Survival of the fittest

Passenger traffic at his Riyadh-based airline increased from 800,000 in 2008 to 2.4 million last year and maintained a load factor of between 68 and 70 percent.

Instead Stewart has been forced to tackle his own unique set of problems, not least Saudi Arabia’s regulatory environment. “We are paying 117 percent over international rates inside the kingdom,” he says somewhat bitterly of oil prices. “The principal issue is that we didn’t receive or experience the same relief on fuel costs as enjoyed by Saudia [Saudi Arabian Airlines].”

Nasair has been battling with Saudi authorities to remove price caps on domestic flights, which would enable it to benefit from the fuel subsidies that state-owned Saudi Arabian Airlines currently enjoys, ever since it first set up operations in 2007. The crippling price caps have already seen the airline’s biggest rival, Sama, Airlines cease operations with more than $266m of debt.

But Stewart is determined his airline will not suffer the same fate, instead opting to buy fuel 30 percent cheaper in Khartoum, Sudan. Stewart said nasair was eager to continue operating in the Saudi market but if it were to operate a domestic only operation it would “suffer significant losses that are not sustainable.”

Nasair currently operates six routes across the kingdom but Stewart says this could rapidly expand should the situation regarding fuel subsidies change. Does he think it will happen? He is understandably reluctant to speculate but points out that it could be some time before his airline would benefit from such reforms even if they were passed. “There is an option moving forward and [Saudi authorities] are calling it regulatory reform. However, negotiations and internal politics take time,” he explains.

“I can’t wait around and make the success or failure of this airline contingent [on] waiting for something that may not eventually happen. We live in hope and we petition and we ask. However, we are smart and have placed ourselves so that the airline will be in a good position to survive and our business plan is reflective of that.”

Nasair increased its revenue 100 percent in 2008-2009, 75 percent in 2009-2010 and forecasts 35 percent growth this year, leaving it in good position to make it fully profitable by year end and perhaps ready for an initial public in 2012. “IPOs require that you have two years of profitability so we are forecasting to be fully profitable at the end of 2011, so logically in 2012,” says Stewart, who was appointed CEO in mid-2010.

The carrier’s impressive financial stability has enabled its CEO to push ahead with an aggressive international expansion plan, which will see it launch a new route every month.

Stewart is in Dubai to launch ten new flights a week between Dubai and two of the kingdom’s largest cities, Riyadh and Jeddah, which will later increase to eighteen when it adds a Dammam to Dubai route in early 2011. Stewart is confident that the new UAE routes will be able to fend off competition from the likes of Air Arabia and flydubai, who both operate similar low cost routes between the kingdom and the UAE.

This year, the total number of flights nasair will operate between the two oil rich states will increase to 39 flights per week, which Stewart believes reflects the strong links between the two countries.

“The growing commercial ties between the UAE and Saudi Arabia has encouraged nasair to expand its destinations in the UAE and we have now three routes to and from Dubai, Abu Dhabi and Sharjah connecting three main cities in Saudi Arabia; Riyadh, Jeddah and Al Madinah with a total 31 weekly flights,” he says.

“Since 2008 nasair has carried more than 400,000 passengers due to the ever increasing demand for travel between the two countries.”

Stewart doesn’t plan to stop at the UAE. Nasair launched seven new international destinations to Syria, Sudan and India during 2010 and plans to add more to Egypt, Turkey and Qatar during the first quarter of 2011. On top of this, Stewart says he is also “actively evaluating Iraq, Afghanistan, Iran, Pakistan and Turkey as potential markets” as well as Africa.

The growing number of routes will inevitably mean the airline will need to boost its number of aircraft. In December the carrier took delivery of two new Embraer E190s. Other aircraft on order include around twenty Airbus, which will eventually replace some of the leased aircraft, as well as three Airbus A320s, due to arrive next year.

When we speak, Stewart is about to unveil his latest plans for aircraft orders to the firm’s board and is therefore reluctant to divulge his spending plans.

