Bringing low-cost travel to the Middle East and North Africa comes at a price, but for Air Arabia, challenges are turned into opportunities, as Martin Rivers finds.
Compared with Europe, few people would describe the Middle East and North Africa (MENA) as a liberal aviation market. Restrictive traffic rights, bureaucratic visa regulations and state aid for flag-carriers conspire to make life immensely difficult for the few private airlines based in the region.
Heavy regulation is particularly burdensome for low cost carriers (LCCs) as they rely on commercial efficiency and free-market access to unlock new demand among price-sensitive consumers.
This explains why most Arab LCCs adopt a hybrid business model that eschews point-to-point flying in favour of hub economics and replaces no-frills service with a whole host of complimentary perks. Airfares, inevitably, remain higher than average.
The one noteworthy exception is Air Arabia, the privatised flag-carrier of Sharjah in the United Arab Emirates (UAE), which was founded in 2003 and now operates 48 Airbus A320s out of 10 bases stretching from the Persian Gulf to the Maghreb.
Adel Ali, group chief executive officer, admits that he has made compromises in bringing low cost travel to the Arab world – local partners share control over his foreign bases, for example, and several key markets are absent from the network – but with profits surging he is confident the region’s dealmakers are waking up to the LCC revolution.
“A lot of people have now started the approach of [thinking], ‘let’s not be greedy and just close everything, because then nobody benefits’,” explains Ali, who has steered Air Arabia since its inception.
“In the 15 years of this airline [being in business], we have gone from a very restrictive-skies policy to a reasonably liberal policy in our part of the world. The mindset has changed, in the sense that they recognise [deregulation] is a good source of income for the economy and for the country … The phrase ‘open skies’ perhaps is not there, but with the way things have changed in the last 15 years, it’s only going to change for better.”
Diplomacy is key to Air Arabia’s success. Despite battling protectionism in all three of the foreign countries it flies from – Morocco, Egypt and Jordan – Ali rarely criticises his host countries, preferring to “be peaceful” and let the benefits of liberalisation speak for themselves.
“When we bring in passengers, the airport makes money, we recruit people, and we contribute to the economical wheel of those countries,” he says. “If someone doesn’t want the benefit from that economic input, there’s no point in fighting those circumstances. We will just slow down and shift those aeroplanes elsewhere.”
The appeal of deregulation became harder for Gulf leaders to dismiss in 2017, when the region’s top three airlines – Dubai’s Emirates Airline, Abu Dhabi’s Etihad Airways and Qatar Airways – slammed the brakes after more than a decade of uninterrupted double-digit traffic growth.
A variety of factors has been blamed for waning fortunes at the big three super-connectors: lower oil prices and a resultant slump in premium traffic; security concerns after the rise of Daesh; heightened competition from low cost long-haul carriers; and travel restrictions imposed by the new US President, Donald Trump.
Qatar Airways has also been hit by a regional blockade against its government, while Etihad is reeling from several loss-making investments in foreign airlines. For Ali however, a simpler truth explains why his full-service rivals have now hit turbulence – and why Air Arabia is weathering the downturn better.
“Airlines are known to buy aeroplanes when the market is good; get delivery when they are not needed; and then … give them up and shrink the business,” he says, arguing that Indian as well as Gulf carriers “dumped capacity” in the MENA region in 2015 and 2016.
Flooding the market with too many seats allows airlines to grow market share, but only at a cost of lower yields and profitability. The inevitable remedy is cutting capacity growth.
“It’s the normal cycle that repeats itself every few years, but 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 … We end up having to do less restructuring and less cleaning when markets get difficult.”
Air Arabia’s ‘conservative’ approach is borne out by its recent growth trajectory, with seat capacity at the UAE operation growing by about 9 per cent in 2016 and 10 per cent in 2015.
While Emirates grew at a similar pace, its larger size entailed far greater risk for each percentage point added: the Dubai flag-carrier transported 4.2 million additional passengers between the two years, versus just 900,000 extra at Air Arabia.
This overreach fuelled a dramatic 80 per cent fall in net profits for Emirates, against a negligible 3.5 per cent dip for Air Arabia.
Moving into 2017, Ali extended his lead by steadily growing quarterly profits above analysts’ estimates: 103 million UAE dirham ($28 million) in Q1 became 158 million dirham in Q2 and 376 million dirham in Q3.
Emirates also improved its results in the first half of 2017, but only after retrenching staff, deferring A380 deliveries, and cooperating more closely with low cost subsidiary flydubai.
The other big UAE carrier, Etihad, meanwhile plunged to a $1.87 billion loss in 2016 after its equity strategy unravelled in spectacular fashion, with both its flagship investments – Alitalia and Air Berlin – filing for insolvency. Etihad does not publish quarterly or biannual results.
Ali is characteristically modest when talking about divergent fortunes in his home market. He credits his full-service rivals for shifting to a more rational growth rate, insisting there is room for both types of airlines to thrive in the region.
Nonetheless, he clearly believes LCCs will benefit the most from the emerging trends of liberalisation and price-sensitivity, noting that they account for just 17 per cent of capacity in the Middle East today. “When economic conditions get a little more difficult then LCCs tend to be the best choice and option for the customers.
We already benefited from that,” he says. “I think, as we move on, economic conditions are going to bring more pressure on the industry in the region, and that will probably make some operators reconsider some of the overcapacity that exists … That gives us the opportunity not to shrink, but to actually expand.”
Air Arabia currently deploys 37 A320s under its UAE licence, serving more than 70 international destinations.
