Counting the costs

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Saudi budget carrier Sama Airlines is feeling the pinch as fuel costs skyrocket. However, as CEO Andrew Cowen tells Andrew White, the young airline is determined to overcome the challenge and continue its expansion across the Gulf.

The low-cost industry means hundreds of thousands of jobs, something that is very important to the Gulf," insists Andrew Cowen. "It attracts investment, and it brings in tourists, which is also very important to this region.

"Higher fares means less travel is occurring, and that means fewer people are coming to the region or travelling within the region - and we don't think that's a good thing."

The CEO of Saudi Arabia's Sama Airlines might be expected to espouse the virtues of the low-cost carrier (LCC) model, as by most standards it has been a great year for Sama.

Having started its operations in March last year with four domestic destinations and three aircraft, it now operates to 13 domestic and 10 international destinations with seven Boeing 737-300 aircraft.

Sama recently celebrated its one-millionth passenger booking, and has reported a 100% increase in passenger numbers over the last four months, raking in revenues of over US$80m.

Yet there are dark clouds on the horizon for the entire aviation industry, and Sama is not immune to the spiralling costs that have sunk several airlines over the last few months - most recently business class-only carrier Silverjet, which went into administration in May and was in the process of re-launching after a deal was struck with administrators as Arabian Business went to press.

Primary among carriers' concerns is the soaring fuel price, and Cowen has good reason to bemoan the ramifications of a crude price that has slammed through the US$135 barrier in recent weeks.

"Fuel is about 35 to 40% of our costs - and we are a low-fares airline that relies on large volumes of passengers, each one of whom represents quite a small profit - so fuel going up by even a little can wipe out your profit on a whole swathe of routes," he sighs.

According to Lehman Brothers, crude oil prices have risen from US$100 per barrel to US$132 since the start of Q2 2008, while the average price per barrel for crude oil last year was US$73.

Moreover, jet fuel is currently US$40 more expensive per barrel than crude oil - and so the consequences for the aviation industry go even further. According to International Air Transport Association figures, for every dollar that crude oil rises, the industry's costs increase US$1.6bn.

Nevertheless, it is not just the rising cost of fuel that concerns Cowen and his peers. Overall, an estimated US$40bn will be spent on airport infrastructure in the Middle East by 2015. The investment will boost the region's passenger capacity to 300 million by 2015, which is three times the current volume.

However, such huge investment must prove worthwhile financially, and Cowen worries that governments will have no choice but to pass the costs on to airlines - and by extension, consumers. For a business model as reliant on slim margins as the low-cost carrier, such price increases could be catastrophic.

We feel that we're moving into an environment with high fuel costs, but we've got a general environment that makes life very difficult for new airlines," insists Cowen.

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