Case closed

Few expected budget airlines to fly in the Middle East. But Marwan Boodai has proved critics wrong.
Case closed
By Rob Morris
Wed 09 Jul 2008 04:00 AM

Few aviation figures expected budget airlines to fly in the Middle East. But Marwan Boodai has proved the critics wrong after establishing a profitable low-cost carrier.

It's been four years since Jazeera Airways' board adopted a tiny, red ball to illustrate the airline's modest growth strategy. But CEO Marwan Boodai only needed a few weeks following the budget carrier's launch in 2004 to realise its true potential.

The company's growth prospects were apparent after management carried out an IPO to secure start-up funds. Boodai and his colleagues were confident of raising US$34 million through the Jazeera Stock Exchange listing. With the launch 12 times oversubscribed, they eventually pocketed $300 million.

Time has proven all the critics wrong. They are now jumping on the bandwagon and talking about starting their own low-cost carriers in the region.

"We obtained approval from the Kuwaiti government to launch the airline in 2003 and the IPO was carried out months later down the line," Boodai says. "We were looking for $34 million but received almost 10 times that, which shows the kind of market perception we had from the beginning."

Having secured millions of dollars, Jazeera's board focused on investing the cash. Shortly after launching flights on October 30, 2005, management ordered 10 Airbus A320s to satisfy demand.

By 2007, the directors agreed to buy a further 40 at the Paris Airshow, most of which are scheduled to arrive between 2009 and 2014. Of that order, the airline expects to receive two aircraft this year, increasing the fleet to eight. Launching new routes to coincide with fleet expansion has also taken place since Jazeera's inception.

The Kuwaiti-based carrier, which has some 470 employees, now flies to more than 20 cities, including Dubai, Bahrain, Damascus, Luxor and Tehrain.

In recent months, Riyadh and Istanbul were added to the network, with Boodai revealing Sana'a as the next destination. Further cities will be announced later this year for the carrier's winter schedule, while plans to increase frequencies on existing routes have been discussed.

Boodai is tight-lipped about the new routes, but appears more willing to discuss Jazeera's finances. Last December, the carrier announced its 2007 financial accounts, reporting KD2.29 million profits and KD34.7 million operating revenues (US$8.62 million and $130.6 million respectively).

The Kuwaiti airline, which has a second hub in Dubai, also carried 100% more passengers compared with 2006, according to Boodai.

The rising profit trend has continued in 2008, with Jazeera generating KD745,815 ($2.8 million) for the year to March 31. This figure represents a 42% increase against the amount reported during last year's opening quarter.

Meanwhile, operating revenues were nearly KD10.8 million ($40.6 million) - up 46% from Q1 in 2007.

While the airline's rapid growth has surprised some aviation analysts, Boodai insists he always expected quick results. He added the board has introduced a new symbol to represent Jazeera's development.

"If you visited our offices when the airline was first launched, you would have seen a tiny, red ball that symbolised our objectives and targets," he says.

"When we placed our first aircraft orders the ball became as big as a table. Whether it will be replaced with a huge ball that sits outside the office, I don't know. But the dynamics of the business are established to encourage new ideas, routes and projects for expansion."

Like other budget carriers, Jazeera Airways was dismissed by Middle East aviation figures following its launch. Indeed, most critics believed the low-cost business model, which involves offering cheap tickets on no-frills planes, would never work in this region.

But Jazeera's recent profit increases suggest otherwise. Huge demand from Indian and Pakistani travellers flying between the Middle East and their native countries has contributed to Jazeera's development.

Boodai adds providing basic in-flight services has proved equally important. Passengers receive snack boxes at meal times, while drop-down TVs air Arabic shows.

The airline's all A320 fleet also offers leather seats, although the high-tech entertainment systems and food dishes found on commercial carriers will probably never appear in Jazeera aircraft. Nevertheless, Boodai is happy supplying no-frills services that require little expenditure.

"Time has proven all the critics wrong," Boodai adds. "They are now jumping on the bandwagon and talking about starting their own low-cost carriers in the region.

