Price cuts

No frills carriers have now arrived in the Middle East, but whether they will be able to have the same impact in this region as they have elsewhere in the world remains to be seen.

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By  Neil Denslow Published  December 4, 2003

I|~||~||~|No frills or low-cost carriers (LCCs) have revolutionised transportation in Europe and North America, introducing cheaper fares and encouraging people to travel more often. However, while consumers have benefited from the low fares, the effect on traditional full service carriers has been to savage their yields, helping to force many into financial difficulties. No frills carriers have now arrived in the Middle East, but whether they will be able to have the same impact in this region remains to be seen.

The low-cost battle in the Middle East is mainly being fought between two players based in Sharjah — Air Arabia, which is backed by the Sharjah government, and menaJet, a private operator, which is due to launch operations early next year. Other players have also appeared on the radar, including TransGulf Express, which seems to have crash landed before even taking off, and a possible LCC launch by Kuwait Airways, which is still in the very earliest stages of development.

Air Arabia has grabbed an early advantage in the forthcoming low-cost showdown by being the first to market in the region. The carrier had its maiden flight at the end of October, and it is now flying twice a day to Bahrain and Muscat, three times a week to Kuwait and Damascus, and four times a week to Beirut — its fares are up to 50% lower than full service airlines. The LCC is currently flying two leased A320-200s, which will be replaced next year with two new ones. Four more A320s are then scheduled to be added to the fleet over the next two years.

The airline has reported a promising start to operations, registering 55-60% load factors on most routes, even though it was a quiet period for travel in the region. “It’s been extremely successful [so far] given that it’s just a start-up and it was the month of Ramadan when people don’t necessarily do much travelling,” says Adel Abdulla Ali, CEO, Air Arabia. “We were surprised at how well it has been received by the people, the business community and the customer base that has started coming in,” he adds.

The airline will add more destinations to its schedules over the coming months, including the Iranian cities of Tehran, Shiraz and Esfahan, Doha in Qatar, as well as higher frequencies to Muscat and Beirut. Next year, however, Air Arabia will also face competition out of its home base from menaJet, a no frills carrier backed by the Saudi conglomerate Al Zamil and Bahrain’s Gulf Finance House. menaJet has secured routes in the region, which have not been announced yet, but it has been forced to delay the launch of operations, as its new aircraft have been held up. “We have moved the launch date back slightly because we have chosen to go with specifically configured aircraft… but it is still hopefully early next year. We are not dramatically delayed. It’s not months, just a few weeks,” explains Mazen Hajjar, general manager of menaJet.

The launch of two LCCs in the region could threaten the flag carriers’ stranglehold on the local market. The big players in the Middle East, however, are not yet concerned about this threat. “I don’t think it is going to be competition that will worry us,” says Mike Simon, senior vice president, corporate communications, Emirates Airline. “We are concentrating on being a quality airline with three classes… and we have always had competition.”

“As an airline, we [at Gulf Air] believe we are in robust shape to take on low-cost airlines,” adds James Rigney, head of strategic planning, Gulf Air. “We have got our cost base under control, we believe that our service is grade A, and like other airlines [around the world] we will compete with low-cost airlines.”

||**||II|~||~||~|GF is fighting against the LCCs with the launch of all-economy Gulf Traveller on routes into the Indian subcontinent, which will eventually become a key low-cost battleground. Within the region, the flag carriers’ confidence is rooted in the belief that the low-cost model doesn’t suit the local market. In particular, they contend that wealthy passengers and business travellers will prefer to stick with them, as they offer a better overall package. “What we believe is most important to them is frequency and the high standard of service we deliver to them,” says Rigney. “We have proof [of this] in the growth of the premium passengers that are flying with Gulf Air. Across our network, first class passengers have increased by 35%.”

The service of the flag carriers will always remain better than that of the LCCs’ — the basic level of service onboard is one of the no frills carriers’ major cost savings — so this will be an advantage for them. However, the frequency argument is less compelling, as the major carriers in the region tend to offer just daily service or less to many cities in the region. Gulf Air is looking to change this by deploying regional jets in the near future, but “to date Gulf Air, particularly, hasn’t served the point-to-point market that well,” says Mark Darby, managing director, Aviation Strategy Consultants, who advised on the launch of Air Arabia.

“Most of their scheduled services have been geared round connecting to their long-haul routes, rather than serving the local needs, so I’m fairly certain there is a market there to serve. The low-cost airlines should be able to take a slice of that market at the right price,” he adds.

The LCCs also believe they can be successful without eating into the market share of existing carriers. Instead the cheaper prices will encourage more people to fly. Migrant workers from the Levant, for instance, will be able to travel home by air instead of by bus, and people might be tempted to take more weekends away as travel becomes more affordable. “70% of the people who fly with us have never flown before, they have been using cars, so we are not necessarily a threat to the larger carriers,” says Ali.

“They have nothing to worry about,” agrees Hajjar. “There is plenty of scope for growth in the region, as we are definitely an under-developed market,” he adds.

