As Saudi Arabia inches towards opening its domestic airline market to more competition, Alan Dron asks who will survive the battle for passengers?
At the last Bahrain International Air Show in January 2014, I asked a senior Middle East airline executive why Saudi Arabia’s plans to open up its domestic air market to new carriers seemed to be taking so long to mature. He looked surprised: “By Saudi standards,” he remarked, “this is going like a train”.
That train seems to have hit the buffers some time ago. At the time of writing, 18 months later, there is still no clear indication of when the two new entrants – Al Maha Airways and SaudiGulf Airlines – will carry their first passengers, although SaudiGulf has publicly targeted November as a starting date.
However, both new carriers, who will line up against each other as well as national flag-carrier Saudia and relative newcomer Flynas, had hoped to be flying by now.
There is little doubt that the two new carriers will get off the ground. But just who will remain in business among the competitors a year or two down the road remains to be seen.
Saudi Arabia is an ideal market for domestic services. As the largest nation on the Arabian peninsula, distances between many cities are sufficiently large to make air travel an attractive option. The country also has the largest population of any in the region (around 27 million) and there is a large, wealthy middle class accustomed to flying.
For years, Saudia has handled the great majority of domestic passengers and, in 2013, 15 million of its 25 million customers flew within the kingdom’s boundaries.
Some routes are densely trafficked; for example, Saudia has 12 flights daily between Riyadh and Jeddah and frequently uses Boeing 777s for the 90-minute hop. These are often full.
The other current domestic airline is Flynas, which began life in 2007 as low-cost carrier Nas Air but which has moved to a hybrid model, with business-class cabins. It operates 24 Airbus A320s.
Saudi Arabia’s aviation regulator, the General Authority of Civil Aviation (GACA), announced in December 2011 that the domestic market would be opened to new entrants and that these could include foreign companies. A year later it said that licences would be granted to two bidders – Al Maha Airways, a subsidiary of Qatar Airways, and SaudiGulf Airlines, a new airline set up by the Al Qahtani Group, a Saudi industrial consortium with no previous airline experience.
Al Maha will operate Airbus A320s and unspecified twin-aisle aircraft diverted from its parent company’s vast order book, with the aim of building a fleet of 50 aircraft within a few years of starting operations.
SaudiGulf announced at the January 2014 Bahrain air show an order for 16 Bombardier CSeries CS300 regional jets (plus 10 options). Bombardier Commercial Aircraft regional VP-sales, Middle East and Africa, John Kassis, commented that the new airline “picked everything on the option list” to provide a high-amenity cabin.
Four A320ceos have been ordered as interim equipment until the Canadian airliners are delivered next year.
Al Maha was due to start operations in the third quarter of 2014, with SaudiGulf following shortly afterwards. Neither has got airborne yet.
The delays have been caused by being unable to obtain air operator certificates (AOCs) from GACA. Speaking at the delivery of Qatar Airways’ first Airbus A350 at Toulouse last December, CEO Akbar Al Baker said that only the lack of an AOC was preventing Al Maha from starting operations, but that acquiring it was proving “complex”. The following month, he was reported by Saudi newspaper, Al Watan, as saying that this process could take “anywhere between six to 18 months”.
However, the following month, GACA’s president, Sulaiman Al Hamdan, was quoted by Saudi newspapers as laying the problem at the doors of the new airlines: “There are regulations that [the airlines] have to follow to get the licence. We are transparent and we provide the same facilities to all airlines.”
GACA said some months ago that “once the two mentioned companies meet all the security, economic and technical requirements, the AOC will be granted”, but has said no more since. SaudiGulf declined to make any comment about its activities for this article, while Qatar Airways has been almost as tight-lipped about Al Maha.
In April, however, Al Baker was at Airbus’s Hamburg facility to take delivery of four A320s for Al Maha; while the AOC affair remains unresolved, these will be used on Qatar Airways’ mainline schedules.
