Air Arabia gets to grips with low cost

The region’s first no-frills carrier is on a high: 2005 was profitable, costs are under control and employees have been awarded a big bonus in recognition of last year’s performance. Adel Ali, Air Arabia’s CEO, tells Aviation Business that he hopes this is just the beginning.

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By  David Ingham Published  March 5, 2006

|~||~||~|Air Arabia’s management is so happy with last year’s performance that it has given all employees a bonus equivalent to eight week’s salary. What has prompted this apparent act of generosity is a net profit of AED32 million, in only Air Arabia’ second year of operation, and a big jump in efficiency and operational performance. “We are particularly chuffed with 2005 and did much better than we had forecast; it was a profitable year,” said Adel Ali, Air Arabia’s chief executive officer. “For 2006, we have set fairly bullish targets and are looking to do better than 2005.” A chat with Ali suggests that Air Arabia has quickly nailed the fundamentals of what makes low cost airlines work. Particularly telling is the fact that the airline sold more than half its tickets through electronic channels in 2005, helping it achieve a cost per sale of a reported 5%. 23% of the Sharjah-based carrier’s tickets were sold online in 2005 and another 30% went through its call centre. Air Arabia’s cost per sale of around 5% is well below the 17-20% figure that Ali says is typically incurred by full service airlines. In addition to its use of electronic sales channels, several other factors have helped Air Arabia control its operating costs. It operates as a ticketless airline, which reduces paper and distribution overheads, and it has an employee headcount of around 350, equivalent to 72 per aircraft. “For a conventional airline, that would total over 200 people per aircraft,” Ali contends. Contrary to the belief that low cost airlines generally mean low wages, Ali insists that Air Arabia’s employees tend to be paid better than those of other regional airlines. “Efficiency is not a question of paying people less,” he argues. “It’s more important to get the right people and make them work efficiently.” According to Air Arabia’s end of year statement, employee productivity grew 11% year on year in 2005. Going forward, the airline hopes to increase efficiency and reduce overheads further by reducing Air Arabia’s existing retail presence. “We want people to go online,” says Ali. One thing that may encourage people to do that is the way agents are compensated. Air Arabia does not pay agents a commission, but allows them to charge customers a fee on top of the standard ticket price. The charge of AED30 on GCC journeys and AED50 on flights outside the GCC is paid by the customer, on top of the ticket price. Booking online means customers pay no charge, so they have a clear incentive to buy tickets through Air Arabia’s web site. Air Arabia’s commitment to efficiency extends further, to its use of aircraft. The airline boasted a seat load factor of 79% in 2005 and hopes to stay close to that figure in the future. How low can you go? Air Arabia has made its name by trying to offer the lowest prices in the market. Nevertheless, a return ticket from Sharjah to Beirut can still cost as much as AED1200 at peak periods, hardly a rock bottom price. Ali counters by saying that no frills airlines work on a cost per flight, rather than cost per seat, model. “If you book early, you get a lower price,” he says. “Depending on the time of year, prices will increase between 10 to 40% from lowest to highest price. We have the best price at the time of travel.” Booking early, however, has caused some Air Arabia customers problems. Late last year, passengers on flights to Beirut were given just three days notice of changes to flight schedules. “I don’t think it’s a widespread thing,” Ali says. “Generally, our schedule is valid for a season.” The problems appear to have occurred when the airline changed from its Summer to Winter schedule in late October. Scheduling issues aside, Air Arabia is clearly in a confident mood. Extra products, such as hotel nights and car hire, are already for sale on the Air Arabia web site. The next step is to formally establish Air Arabia Holidays, which will sell competitively priced vacations. “We will offer budget holidays for people that want to fly with us and then stay at their destination,” explains Ali. “The holidays will include all sorts of hotels. Our customers are not only those that stay in three-star hotels; everybody travels with us. We give people choices.” Air Arabia will also continue to launch new routes, insomuch as protectionist regional governments allow it to. “We are living in an area that doesn’t have total freedom of skies, but we are happy we have expanded in the way we have,” Ali says. “We want to expand more in India, and would like to get into Pakistan. We would like more frequency in the GCC and places like Jordan. “We would like to operate double dailies to our GCC destinations. That is our aim. We are also looking at central Asia, the CIS and Turkey.” The airline’s current target is to add 8 or 9 new destinations this year, to take its total to 32. Three new Airbus planes will arrive over the course of the year, taking the fleet size to eight aircraft. Asked where Air Arabia’s ambitions might stop, Ali says that the airline will consider flying to any airport within four hours flying time of Sharjah. He reckons there are around two hundred airports that meet that criterion. “Some of those are only domestic airports, but we feel there is enough growth there for five to seven years,” reckons Ali. Beyond those two hundred airports, Ali has an idea forming in his mind of how Air Arabia could growth further. Currently, all Air Arabia flights begin or end in Sharjah. He suggests that Air Arabia could, one day, set up another hub in a Mediterranean or Indian location. From there, Air Arabia flights could go anywhere within four hours flight time. No discussions have yet been had with potential hub airports, but the prospect is a fairly tantalising one. From a location in the East Mediterranean, for example, Air Arabia would be able to fly into large parts of Europe. All of this and the realisation of Air Arabia’s immediate goals depends on obtaining airport access rights. In the Middle East, and the surrounding region, where governments still tend to protect their flag carriers, open skies policies are often non-existent or not adhered to. “The issues in the Middle East are generally to do with access,” says Ali. “We remain very optimistic, however.” What is certain is that Air Arabia will keep on plugging away, trying to make its model of low cost aviation available to more and more people.||**||

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