Even if the LCCs do attract passengers through expanding the market, rather than by stealing customers from the flag carriers, their entrance in the Middle East may still impact on the major players by changing customers’ perceptions. Once the market realises that low-cost carriers can offer fares that are less than 50% of the current market rate, then, as has happened in the US and Europe, customers will want to see cheaper tickets across the board. “People [now] expect a low price for their air travel, and that’s irrespective of whether it’s a large carrier or a low fares carrier,” says David Stewart, director, AeroStrategy Management Consulting. “The impact has been really severe on the major [European] carriers. They used to charge £420 to fly London to Hamburg, for instance, and now they are charging £70-90. They haven’t lost much traffic, but they did take a big hit on yields.”

This type of transformation in the region will take time, and a lot of work to raise understanding of the low-cost model. The LCCs are tackling this task through marketing, advertising and PR activities. “A large part of our advertising budget is geared towards education,” notes Hajjar.

||**||III|~||~||~|The most effective ‘teachers’ though will be previous passengers who can explain the model to their friends and colleagues. Getting these large numbers will require a large number of flights and destinations. This is something that the LCCs are struggling to get, however, because of the closed skies policies in most of the Middle East and in the Indian subcontinent.

Air Arabia, for instance, has started with five destinations, which Dr. Ghanem Al Hajri, director general, Sharjah’s DCA & Sharjah Airport Authority, calls “quite a good start, but it is not how we wanted it, as many airports in the region still have closed skies.”
Open skies airports are easily able to grant slots to LCCs, and some such as Dubai are actively looking to attract them. DXB has drawn up a tailor-made incentive package for low-cost airlines, as it looks to attract as many carriers as it can to fill its new terminal.

“All airlines are welcome at Dubai International Airport. The concept of open skies policy is implemented completely and equally to all airlines,” says Anita Mehra Houmayoun, director of marketing & corporate communications, Dubai DCA.

Many other airports in the region are also keen to attract LCCs, but because of the regulations governing access rights, they can’t always give them slots even if they have the capacity. “The airports are really being very friendly and helpful,” says Hajjar. “The problem lies in the bilaterals that govern traffic movements, as the airports want more business.”

India, in particular, is yet to grant landing slots to either of the Middle East LCCs because of the country’s restrictive policies. This is a key market for them, however, as it offers a huge number of potential passengers who would accept a more basic level of service. Air Arabia is aiming to start services to India next year, but the Indian authorities have yet to confirm this, despite the large number of services flown into Sharjah by its national carrier. “Air India operates 24 services a week from Sharjah Airport, so there is an issue of reciprocity,” notes Ali.

||**||IV|~||~||~|Until more liberal aviation policies are implemented in the Middle East and India, the two LCCs will be limited to airports in countries operating open skies policies. As such, there is a strong possibility that Air Arabia and menaJet will end up serving a number of the same routes, which will put them into direct competition with each other.
Globally, this is an almost unique situation, as two LCCs have rarely competed on the same route. For instance, while the largest European players, easyJet and Ryanair, both operate out of London, they have different hub airports and fly different networks. “Ryanair and easyJet have not really clashed because they are rarely flying from the same airport to the same airport,” notes Stewart.

Avoiding direct competition has been one of the keys to the growth of LCCs in Europe, and hence it is likely that the direct clash in Sharjah will impede the growth of both Air Arabia and menaJet. “If you end up with two low-cost carriers on a route that is also served by an Emirates or Gulf Air, you are just asking for people to start losing money in a big way,” says Darby.

Furthermore, the number of potential travellers within Sharjah’s catchment area is a lot smaller than that of European LCC hubs. easyJet and Ryaniar have over 7 million potential passengers in London alone and their secondary hubs, such as Liverpool, Frankfurt and Geneva also offer easy access for several million people. By contrast, the total population of the UAE is just 2.5 million. “It is a strategic issue as to whether they have got enough critical mass, and how does that support more than one carrier?” asks Stewart.

Which of the two Sharjah-based LCCs will come out on top will depend on a variety of factors, but Air Arabia has two clear advantages in being first to market and through its designation as a national carrier. To ensure that it was the first LCC in the region, the carrier hurried through its launch. “In an ideal world, the start date would have been a lot later, but the key thing we saw was to... be the first to market,” says Darby.

“It’s very important to be first... For others who come afterwards, it is possible [to grow traffic], but it is difficult… because the market share has already been taken. As such, they will have to put in double the effort to obtain additional traffic,” adds Al Hajri.

menaJet also suffers from the drawback of not being a national carrier, which is going to make it more difficult for the airline to get traffic rights than it is for Air Arabia. “We are a UAE national airline, and there is an obligation in bilaterals and so on, and we are having difficulties. I imagine for a private sector [company] coming in and trying to do these services, it is going to be extremely difficult,” says Al Hajri.

“It definitely is an advantage to be designated as a national carrier because then you have the Civil Aviation requesting landing rights on your behalf,” admits Hajjar. However, now that the UAE has four national carriers, it is questionable how big an advantage this will be.

In the end, both carriers may find it difficult to establish a clear competitive edge over the other, and the market may not be big enough to support two carriers. Which will last the longest will then be largely dependent on their financial backing. “I suspect all it [menaJet] will do is spoil the market for both of them, and then the question is whose pockets are deepest,” says Darby.||**||

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