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Sat 11 Jul 2009 04:00 AM

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Turbulent times

Air Arabia CEO Adel Ali tells Kat Slowe how he plans to keep the airline flying high this year and how he intends to overcome the turbulence hitting the region's aviation industry.

Turbulent times
Turbulent times
Air Arabia was formed by the Sharjah government in 2003 to be the region’s first budget airline, flying in different destinations across the Middle East and North Africa.

Air Arabia CEO Adel Ali tells Kat Slowe how he plans to keep the airline flying high this year and how he intends to overcome the turbulence hitting the region's aviation industry.

"I was watching the BBC today, actually," Air Arabia CEO Adel Ali says. "I am trying to get a bit more updated on this aeroplane crash... It is somewhere - probably sunk where the Titanic is."

We are sitting in Ali's surprisingly pokey office. A TV screen is attached to the wall on the right and is showing constantly running updates of the Air France plane crash. The only way to enter Ali's private workspace is through a large reception room, where the CEO claims he receives "unwanted" guests.

In this part of the world, every airport is different, every government is different... It is a complex business.

"I just don't like big offices," he says. "I can't work in them. I like cosy stuff and small things like that. I will put my head down, close the door and watch the telly - somebody else does the work."

Ali is being modest. Air Arabia was formed by the Sharjah government in 2003 to be the region's first budget airline. Ali has since turned Air Arabia, a small company which operated only two planes, into a multi-million dollar business, with a fleet of twenty aircraft.

In early 2007, 55 percent of Air Arabia's shares were floated on the stock market and raised a staggering AED2.7bn ($735m), with the initial public offering (IPO) reportedly 150 percent oversubscribed.

But these days Air Arabia's stock, like the majority of companies,' is not flying so high. Despite a recent surge, Ali claims that he still believes shares to be undervalued by around 40 percent.

"My job is not really to promote shares," he says, laughing. "My job is to make sure the company's bottom line shows a profit and that the existing shareholders make a good return on their investment.

"But the financial firms that look at Air Arabia say that our shares are undervalued by at least 40 percent, and therefore as a shareholder, not as chief executive of the airline, I would like to see it do better - so that my investment is worth more."

And the company is definitely showing a profit, despite the turbulence of the last few months.

Ali claims a higher number of passengers travelled on the airline than was originally predicted for Q1, with the volume up 32 percent from the same quarter last year. He also adds that "good oil prices" helped drive profit.

Yet, too low an oil price, he says, could also have a negative impact on the carrier: "You need a good oil price. Too low [a price] in a region which is oil dependent basically drives the economy negative, which means people don't travel. In fact, globally, if you track back history - nowadays it can be easily done through Google - you find that every time there was an oil dip in price, the world, and especially these regions, went into bad times.

"So I think $140 per barrel is a bad price and $30, or $40, is also a bad price. Probably $60, $70 or $80 is good for the region and good for the airlines as well."

Hedging - a double-edged sword

Air Arabia, Ali explains, hedged against the fuel price for 2009, and has also partially hedged against it for 2010. He admits that the company hedged the price "within the fifties" and states he does not regret his decision.

"We got most of our needs for 2009 within the fifties (dollars)," he says, "and I think it was good. All hedging is a double-edged sword. You can get it wrong and nobody can say that they are the best at it. Certainly, we are not. But I think this year we have got it right and we hope to do a similar thing for next year."

Ali hopes that by next summer the travel business will have begun to regain its poise. But, though Air Arabia, with its low cost niche in the market and relatively small overheads, is arguably in a better position than many airlines to ride out the storm, it still faces challenges from the economic environment. One of these is the increasing competition it is seeing from legacy airlines.

"The legacy carriers that exist are big and they are global," he says. "Because the global business is down they all focus on the local market, which means the competition puts pressure on the yield that you have got and everybody has to react to that.

"There is a pressure on the yield. There is a reduction in the number of people in total that operate. I would be telling you a lie if we said that we have the same number of tourists coming into the country that we had last year."

And establishing new hubs is perhaps one way Ali is hoping to combat this new battle for passengers in the region. Air Arabia recently opened a new hub in Morocco, from which it flies a total of three aircraft to six destinations. Ali plans to expand this number to fifteen by 2010.

