Best of 2012: Air Arabia interview

New planes, new routes and new hubs are all on the agenda for the Middle East’s first listed airline, Air Arabia
Best of 2012: Air Arabia interview
By Daniel Shane
Sun 26 Aug 2012 09:58 AM

Despite lacking the petrodollars enjoyed by the government-backed airlines that dominate Gulf aviation, budget carrier Air Arabia continues on a streak of uninterrupted profitability that began shortly after it was founded in 2003.

The Sharjah-based airline, which competes with state-owned flydubai and Kuwait’s Jazeera Airways, has extended this rally into 2012, posting another two profitable quarters.

In its recent second-quarter financial results, Air Arabia recorded a 31 percent rise in net profit to AED65m ($17.7m), higher than Reuters analysts’ estimates. Revenue increased to AED729.6m, while passenger numbers were up fifteen percent to 1.5 million and average seat load factor up three percent to an impressive 85 percent.

As of July, nearly half a million people now fly with the region’s first low-cost-carrier every month.

Adel Ali, the Bahraini-born CEO of the airline, is positive Air Arabia will continue its good form through to the third quarter, although he is reluctant to provide a full-year picture, as the firm is publicly listed.

“It’s difficult to predict for the rest of the year, but certainly for Q3... the booking is looking very promising, despite some of the political instability in part of the area that we operate,” he says, in reference to the Arab Spring protests that have rocked countries including Egypt, Syria and Yemen over the past eighteen months, all of which are served by Air Arabia.

“Even Ramadan normally is a quieter month, but this year we’ve seen reasonable demand compared to the previous years,” Ali says.

While some of Air Arabia’s routes in the Arab world have been marred by unrest, the farther flung destinations in the carrier’s current network of 65 destinations appear to be picking up some of the slack.

In October 2011, the airline launched a three-times-a-week service to Russian capital Moscow and a twice-weekly service to Ekaterinburg, in the same country.

Such has been the popularity of the former route, Air Arabia three months later announced it would be upping the Moscow service to five-times-a-week. Other destinations in that region served by Air Arabia include Almaty in Kazakhstan and Kiev in Ukraine, which Ali says have both “been doing very well”.

Ali says Air Arabia is currently negotiating to fly to more countries in Russia and former Soviet states, which he says see sizeable demand over winter, when many look to escape sub-zero temperatures.

“Certainly Russia is a promising one — it’s a very sizeable market. Moscow’s been good and obviously there are a lot of other airports in Russia that we’re looking at,” Ali says. “We’re looking at a couple of new routes in CIS [Commonwealth of Independent States] and Russia for winter. As soon as those formalities and the paperwork is finished and we’re able to announce the names, we will.”

Since its founding, Air Arabia has capitalised on flying to under-served routes — typically countries’ second or third cities — in both the Arabian Peninsula and further afield.

Two such services launched this year are Taif, a city in western Saudi Arabia not far from Makkah, and Salalah, a tourist destination on the south coast of Oman. Ali says both are performing well.

He also says that in terms of new routes, Air Arabia will continue to expand its network by “about three to four new points each year”.

Not all of these new points will be from the airline’s main hub at Sharjah International Airport, however.

In 2009, via a joint venture, Air Arabia commenced flights from a secondary hub at Mohammed V International Airport in Casablanca, Morocco’s largest city. A year later, the carrier began flying from the Egyptian port city of Alexandria via Borg Al Arab Airport.

The addition of these two periphery hubs has added several attractive European markets to Air Arabia’s network, including Milan, Barcelona and Lyon, via a fleet of seven dedicated aircraft. Ali says Air Arabia will focus on growing the number of destinations it serves from Casablanca and Alexandria.

“We’ve just put another plane into Morocco and that hub keeps growing and it’s done well, both in terms of passenger numbers and in terms of the operation into Europe,” says Ali.

“Egypt’s getting more into stability, they’ve now got a new government — we’re very optimistic that as things settle in Egypt, they’ll... get back to normality,” Ali continues. “We’ve always said it’s a big market — [there are] 85 million Egyptians, [it’s] a big tourism place... we’re looking forward to expanding there.”

