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Sun 20 Jun 2010 04:00 AM

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Brighter skies ahead

Air Arabia is emerging from the shadow of its illustrious neighbours with a business model that could change the face of the regional industry.

Brighter skies ahead

Air Arabia is emerging from the shadow of its illustrious neighbours with a business model that could change the face of the regional industry.

Annual general meetings are often viewed by fire-breathing shareholders as an opportunity to vent spleen at a row of nervous executives who would rather be back in their cosy offices. However, by contrast, Air Arabia's AGM in March was a uniquely sedate affair; shareholders were wreathed in smiles, while  executive statements were greeted with enthusiastic hand-clapping.

Why the good cheer from shareholders? Haven't we all been told, by none other than the International Air Transport Association (IATA) itself, that the aviation industry suffered its worst year ever in 2009?

"They are happy because they have been paid," beams Air Arabia's ebullient CEO Adel Ali, who is comfortably ensconced in his office at Sharjah International Airport the morning after the AGM. And there's no wonder that Ali is pleased; the headline news was that profits dipped by 11.3% to US$123 million. If the extraordinary dividend that the airline received in 2008 is removed from the books, Air Arabia's performance last year was identical to its efforts in the previous ‘boom' year.

Shareholders received a generous 10% dividend, which in total actually added up to more than the total profits the carrier made during the course of 2009. Compare that to other airlines across the world, and the difference is startling. Established carriers from Asia Pacific to Europe have been haemorrhaging their cash piles to an alarming extent. Granted, Air Arabia is a relatively new player at six years old, and is thus rapidly expanding its business in what was a non-existent market before the Sharjah low-cost firm's arrival, but the strength and diversity of its offering has surprised industry analysts. "At the moment, we will probably grow our business at around 10-15% per annum," Ali explains. "We have an expansion plan this year that will take us into a couple more points in India, and we're also getting into Central Asia. But a greater focus will be on increasing frequencies into Turkey and intra-Gulf, which should take us to the end of this year."

In terms of profits for 2010, Ali is reticent, and not just because he is unable to reveal the targets of a publicly listed business. The number of variables facing the aviation sector in 2010 means that this year may well turn out to be just as uncertain as the last, despite the increased traffic across the board globally. "While we would like to achieve similar or better results [to 2009] but there is a current surplus of capacity in the marketplace, which is a challenge," the CEO adds. "There's a lot of unbalanced competition, and the oil price is still high, despite the huge amounts of surplus oil being stored around the world. The whole thing is very ambiguous in terms of how business will develop."

However, new destinations - Air Arabia now has 46 destinations from Sharjah and 12 from its new hub in Casablanca - are by no means the whole story. Last month, the carrier received its Air Operators Certificate (AOC) from the Egyptian Civil Aviation Authority, clearing the way for the imminent launch of Air Arabia ‘Egypt', an Alexandria-based joint venture company with the Travco Group, which is expected to start with flights to Khartoum and Kuwait.

While Ali confirms that these hubs will operate as standalone locations, and are not designed to feed traffic to each other, what the carrier is developing is possibly unmatched anywhere else on the globe. Given the four-and-a-half-hour flying range of the Airbus A320, the narrow-body aircraft of choice in the Air Arabia fleet, the carrier has a network that could potentially encompass 80% of the airports in the MENA region. "If you look at the Arab world generally, every airline has either a country or a city named in the brand," Ali explains. "We're trying to change that, and to ensure that our customers don't have to fly via specific cities to reach their final destinations."

So perhaps the long-term vision for Air Arabia doesn't involve a group of big hubs, rather a web of smaller hubs, where passengers can effectively opt to fly direct from city to city? Ali pauses before answering. "It's possible - we have people's money, and while it's important that that investment is not wasted, it's also important that we don't sit on it," he outlines. "Therefore, the objective is to get to the lucrative areas - such as Egypt and Morocco - and those will take another year or two to mature appropriately. If another business opportunity comes along, and smaller hubs add to what we're doing and becomes financially viable, then of course we'll look into it."

