Ed Winter, CEO of National Air Services, and Sama's Andrew Cowen on combating rising fuel prices, fare caps and the changing Saudi Arabian market.
Ed Winter, CEO
Nas Air is the low-cost airline that National Air Services started up just over a year ago. For years, Saudia (Saudi Arabian Airlines) had total control within the kingdom until Nas Air finally gained the first low-cost licence last February.
Up until recently we had just been flying internally, serving an extensive domestic network of 21 cities.
But our objective all the way through has been to travel internationally, because we can take our product further and consumers across the region can enjoy our services.
We've recently launched our first international routes to Sharjah and Abu Dhabi in the UAE. We did try and come to Dubai but it's unfortunately full at the moment and we couldn't get rights to fly.
However, we do recognise that the emirates are a key part of the Middle East market. It's an important leisure market for people coming out of the kingdom, as well as an important business market.
In addition, large numbers of people from the emirates visit Saudi Arabia for religious reasons. There's no reason why we shouldn't be serving three different airports in the UAE, and we'd love to come to Dubai as well.
In order to operate these routes, we've purchased several new aircraft. Passengers are quite surprised when they come on a low-cost airline to find we've acquired brand new Airbus A320s to fly to these destinations, with four in operation.
We also have two brand new Embraer 195s, which are slightly smaller aeroplanes with 118 seats as opposed to the 180 on board the A320. We've gone slightly away from the traditional low-cost model of having only one type of aeroplane because we have to operate several domestic routes.
Some of those routes are actually quite thin, so we have small Embraers for these.
In terms of future orders, we have three more dry-leased A320s arriving in the first two months of 2009. And direct from Airbus, starting 2012, we have 20 planes on order.
During the first six months of operations, we were running four or five key domestic routes and on those we were around 70-75% full.
When we began the public service obligation routes, which are a lot thinner, the load factors fell quite considerably to the extent that we had to start looking at bringing in smaller aeroplanes to operate some of those routes.
We're going to try to bring a whole new face to low-cost travel in the region. People will be used to using airlines with some pretty old, unreliable aeroplanes, but our new aircraft are much better.
A new plane is not just comfortable and shiny, it's also reliable and that's the key reason we've invested in brand new equipment. We want something that can fly hard so that we can achieve high punctuality and regularity for our passengers.
The only major problems I envisage are the rising fuel costs and fare caps. The price of fuel is a huge problem and it's eating into everyone's budgets, particularly low-cost carriers.
The budget model is all about competing with other expenditure, rather than other air travel, and what we're trying to do is offer people low fares to stimulate the market.
You can't just pass on the cost of fuel because you'd be breaking down that model. I am concerned that things haven't turned around yet; it is a huge part of our expenditure. One particular issue we do have is that Saudia is still subsidised, so they're paying a much lower rate for fuel than we are.
Fare caps were set some while ago against the background of Saudia, which was receiving and still does, huge fuel subsidies. So at the moment on most domestic routes, if I filled every single seat at the fare cap we would still lose money.
We're working closely with the government and the aviation authority in Saudi Arabia to bring some realism to the regulations there. Fare caps make it impossible to make money if we continue operating in the kingdom alone. The only way the airline is going to work is to expand internationally as rapidly as we can.
Most routes in this area are governed by bi-laterals and government restrictions, so we'll be negotiating hard over the next few months and I hope in the near future we'll be announcing routes into Pakistan, India, Egypt, and Sudan.
Round the region, we're looking to fly into Jordan, Syria and Lebanon and probably other places as well, although they're the key ones on the list at the moment.
We're hoping to add about a dozen to our list this year. Unlike European low-cost carriers, the majority of our bookings are not made online. This is due to internet penetration and familiarity.
First of all, it's people's access to the web and then it comes down to their confidence. In Europe 10 years ago, the actual percentage of people using the internet to purchase was quite low, where as now company's like Easy Jet are selling 99% of their flights online.
Obviously, in an ideal world all of our bookings would be on the internet but you have to adapt to where the market is, so for the moment we have a mixture of internet bookings, telephone call centres and travel agents.
