Interview: Flynas chief Sulaiman Al Hamdan

Low-cost Saudi carrier Flynas has struggled amid a skewed competitive landscape and regulatory challenges. With the entrance of two new rival airlines next year, things are only going to get tougher for chairman Sulaiman Al Hamdan
SETBACK: Al Hamdan says Flynas has suffered during the normally busy Umrah season when the Saudi government slashed the quota for foreign pilgrims.
By Daniel Shane
Mon 17 Feb 2014 01:57 PM

Sulaiman Al Hamdan didn’t take part in the Dubai Airshow free-for-all conducted by the likes of Emirates, Etihad and Qatar Airways. Instead of launching billion-dollar contracts, the chairman of Saudi Arabia’s Flynas was instead trying to squeeze a couple more of the modestly sized Airbus A320 jets out of one of the carrier’s lessors.

This kind of wheeling and dealing is part and parcel of how Al Hamdan runs low-cost Flynas, which since it launched eight years ago has battled a skewed competitive landscape that generally favours government-owned Saudi Arabian Airlines (Saudia).

With two new carriers set to begin services in the Gulf country this year though, the rivalry in Saudi Arabia’s aviation market is set to intensify further. But for Al Hamdan, the success of Flynas has always relied on beating the odds.

Set up in 2007 to operate some of the kingdom’s most under-served domestic routes, Flynas had a challenging start to life, Al Hamdan recalls. “It was a very, very difficult start for the airline during the first three years, for very good reasons,” he says.

Among these challenges has been the air fare cap that Saudi aviation authorities impose on domestic services, designed to make air travel affordable in a country that is geographically large but lacking in basic transport infrastructure. It has also had to contend with an uneven competitive landscape, with larger incumbent Saudi Arabian Airlines offered generous subsidies on jet fuel, which are not extended to Flynas.

Al Hamdan says that in 2010, in co-operation with rival carrier SAMA, he presented a case to Saudi Arabia’s Supreme Economic Council to reassess the situation over subsidies and ticket caps. He is still waiting for his answer, while SAMA has since gone bankrupt.

“I think there is so much debate and discussion. There are good intentions, but the decision-making is so slow,” Al Hamdan claims. “Basically, we can’t wait any longer, and we felt that if [a decision] comes, it comes, and it will be welcome, and if it didn’t, that’s fine.”

Since it began operations nearly eight years ago, Flynas has yet to turn a profit, as issues over subsidies and fare prices have consistently pressurised margins. The carrier had previously forecast that it would close 2013 in the black, but Al Hamdan says he is no longer sure if this will be the case, noting that the airline suffered during the normally busy Umrah season when the Saudi government slashed the quota for foreign pilgrims.

“Luckily, we’ve managed to survive basically because we’ve got very committed shareholders who believe in this airline, who’ve kept injecting and funding its operation,” Al Hamdan adds.

The situation regarding fuel for the airline could be described as absurd. It is not uncommon for fuel expenses to account for up 50 percent of a carrier’s operating costs depending on the oil supply climate. However, Al Hamdan says that the price of jet fuel in Saudi Arabia, the world’s largest oil producer, is so crippling for Flynas that the airline is forced to purchase from outside of the country.

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“We were not asking for fair and equal treatment like [incumbent carrier] Saudia, we don’t want 80 percent to 90 percent subsidies,” he explains. “We said that we want the fuel prices in Saudi Arabia, the largest oil producer in the world, to be equivalent to... what other airlines get in neighbouring countries. We have a tankering policy that our flights go out of Saudi and they fuel from outside. We fuel from neighbouring countries to serve Saudi. It’s very ridiculous and it’s rather shameful.”

The competitive environment for Flynas is unlikely to get easier any time soon. Last year, Saudi Arabia’s General Authority for Civil Aviation (GACA) invited foreign airlines to launch domestic carriers in the kingdom in a bid to alleviate current capacity constraints. After a lengthy bidding and evaluation process, GACA invited fast-growing and cash-rich Qatar Airways and an entity backed by Bahrain’s Gulf Air to launch operations in the country.

Qatar Airways is due to begin services, branded as Al Maha Airways, in the first half of 2014 and will initially focus on Riyadh and Jeddah before moving on to tier-two cities. Local firm Al Qahtani Group, with Gulf Air acting as a consultant, will launch at a later date, although further details on this operation are yet to materialise.

