Tuesday, August 24, 2010

The Consolidation of the LCC Market

In the last few weeks three events happened which might indicate some changes in the Low Cost Carriers market in GCC in particular.

The most important is SAMA stopping operation after sustaining one (1) billion riyals ($266 millions) in losses. These losses were sustained during the period of Oct 2009 and March 2010. A government relief package and a shareholders' cash injection fell short in monetary and time terms to bail out the airline. SAMA competes against NAS another LCC and Saudia the national carrier. Saudia has been subsidised for years by the government to keep domestic ticket prices low. SAMA senior management are hopeful to restart operation, how soon and under what shape remains to be seen.

Last June Bahrain Air announced that they will exit the Low Cost Carrier market and become a "value for money airline" more like a regular aka legacy airline. They reckon the LCC model does not work in the GCC. Bahrain Air will go for code shares, alliances and a frequent flier loyalty program.

Finally, RAK Airways announced its relaunch sometime in the September/October period of this year indicated also they will not launch as an LCC, but as a full fledged service airline.

The three airlines are not major players, but are feeling and reacting to the effects of a crowded and very competitive LCC market dominated by Air Arabia, Flydubai and Jazeera Airways.

How the market develops in the GCC remains to be seen. I very much doubt that we will see more airlines than the existing four (add NAS to the big three). This may mean that the next market is going to be in MENA, giving credibility to Air Arabia's strategy of starting LCCs in Morocco, Egypt and Jordan.

3 comments:

  1. Oussama

    It was always going to be a challenging region to operate in! With regard to SAMA, they start from a disadvantage in tyat they are operating 737-300s, a more costly aircraft to maintain than the big three in the region. Whether Bahrain Air or RAK Airways survive is a matter for debate; will the "flag" carriers allow them to continue in these chaste times?

    Malcolm

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  2. Malcolm

    It appears that SAMA had to operate a few city pairs at very low prices at the request of the government without any compensation whatsoever. While Saudia enjoyed subsidies to operate these routes, a case of uneven government intervention. there are rumors that Air Arabia is interested in buying SAMA.

    ReplyDelete
  3. The airline business model does not congenitally have geographic restrictions on its own. Airline companies are free to choose their operational models as long as they can successfully operate. The so far success of Air Arabia in applying the LCC model does not necessarily mean that Sama can comparatively succeed applying the same model.

    Sama's management was fully aware of the applicable rules of the Saudi Civil Aviation from the beginning. Considering the fact that there was no significant change in those Saudi rules, Sama’s management team was gambling by mainly depending on the possibility of changing those rules.

    What was the plan of Mr. Bruce Ashby, the CEO of Sama by searching for more finance? Was he planning to use the same management culture in utilizing the new funds? Was he simply planning to eventually run out cash again?

    ReplyDelete

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