The Gulf is going through a period of great economic turbulence and the region’s airlines have been at the center of it all. The International Air Transport Association (IATA) announced that the Middle Eastern airline industry is expected to suffer financial losses of $800 to $900 million in 2009. Regional airlines have cut international passenger capacity by nearly 5 percent. Despite this downturn, Gulf airlines are continuing to expand and, in total, are expecting to add 114 new aircraft to their fleet in 2009, 8 percent of global deliveries. This year’s launch of two new airlines, Fly Dubai and Wataniya Airways, has been an integral part of the continued growth in the region’s airline sector.
Whether the region is capable of soaking up all this extra capacity during these tough times, only time will tell. But what these ventures are certainly illustrating is the strong economic fundamentals of the region, and most importantly that lessons have been learned from the global financial contraction. These airlines, by very different methods, are focusing their business model on three basic pillars: price sensitivity, efficiency and sustainability; not practices the Gulf is traditionally known for.
Wataniya airways
Wataniya Airways, also known as Kuwait National Airways, is Kuwait’s third passenger airline and was launched at the beginning of this year. The main concept of the airline is to deliver a ‘premium’ service at the best price by ensuring that the fixed costs are as low as possible. The Kuwaiti Investment Project Company (KIPCO) owns 30 percent of the airline while the other 70 percent is owned by Kuwaiti investors. It’s first route was Kuwait to Dubai. In addition to the Dubai route, three other routes were quickly announced: Cairo, Bahrain and Beirut. The airline is run by George Cooper, the British chief executive officer of Wataniya Airways and a former managing director at British Airways. A return flight from Kuwait to Beirut on Premium Economy costs around $225 (including taxes and fees), while First Class costs around $362.
In line with Wataniya’s business model, the airline has reduced fixed costs as much as possible by employing two central concepts: leasing and outsourcing. Wataniya’s fleet of four Airbus A320s and the three more slated to arrive in 2010, are all leased. Leasing the airplanes means that Wataniya does not have to put down capital upfront while, at the same time, allowing the airline to downsize or upsize relatively easily.
Wataniya outsources maintenance, catering, information technology and engineering. The company also outsources accounting services from a center in India. Catering is the best example of how outsourcing reduces costs, as they only pay the catering company per passenger.
“If we don’t get the passengers on the plane we don’t have to pay for them,” says Cooper. “This is not the case for most of the major airlines, but as a smaller operation we have the flexibility to work in such a manner.”
To ensure that “premium” service is delivered on the flight, Wataniya puts extra emphasis on crew training. While many of Wataniya’s crew have previous training, Cooper says “we ignore this.”
“While most airlines undergo a training program of six weeks we have created a training program of eight weeks to ensure that our customers receive that extra service.”
Wataniya can also boast an almost exclusive terminal. On landing in Kuwait, Wataniya takes you to an almost empty terminal. A modernist building with gleaming metallic passport desks, Sheikh Saad General Aviation Terminal was opened this year to private and business charters and one commercial operator, Wataniya Airlines. The terminal has lounges with wireless internet, concierge service and a range of shopping facilities. The terminal also boasts a lounge for First Class passengers, ensuring a pleasant wait before the flight, a complimentary buffet and catering services.
The A320 in service with Wataniya is designed to hold 180 passengers, but Wataniya has decided on only 122 seats to create extra room. The difference is noticeable, as this reporter, who is nearly 2 meters tall, had more than enough space in premium economy, sitting in chairs that are all ergonomically crafted. Another highlight of the airline is the OnAir in-flight passenger communication service with the ability to use mobile phones and internet that allows passengers to stay connected while flying. Wataniya is the first Middle Eastern airline to introduce this service.
Fly Dubai
The other airline to launch in 2009 is Fly Dubai, the emirate’s first budget airline, which made its inaugural flight on June 1st from Dubai to Beirut. Fly Dubai is a complete reversal of the business model of Wataniya Airways. While Wataniya aims to lower fixed costs as much as possible, Fly Dubai bought 50 new Boeing 737-800 aircraft at an estimated cost of $3.7 billion.