There is a huge space here and the vacuum needs to be filled. We have a low-cost model in the Middle East, but it's not one-size-fits-all. When you have seven-star airlines you can't go down to the bottom end of the market - people won't accept it. We have maintenance, onboard crew and some of the best quality features low-cost airlines can offer."As Boodai points out, demand for low-cost carriers in the Middle East has encouraged other aviation figures to follow suit. In recent months, Qatar Airways' CEO Akbar Al Baker admitted he would consider launching a no-frills airline if established operators affected his carrier's passenger figures.

Elsewhere, Emirates is helping form a low-cost airline to fly across the Middle East. Once established, the unnamed carrier will operate independently from the Dubai-based airline.

Whether other budget carriers enter the market remains to be seen, but Boodai is convinced all can operate side by side. "There aren't that many low-cost carriers in the Middle East, although we expect more to emerge, and we are prepared for that," he says.

"If you look at banking or real estate you have dozens of companies but how many airlines can you count? Five to seven and that's it. The potential is there but you won't find all of them doing well."

Despite operating on a sound financial footing, Jazeera's management is still cautious about rising fuel costs. Last month, the price reached $135 a barrel - an increase that hit the airline industry hard.

To offset the rocketing costs, some airlines have raised ticket prices on certain flights. Boodai admits he has considered this strategy, although keeping air fare increases to a minimum is the priority.

"To make travel more affordable, we are focusing on having more planes and loading more passengers on to share the impact of increased fares," he says. "Let's not forget we are still in the growth stage in this region and while the fuel price is affecting the cost side of the balance sheet, it's also enhancing our revenue side. Each and every traveller has more money in the Gulf to spend and that's what we are looking for.

"Being realistic, you have no choice but to share the fuel increases with the consumer," he adds. "But what we're trying to do is not dump the whole thing on them. By doing this, we can gain their confidence and enable them to continue travelling.

It's about filling the aircraft, so the fuel surcharge will be spread among the seats rather than through a small number of passengers." The coming months will reveal whether Jazeera has been forced to increase ticket prices.

But Boodai is adamant there are no plans to co-launch another airline operation. Earlier this year, budget carrier Air Arabia linked up with Yeti Airlines to establish Nepal-based Fly Yeti. The low-cost operator was formed to provide Air Arabia passengers access to destinations across India, central and southern Asia and the Far East.

With the airline launched in January, it's still early to judge Fly Yeti's performance. But regardless of whether or not the carrier proves successful, Jazeera Airways will not follow suit. Boodai also rules out establishing other related ventures, such as hotels and excursions.

"Jazeera will be expanding within the Middle East, so we are prepared to focus on the local market. There are 140 million passengers here, so why should we care about other regions? You won't see Jazeera in hotels, catering or ground services. Our business is running these aircraft safely and on time, which is what we do best."

Boodai adds forming affiliates can distract management from concentrating on the core business. "You can't be the master of all these businesses," he says. "This team has been built as a dedicated operation that runs an airline. Now, the minute we step into other businesses Jazeera will no longer be as competitive in the airline industry."

The board's desire to retain focus is the major factor behind plans to offload several interests. Aircraft maintenance, ground handling and engineering will be outsourced, with each subsidiary controlled by separate management teams and shareholders. Elsewhere, Jazeera's directors are keen to expand the airline's Middle East network.

A third hub to complement operations in Kuwait and Dubai is planned, although Boodai is unwilling to confirm its location. He did, however, admit management had two cities in mind, with a decision expected shortly. Increasing passenger numbers and further raising Jazeera's profile are also on the agenda.

Boodai: "Jazeera is the fastest growing airline in the Middle East by destinations and routes. It had 600,000 passengers in 2006, 1.1 million in 2007 and hopefully 1.8 million this year with just six aircraft.

If we had more planes, we would have even more travellers. We are creating demand and Jazeera is one of the top 10 airlines in Dubai airport. It's taken just two years to reach that point, but the aim now is to make the top five as quickly as possible.

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