But Ali's ambition does not stop there. In five years time, he claims, he hopes to have established an overall fleet of 100 planes, over four hubs. He is currently examining five locations for suitability, but, though he admits these are all in the Middle Eastern region, he refuses to be more specific: "We are already in Sharjah, UAE, which is really the end of one side, and Morocco is the Atlantic Ocean, so anywhere in between," he chuckles.

Ali explains that choosing the right location for a hub is about more than simply going where there is a demand. He would know that better than anyone. Air Arabia established a new hub in Nepal last year, but was forced to suspend it upon the onset of political unrest in the country."It is not about just establishing a hub," Ali says. "I have always said I am not running an airline, I am running a business. [The hub] could be in Africa or the Middle East, or anywhere. It really doesn't matter. There are a lot of lucrative places to be honest... We will only do it if all the other criteria fits. Every country you find now has a free trade agreement, but it is actually meaningless for most places, because what you need is the legislation. You need the entire policies to be reviewed and it is not just about ‘yes, you are allowed to bring money and set up a business.'

"In the Arab world you also have more agony if you want to set up an airline business. Every country, they allow you freely to set up a property business, but when it comes to the airline they say ‘no, that one is very special, you will impact on our national carrier.'"

Ali points to Pakistan as an example of a country to which demand for travel is incredibly high, but to which Air Arabia has relatively few flights, due to political reasons. This, he says, is in sharp contrast to India, one of the airline's most frequent destinations. And it is the Pakistani people, he claims, who are the losers.

Pakistanmarket underserved

"My issue with Pakistan is not so much about setting up an airline or a hub," he states. "Pakistan is a big market. If you look at the Pakistani population in the UAE, it is similar to that of the Indians. We fly to fourteen of fifteen airports in India, over 120 to 130 flights a week.

"In Pakistan we fly to two places, cumulatively seven flights a week. Basically, one country has decided to be liberal when it comes to their travel rights and the other one is conservative. And, the loser out of this is the Pakistani people who are here and who want to get back home."

But, though the complex politics in the Middle East may cause Ali some frustration, to an extent they also protect his business. There were rumours last year that Sir Stelios Haji-Ioannou, founder of easyJet, was considering expanding into the region. Yet, Ali argues, this actually happening is unlikely, as he says most European low-cost carriers would not find it financially viable to operate under Middle Eastern conditions.

"I don't believe an easyJet or a Ryanair will change their business model to come to the Middle East," he says. "They have set up their businesses differently and they work in a different environment, and both of these carriers work in Europe."

"In Europe there is one law, there is one legislation, and, in general terms, peaceful aviation. They tend to decide to which airport they want to fly, they do a five-year strategy plan, buy an aeroplane and operate it. In this part of the world every airport is different, every government is different, every city is different, every currency is different. It is a complex business."

In addition, European low-cost airlines, Ali describes, sell 90 percent of their tickets online. This, he claims, would create a problem in a country such as the UAE, where 60 percent of people do not possess credit cards. This is because the majority of banks in the country demand proof that you are earning a minimum wage of AED5,000 ($1,361) per month before they will give you a card.

As a number of people who travel on Air Arabia are labourers and earning less than this amount, the airline has been forced to broaden its distribution channels. Customers can now buy tickets at Emirates NBD cash points or even UAE Exchange outlets, among other venues. Yet Ali is keen to emphasise that Air Arabia is not purely an airline that transports labourers.

"My typical customer is the person who puts his hand in his pocket and pays," he says. "The reason I say that is there is a perception among a lot of people that we generally carry the labour traffic. And labour traffic is a great thing to have, but we also carry a lot of very senior business people. When they are paying themselves, they travel with us. We carry a lot of students, families, a real mix of everybody.

"Lately I have seen - and this is why I say people are down trading - a lot of people with BlackBerries on our flights. That means ‘I am important, I am BlackBerry man,'" Ali grins.

The Air Arabia boss says he has been seeing a growing amount of interest in corporate travel, as the airline's flights gradually increase in frequency. Currently he estimates around eleven to twelve percent of customers are businessmen, but he predicts that this could rise to as high as 25 percent in the next year.

"Corporate travel, once they try it and use it, they realise it is good," he says. "We are not mushrooming and putting too many people on a small aircraft.

"But I am a salesman. I would welcome anyone who wants to get in. My job is to maintain the seat factor. Whoever gets in, be it the guy who builds buildings or the guy who sits in the back, it doesn't make a difference to me. For me, both are customers and both need looking after."

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