The airline has been set up by the government of Dubai and although in the beginning will be supported by the Emirates Group, it will not be a part of it. The business model is a new twist to Dubai’s airline industry.
“We focus on trying to offer the lowest price possible and to make travel as uncomplicated and with as little stress as possible,” said CEO of Fly Dubai, Ghaith al-Ghaith, who was previously a vice president of worldwide commercial operations at Emirates Airlines. The company’s slogan is: “It’s that easy.”
The lowest fare on Fly Dubai is $100, one way, inclusive of taxes, from Dubai to Beirut. Fly Dubai, by the end of June, will also fly to Amman, Damascus and Alexandria with further plans to expand throughout the region and Eastern Europe, India, Iran as well as North and East Africa. To ensure the lowest fair is offered, passengers only pay for the extras they select. Luggage, for example, is seen as an extra. One piece of luggage costs $11, at a flat rate, up to a weight of 32 kilograms; the second bag $27, up to 32 kilograms. Normal sized hand luggage is free. Any ‘extras’ a passenger orders on board, such as food, is charged. The Fly Dubai experience is very similar to that of any American or European budget airline, but with a touch of Gulf luxury added in. All the seats are ergonomically designed, with the seat pocket placed on top of the seat instead of at the knees to maximize knee space.
One essential element to Fly Dubai is that it has Emirates by its side. Fly Dubai does not need to consider the methods Wataniya uses because Emirates group will ensure that all the IT, engineering, catering and maintenance is taken care of. As for the risk of buying 50 Boeing 737-800s upfront, Ghaith said it was the best way to deliver the kind of efficiency needed for low cost airlines, and that leasing could not possibly achieve the same results.
Ghaith is very confident that Fly Dubai is filling a gap in the market.
“In this region we are way behind when it comes to low cost,” he said. “Only 5 percent of total traffic is low cost, compared to Europe that is 20 percent and increasing. So Fly Dubai is in a good position to fill this gap.”
The open closed skies of the region
One of the main difficulties that Fly Dubai, Wataniya and all airlines in the region face is the open skies policies of the region. Currently they are opaque and lack uniformity. All Arab League members are expected to agree on an open skies policy by 2015, but so far only 11 countries have signed the policy. This has caused problems for airlines, which try to base their business model on travel in the region, especially for airlines like Fly Dubai and Wataniya.
Even those governments that have signed the open skies policy, such as the Emirates, have also not always upheld the spirit of the agreement. Wataniya, for example, has already started to run into problems in the Emirates, being told that they cannot fly over certain parts of the country, as other airlines have tried to scupper the progress of the carrier. While regional jealousies and protectionism have created hurdles to the region’s ambitious airline industry, the financial crisis has had both positive and negative impacts.
Financial crisis?
The idea that there are positives from the global financial contraction for the region’s airline industry is hard to believe. It is even harder to understand how a start up airline could benefit from a market that is having its growth squeezed. Yet, Cooper claims that the financial crisis helped in many ways.
“The crisis helped us pick up talent from other airlines that were downsizing. Over half the pilots of Wataniya are American and victims of the downsizing that went on there,” Cooper said. “Also, because of the economic crisis, costs are low and we do not have to buy planes in advance as now there are no waiting lists.”
Fly Dubai’s al-Ghaith noted that the crisis has created opportunities.
“Airlines are part of the infrastructure and as everyone says, ‘what you need to do in a crisis is build up your infrastructure,’” he said.
But these airlines have, of course, not escaped the economic turmoil. Cooper does admit that, especially for the Kuwait-to-Dubai route, capacity is below the desired amount.
Ghaith also stressed that Fly Dubai is very much “a long term commitment.” Those launching the airlines are quietly confident that when the Gulf begins to boom again they will be more prepared than ever. The two airlines’ focus on price, quality and luxury is a welcome addition to the market. Price sensitivity has finally come to the region; let’s hope it’s just the beginning.