One benefit of the hub network is that Air Arabia might never have to upgrade to the larger wide-bodied aircraft so beloved of the other Gulf carriers. Big is generally beautiful if you're a Middle Eastern airline; the GCC makes up a whopping 30% of the world's aircraft order book. The majority of these aircraft dwarf the A320 in terms of size; Dubai carrier and perennial Airbus-lover Emirates has ordered 58 A380 ‘superjumbos', 38 more than the type's next biggest customer, Qantas. Meanwhile, Abu Dhabi's Etihad and Qatar Airways have invested heavily in Boeing's ultramodern 787 ‘Dreamliner', and all three have bought into the future A350 as well. Ali confesses to a degree of envy when it comes to the bigger jets being ordered by his neighbours. "We looked at it [larger planes] briefly, and it's tempting because you want to do everything," he says. "But generally speaking, those carriers that wanted to do everything inevitably got it wrong."

But for now, Air Arabia is happy to let Air Asia test out the long-haul low-cost model, and Ali says he sincerely hopes it works out for the Malaysian carrier. "If it works well, there will be many more, and we may consider it too, but it's not an easy option to mix the two working systems," he remarks. "It's one of those questions that frequently comes to mind, but you try to discourage yourself from thinking it."

The CEO has no doubt been consoled by a by-product of the recession, which has been the cancellation or deferral of jet deliveries by some carriers, leaving Air Arabia well-placed to capitalise by having its aircraft delivered faster than had been originally anticipated. Instead of having to lease A320s until 2012, when another 44 aircraft were due to start coming online, Ali reveals that the first planes in this particular batch will be handed over in October this year, at the earliest, which gives the fast-growing business a chance to move forward.

On the more general level, Ali has some strong words about what he sees as incorrect priorities adopted by certain governments in the Arab world. However, the growth in competition, with eight LCCs plying their trade in the region since Air Arabia first blazed a path six years ago is not so much of a concern.

"They [local LCCs] are all busy, but not all of them are successful," indicates the CEO. "They're all carrying people, and some are doing it for good reasons - to improve business, for example - but some are doing it simply because they love to have another airline."

There is a hefty difference, as Ali points out, between those carriers that are private and even listed - such as Air Arabia - and those that are government-backed. The latter can generally afford to have lower yields due to the fact that they have access to substantial cashpiles and could be seen more as vanity projects than actual businesses. It's those firms, Ali says, that won't be forced to shut up shop during this recession. But at what price? "Obviously the legacy carriers will not close down because they are owned by governments," he explains. "So probably instead of building hospitals and schools, they will buy more aeroplanes, in this part of the world."

It's a controversial remark, and it's also worth bearing in mind whether the low prices being offered to consumers now due to the high level of competition will be beneficial to those same clients in the long run when carriers start to drop out of the market. "I hope that people look at this business not just as a marathon race to see who will have the biggest and most planes," Ali indicates. "At the moment, it seems like a race to fight for statistics rather than taking care of the bottom line."

The topic of competition and the race for supremacy in the skies above the Arab world brings Ali onto another point - what he sees as a pervasively conservative element in business attitudes in the region. "We are not really risk takers when it comes to business, despite all the talk of entrepreneurism in this part of the world," the executive says. "Every country tends to think it is cleverer than the next, and that is why I believe that not a lot of pan-Arab projects tend to succeed long-term. I believe that you have to take a bit of risk, gain that confidence and close those bridges, because if no-one does it, it will never happen." Ali says this is largely to do with communities still preferring to operate within their own comfort zones, which explains why there is still a certain amount of resistance to foreigners doing business in Arab countries. "But anyone who comes to do business is good for the country," the Air Arabia boss argues. "We went to Morocco and hired 100% Moroccan staff, and we will do the same in Egypt, plus paying taxes and working closely with a partner."

From a social perspective, Ali is being credited with a sea-change that has seen disparate Arab families come closer together simply by stepping on board an aircraft for the first time. It is this, perhaps more than anything else, which saw him place a strong eighth in the recent Arabian Business list of the 100 most influential Arabs in 2010. How does Ali feel about this kind of recognition?

"At the top of any business, it's lonely, but it's good that someone is noticing what you are doing," he says. "But this is really only the start. There's still massive potential, as Egypt, Syria and Iraq are still untapped, and at some point geopolitical scenarios will change and markets will become unlocked. We're in the same situation as Europe was eight or nine years ago, with too many airlines, a depressed market and some casualties. But then carriers bounced back and had their golden years and that's what we are working towards."