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in Air Transport / Features

Arabia'a knight

Posted 22 December 2017 · Add Comment

Air Arabia’s cautious growth strategy and budget product may not have the ‘wow’ factor but, as the region’s glitzier airlines fly into turbulence, this low-cost carrier is proving that substance beats style every time. Group chief executive Adel Ali talked to Martin Rivers.

When it comes to press coverage about Gulf aviation, Air Arabia, the 14-year-old flag-carrier of Sharjah and the region’s only true low-cost carrier (LCC), flies well under the radar most of the time.
Winning the attention of media outlets is not easy when you operate in the backyard of the ‘big three’ super-connectors – Dubai’s Emirates Airline, Abu Dhabi’s Etihad Airways and Qatar Airways – goliaths that have transformed the airline industry with their insatiable appetite for double-digit traffic growth and on-board luxury.
Air Arabia’s slow steady expansion and frugal no-frills product, by contrast, seems mundane to observers.
Yet, as Sharjah hosts the 50th annual meeting of the Arab Air Carriers’ Organisation (AACO) in November, media and industry professionals would do well to draw lessons from the LCC’s strategy. At a time when Emirates is deferring aircraft orders, Etihad is selling foreign investments, and Qatar Airways is battling a regional blockade, Air Arabia continues to reap profits from a low-cost business model that many had dismissed as too lowbrow for the Gulf.
“The market has really changed. LCC used to be a bad word,” smiled Adel Ali, Air Arabia group chief executive.
“Today, in Europe, the biggest chunk of people fly on LCCs. I think it’s something that will inevitably come to this part of the world too. In terms of ease to arrange, ease to travel, the speed of doing things, LCCs are helping people to do what they really want. The millennials of this world don’t want complicated things; they want to just manage their own lives. LCCs offer them that freedom.”
Looking at overall market share, the Middle East still lags behind other parts of the world for low-cost penetration.
Ali estimates that LCCs provide about 17% of capacity in the region today – less than half the penetration rate in Europe. What’s more, the Middle Eastern contingent includes hybrid carriers like Kuwait’s Jazeera Airways and Flydubai – companies which use the ‘low-cost’ label to project affordability, but which, in truth, offer full-service perks like free checked luggage. Those airlines barely qualify as LCCs under the European definition, whereby all non-essential services attract a surcharge.
This more gradual ascent of LCC operators in the Gulf can be attributed to a number of causes, ranging from lengthier flight sectors to more restrictive bilateral agreements to lingering – and wholly unfounded – concerns about safety.
Far from being a weakness, however, Air Arabia’s conservative growth trajectory and disciplined cost management is ideally suited to prevailing market conditions. When industry yields plummeted last year amid a volley of economic, security and competitive headwinds, the Sharjah-based carrier still delivered a net profit of 509 million UAE dirhams ($139 million). It then stayed comfortably in the black for the first half of 2017.
That contrasts with waning fortunes among the full-service Gulf carriers, which have scrambled to freeze traffic growth and renegotiate ambitious aircraft orders.
“We have been consistent in managing our costs year after year, whether the year is good or bad. As a result, it helps in the difficult times,” Ali said, referring to last year’s perfect storm of currency instability, low oil revenues and global terror attacks.
“I think, as we move on, economic conditions are going to bring more pressure on the industry in the region, and that probably will make some operators reconsider some of the overcapacity that exists. We are different because our DNA [entails always] having a low-cost mind-set. So we end up having to do less restructuring and less cleaning when markets get difficult.”
Air Arabia currently deploys 35 Airbus A320s from its hub at Sharjah International Airport, configuring the planes in an all-economy layout with 162 seats.
Its route network stretches out in all directions to 69 markets within range of the narrow-body fleet. Alongside a deep footprint in the Middle East and the Caucasus, the airline serves seven countries in Asia (Bangladesh, China, India, Kazakhstan, Nepal, Pakistan and Sri Lanka), four in Europe (Bosnia & Herzegovina, Russia, Turkey and Ukraine), and four in Africa (Egypt, Kenya, Somalia and Sudan). The Indian subcontinent accounts for more than 50% of its available seat kilometres (ASK) capacity, while Saudi Arabia is the largest regional market with more than 100 flights a week.
Since 2014, Air Arabia has also based two A320s in the neighbouring emirate of Ras Al Khaimah to fill the void left by defunct home carrier RAK Airways.
However, flights from the UAE are only part of the puzzle.
Like Ryanair in Europe, Air Arabia’s long-term goal is to offer point-to-point connectivity between all major cities in its home region. Its major handicap is that, unlike in Europe, there is no single aviation market spanning the Arab world. Basing aircraft outside of the UAE, therefore, necessitates joint ventures with local partners – a franchise model that brings with it heightened complexity and the ever-present threat of protectionism.
