LCCs Redefining the Travel Market - GCC and MENA

Air Arabia aptly celebrated its 7th anniversary by taking delivery of the first A320 of its 44 aircraft order having finished 28 profitable quarters. YouGov Siraj latest survey revealed that LCCs have changed the travel habits of UAE residents (click here for full story) and I am sure it did the same in the GCC and MENA.

The LCCs reshaped the market by making air travel more affordable and as a result expanded the market by introducing a segment of the population that traveled by land or sea to air travel and most importantly enabled middle class professionals to travel more often on holiday and business.

Seven years ago when Air Arabia started flying, legacy airlines did not pay attention, for them this was a fad and if you ignore it, probably, it will go away.

Well it did not go away, on the contrary the concept flourished and today there are about 7 or 8 airlines operating. The major ones being Air Arabia, Flydubai, NAS Air, Jazeera Airways and Nouvelair. Air Arabia has 2 operating Startups in Egypt and Morocco with the one in Jordan under set up. Jordan has 2 startups Royal Falcon and Petra Airlines and with Air Arabia Jordan coming up this market should prove to be interesting. Etihad has opted for an all economy operation using the A320 which is its version of a quasi low cost operation.

It is true that this year saw the bankruptcy of SAMA Airways in Saudi Arabia and the exit of Bahrain Air from the market to operate as a legacy type airline.  The market is getting crowded and it will eventually determine who is there to stay (at this time, other than Air Arabia all others are not profitable).

The segment faces many problems that range from

• subsidies to Flag Carriers in Saudi Arabia and Kuwait.;
• crowded markets in the UAE and Kuwait;
• competitive pressures from legacy airlines of the region
• competitive pressures from foreign low cost carriers operating into the region 
• relatively small markets;
• lack of secondary airports;
• governments that will not award traffic authorities in order to protect their airlines 

Having said that, the LCC's market share will increase over the coming few years to beyond the existing 6 to 8 percent as it expands the local markets by enabling more and more people to experience air travel.

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.

Air Arabia vs flydubai.... Interesting Times

For starter's I have to admit I am an alumni of Air Arabia, I have spent four (4) years there witnessing its expansion, so I may be a little biased.

Air Arabia and flydubai are starting to look more like easyJet and Ryan Air. Starting from the equipment they fly to how they structure their fares.

Air Arabia is well established and is without any doubt the major force in establishing the LCC sector in MENA. The market is where it is because of Air Arabia and in the process it had to fight off almost every legacy airline in the region. It has revolutionized air travel by providing people with affordable air travel, not only at the traditional major destinations but at other under served population centers.

On the other hand flydubai enjoys the backing of the extensive network of Emirates who provides a link to connect with flydubai on its website. It also allows interlining, through check in and baggage handling throughout both networks.

As flydubai's fleet increases and it adds more destinations, it goes into head on competition with Air Arabia. Notwithstanding the wealth and buying power of the population, the UAE market is after all a finite market that is around five (5) to six (6) million people. This prompted the Air Arabia strategy of starting new subsidiary LCCs like Air Arabia Maroc and Air Arabia Egypt.

So the battle will have to be fought not only in the UAE but in the development of the markets in every station they both compete in. flydubai may have a slight advantage by capitalizing on Emirates ability to provide feed and visas, whereas Air Arabia has been present in these markets for years and knows them very well.

There is no doubt that the LCC segment in MENA will develop to eventually become 15% to 20% of the market. Air Arabia will probably remain the top airline in the segment for the coming few years with flydubai catching up as its fleet and network increase.

These are interesting times ahead to watch for as LCCs develop in the MENA region.