Adel Ali: Last laugh

In four years, Adel Ali has silenced most low-cost carrier critics by establishing a successful no-frills airline.
Adel Ali: Last laugh
By Rob Morris
Sat 01 Sep 2007 12:00 AM

When Adel Ali launched Air Arabia in 2003, he was ridiculed for introducing a low-cost carrier to the Middle East. Critics were adamant budget airlines would struggle to take off in a region dominated by commercial carriers. But Ali was determined to silence his detractors.

Indeed, the airline's CEO was confident that cheap, no-frill flights appealed to the masses. "If you build something like this you really change the dynamics of air travel," he says. "In the airline industry, people wanted something affordable; something to make air travel a part of their lives and not just an exception."

The number of people who say ‘it [low-cost travel] helps me get home every month to see my parents or children…’ you actually believe you bring people together.

The airline started trading in October 2003 on a US$15 million budget sourced from outside investors. Before the launch, Ali and his management team spent almost six months researching the low-cost market, securing rights to operate from Sharjah International Airport and choosing Middle East destinations. Demographic studies were also carried out to establish whether demand for a budget airline existed. The results confirmed Ali's faith in the low-cost market, with thousands of expatriates across the Middle East wanting cheaper tickets to fly home more regularly.

"There was a market where people were unable to travel and weren't getting what is available in the rest of the world, which is a low-cost airline," Ali says. "The hotel industry moved from just one type of hotel to different classes and categories, such as budget and drive-ins, because there was a market to use it. When we looked at the business model, we saw it was ideal for this part of the world."

Judging by Air Arabia's finances, Ali was right to ignore the so-called industry experts. In its first year, the airline broke even on the initial investment before returning $8 million to its shareholders 12 months later. By July this year, the carrier had generated $31.3 million - a 342% increase compared with the same period last year.

In this year's opening half, Air Arabia also increased its turnover to $139.6 million from $83.5 million and carried 57.9% more passengers (1.23 million). The average seat factor on each flight is now 84%, supporting Ali's claims that demand for low-cost travel is high.

Indeed, Ali has come across several Egyptians living in the UAE that would usually spend three to four days on a bus before reaching their native country. Those living in Luxor would then have a three hour journey to Cairo, before getting a taxi to the train station and travelling eight hours south. Since introducing cheap flights to Egypt, journeys to the capital now take just two hours and 35 minutes.

With travelling times drastically reduced, demand for low-cost flights has soared in recent years. Nevertheless, some critics still have reservations about budget carriers. "I understand where they come from but I just hope some of them will change their views after seeing our four year track record," Ali says. "In 2003, we not only said that Air Arabia will be successful but also other people in the region would try and copy us. The whole world can't be wrong and these few people right."

According to Ali, the critics consider the airline a threat to the region's established commercial carriers. But the aviation veteran is more interested in further expanding Air Arabia than promoting low-cost travel to competitors. In recent months, the airline has launched twice weekly flights to Chittagong in Bangladesh and increased its service to Mumbai. Air Arabia now operates nine weekly departures to the Indian city after adding two more flights.

The additional routes extends Air Arabia's flight path to 36 destinations across the Middle East, North Africa and Indian subcontinent. Ali says the airline will continue looking for new routes while adding more flights to existing services.

"We hope to launch a number of new destinations - some in the subcontinent area and some in the Mediterranean." Aside from introducing new routes, Ali and his management team are also keen to bolster the airline's fleet. Earlier this year, the board announced plans to increase the fleet to 52 from nine by 2015. During the next two years, Air Arabia will have an additional nine aircraft, increasing its all A320 fleet to 18. The remaining 34 are expected to arrive within the next eight years, providing Airbus can deliver on time.

The aircraft manufacturer has struggled to satisfy aircraft orders following production setbacks and employee strikes in Toulouse. Whether Airbus can claw back time is uncertain, but Ali insists any delays will have little effect on Air Arabia's plans.

"It's difficult to purchase airplanes but it's not so difficult to lease them. We have planned ahead for what we need and aircrafts are going to arrive on time to fit our plans."

To finance expansion and launch new routes, Air Arabia recently listed on the Dubai Financial Market. Some 4.66 billion shares worth AED1 each ($0.27) were issued, giving the airline a $1.26 billion authorised and paid up capital. Up to 100% ownership of shares is available to UAE and GCC nationals, while foreigners can only claim 49%.

Since listing in July, Air Arabia's share price has fluctuated between AED1.25 and AED1.05. While it's a modest peak, Ali insists the airline is attracting interest from regional and international investors. "I have heard from a number of prospectors who are keen to see the shares appreciate."
Securing outside investment may be Ali's main objective following the listing, but gaining potential shareholders' trust is just as important.

Like all public companies, Air Arabia must release its financial figures to the market - a requirement that most Middle East airlines are unwilling to meet, according to Ali.

"You are working in an environment where lots of airlines tend to be owned by governments and many in the Arab world don't release figures except when they have made a loss or profit. Air Arabia is an exception because you can't go to the market unless you open every book to the public."

Accountancy practices Deloitte and Mercer were called in before the listing to pore over Air Arabia's books. Within two weeks, both firms were satisfied with the airline's accounts.

The launch was completed soon after.

While Ali now has more shareholders to appease, he insists management's focus will remain on the business. "The market takes care of itself; if we do a good job, which is our objective, the share price will appreciate and if we do a bad job it doesn't so we know the path we have to follow. Our job is to manage the airline and not the stock market."

The coming months will reveal how keen investors are to buy Air Arabia shares. For Ali, the airline's strong financial performance should be enough to entice financiers.

Whether he's right remains to be seen, but Ali believes the airline's appeal is based on a simple business model that few other carriers utilise.

Indeed, the airline chief says most rivals in the Middle East place too much emphasis on other areas instead of getting passengers from one destination to another. Consequently, profits are dwindling as carriers invest huge amounts on the latest in-flight entertainment, food and drink.

"The reason people have stopped making profits is because they have moved away from the airline business," Ali says.

"They have turned it into a five-star hotel and entertainment business. They have turned it into a publishing business, a gourmet cuisine business - everything but airline. If you give all these services to people for free they will use them but don't expect them to pay more, hence the bottom line keeps going up."

Despite the airline's rapid growth, Ali says he is content to continue operating from Sharjah Airport - but doesn't rule out expanding to other hubs.

Indeed, Air Arabia's management team is considering several options, such as establishing operations at Dubai World Central International Airport in Jebel Ali and other hubs across the Middle East.

The directors are also looking into the regulations and costs associated with each airport before making any decisions. Unsurprisingly, Ali is reluctant to reveal too much about the airline's plans, but admits he is keen to expand in both directions across the UAE.

If achieved, Ali believes Air Arabia will have an advantage over its rivals. "Everybody in the transport business is competition," he adds.

"There are so many airlines getting government funds all year round that expect to lose money. All those companies are competition but our philosophy is you can spend your life worrying about others or focusing on your business."

Unlike most airlines in the region, Air Arabia generates healthy profits and provides solid returns to investors. For Ali, helping establish a financially-sound carrier has, and continues to be, a rewarding experience. But he insists reuniting people with family and friends by offering cheap flights is equally, if not more satisfying.

Ali: "The number of people who say ‘it helps me get home every month to see my parents or children...' you actually believe you bring people together. The money at the end of the month goes to the shareholders and government, but what really drives our people is the positive vibes that we get from the general public."

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