“It’s not difficult for us to establish [foreign bases] from the logistics point of view,” Ali said of the strategy. “But this is not the EU. This is not a single air operator’s certificate (AOC). A lot of countries have national carriers that are owned by governments and you could be going in competing with governments. So we always need to make sure that the opportunity is right.”
His cautious approach has so far seen three affiliates established in Morocco, Jordan and Egypt.
Air Arabia Maroc is by far the largest operation, with eight A320s flying from six domestic bases to 29 points in western Europe plus Istanbul. Two aircraft are also based in the Jordanian capital Amman, offering connections to Egypt (Sharm El Sheikh), Georgia (Tbilisi), Iraq (Erbil) and Saudi Arabia (Dammam, Jeddah and Riyadh). In the northern Egyptian city of Alexandria, one more A320 flies to the same three Saudi points plus Amman and Kuwait.
The multi-hub strategy gives Air Arabia broad exposure to markets in the Middle East and North Africa. But, in its current form, it falls short of a pan-Arab offering. Algeria and Tunisia are entirely absent from the network, for example, while no outbound services are operated from key Arab markets like Cairo and Jeddah.
While he recognises these limitations, Ali is in no rush to establish more franchises. “We are by nature conservative about protecting the investors’ money, so I’m not prepared to just to sign up joint ventures [for the sake of it],” he said. “You can burn too much money in this business.”
Growing the existing hubs is considered a higher priority – albeit a challenging one in a region where protectionism seems to lurk around every corner.
In Amman, Ali admitted that operations have “not grown as fast as we would have liked” due to high airport taxes and difficulty securing traffic rights. Despite signing an open-skies treaty with Europe, the Jordanian authorities have stonewalled plans for connecting flights between Sharjah and the continent. Requests to serve Beirut and Istanbul have also gone unanswered. “There’s a long list of places that we would like to go from Jordan,” Ali shrugged. “It’s been with the authorities in the Civil Aviation Authority for more than a year, but it’s just not been coming through.”
Protectionism in Egypt also keeps Cairo off the table, though Ali believes the country is turning a corner after a difficult few years. He expects to base a second A320 in Alexandria this year, and will consider further growth following the 2018 presidential elections.
Morocco, meanwhile, is the star performer in the group thanks to the government’s comprehensive – and faithfully enforced – open-skies deal with Europe. Even here, though, traffic rights can be a bugbear: Royal Air Maroc, the flag-carrier, still enjoys a monopoly in the all-important West African market.
“I’m sure it will come one day,” Ali said of his stalled request to enter the sub-region. “The challenge is to say when.”
With just three units outstanding from the group’s original Airbus order – two destined for Sharjah and one for Cairo – Air Arabia is also now turning its attention to fleet renewal.
Management will sign commitments for “around 100 aircraft” in “either the latter part of this year or early next year”, laying down a roadmap for gradual expansion and renewal of the fleet. Airbus, Boeing and Bombardier products are all being considered, with Ali insisting he would be “daft not to look at everything”.
Indeed, while Boeing and Airbus are the only contenders in the 150-seat-plus market, Ali heaped praise on Bombardier’s 110-130 seat CSeries. “There are very positive vibes coming out,” he said, referring to glowing reviews from launch customer Swiss International Air Lines. “CSeries could be a good size for some of our thin routes, some of our development routes… domestic flights in Morocco, some of the Egyptian routes. They could do quite a lot of routes in the region.”
His only concern is that the aircraft has not yet proven itself reliable in the Middle East’s “harsh weather climate”.
Another new aircraft type, the A321neo, a stretched re-engined version of the A320, will, meanwhile, join the fleet thanks to an agreement with Air Lease Corporation. Six of the aircraft will arrive in 2019, kick-starting Air Arabia’s finance diversification programme as it moves away from a fully owned fleet.
Confirming his preference for the long-range variant, Ali said the A321neoLR would open up new markets in China, Russia, the Far East and Africa from Sharjah. Air Arabia Maroc could also use the type to extend its reach into eastern Europe, as well as into West Africa when traffic rights are eventually secured.
With about 40 more seats than the A320, the stretched aircraft will further enable up-gauging on dense routes to the Indian subcontinent and Moscow.
Despite its suitability for mid-haul flying, however, Ali is in no rush to add western European points like London and Paris. Citing overcapacity and yield pressure in these markets, the chief executive said he wanted to stand back and see how his struggling rivals adapted their premium products. Some have already vowed to “completely stop service at the back end of the aeroplane,” he noted, meaning there could soon be “very little difference between legacy and low-cost” models.
“The only difference is, ‘Who is the true low-cost carrier that manages costs, and who isn’t’,” Ali asked, hiding his confidence behind a smile. “To survive in the industry from now onwards, you’ve got to manage your costs. It’s nothing to do with your revenue.
“And we are the only pure LCC in the region.”
 

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