Al Hamdan says that he understands that both of the new carriers will be offered some form of fuel subsidy by the Saudi government, which would further skew the competitive landscape against Flynas. “We’ve been informed that there are certain packages designed for the newcomers, and we were hoping that those would be released so as to benefit us,” he adds.

Al Hamdan says he is not fearful of the pressure that two new competitors will bring, claiming that Saudi’s geographical expanse and population of 27 million is too large a market for the two existing incumbents.

“Competition will bring the best for customers at one end and it will bring a good pressure on all of the operators to provide good service,” he continues. “The size of Saudi Arabia is quite huge, it’s three quarters of the entire size of Europe and there are areas that are extremely under-served. The main hubs where we operate to and from are also under-served. So the market is there. We try to fill some of the gap, but we can’t fill all of the gap.”

While Al Hamdan says he is not frightened by the prospect of some even stiffer competition, that does not mean Flynas is not sprucing up its service offering in preparation. It has rebranded from its previous moniker Nasair and introduced a business class section on all of its routes. “What we have decided after being in the market for nearly seven years, is that it is time to refresh, to look new and get ready for the new competition,” he says.

Al Hamdan has also been busy paring costs where possible at the airline in a move in part necessitated by pressures caused by fuel outlay and the ticket cap.

“As far as our internal operation goes, we have made remarkable changes and movements in terms of improving our efficiencies, our productivities, aircraft utilisation, crew productivities,” Al Hamdan explains. “The key performance indicators which we are monitoring on a daily and weekly basis, I can confidently say today that they’ve increased to probably within the range of any of the best-performing airlines. So we have no issue with that, seriously.”

As part of its cost-cutting drive, Flynas is also standardising its fleet. The airline had previously operated a combination of jets made by Europe’s Airbus and Brazil’s Embraer, but has gradually been phasing out the latter. It now flies 19 Airbus A320s, which it plans to increase to 24 by the end of April next year, and Al Hamdan says Flynas is benefiting from the consolidated fleet. “We believe the commonality of running a single [aircraft] is more efficient in terms of everything, like training and maintenance,” he says.

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It’s not just the fleet that is changing, but also Flynas’ network of destinations. As of now the airline flies to 30 cities across the kingdom and wider Middle East and North Africa via its hubs in Riyadh and Jeddah. Al Hamdan says that the carrier will add additional hubs in Madinah, Dammam and possibly Taif next year, as well as analysing the possibility of using overseas hubs. “We’re looking at additional hubs outside of Saudi, and we’re just analysing those, which will enable us to have extra outreach,” he explains.

Using leased Airbus A330s, it will also fly from Jeddah to Paris and London, two of the most popular European destinations for Saudis during the summer season.

The airline says that it will operate its long-haul routes on a low-cost basis, as well as offering business class on these flights. “We’re looking at adding aggressively more flights,” Al Hamdan says.

One destination that has been crossed off the list, though, is Dubai’s new Al Maktoum International, located on the outskirts of the emirate. Flynas had originally expressed its intention to be one of the first commercial airlines to run services from the long-delayed facilities, before suddenly deciding against the plan just weeks before the new airport opened in late October.

“We always had the right intention to come and operate from here,” Al Hamdan says, without elaborating precisely why the airline pulled out. However, he does say that Flynas could use next summer’s temporary closure of a runway for maintenance at Dubai International to trial the new facility. “[Dubai Airports] are asking airlines to reduce the number of flights. One of the thoughts we had was to shift those flights to this airport. It’s a good opportunity for us for that period of time to test it to see if it’s something worth it,” he reckons.

The shift to Al Maktoum International may not be the only thing that Flynas is pulling back from. Al Hamdan announced in 2012 plans for an initial public offering (IPO) in Riyadh in the first quarter of 2014. The airline has since appointed Saudi Fransi Capital as bookrunner for the flotation, but Al Hamdan concedes that the original timeframe may prove tough to stick to, with the IPO potentially not even taking place this year at all.

“We are providing all the necessary information that they require... It’s very difficult to guess or to decide when, because there are so many other factors,” he admits. “I’m not quite sure to be honest. I can’t give any specific answer here.”

For Flynas the past 12 months seems to have been about nothing but change. From a new name, to a new CEO, and in some regards a whole new operating model, Al Hamdan has spent 2013 repurposing the low-cost carrier to better compete in an operating environment that will undoubtedly get trickier in 2014.

For Al Hamdan though, this is all part of the job. “We realise that change is something that we have to look at and just accept the reality of,” Al Hamdan says. “We know we have to work within all of these constraints.”

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