The only way is up for Middle East LCCs
Over the past 20 years, low-cost carriers (LCCs) have become a major feature of the airline landscape in Europe, Asia and North America. They have certainly made an impact in the Middle East, but will they ever become as significant in those other regions? Alan Dron talked to the CEOs of several Middle East LCCs to take the market's temperature.
When LCCs first emerged in the Middle East, there was scepticism over whether they would survive. Many industry observers believed that potential passengers would equate ‘low cost’ with ‘poor quality’ and hesitate to use them.
The past decade has shown that passengers in the Middle East like a good price as much as their counterparts in Europe, North America and Asia.
But just how strong is the Middle East low-cost market at present?
“It’s very strong. Travel is an essential part of our life here,” said Flydubai CEO Ghaith Al Ghaith. The high number of expatriate workers from the region and the Indian sub-continent virtually guaranteed strong passenger flows, he said.
“This region is not really different from any other region that has experienced low cost in the past,” commented Adel Ali, CEO of Air Arabia, the region’s first LCC. “It always starts with negativity. The perception has been like everywhere else – that LCCs don’t have a good product or good punctuality. Once you prove to people it’s a sustainable business, with good aircraft and good prices, it tends to work. People like it. You stimulate a new market.
“We’ve had 13 years of sustainable growth and have no reason to think that growth won’t continue.”
Most of the region’s LCCs are profitable. One that will not be – this year, at least – is Turkey’s Pegasus Airlines, admitted its CEO, Mehmet Nane.
However, the reasons for the anticipated drop into the red are largely geo-political and outside the airline’s control. A series of terrorist attacks in Turkey – notably at Istanbul’s Ataturk International Airport that left more than 40 dead – led to a sharp drop in inbound tourism, denting Pegasus’ passenger figures.
This followed Russia’s ban on charter flights to Turkey after Turkish F-16 fighter aircraft had shot down a Russian Sukhoi Su-24 that had strayed into Turkish airspace at the end of 2015. Relations are now on the mend.
Fortunately, said Nane, the Turkish domestic market remained strong and still had room to grow. “Next year, we’ll definitely be back in profit.”
However, while low-cost travel has taken off in the Middle East, it is a rather different animal from the European market, said Al Ghaith. There, airlines can offer essentially a uniform model throughout the continent. In the Middle East, the ‘one size fits all’ approach doesn’t work.
Flydubai focuses on keeping costs low by being as efficient as possible, but offers facilities unheard of on European LCCs, such as on-board television and movies. Passengers have to pay for the service, but “That’s what people here are used to.
“As for food, people have to pay for it, but some routes are so long that we had to include it as part of the ticket price.”
One other major difference to European no-frills carriers, such as Ryanair and EasyJet, is the move of airlines, such as Flydubai and Saudi Arabia’s Flynas, towards a hybrid model, with business-class seats.
Paul Byrne, Flynas’ CEO, believed that LCCs still did not have the same level of acceptance as elsewhere. “People here are used to their luxury. That’s one of the reasons why we felt we had to provide a business-class as part of our offer, together with a frequent flyer programme.”
On certain routes – notably to Cairo – business-class is essential, he said and some carriers have fitted the wider seats specifically for that sector. The Riyadh-Jeddah sector got decent load factors in its eight-seat business section, he added, as did weekend traffic between Saudi Arabia and Dubai.
Air Arabia’s Ali accepted that carriers had to refine their offerings to meet market requirements. “For us, it would be wrong for me to say we would never develop business- class but, until now, we’ve sustained a very high seat factor. Better to operate a single class and maximise our profitability and carry a large number of passengers rather than a business-class seat.”
Kuwait’s Jazeera Airways has always had business-class cabins but Jazeera Group chairman, Marwan Boodai, believed that there are deeper underlying changes. “The market today in the Gulf, as with other parts of the world, is no longer segmented into low-cost versus legacy. Instead, we are seeing the market more and more now being consolidated into two categories, the short-haul or regional airline category [and] the long-haul or global airline category.
“Frequent travellers, and those who follow the sector, have seen legacy carriers reposition their product for regional travellers and adopt some of the key success factors of classic low-cost carriers. There is a customer-led push into redefining what short-haul or regional travel is, in terms of price, cabin fitting and services. And, as a result of that push, legacy airlines’ economy-class experience on short routes is being overhauled to meet what regional or short-haul travellers require. So, the question today isn’t how strong the low-cost market is, but rather how strong is the regional travel market?”
Despite its success, can the low-cost market ever be as strong in the Gulf as it is in Europe or the USA?
“There are about one billion people between Europe and the USA and both regions operate under a single sky policy separately. Now, the Gulf's population is roughly around 50 million people. So, no,” said Boodai.
“However, the sector doesn’t have to mimic Europe and the USA. In fact, open regional travel in the Gulf is quickly taking on different and very noteworthy characteristics.
