Sulaiman Al Hamdan interview: Tough competitor

Nas Holding CEO explains how his airline is trying to cope with the unique challenges in the kingdom
Nas Holding CEO Sulaiman Al Hamdan has to cope with high fuel prices and a fare cap on domestic travel
By Massoud A. Derhally
Sun 23 Dec 2012 10:11 AM

The airline industry is cut-throat. Running an airline in Saudi Arabia, a country that is overhauling its vast infrastructure and with a culture that’s still not entirely in tune with no-frills budget travel, is even more challenging. But Sulaiman Al Hamdan, who runs National Air Services, the holding company to which Nas Air belongs, is unfazed. He’s actively been trying to trim the fat off the budget carrier that's been operating in Saudi Arabia for five years and has tried to make the airline’s operations more efficient in the wake of high oil prices, regional political upheaval and an uneven domestic playing field when it comes to the government subsidies its main competitor gets.

“When the licence was granted neither the civil aviation authority or the company seriously considered the situation,” Hamdan says. “Accepting preconditions to fly to very specific domestic airports as a precondition to getting the licence before you are allowed to fly international was a mistake.”

Saudi Arabia plans to open up its aviation market with the issuing of a third operating licence by the end of this year, for which fourteen companies have applied, to operate both local and international flights. Qatar Airways, Bahrain Air and Gulf Air are among the carriers bidding for the licence. It remains to be seen if a new player in the market will change the dynamics of the aviation industry in the kingdom. A main criticism in Saudi Arabia has been that the fuel subsidy for national carrier Saudi Arabian Airlines and a cap on domestic fares has disadvantaged competitors.

Sama Airlines, another budget carrier that also operated in Saudi Arabia, suspended operations in 2010 after amassing over $300m in losses. Nas Air, which is 37 percent owned by Prince Alwaleed Bin Talal’s Kingdom Holding Co, started operating in 2007 and has not made a profit to date, suffering losses due to higher oil prices and political instability that swept across the Arab world, causing it to withdraw from several countries.

Nas Air currently flies to six destinations within Saudi Arabia and nineteen foreign routes. As part of its restructuring and also as a response to changes in its operational environment when protests swept across the Arab world, it has realigned its business. It withdrew from Syria and Yemen because of political instability. And it also left India to maximise the utilisation of its fleet which will now fly within a three-and-a-half-hour radius from its base in Saudi Arabia. Potential routes include Ethiopia, Iran, and Iraq, which all tie in with that new strategy.

The carrier has also introduced what it terms as a fuel-efficiency programme, which has saved it, in the past ten months of this year, nearly $16m, or about 8 percent of its total fuel consumption. Somewhat astonishingly, jet fuel prices in Saudi Arabia are about 18-20 percent higher than the cost in neighbouring countries which has prompted Nas Air pilots to refuel outside their base.

“Sudan is cheaper than us,” Hamdan says.  “When the pilot sees that he has a 50 percent load of passengers he takes more fuel because it’s cheaper.”

These changes are slowly helping the airline decrease its losses and are putting it on target to becoming profitable for the first time since the carrier’s inception next year, Hamdan says.

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“Next year we are anticipating a real profit for Nas Air,” Hamdan says. “For 2012 we have managed to reduce our losses by 70 percent compared to 2011. Fuel is one part. What we have done is improved our operational efficiencies. Our aircraft are flying now an average of twelve hours. We have improved the productivity of our crew so that they’re flying a range of 90 hours. We have improved our revenue by 28 percent.”

The airline has a 75 percent seat load factor, up from 62 percent in 2011, and aims to boost it to 80 percent. It plans to add 50 percent additional seats in 2013 by increasing flight frequencies, opening new routes and adding more aircraft to its fleet in the first six months of next year.

To cut costs, Nas Air is also phasing out the Brazilian-made Embraer aircraft from its fleet, operating only Airbus planes until it’s able to buy models of new aircraft that come online in the future as part of its expansion plan.

“Operating two types of aircraft is very costly from all aspects of maintenance, training, pilots and spare parts. It doesn’t fit with the LCC model,” Hamdan says.

Beyond the company’s shift in strategy, Hamdan says the infrastructure in Saudi Arabia doesn’t allow for a smooth operation of a budget carrier as might be the case in Europe, the US or Asia.

“I am very confident today that most of our operational indicators are no different from any successful LCC partner,” he says. “The issue which we are really encountering is the fact that the region, including Saudi Arabia, is not probably ready for this kind of business model. We still don’t have the right infrastructure for this kind of business. One of the main elements of the LCC is a quick turnaround with secondary airports. In Europe the secondary airports pay for the airlines to land there because they add momentum to the airports and we are missing that.”

“The infrastructure is a disaster,” Hamdan says bluntly. “When you take your aircraft to Jeddah airport and you keep transferring people from one terminal to another...they stay on a bus for 15 minutes...[and] our crew have to go out of the aircraft to the immigration and queue with the passengers, there are no crew designated [lines].”

Looking forward, Nas Air plans an initial public offering (IPO) by the first quarter of 2014 as part of a five-year expansion plan that will see the airline more than double its fleet, Hamdan says.

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“We are working extremely hard to enhance and improve our financials as this is one of the pre-requirements coupled with a solid business plan,” he says. “We are about to start a new five-year business plan which will be approved the 8th or 9th of January.”

The IPO would be partial and would help, along with bank loans, finance aircraft acquisitions in the future.

“That’s something we will leave for the financial advisor and investment banks,” Hamdan says when asked how much the carrier would seek to raise from the market. “We are talking to two banks and one of them will be chosen as a leading bank. They will do a proper valuation and then it will be decided.”

The Riyadh-based carrier plans to lease as many as six aircraft in the first six months of next year and then buy about 20 new single-aisle planes from either Toulouse-based Airbus or Chicago-based Boeing, Hamdan says.

“By 2015 we should have 35 aircraft, today we have 15,” he says, adding that the carrier is considering Boeing’s 737-MAX, which will use 13 percent less fuel than current 737s, or Airbus’s A320neo, which will provide a 15 percent reduction in fuel consumption, two tonnes of additional payload, up to 500 nautical miles of more range, lower operating costs, along with reductions in engine noise and emissions. The first delivery of the 737-MAX is 2017, while the date for A320neo is 2016.

An order for 20 A320neos, at current average list prices, would amount to around $2bn. The same order for the 737-MAX would be worth roughly $1.9bn.

“We had serious discussions with both manufacturers,” Hamdan says. “We are currently evaluating...We are looking at both what is most cost effective in terms of pricing and operating.”

The airline, which is the fourth-largest regional budget carrier after Kuwait’s Al Jazeera, Sharjah’s Air Arabia and flydubai, welcomes additional competition in the Saudi market, Hamdan says.

“Competition never worried us,” he says. “I think it’s very healthy. The client at the end of the day benefits with the variety of choice.”

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