He adds that there is scope to add further European destinations to Air Arabia’s network via these hubs, including the possibility of a London route from Casablanca at some point.

“The UK is a smaller market for Morocco, [it’s] not as big as France or Italy, but the option is there at the moment and there is a possibility that at the right time we would fly into London,” Ali says.

Last year, Air Arabia abandoned plans to launch a fourth regional hub from Amman, Jordan, due to “political instability”. Ali says that for now the proposal remains on ice and if were to be resuscitated the plan would be re-thought out from the beginning, although the airline could look into flying from elsewhere in the Middle East.

“We decided to shelve [Jordan] because of the Arab Spring,” Ali says. “In time we’ll need to review [it] all from scratch, and if we find it’s as promising as it was at the time, we’ll certainly look at it. If we find that we need to look at other hubs, we’ll keep our options pretty open about these things. ”

One market that Ali says Air Arabia will not be looking into any time soon is Saudi Arabia’s domestic aviation scene. In late 2011, the kingdom’s General Authority for Civil Aviation (GACA) announced that foreign carriers for the first time would be permitted to operate the domestic routes monopolised by domestic airlines Saudi Arabian Airlines and nasair. Fourteen carriers have applied to set up an airline in the Gulf’s largest country, including Gulf Air and Qatar Airways, but Air Arabia is not one of them.

“We fly from the UAE already into six airports in Saudi, we’ve got a very extensive operation into Saudi. In terms of setting up a Saudi airline, we’ve not applied and we’re not part of the list of people who applied to set up a domestic airline in Saudi Arabia,” he explains.

One barrier to entry in this market would be the lack of fuel subsidies, which are provided by the Saudi government to Saudi Arabian Airlines, which would potentially put any new entrant to the market at an immediate disadvantage. Qatar Airways has already expressed unease about this.

Ali, however, says Air Arabia has its own reasons for not staying clear of this market for the time being.

“Saudi Arabia’s philosophy toward air travel has really been developed positively over the last few years and because of that all of us — all the airlines in the region — have increased our frequency into Saudi. We just feel that it’s too close to home — because we’re flying so many flights into Saudi we just didn’t feel that it was appropriate now to set up a hub there,” he says.

“It doesn’t mean that we will not in the future, but at this round we didn’t apply,” Ali reiterates.

Given Ali’s plan to expand Air Arabia’s flight network by up to four destinations per year, it makes sense that the firm is significantly broadening its fleet of aircraft. Between 2007 and 2010, the airline ordered 44 Airbus A320 planes, the last of which is due for delivery in 2016.

“Once this delivery’s done we will continue to review our fleet plan and it’s natural [to address] the question of supply and demand, and if the market continues to grow, it’s obvious that we will be ordering some more aeroplanes,” Ali adds.

He says that Air Arabia’s fleet expansion plans will not necessarily be confined to Airbus-manufactured jets, and the carrier will explore other plane makers. Among the options that the airline is likely to consider is Boeing’s 737 MAX, the US manufacturer’s equivalent to the Airbus A320, which has been selling extremely strongly so far this year.

“Our options are open for not just Airbus, but Airbus and others, [depending] on what at the time best suits us,” Ali says. Asked if Air Arabia could purchase craft from Airbus rival Boeing, Ali responds: “Absolutely.”

To accommodate the expansion of its craft, Ali says that the carrier will be hiring approximately 200 to 250 new employees per year.

One aspect of Air Arabia’s operations that Ali cannot control is the price of oil. Tensions caused by the Arab Spring regional unrest and sanctions imposed on Iran’s oil exports have all contributed to recent rises in the price of oil. Ali says that he has to be “realistic” in this respect. “A good oil price is good [for] the economy of the world, and particularly improves the economy in the GCC,” he believes. “We always said that $80-$90 — [anything] below $100 is a reasonable price for everybody. So long as it stays within those parameters, we’re very happy.”

At the time of publication Brent crude was riding high at $114 per barrel, more than Ali would like, but it will take more than this to clip Air Arabia’s wings, if the airline’s form so far is anything to go by.

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