Saudi air industry to get more competition

Saudi Arabia is trying once again to open up its aviation sector by granting licences for two new airlines to operate domestic services, marking a potentially transformative period for the sector. Published in MEED, 20 May 2014

Those flying from Riyadh to Jeddah currently have a choice of 14 direct flights on Saudi Arabian Airlines (Saudia) and a further nine on its only domestic rival, flynas. That sounds like a lot, but before long there might be even more choice on the route, with two new airlines due to launch in the coming year.

The recent history of the Saudi aviation sector gives cause for caution about the prospects for the new arrivals, however. Dammam-based Al-Qahtani Aviation Company and Qatar Airways gained their licences in December 2012 from the General Authority of Civil Aviation (GACA).

More competition

It is the second time in recent years that the authorities have tried to open up the market and some observers suggest there should be room for more competition. Mike Arcamone, president of Bombardier Commercial Aircraft, a division of Canadian aircraft manufacturer Bombardier, has described Saudi Arabia as “an under-served air travel market”.

Previous efforts to bring in more competition have been only partly successful. FlyNas, which began operating in 2007, is the product of that first wave but another carrier launched around the same time, Sama, did not fare so well. A combination of government-imposed restrictions on routes and pricing, and the fact that Saudia gets favourable fuel subsidies meant that Sama was ultimately unable to compete. The airline went out of business in August 2010, after racking up losses of about $266m over its short lifespan.

FlyNas has managed to weather the difficulties and is still going, helped by being part of a larger aviation group, Nas Holding, which also offers corporate jet services among other business lines. Even so, it has had to adapt its offering as it has gone along. In March, the airline announced plans for its first direct flights to Europe, with three a week from Jeddah to London’s Gatwick airport and to Manchester, also in the UK. FlyNas plans to add direct flights to Casablanca, Jakarta and Karachi and, since January, it has begun offering business-class services on all of its flights, presenting another challenge to Saudia.

Just how the two new market entrants will try to differentiate themselves as they compete for lucrative business-class passengers or the mass market is still unclear. But the demand should be there once they launch, according to Giuseppe La Commare, managing director at Irish consultancy Accenture. “Due to the massive size of the market, the growing population and the development of cities outside of the primary urban hubs of Jeddah, Riyadh and Dammam, there’s a need for expanding the number of airlines that operate internally,” he says. “Anyone who has lived in Saudi Arabia will tell you the country needs more domestic carriers.”

Of the two new entrants, Al-Qahtani Aviation, a subsidiary of the local Abdel Hadi Abdullah al-Qahtani Group, has been more public with its preparations. It is due to launch operations under the SaudiGulf brand and has already announced several aircraft purchase deals. In January, it signed a firm order for 16 CS300 aircraft from Bombardier, worth a total of $1.2bn at list prices. Al-Qahtani also has options for a further 10 jets, which would take the total value of the order to just under $2bn. Each of these can be configured in a 130-seat layout with two classes, or up to 160 seats of economy-only class.

Since then, SaudiGulf has also ordered four Airbus A320 aircraft. If it exercises all its options, it will have a bigger fleet of aircraft at its disposal than FlyNas. SaudiGulf said in March that it plans to launch its first flights from its base in Dammam in the first quarter of 2015, although no specific date has been announced.

For its part, Qatar Airways will run its services under a new brand, Al-Maha Airways. It too should start flying some time in 2015, but it is not clear when. It has not announced any plane orders, although in recent months, the Qatar Airways recruitment website has featured numerous jobs based in Jeddah for the new service, from chief pilot to director of operations.

Fuel access

The difference between success and failure for the new carriers may well hinge on access to cheap aviation fuel. Local media reports in January suggested national oil company Saudi Aramco was coming under pressure to offer cut-price fuel deals for the new airlines in the same way it does for Saudia. The oil giant is thought to be unhappy about the policy but it may be unable to resist the pressure.

“There is a strong lobby coming out of Aramco for reform of the subsidies system on energy,” says one economist at a local bank. “There are attempts to address this issue, but they’re not really addressing the demand side, which would involve raising the price. They are under pressure from a lot of people.”

There are wider plans afoot to overhaul the Saudi airline sector, above and beyond the introduction of new carriers. In particular, Saudia is being sold off piecemeal in what has proved to be a successful privatisation process to date.

When shares in Saudi Airlines Catering Company were floated on the local stock market, the Tadawul, in June 2012, they were snapped up by investors. Some 24.6 million shares were sold, but, as is often the case in the kingdom, demand was far greater than supply and the offer was oversubscribed by five times.

Saudi Airlines Cargo Company is due to follow its sister subsidiary on to the market this year, having appointed local investment bank Samba Capital to act as financial adviser on the listing. The cargo division’s chairman says the flotation should allow the company to grow and strengthen its competitive position in the region and beyond. It currently serves 26 domestic destinations and 225 international ones across Asia, Africa, Europe and the US.

The cargo firm will not be the last part of Saudia to be floated. “Saudia Cargo is just continuing the programme of privatising the subsidiaries,” says one local investment banker in Riyadh. “They started with catering a few years ago and now they are announcing a few others.” Saudi Ground Services could be floated before the end of the year. Other units set to follow are the flight academy, the maintenance division and the airline itself.

The last part of the jigsaw is the extensive investment being made to expand and modernise the kingdom’s airports, a programme that is reaching into most corners of the country. The biggest project is the expansion of King Abdulaziz International airport in Jeddah, which has an overall budget of about $28bn, according to regional projects tracker MEED Projects. It is being carried out in three phases up to 2035, by which time the airport will have capacity to handle 80 million passengers a year.

King Abdulaziz International is already the busiest airport in Saudi Arabia, accounting for more than half of the total international flights coming into and out of the country and second only to King Khaled International in Riyadh when it comes to the number of domestic flights. King Abdulaziz airport is also growing more quickly than most of its peers in terms of the number of flights and passengers and the amount of cargo it handles. In 2012, the most recent year for which comprehensive statistics are available, the airport handled more than 27 million passengers, up from 23 million in 2011.

Project activity

Many other, far smaller projects are also under way across the rest of the kingdom. Saudi Arabia has four international airports – at Riyadh, Dammam, Medina and Jeddah – and 24 domestic airports. Currently, Gaca is planning or already carrying out work at three of the international hubs and at least 15 of the domestic airports, at a total cost of about $34.9bn. In addition, more than $1bn of other airport projects have been completed in the past five years and $580m-worth of schemes at Hail and Taif airports are currently on hold.

The kingdom could certainly benefit from such investment. Industry rankings such as those run by UK research firm SkyTrax typically place Saudi airports below more prominent regional hubs such as Dubai, Doha and Abu Dhabi in terms of their quality. Taken together with the efforts to modernise Saudia and bring in new carriers, the investment programme represents a potentially transformative period for the country’s aviation sector. Whether the future reality will match the potential, though, remains to be seen.