Liberally Rising

Liberalisation has opened up Saudi Arabian skies to competition and Sama is the first low cost airline about to be launched in the Kingdom, but bureaucracy in setting it up is causing delays.

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By  Barbara Cockburn Published  August 1, 2006

|~||~||~|The flag carrier in Saudi Arabia, Saudi Arabian Airlines, had, until 2005, enjoyed a monopoly since its launch in 1945. Now that liberalisation has opened the market up to competition, two new Saudi low cost airlines are already setting out their stalls on domestic routes and getting involved in developing the country’s 27 domestic and international airports. British-based Mango Aviation, an advisory firm specialising in setting up and managing low cost airline operations, is overseeing the launch of the region’s first low cost carrier, Sama, which in Arabic loosely translates to ‘soar’, which is set to be hitting the skies later in the year. In July last year, National Air Services (NAS) became the first private airline licensed to operate in competition to Saudia’s domestic services. The Jeddah-based charter operator commenced operations with an exclusive business-class scheduled service, known as Al-Khayala, between Jeddah and Riyadh using an Airbus A319. NAS also announced plans to establish a low cost carrier (LCC), forcing Sama to keep a competitive edge as NAS’s LCC subsidiary threatens to step on Sama’s toes. Both LCCs are currently undergoing the same bureaucratic delays. Andrew Cowen, founder and chief executive of the self-styled start-up “boutique", Mango Aviation, says: “Sama believe that the market is easily big enough for more than one carrier in addition to Saudi Airlines and expect this to result in very attractive fares and travel opportunities for the citizens of Saudi Arabia. Saudi Arabia’s Supreme Economic Council set a July 30 deadline to apply for licences to operate the two new national private air carriers, of which Sama is one. Cowen says: “We expect the decision to be made earlier because it does not make sense that the General Authority of Civil Aviation, who is conducting the evaluation of license applicants, will take five months [to November] to make a decision based on applications submitted. We believe Sama has a very compelling proposition to put forward." General Authority of Civil Aviation GACA president, Abdullah Rehaimi, said, last month, at a seminar on the liberalisation of Saudi Arabia’s civil aviation industry: “This sector has a positive impact on other sectors, such as tourism, commerce and industry. Socially, it contributes to people’s lifestyle and luxury. It also helps at times of crisis and natural disasters in providing aid." Sama will be the third LCC in the Gulf, after Kuwait’s Jazeera Airways and Sharjah-based Air Arabia. Cowen explains that Sama won’t be launching until later this year. “Sama has still to overcome obstacles before it can finally fly. It was supposed to begin flying during this summer and now, it will be difficult to give an exact launch date, but I’m optimistic that despite the bureaucracy, Sama will launch later this year," he says. The regulatory approval process for securing an air operator’s certificate (AOC) in Saudi Arabia follows the standard Federal Aviation Authority (FAA) process of which Sama has been proceeding through since last year and Cowen expects to complete the remaining steps in the coming months. The AOC process essentially assesses the airworthiness of the airline; the scheduled air carrier licensing process assesses the financial viability of the airline, explains Cowen. In parallel to the AOC process, Sama is working through the scheduled air carrier licence process, which is also expected to conclude later in the year. Sama has secured 30 investors, eight of which are institutional investors and the remaining 22 are wealthy individuals. Sama’s principal investor is chairman of Investment Enterprises and senior member of the Saudi royal family, His Royal Highness Prince Bandar bin Khalid Al-Faisal. The company is now armed with US$50 million, and has already leased and received its first four narrow body aircraft, all Boeing 737 - 300s, which Cowen describes as the “standard workhorse” of low cost carriers. He says: “In order for Sama to have a licence, it needs to fulfil different objectives. The delay is due to the authorities having only recently published the rules by which they will grant the licences." The role of the private sector in developing Saudi Arabia’s aviation sector has been emphasised by Crown Prince Sultan, deputy prime minister and minister of defence and aviation. As a result, a number of representatives from the private sector have been appointed to the newly constituted General Authority of Civil Aviation (GACA), an independent state body, which will oversee the liberalisation of Saudi Arabia’s aviation sector, including licensing new airline operations and development of the Kingdom’s airports. Cowen says: “The conditions attached to the scheduled air carrier licence are that successful applicants can only initially fly scheduled domestic routes and once properly established, it could gain the opportunity to fly regional international routes. GACA has elected to follow a phased liberalisation process, whereas Europe went for full deregulation, which allows European carriers to fly wherever they want within Europe.” The Middle East region is often viewed by Westerners as a dangerous place to go with civil unrest in many countries and the recent unrest in Lebanon which began last month. However, this doesn’t stop the carrier’s safety and security processes being on a par with that of the West which upped its airport security following the terrorist attacks on New York and the Pentagon in Washington in 2001. Cowen says that since those attacks, terrorism has become a global concern and no country can guarantee that it is safe. “The Saudi authorities take the threat of terrorism extremely seriously because the country has been affected, and has as much to fear as Westerners. “Safety and security is part and parcel of obtaining the AOC, because you have to establish procedures,” he says. These standard procedures Cowen talks of are twofold, the US standard is the Federal Aviation Authority (FAA) and the Joint Airworthiness Authority (JAA), which is a standard tried and tested in the US and is very robust. Saudi Arabia works to these standards. In June, Sama signed an aircraft maintenance contract with SR Technics of Switzerland, an ISO 9001 certified company that provides maintenance of over 750 aircraft with a number of international airlines. Sama in a statement said the contract, worth $121 million, was “a step that reinforces Sama’s commitment to maintaining the highest standards of safety and security for its passengers.” The contract will secure all the required technical support for daily engineering and maintenance of Sama’s eventual 35 aircraft operation. His Royal Highness Prince Bander Bin Khalid Al Faisal, chairman of Sama’s board of directors, said that Sama is striving to achieve the highest standards of safety and security in the maintenance of its aircraft. “Safety and security is a top priority,” he said. Sama’s main hub will be at Dammam, the largest city in the Kingdom’s Eastern Province, but regarding further developments, such as future routes and how soon, Cowen wouldn’t be pressed, saying only that the airline will look to build a strong domestic network in the principal cities of the Middle East. He says: “There are some excellent airlines in the Middle East, but they are not as competitive as they could be by international standards and this opportunity to launch a low cost carrier is very significant for the region.” Before it begins flying, Sama is already blighted by the problem of rising oil prices. Cowen says: “The Middle East is enjoying an economic boost from the oil price, but in Saudi there is a cap on domestic fares, which is highly problematic, because it doesn’t take into consideration that oil prices have gone up. And with such regulations, aviation fuel in Saudi is the most expensive in the world.” This is why Cowen has built it into the airline’s future projections on flights. “While most carriers in the region and around the world are putting up fuel surcharges to cover those costs, the authorities here do not allow a fuel surcharges to be passed on, which means that Sama has to offset savings elsewhere in the business. “The fuel cap doesn’t take account of the economic reality of fuel prices that have quadrupled over the last four years,” he says. Cowen adds: “From a political perspective, this is really making travel more difficult. Most carriers in the region and around the world are applying surcharges to cover those rising fuel costs. On the subject of hedging, we will be looking at putting a hedging strategy in place, as soon as we are operating, but it is a bit tricky to judge when best to hedge, because of fuel prices moving around. We will have to be careful not to hedge at a high price, especially when we are not be able to pass those costs on.” When the LCC does eventually launch, Sama’s first year will, no doubt, have its share of obstacles to overcome, just like other carriers, such as coping with the persistent rise in fuel prices.||**||

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