Meanwhile, at least two A320s in SaudiGulf’s green and gold colour scheme are understood to be parked at Tarbes-Lourdes-Pyrénées Airport in southwest France. Unlike Al Maha, SaudiGulf has no other services on which they can be deployed.
For its part, Flynas is preparing for the forthcoming competition for passengers by strengthening its domestic timetable. Its current schedule shows no fewer than 14 daily round-trips between Jeddah and Riyadh compared to 11 a few months ago and CEO Paul Byrne said that it was changing departure times to differentiate them from those of Saudia.
A ‘nasmiles’ loyalty programme was launched at the Arabian Travel Market travel trade shop window in May and more Saudi destinations are due to be launched this year.
Speaking at May’s inaugural Routes Middle East & Africa forum in Bahrain, Byrne said that about 70% of Flynas’ operations were focused within, to or from Saudi Arabia. Due to local market regulations and pricing systems, the airline could not be defined as a true low-cost carrier. However, it was definitely low-cost compared to its competitor Saudia.
He said that growth for Flynas would come primarily in the domestic market but acknowledged a need to increase its activities internationally, particularly within the Gulf Cooperation Council countries.
It will, however, be careful not to over-extend itself, as it did in 2014 when it launched short-lived long-haul Airbus A330 services to the UK, Malaysia and elsewhere. The UK routes, in particular, lasted less than three months.
Low-cost long-haul may work “if you’re completely focused on it. We dabbled. It didn’t work for us as we weren’t good at it.”
However, lessons have been learned from the experience: “If we want to go the long-haul route, we will do that through codeshare,” said Byrne.
He added that he was not afraid of increased competition: “Competition is not something new for us. In fact, we currently only serve one route in the country that has no direct competition, less than 1% of our network. We have become accustomed to competition and it is something we do not fear. Bring it on.”
Saudia, meanwhile, says it is also ready for battle. A spokesman commented that the national carrier currently had “more than 90%” of the domestic market and that, even after the arrival of the new competitors, it expected its market share not to drop below 80%.
He added that, unlike the other carriers, it would serve all 26 Saudi airports and additional aircraft were being acquired to provide frequent point-to-point services, as well as providing connections at the two main hubs of Jeddah and Riyadh for international traffic. It expects to accept eight Boeing 787-9s and four 777-300ERs in 2015-16.
Saj Ahmad, lead analyst at UK-based Strategic Aero Research, believes that the two winners in the forthcoming struggle for passengers will be those with the strongest financial resources, namely Saudia and Al Maha.
Ahmad believes that the Saudi Government will not allow Saudia to be damaged by increased competition, while Al Maha will benefit from having access to Qatar Airways’ resources.
He believes the two companies most at risk from a prolonged battle for market share are Flynas and SaudiGulf.
He believes that Flynas is hampered by its relatively small route network: “They’re not expanding anything like as fast as [low-cost carriers] Flydubai or Air Arabia. Flydubai has been flying six years and has more than 100 destinations. Flynas has been around for 10 years and has 24 destinations.” This gives the Jeddah-based airline a lack of connectivity compared to rivals, he believes.
His greatest concerns, however, are for SaudiGulf. “SaudiGulf worries me for a number of reasons. If Al Maha wasn’t there, they might have some chance of making inroads [but] I don’t think they have the power to make any meaningful difference to the market.”
The combination of the Al Qahtani Group’s lack of aviation experience, its planned reliance on the untried CSeries and what Ahmad perceives as a relative lack of financial muscle may be fatal, he says.
He thinks that the Saudi authorities may be having second thoughts on the wisdom of opening up the domestic market to competition but that they have passed the point of no return.
“The biggest flaw in their strategy is that opening up the domestic Saudi market harms Saudia and Flynas… I think they are realising their folly.
“I think [providing] AOCs is nothing more than Saudi procrastination at this stage. It will happen, but we can’t say when.”
Saudi passengers will shortly have more choice in domestic air services than ever before; but will the airlines serving them have a similarly happy experience?