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Wed 15 Oct 2008 04:00 AM

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Calm waters

Despite the many obstacles in Sama's path, management remains confident the budget carrier will continue to succeed.

Despite the many obstacles in Sama's path, management remains confident the budget carrier will continue to succeed.

When Sama airline first launched its bargain priced flights 19 months ago, critics thought it unlikely to be a success. But CEO Andrew Cowen has proved them all wrong. "In this time we've come to understand the market much better, doing a few things we haven't expected.

After only a year we hit our one million passenger milestone." However, Cowen admits it hasn't all been plain sailing. "We've also faced certain issues that we didn't expect and the obvious one there is fuel."

Despite the fuel price we’ve managed to break even so that’s obviously been a tremendous achievement.

For the time being, the carrier is putting its rapid expansion plans on hold until the price of crude oil drops. "Our plan was to grow our fleet to 30-35 aircraft by 2010 but we're now having to refine that a little bit because with oil being where it has been, even though it's come off the boil a bit we don't know if it's going to spike again," explains Cowen.

However, once the market settles the company will reassert itself as Saudi's fastest growing new carrier.

Luckily for Cowen, the budget carrier is already well on the way to stability thanks to a US$52 million investment from shareholders. "Really what they were looking for was to see us through the initial start up phase and demonstrate that we could establish an airline that could not only build a strong product in Saudi Arabia but could also build up a strong international network."

And now the carrier has successfully proved its capabilities, investors are willing to continue their support during turbulent times.

"They really understand that we've been damaged by these fuel prices which have been causing destruction all over the industry." According to Cowen, by strengthening the balance sheets with generous financing, shareholders are encouraging Sama to continue its expansion across the Middle East.

"It makes more sense for us to sort of sit out the storm a little bit and then go in with the financial support we've had and secure our future aircraft needs at much more bargain prices."

When the airline was first granted flying rights in 2006, the Saudi Arabian Civil Aviation Authority (SACAA) limited the license to domestic routes for the first two years. However, this rule made life difficult for the carrier due to the high fare cap charges which were introduced at the start of the century.

"On a typical route from Damman to Riyadh, the one way fare is capped at around US$45. But of course flying costs are considerably more than this per passenger so it leads to significant losses in domestic flying."

This combined with high oil prices made it impossible for the airline to be profitable. "Domestic carriers can't make money unless they have a full load factor, at which point they barely break even," explains Cowen. "A fare cap with an ever growing fuel price has the ability to effectively bankrupt an airline because it simply doesn't have the ability to pass on the cost increase."

After persistently lobbying the SACAA, Sama was granted an international license 18 months early. "We've been in negotiation with the civil aviation authority for some time now," explains Cowen.

"We did see it coming to some degree, although of course we didn't see oil prices going through the roof." However, management's anticipation of the fare cap problem initiated early lobbying and the subsequent access to profitable international routes. "Since then we've steadily expanded our network and now 75% of our flying is outside Saudi Arabia," says Cowen.

At present, Sama flies to 10 international cities from three of the kingdom's principle airports, Damman, Riyad and Jeddah. These destinations include, Damascus, Latakia and Aleppo in Syria; Beirut in Lebanon; Amman in Jordan; Alexandria, Assiut, and Sharm el Sheik in Egypt and Sharjah and Abu Dhabi in the UAE.

"For these we are able to charge fares that cover these costs and many of these routes have only previously been served by flag carriers so we've been able to offer very attractive prices.Despite the fuel price we've managed to break even so that's obviously been a tremendous achievement." Once fuel prices stabilise, Sama's management plans to add several new international destinations to its route network.

"We'd like to fly to Dubai," says Cowen. "We've had an application to fly to Dubai with the authorities for over a year now. It's fully supported by our own civil aviation authority but we've not been able to persuade Dubai's civil aviation authority to allow us access."

The airline attracts a mix of business and leisure passengers, both domestically and internationally. "We get small businesses sending people on low cost carriers and we get a lot of the visiting friends and family market, for example husbands working in Saudi Arabia can go back to their home countries more often to visit families because flights are cheaper."

We are the second airline to introduce a system where you can pay for your bookings through ATM machines.

In addition Saudi Arabia attracts a great deal of religious traffic; Muslim passengers en route to the famous holy city of Mecca. But Cowen believes the airline's popularity lies in the price. "Typically our entry level fares can be as much as 75% below flag carriers, even our highest fares are still showing a substantial, 25% discount," he points out.

Recently Sama signed a deal with Safi Airways and Bahrain Air to enhance cheap network connections across the Middle East. "We don't have the aircraft capacity yet to serve countries such as Afghanistan and Bahrain yet, both examples very close to home.

What we wanted to do is to establish commercial relationships with other carriers like Bahrain Air and Safi Airways to enable both carriers to broaden their international networks." Cowen insists this will enable passengers to travel further, without resorting to expensive flag carriers.

"This is really for the convenience of the passengers because it means someone travelling on Sama as part of the booking process can also book onto Kochi in India which is a destination that we don't fly to.

We're not talking about a traditional airline connecting product, all we're doing here is joining point to point segments." He adds that this simple, low tech solution will enhance customers' travel opportunities.

When low cost carriers were first introduced in Saudi, there was some speculation as to whether the online ticket orders would take off. "In our initial business plan I can't tell you how many people said internet booking wouldn't work in Saudi Arabia. We said, yes it will work, if it works everywhere else, why wouldn't it work here?"

Cowen was proved right and the airline now receives 50-60% of its bookings online. "This really underlines the convenience for so many people of booking that way. If you're just booking a quick trip for the weekend why would you go through a travel agent?"

Cowen argues that although Sama has been a ‘pioneer' in internet bookings, it is more advanced in other areas. "I believe we are only the second airline in the world to introduce a system where you can pay for your bookings through ATM machines which is a popular option for customers. You can't do that in Britain or Germany or anywhere else really."

This option provides passengers with the chance to pay for their purchase through a cash point after the booking has been made. "Many of the ATMs are drive through and then you have a menu where we are one of a number of retailers that offer payments through the ATM.

You select Sama then obviously type in your booking number and the payment is taken, it couldn't be easier," explains Cowen. He adds that in an Islamic country, where loans and credit cards are not approved, this payment method provides a popular alternative. "Over here there's all sorts of religious issues surrounding borrowing money, so this has worked really well.

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