The Middle East and the Indian subcontinent are its largest markets – particularly Saudi Arabia and India – but spokes also extend to the Commonwealth of Independent States (Almaty and Astana in Kazakhstan; Baku in Azerbaijan; Kiev in Ukraine; Moscow in Russia; and Yerevan in Armenia); Sarajevo in Bosnia and Herzegovina; Istanbul in Turkey; Tbilisi in Georgia; Ürümqi in western China; and three African points south of Egypt (Hargeisa in Somalia; Khartoum in Sudan; and Nairobi in Kenya).
Further afield, eight A320s are based in Morocco under a joint venture with local partners. Those aircraft fly from six bases (Agadir, Casablanca, Fez, Marrakech, Nador and Tangier) to 29 points in western Europe, plus Istanbul. One domestic route is also served between Fez and Marrakech.
Air Arabia Jordan, a second joint venture, deploys two A320s from Amman to three points in Saudi Arabia (Dammam, Jeddah and Riyadh), plus Sharm El Sheikh in Egypt. Air Arabia Egypt, a third part-owned affiliate, links the northern city of Alexandria with the same three Saudi points, plus Amman and Kuwait.
Finally, back in the UAE, two of the 37 locally-registered aircraft have been moved from Sharjah to the emirate of Ras Al Khaimah, which lost its flag-carrier, RAK Airways, in 2014. “It is never going to be a very large hub,” Ali says of the secondary UAE base.
“But we will consider operating out of anywhere, so long as the business exists and the traffic rights exist. We are in the business to move people around, and we will move them.” Management’s willingness to explore new markets is now coming to the forefront as Air Arabia prepares for its next wave of fleet expansion.
The airline’s original order for A320s will be fulfilled in 2018, when the final two units arrive in Sharjah and one additional plane lands in Cairo. A leasing deal for A321neos will then see six stretched aircraft delivered in 2019 – likely the long-range variant – enabling deeper expansion into China, the Far East, Russia and Africa.
The A321neos will also be useful for up-gauging routes such as Moscow and Kathmandu in Nepal. Air Arabia Maroc may use them to push further into eastern Europe.
Despite rumours to the contrary, however, the UAE operation has no plans to serve western European markets like London. Doing so would be perceived as an assault on Emirates, which serves the UK capital nine times daily from Dubai International Airport – a mere half-hour drive from Sharjah.
“We see there are too many aeroplanes already flying into Europe. There’s overcapacity on certain routes particularly,” says Ali. “We won’t rule out anything. But I think we have not considered Europe yet because we’ve got enough on the plate for those aeroplanes already.”
As work continues to identify markets for the A321neos, management is also preparing to sign an order for more standard-sized narrowbodies. Airbus has a head start in the negotiations given its existing relationship with Air Arabia, but Ali stresses that all options are on the table for long-term fleet development.
“In terms of the quality of the aircraft available today, everybody gets good aeroplanes,” he says. “So, we would be daft not to look at everything that exists … We will not tie ourselves to one particular brand just because we started with that brand.”
Although airlines typically stick with one manufacturer in the early stages of their development – building economies of scale through uniform maintenance, training and licencing – the benefits of a single-type fleet begin to wane after 50 units.
Switching suppliers is particularly viable for airlines that spread aircraft and crews between multiple hubs, as they avoid the need to hire two sets of technicians and pilots at the same base. Ali says an order for “around 100 aircraft” should be announced by early 2018, meeting Air Arabia’s long-term requirements for both replacement and expansion units.
Parallel leasing deals will also be sought on an ad hoc basis, building flexibility into the renewal programme. Asked what markets are ripe for A320 growth, he paints a picture of abundant opportunity stretching in all directions from the Gulf.
Russia stands out as one underserved country from Sharjah, though fluctuating demand means that “charter-type operations” may have an advantage at some of its regional airports. Tunisia and Algeria – two glaring white spots for the group – are in the crosshairs of the Moroccan unit.
For the Alexandria base, western and eastern European destinations will be considered after Egypt’s 2018 presidential election. In Amman too, plans are afoot to serve Europe, along with key markets like Istanbul and the Lebanese capital Beirut.
Niche destinations will also be considered as talks continue with a third manufacturer, Bombardier, about a possible order for the 110-130-seat C Series. Ali notes the “positive vibes” coming from the aircraft’s launch customers, speculating that it could work well on domestic flights in Morocco and some thinner routes from Egypt.
He has little appetite for widebodies, though, warning that operators in the low cost long-haul field have yet to prove their business models. “I don’t want to rush to be the first to do it,” he insists. “I’d rather watch some successes.”
Ultimately, it must be said that Air Arabia’s long-term vision – of developing a point-to-point network akin to Ryanair in Europe – bears little resemblance to its present-day scope. Protectionism is by far the biggest obstacle to growth, holding back existing affiliates and pouring cold water on future ones.
Despite having an Egyptian operating licence, Ali has all but given up on basing aircraft in Cairo, the largest city in the Arab World. “Yes, we would like to, but we know it’s not going to come soon,” he shrugs. “So, we have got to operate from where we are, and develop that.”
The Jordanian authorities have stalled route applications “for over a year”, he adds, while Morocco is blocking flights to West Africa. Even in the UAE, Air Arabia’s wings are being clipped by foreign governments who protect local carriers by hindering access.
India has revoked traffic rights for flights from Ras Al Khaimah, for example, while Iran is lifting capacity restrictions at a disappointingly slow rate. Such obstacles explain why Ali is in no rush to add more joint ventures. However, with patience and perseverance, his dream of a pan-Arab carrier moves closer to reality each day.
“In every country, I visit governments are very positive and their wish is to be open skies, but obviously there are other considerations,” he concludes. “Looking at where we were, and where we are today, I think I’m extremely satisfied. We’ve just got to keep working.”
Visit airarabia.com for more information.
Editor’s Note: The post was originally published in January 2018.