The remarkable growth of Gulf–based full service carriers (FSCs) like Qatar Airways, and UAE’s Etihad Airways and Emirates, is now being followed by low-cost carriers (LCCs) from the region. The LCC business model is well exploited around the world – especially in Europe, North America and parts of Asia, but the concept is relatively new in the Gulf, where just little more than a decade ago nobody considered the possibility of LCCs.
Everything changed when Air Arabia was founded in Sharjah in 2003, becoming the first low-fare airline in the region. The market was open and the stage was set for others who soon followed: Kuwait’s Jazeera Airways in 2004, Saudi Arabia’s flynas (former Nas Air) in 2007, and Dubai’s flydubai in 2008. According to OAG, UK-based aviation data monitor, “A quiet revolution” is taking place in the GCC region when it comes to LCCs.
“According to OAG Schedules Analyser,
LCCs will have flown 37 million air passenger seats to, from and within the Middle East in 2014, compared to just nine million five years ago.
Providing 13 percent of all scheduled airline seats, their contribution is still relatively small compared to the LCC market share in Europe, the US and parts of Asia, but they’ve grown at a breathtaking rate, averaging 35 percent per annum over the past five years,” says OAG’s newest report from last November, significantly titled, ‘Like bees to a honeypot: low-cost carriers swarm to the Middle East.’
In the report submitted to bq magazine, the OAG analytics team is forecasting a bright future for regional LCCs: “Prospects for LCCs operating in the Middle East look good and the region is clearly a fertile ground for the on-going development of the LCC business model whether in the form of hybrid operations, expansion into the long haul market or premium versions of the low cost product.”
Liberalisation of air markets
Low-cost carriers have been gaining in market share in the Middle East, though the gains have been marginal according to The International Air Transport Association (IATA) spokesman Chris Goater. “This is because although they are growing fast, so are the big long-haul carriers, so the LCC share of the market has only grown marginally.
However, it is also clear that LCC penetration in the region is a lot lower than other regions such as Europe and the US. Part of the reason for this is, while economic growth within the Middle East is solid, air travel is still hampered by regulatory restrictions,” he says. As a result, growth is not balanced and we see long-haul demand growing at a faster rate than inter-regional traffic.
“The Damascus Convention of 2004 provides a framework to remedy this with regional liberalisation, but the number of countries that have ratified the Damascus Convention is insufficient,” says Goater…
He emphasises the importance of the liberalisation of air markets as a crucial element to enabling more services and open markets to LCCs. “For example, liberalisation of the European air transport industry has enabled significant growth both in terms traffic, new routes and the number of new airlines and business models, including low-cost carriers.
Liberalisation has given the opportunity for all airlines to make commercial decisions and has offered passengers varying travel options and lower fares. According to the European Commission, the European Union saw a 310 percent increase in intra-EU routes that had more than two carriers between 1992, when the EU common aviation market went into effect, and 2009. Moreover, the number of cross-border intra EU routes increased by 220 percent from 1992 to 2009. The benefits of air transport liberation are many, and are not limited to low-cost carriers. For example, liberalisation can promote cost efficiency, increased access to capital, and improved profitability and market value,” he tells bq.
The LCC model is very well known. These carriers operate from point-to-point rather than from spoke-to-hub, which minimises connections and travel time, and allows for more flights and frequent service. Usually LCCs – that have grown from seven percent of the world market in 2003 to 16 percent in 2014, and are projected to reach 21 percent by 2033 – have predominantly short-to-medium haul route structures, and they frequently use second-tier airports. Besides low fares, budget airlines usually have just one aircraft type with single class configuration, and very high seating density.
Fleet size and average age comparison of low cost carriers
But in the case of Gulf-based LCCs, the line between FSCs and LCCs is more than blurred: flydubai has a Business Class lounge at Dubai International Airport, and like its other Gulf-based LCC peers, it introduced Business Class on board its flights. This is full Business Class – it is not Western model of Business Class in LCCs where some companies simply block the middle seats in economy and calling it “business”.
“This allows them (flydubai) to accommodate interlining premium passengers from Emirates and behave, perhaps, as an Emirates short haul feeder airline,” stated OAG in their report, adding that for Gulf-based LCCs, it isn’t simply a matter of slashing costs but maintaining quality standards perceived to be consistent with the expectations of their largely Middle East clientele.