It will come in time but in the interim period we are looking at how people want to make their purchases, and ways to help get access to our flights. Meanwhile, we will also look at moving towards internet booking.
Andrew Cowen, CEO
What are your thoughts on the Middle East aviation industry's general outlook and future?
The region probably has the biggest opportunities for aviation in the world. I have worked on start ups in several places and for me this is where it's at. In terms of working in Saudi, it sounds a bit strange, but even here in the Middle East the country is still a bit of an unknown.
I tend to find myself educating and enlightening people about Saudi Arabia.
What is the competition like in Saudi Arabia?
Cowen: Our primary competitor Saudi Arabian Airlines (Saudia) continues to be heavily subsidised by the government. We do understand the historical reasons behind this and the demands on the country, but equally our private shareholders are asking why the carrier should continue to get these advantages.
We need to see a managed timeline towards a level playing field. For example, Saudia gets all the government traffic and in a country where 60% of the economy is controlled by the government it's very significant. The airline also gets a favourable rate of fuel, which is about 20% of the market rate, while we pay the market rate.
Have you encountered any other problems or obstacles?
Many people told us the Saudi market was not ready to book on the internet, which is one of the basics of the low-cost model. But we've found that's not true, it's actually our biggest booking channel by some way. I think our biggest concern is the pace of liberalisation.
There are too many excuses from the flag carriers about needing time to prepare and get ready for life in the real world.
Although I do understand their problem, I think it's just an excuse. The flag carriers have been competing against the international carriers for years so how much more time do they need?
How has Sama developed since its launch last year?
Our first flight was on March 18 last year. We now have 20 destinations with eight internationals, including the recent launch to Alexandria. We moved into international destinations more quickly than we thought we'd be able to.
A local publication had an awards ceremony recently and we won the best new brand in the Middle East. These achievements have given us encouragement and it shows we're doing things right.
How does Sama compare to other low-cost carriers in the region?
We're the new kids on the block compared to Air Arabia or Jazeera Airways, both of which have done an excellent job. I hope in some respects we can emulate them. Saudi Arabia is a lot bigger than other countries in the Middle East and we're bringing certain innovations that this market hasn't seen.
For example, in Saudi, more or less since we've started, you've been able to book online or through the contact centre and then pay for your booking through an ATM.
I think we're only the second airline in the world to do that. We've also introduced a simple frequent traveller scheme; you buy nine flights and get the 10th free.
Saudi Arabia isn't a particularly popular holiday destination compared to other countries in the Middle East. Is that a concern?
It depends on what you want. We obviously have a major advantage in terms of all this religious traffic. Saudi officials recognise they need to invest more in facilities for visitors and the tourism commission has a major strategy under way to do that.
The commission is working hard to increase visitor numbers to the country. The kingdom is home to tourist sites that are just waiting to be discovered and that's an advantage that Saudi is trying to work with.
What about the difficulties for female travellers?
They're overstated. About 35% of out staff are female. Our chief financial officer is a woman, so is our director of internet and e-commerce. But it's an issue and I don't want to pretend otherwise.
You know it's a challenge but there are many people who'd be interested in seeing more of the culture and are respectful of the social climate.
Critics have argued that low-cost carriers will be unsuccessful in the Middle East. What are your thoughts?
It's total nonsense. We hear that in this region from people who are just dinosaurs. They say the public will not take to low-cost travel and that the Middle East is different but they're wrong.
If you're travelling on a one-and-a-half-hour flight from Amman to Abu Dhabi, you can fly with us for 250 riyals (US$66). Why would you pay 1200 riyals ($319) on the legacy carriers? Why would you do that on a one-and-half-hour flight?
Do you have any other development plans?
You could summarise our strategic developments as being about low fares and good quality customer service. We've recently launched an umbrella initiative called "just for you", it's our customer service scheme and we've launched a series of individual initiatives, such as the frequent flyer scheme.
We have something called hot deals for people who want to go away for the weekend and don't really mind where. It's a way for us to shift some of the airline's last minute inventories.