The news is not good: the global airline industry is desperately struggling to keep its head above stormy waters. With more than 25 airlines having gone belly up since the start of the year, oil prices peaking at nearly $150 per barrel back in July, and a flagging global economy, it is almost scary how unsurprising the anticipated industry losses for 2008 are. The International Air Transport Association (IATA) revised its financial forecasts early last month, landing on a stomach-churning $5.2 billion in projected losses for the global airline industry this year. As the industry confronts its bleakest days since September 11, 2001, one wonders, are there any survivors in this crash?
Picking through the rubble one can see the debris of several carriers who barely stood a chance against the 82.5% increase in jet fuel prices, as compared to last year. One sees planes being grounded, routes forsaken and thousands of jobs vanishing into thin air, whilst ticket prices and baggage charges keep rising.
Traditionally, fuel accounts for anywhere between one third (in the case of legacy carriers) and one half (in the case of low cost carriers) of airline budgets, and for every dollar that the price of fuel increases, costs to the aviation industry rise by $1.6 billion. Clearly this indicates desperate times, and as those kinds of times call for corresponding measures, airlines are adopting rather innovative methods to reduce fuel burn. Some airlines are flying at slower speeds to increase fuel efficiency, or towing planes to take-off areas to save up to 2 tons of fuel per flight; others are removing unnecessary weight by switching to lighter seats and carrying less toilet water. Some airlines plan to strip the old paint off planes that are scheduled for re-spraying, making them 400 kilograms lighter; others have streamlined on-board cutlery, reducing weight by 2 grams per piece. These airlines are enduring the disastrous circumstances, just barely.
The low-cost equation
Anomalous to rest of the industry, low-cost carriers (LCCs) in the Middle East are not only avoiding bankruptcy, but are moving forward with expansion plans, acquiring new planes, diversifying routes and making a profit. LCCs are structured in such a way that they are able to offer low fares by efficiently managing operational costs and removing many traditional passenger frills such as in-flight meals. “Air travel to us is taking a person from point A to point B with the safest operation, with good services, and with the best price so that he can fly over and over again,” explained Housam Raydan, communications manager for Air Arabia. “It’s not that we are doing something super; it’s simply that we are offering a good value for money, and people are loving the experience.”
Regional LCCs have certainly felt the blows of today’s high oil prices, yet they have managed to dodge the knockout that numerous other LCCs around the world could not, and will round out 2008 with just a few inevitable bumps and bruises. “The region here is different,” Raydan explained. “You have over 25 airlines that went bankrupt in North America, Europe, and parts of Eastern Asia, while here we are still recording profits.”
So what is it about the region that has allowed LCCs to endure these hard times? Raydan cited three reasons. “First, the Middle East has an oil-based economy; when oil goes up people get more money and travel more often. Second, air travel is the only means of transportation in this region. We don’t have trains, we don’t have buses, you can’t travel in your car between countries, so you have to depend on air travel as a means of transportation. And third, the nature and the geographic factor of the GCC countries. 80% of the UAE’s population are expatriates from neighboring countries, and therefore people want to travel more often to more places, back to their home countries as often as possible. Added to that are the business demands, which require a lot of travel within the region.”
Currently there are five major LCCs spread throughout the Middle East. Air Arabia, based out of Sharjah, was the first of its kind in the region, commencing operations in 2003. Two years later, Jazeera Airways came to Kuwait City, followed by Saudi Arabia’s NAS Air based out of Riyadh and Sama Airlines out of Dammam. Manama-based Bahrain Air, the newest LCC in the Gulf and the first privately owned premium low-priced carrier, launched its first commercial flight in February 2008.
As a result of its early success, Bahrain Air has decided to double its authorized capital to $53 million, which it will use to move forward with expansion plans. With about 10,000 low cost passengers using the available airlines in Bahrain per month, Bahrain Air is seizing the available opportunity with zeal. According to the airline’s three-year plan, it will have 14 aircraft by the end of 2008 and 25 at the close of 2010, making it the most rapidly growing LCC in terms of fleet expansion.
The growth of cheap flights
Likewise, Jazeera Airways recorded markedly improved results for Q2 2008 as compared to that of the previous year, pointing to a 100% passenger increase and robust cost management as factors that outweighed high fuel prices. The airline plans to go ahead with scheduled market expansion strategies later this year
Lately it seems that the majority of airlines have been forced to take a cue from circus contortionists: bending and wriggling themselves in ways that seem unnatural, yet are essential to generate income. Middle Eastern LCCs like Air Arabia attribute their success not to any new, creative ways of doing business, but to sticking with the same business model they have followed since inception. “We have managed because we have a flexible business model that allows us to adapt as per country, as per industry challenge,” Raydan said, and added that Air Arabia has recorded a net profit of about $43.5 million in the first half of 2008. “If you adapt the local business culture into your company, you manage to become profitable and face many more challenges.”
Raydan said that some of the cost-saving features that LCCs have adopted at the core of their business models were to make company websites the sales engines for business to reduce distribution channels, being completely paperless in favor of electronic tickets, and not giving commissions to travel agents. Also, LCCs typically use a single type of airplane and a single class of aircraft cabin; they offer short flights and fast turn around times, fly direct flights, and practice aggressive fuel hedging programs.
Despite the widespread economic duress, air travel in the Middle East remains stable and shows no signs of abating. In 2007, the region hosted the fasted growing aviation market in the world, and is currently investing over $100 billion in airplanes and infrastructure to accommodate the influx of travelers. Drivers of this unprecedented growth include excess liquidity, budget surpluses, demographic makeup, and geographic position. LCCs are dramatically increasing their activity, and are buoying the industry as a whole.
“The oil price is harder to predict than the weather,” Raydan said. “At the end of the day, we all pay the same price for oil. The only difference is, as a low cost carrier we have made a choice; we took a simple business model and we adapted it. We are not looking to make a luxurious hotel in the sky. Our business model is based on managing our costs ruthlessly, in a way that we can maximize profit without affecting the level of service and safety we offer.”