“We are looking at all options for our fleet but consider the fact we have Airbus A320s [with] a four hour maximum range. So you need to think about can you make profit on this and where you can best utilise this aircraft.

“They are best at servicing on shorter routes and higher frequency with good network density,” he says.

With the restraints on the use and range of the A320, Stewart has come up with an alternative plan, which will enable the airline to operate code sharing agreements with larger long-haul airlines.

Last year, the carrier announced one such agreement with the Doha-based Qatar Airways, which is in the final stages of negotiation and is due to start in April.

The synergy between the Saudi low-cost carrier and the Qatari five-star airline will not be the last agreement Stewart hopes to put in place and he says he is currently in talks with a number of other large operators to come on board with them.

With the focus on international routes, code sharing with larger airlines and issues at home in its domestic market, Stewart reveals that the carrier is considering setting up another base outside the kingdom, though declines to specify where.

“Indeed we are and we are evaluating that right now, you must be sitting in on our meetings,” he laughs.

Stewart might be reluctant to reveal too much before his board meeting but it is refreshing that, when questioned, he is forthcoming with the figures and data and honest in his evaluation of the market. So it comes as no surprise to learn he is a numbers man. With the ongoing domestic issues over fuel subsidies and fare caps, negotiations with larger carriers, fleet orders to push through the board, a new base to set up, new launches every month and an IPO in the not too distant future, let’s hope the numbers all add up for him.

The fate of Sama Airlines

Nasair’s success in the increasingly crowded low-cost market in the Gulf is even more impressive when you compare it to the fate of its now defunct rival, Sama Airlines.

In August, the Saudi-based airline announced it was stopping all flights with immediate effect as it struggled with high fuel prices that had left it $266m in debt. It was the first Arab Gulf airline to fall prey to the global financial crisis.

“The decision to stop flying was not taken lightly, but we have spent many months seeking alternatives, and now this is the only option remaining to us,” a beleaguered Sama CEO, Bruce Ashby, said at the time.

“Sama, and all other airlines throughout the region, experienced very low fares and somewhat slow demand for regional travel during the winter season (October 2009 through March 2010),” he continued.  “Although revenues were up sharply during the summer peak season, it has not been enough to offset the heavy losses we suffered during the winter.”

The airline, which launched operations in 2007, operated ten destinations in the kingdom and neighbouring countries with 164 weekly flights, according to its website.

Several days after its collapse officials confirmed that the airline would not be selling off its assets and hoped to re-enter the market. Several other Gulf airlines including state-backed Saudi Arabian Airlines, Qatar Airways and UAE-based Air Arabia are all reported to have expressed an interest in buying the carrier.

Low-cost to take off in the Middle East

Budget airlines are currently underrepresented in the Middle East and are due to see their capacity increase by more than four fold over the next few years, according to research by US-based Boeing. “In 2000 low cost airlines provided zero percent of the seats [in the Middle East]. Today that is about 6 percent and [in 2011] it is forecast to be about eight percent,” Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes, said recently.  “In Asia low cost carriers provide 30 or 40 percent of seats, so there is a great opportunity for low cost carriers in this region. We have seen a number of carriers enter the market and if you take a look at all the major low cost carriers in the region they expect to grow a factor of four over the next several years based on the amount of airplanes they [have on order],” he added.

Tinseth’s comments have been further validated by Ghaith Al Ghaith, CEO of Dubai’s flydubai, who forecasts low-cost carriers in the Middle East are likely to double their share of the air travel business to about 15 percent in the next three years. “We believe the market is underserved,” he said.

At present, flydubai competes with Sharjah-based Air Arabia, Kuwait-based Jazeera and Saudi-based nasair. Despite the competition figures still show that the Middle East low-cost market is way behind the US and Europe, where operators enjoy 30 and 39 percent market share respectively. Full service airlines are also getting in on the trend, with Abu Dhabi-based Etihad Airways recently launching economy-only flights and Qatar Airways stating that it has a low-cost model ready to be rolled out if it ever feels its market share is being threatened.