“For example, the Gulf and the Middle East has religious sites in four different countries for people of different faiths. Airport ownership and management are gradually moving away from governments and into the private sector, and when that happens growth will be a primary objective for these airports. And when airports grow, airlines grow.
“Other noteworthy factors include the growth of same-day business travel, and that makes airlines focus on frequencies not just numbers of destinations. And there’s a whole set of other factors, including the strong family ties across Gulf countries. So regional travel is inevitable for everyone.”
Air Arabia’s Ali is more optimistic about the low-cost market’s future status, but sounded a cautionary note, namely the lack of open skies policies in many countries around the region.
“A good example is that we’ve not been able to grow our requirement into India for the last eight years. We know we can double the capacity on Indian routes but India is not open to an open skies relationship, although we have a good relationship between the two countries. Similarly, there are a number of airports where they don’t want to see us growing, to protect their conventional airlines. Every airport that an LCC has gone into has grown passenger numbers and the business.
“The market is there and, proportionately, it will grow in the same way as in Europe and elsewhere.
“Simply, people want to travel more and travel has been an integral part of people’s lives. To fly frequently, people want affordable prices that can only be offered on a commercial basis by an LCC.”
Al Ghaith concurred: Flydubai considers any destination within a five-hour radius from Dubai as a possible route, but is stymied by restrictive controls and visa regulations in several major markets.
“India accounts for less than 2% of our flown seat-miles but is the largest market here,” he said.
“Most GCC countries have open skies, which is very positive, but what matters in our region is a big block of countries important to us – India, Pakistan, Iran – where open skies is still not there.”
Despite these constraints, several Middle East LCCs are gearing up for fleet renewal or expansion. Flynas, for example, is in talks with both Boeing and Airbus for replacements for its fleet of A320s and anticipates making a choice by the end of this year.
Similarly, Air Arabia is in the market. By the first quarter of 2017 it will have taken delivery of all 44 A320s that form its current fleet. The airline’s network plan “suggests we will have requirements for additional aircraft after Q1 2017. We’re in discussions with a number of lease companies,” said Ali.
LCCs traditionally operate single-type fleets, but Ali did not rule out a mixed fleet if Boeing produced the best offer. Bombardier’s CSeries also looked like being a good aircraft, he said.
“Our balance sheet means we require some aircraft to be leased. But we will also be putting in orders for replacements and expansion.”
Longstanding marketplace rumours that Air Arabia was looking at the larger, longer-ranged Airbus A321neo were confirmed in late September when Air Lease Corporation said it would be supplying the Sharjah-based carrier with six examples in 2019. Ali had earlier hinted at this decision: “Perhaps we’re on the limit with the A320,” he said. There were routes where Air Arabia needed more capacity, he noted.
Pegasus is expanding its operations in the Gulf through a codeshare arrangement with Flynas, which sees the Turkish carrier flying passengers to Istanbul, from where they can connect on to destinations on the Pegasus network.
It has just begun a major fleet switch from the Boeing 737-800 to the CFM LEAP-1A-engined A320neo, but anticipates running both types in tandem for some time.
The A320neo, which entered service this summer, is delivering its advertised 15% reduction in fuel consumption compared to its predecessors. “So far, reliability has been good,” added Nane.
Over the next year, Salam Air in Oman and Flyadeal in Saudi Arabia are due to join the low-cost ranks. Can the region absorb new LCCs?
“Absolutely,” said Al Ghaith. “I remember when Flydubai was announced, people asked ‘Do you think there’s enough room?’ We’re now up to 53 aircraft. It’s been an amazing journey and whatever we have done could be done by other airlines.”
His airline has orders and purchase rights for more than 100 Boeing 737-800s and 737 MAX versions.
Ali also believed that more competition is inevitable. “The more successful the airlines are, there will be people who see that this is a good business model and they’ll set up LCCs in different markets. What we’ve seen in 13 years is that some have succeeded and some haven’t. ‘Can you stick to the business model’ is the question.”
Jazeera’s Boodai has often talked of over-capacity on some Gulf routes, but also believed that the market could cope with more aircraft – in certain places.
“There is no doubt that there is a lot of over-capacity on Gulf routes to and from Kuwait. In fact, some routes today are flying aircraft that are practically half empty. Having said that, there are other markets that seem to be underserved, such inter-Saudi travel.
“In terms of the big picture, there is room for growth and room for the Gulf regional travel market to expand. I believe that once the private sector takes over the airports, once more liberal traffic legislation is introduced, and once more Gulf cities work on their infrastructure and facilitating home-grown tourism, there will be plenty of opportunities for everyone.”
This year has been, sadly, defined for Flydubai by the March crash of one of its Boeing 737-800s at Rostov-on-Don, southern Russia. However, the public has not been deterred from travelling, said Al Ghaith:
“From the numbers we can see, there’s always an effect from those dreadful events. But I can say that as far as loads and people’s reactions are concerned we’re coming back to normality very quickly, if we’re not already there.”