Low cost flies high

As low-cost airlines profit from the credit crunch, CEOs say more needs to be done to allow the sector to grow
ANALYSIS

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Low-cost airlines are benefiting from the credit crisis, but CEOs say more needs to be done to allow the sector to grow.

“Five years ago we were told, ‘you have three months to live’; since then five low-cost airlines have flourished in as many years, and more will come,” Air Arabia CEO Adel Ali told Aviation Business at the Middle East Airport Projects conference last month.

But as leader of the first and largest low-cost carrier (LCC) in the Middle East and North Africa (MENA), Ali has concerns for the sector’s future. The CEO is a firm believer in the low cost concept. Since 2003, Ali has built a business, which in 2008 delivered an annual increase in profits of over 35% and an annual turnover of US$500 million.

This month, the carrier takes its destination quota to 46 when it begins flights to Athens and Goa, and the Sharjah-based airline is about to open its secondary hub in Morocco’s largest city Casablanca. It will begin its operations in April or May of this year, which will allow it to expand into Europe and Africa. So how does the low cost model continue to flourish, while the region’s legacy carriers record a massive drop in profits?

The bottom line

With premium travellers, and even economy passengers who usually opt to fly with large commercial airlines making the switch to lower cost travel, the economic slowdown is benefiting the region’s low-cost carriers. Air Arabia consistently maintains a seat factor of around 85% and even when the fuel price rose to an all-time high of $147 a barrel in July 2008, Air Arabia was prepared.

“We insured we got a minimum income per passenger so that we could overcome this period, and it did impact our bottom line, but it was less severe than other airlines,” said Ali.

In 2005 the airline was privatised and Ali said this was a turning point for, not just the airline, but the future of air travel in the region. However, he has concerns that non-privatised low-cost airlines could have their wings clipped.

“Our success tells you there is a need for more low-cost carriers in the region,” explained Ali, “and I believe the authorities recognise this, but the dilemma they have is do they support LCCs or the national carriers?”

With government-owned flydubai launching this year, this topic is of particular relevance to LCCs that are struggling to maintain the market share.

“If low-cost carriers get too big then they become a threat to bigger airlines and this is why all airlines should be privatised.”

Fact of life

International Air Transport Association (IATA) regional vice president MENA Dr Majdi Sabri agreed that the low-cost model is a fact of life. “They [LCCs] have proved they are covering a certain part of the market.

“They are expanding the market base, and providing good competition, which in our opinion is healthy as it benefits the consumer and creates challenges for all airlines to reduce costs and become more efficient.”

Ali agreed these changes will come and says the region should look to India for inspiration.

Air Arabia has moved into 13 airports in India and, in most cases, was the first international airline to do so.

Since then, many other small airlines have followed and this has improved the airports’ business. But Ali admitted that similar investment in airports across the Middle East is sorely lacking. “We need more secondary airports into which airlines can operate. I would like to see a move away from this idea of ‘gateway’ airports. We don’t need massive airports, but simplified ones that will stimulate passenger traffic.”

Simplified product

But not all LCCs feel the same. Andrew Cowen has recently taken over as CEO of Jazeera Airways and explained that the infrastructure has a two-pronged approach.

 “The advantage in this region is that there’s the space to build large airports without the congestion and environmental issues occurring, which impact airport expansion in the UK or Europe for example. For us, it is easier to fly to one airport than multiple airports as it is less confusing for the passenger and offers better connecting opportunities.

“What I would say is that too many airports have been built at the luxury or high end and this all has to be paid for, which ultimately pushes up fares, so we would argue for a simpler airport product. As we walk into a downturn we hope some of this will be brought to bear.”

Driving efficiency

Currently there are around 10 low-cost carriers in the Middle East and North Africa, and despite the argument that the Middle East simply lacks small and efficient airports to meet with travel growth, Dr Sabri added that airlines have improved their productivity by 61%, and it is competition from LCCs which is creating more of these efficiencies.

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