabia has partnered with local companies in Morocco and Egypt for its two new ventures. Aviation, always a cyclical business, sometimes throws a spanner in the works. Air Arabia was forced to do a U-turn on its plans for a hub in Kathmandu, Nepal, in 2008, and pulled out of several routes from Sharjah, including Sharm el Sheikh and Kabul, because of low demand or security concerns.

Similarly, Jazeera operated a second hub out of Dubai temporarily but pulled out last year, citing profitability concerns. "You have to be realistic that in the Arab world each country has got its own law, its own parameters, own currency, own licensing," he says. AirAsia X has taken the concept of cheap travel to long-haul flights. In pulling the plug on its service to the capital, the carrier said its wide-bodied A340, with more than 250 seats, was too big, but hoped to resume services once it obtained a smaller aircraft. Sometimes, though, problems can work in favour of budget airlines. With the economy slowing, travellers have "traded down", forsaking the premium seats and heading to the back of the plane or to a cheaper option altogether, such as the budget carriers. "Last year, we saw a lot more people with BlackBerries and laptops on our aeroplanes," Mr Ali says. @Email:[e-mail]

What strategies have airlines used to open up second hubs? The main "liberalising" feature is establishing cross-border joint ventures, where the local owner holds a majority of the equity in the entity, but the airline is operated by the core operator. This not only opens up entry for the airline, but increasingly exposes the anachronism that is the international bilateral regulatory system. So that states become more willing to liberalise as they see the tourism and -business benefits that are delivered. Out of the current crop, which is the favourite to be the dominant regional player? The first mover, provided it is a sound model, and Air Arabia is, has a great advantage. But there will be others. I suspect we will eventually see more [low-cost carrier] subsidiaries of the major airlines, as has been the case in Asia. Indian airlines have not yet asserted themselves internationally, but they will as that market grows massively over the next decade. Likewise countries such as Saudi and Egypt, with large home markets, which have in the past been restrictive, will open up. What did we learn about Jazeera Airways pulling out of Dubai International, and Air Arabia pulling out of Nepal? Little more than that establishing internationally has its own difficulties, both in regulatory terms and in practical terms. In Dubai it was protectionist, in Nepal, largely problems with the local airline partner. [e-mail]