“Passengers can now benefit from faster check-in services, a dedicated business team, more comfortable and spacious seating and a variety of internationally inspired menus during their journey, complemented by the convenience offered by Dubai International’s Terminal 2,” flydubai tells bq. So pampering passengers is continued by the “younger” brothers of full service Gulf carriers globally known for their high-class amenities and comfort in a time when not just LCCs, but more and more FSCs are also adding seats and shrinking space for passengers in their aircraft.
The popularity of LCCs in the Middle East and the Gulf is propelled by the robust growth of tourism (according to Frost & Sullivan, expenditure by outbound visitors from the GCC countries is expected to rise from USD 55 billion in 2013 to USD 216 billion by 2030), especially during Hajj and Umrah, and huge expat communities who seek cheaper ways to fly home.
According to data from UAE-based marketing company Sekari, low-cost carriers are soaring higher than traditional airlines. Budget flights have become the main priority online – in the UAE 57 percent of searches in English are for low-cost air fares.
The company researched languages used online and found marked differences in the activity of English, Arabic and French searches: English searches focus on bargain travel; Arabic users are more interested in full packages and tours; and French speakers split between budget and traditional carriers. According to Sekari, travel remains the biggest item bought online, with an average USD 1,521 spent each year per person.
IATA’s newest data, published in February, show that more than half of the growth in passenger travel occurred on airlines in emerging markets including Asia-Pacific and the Middle East, whose airline carriers had strong annual traffic growth at 13.0 percent. On the whole, 2014 revenue passenger kilometres (RPKs) globally rose 5.9 percent compared to 2013 as 3.3 billion passengers boarded aircraft last year, some 170 million more than in 2013.
The biggest player in the Middle Eastern LCC market is flydubai, which by now has far surpassed Air Arabia and the others. “In the few short years since flydubai was established, the airline has enabled more than 10.4 million passengers to travel affordably across a network of destinations in the GCC, Middle East, Europe, Central Asia, the Caucasus, Subcontinent and Africa; a growing network that has resulted in the constant review and evaluation of market conditions and passenger requirements to inform a dynamic and continuously evolving business strategy,” flydubai tells bq.
Airline experts share similar views when it comes to flydubai’s success. According to OAG, flying 29 percent of all LCC airline seats operated in the region, flydubai’s rate of growth has been extraordinary, as seat capacity has grown at an average rate of 92 percent per year since 2009.
Also, OAG emphasises the average flydubai sector length is just shy of 2,000 km which is significantly longer than the average 1,300-1,400 km lengths operated by other LCCs such as AirAsia, easyJet, Ryanair and Southwest.
Aviation analysts Centre for Asia Pacific Aviation (CAPA) recognized flydubai as “the world’s most innovative and influential LCC” in 2014, and stated that the company is considering the possibility of a long-term plan to grow its fleet to 200 aircraft. According to planespotters.net, flydubai currently has 44 Boeing 737 aircraft that are on average 2.8 years old. Flydubai made a net profit of USD 14 million in the first half of 2014, according to Reuters. Revenue in the period was USD 515 million, up 17.1 percent on the same six months of 2013.
Also, in mid-January this year, flydubai announced the listing of its USD 500 million inaugural Sukuk on NASDAQ Dubai. The future is very bright for flydubai aviation experts agree, but the projected growth for other LCCs from the region is not as upbeat. The OAG report says that the growth trajectory of UAE-based Air Arabia has been more modest than flydubai, averaging 12 percent per annum over the past five years, but it ranks second among the Middle East LCCs, operating 22 percent of low cost capacity in 2014.
The Gulf LCCs are also tackling long-haul flights, with relative success. Saudi Arabia’s flynas – with 18 percent share of the market, which aims to carry six million passengers in 2015, up from 3.5 million in 2013 – at the end of the last year cancelled all long-haul flights. On the other side, Air Arabia is expanding its long-haul routes by recent services to Urumqi in Western China, thus becoming the first Gulf low cost airline to fly to the country. Air Arabia also bought a 49 percent stake in Jordan’s Petra Airlines, which will become Air Arabia Jordan.
The Sharjah-based LCC officially stated that their revenue for the first nine months of 2014 reached USD 762.2 million – up17 percent, and in that time they served over 5.1 million passengers, a 13 percent year-on-year increase. Budget airlines from the region have found new ways to lure passengers, but, as numbers show, there is a huge opportunity for further development. LCCs in Europe account for 38 percent, and North America, for 30 percent, of total passenger traffic.