Saudi Arabian Airlines is undertaking an ambitious expansion plan which belies the myriad challenges it faces, not least in what is widely considered an over-regulated, anti-competitive domestic market
Despite being the Middle East's third largest carrier by revenue, Saudi Arabian Airlines, or Saudia as it is often still known, rarely features in discussions about Gulf aviation. The kingdom's flag carrier has a reputation for shying away from the limelight, due in part to its beleaguered domestic market, and in part to the pre-eminence of more media-savvy rivals in the United Arab Emirates (UAE) and Qatar.
This coming year, however, Saudia will throw itself onto the global stage like never before. Against a backdrop of gradual privatisation, the airline will join the SkyTeam airline alliance in May - kick-starting a strategic plan which, if successful, will see business travellers in the Americas, Asia and Europe fuelling profitability.
Its focus on foreign custom reflects the limited opportunities still available in Gulf airspace, which has become saturated with excess capacity. But courting western travellers will not come naturally to the airline. Though its regional route network brings much to SkyTeam, its home market is saddled with anti-competitive regulations and weak infrastructure. In a kingdom defined by conservatism and hierarchical constancy, few will be betting on an easy transformation for this 67-year-old company.
There is no question that, of the many storm clouds overhead, the darkest billow comes from Saudi Arabia's archaic regulatory landscape. In a recent interview with The Gulf Simon Stewart, chief executive of the country's only remaining private carrier, Nas Air, said domestic aviation is essentially still "structured as it was in the old legacy days" - hamstrung by artificial price ceilings and inefficient supplier monopolies.
The domestic fare cap is the worst offender among these obstacles. In an attempt to keep flying affordable, the government prohibits all domestic operators from raising ticket prices above pre-approved levels. No flexibility is afforded in reacting to fluctuations in the price of oil - which rose 19 per cent last year, and which accounts for almost one third of the aviation industry's costs - nor are subsidies provided to offset low occupancy on Public Service Obligation (PSO) routes.
Though Saudia's fuel subsidy offers some reprieve, the fledgling private sector is fully exposed. Sama Airlines folded in 2010 just three years after its creation, citing losses of SR1 billion ($266 million), and Nas Air has virtually abandoned its domestic routes, leaving Saudia with an unhealthy 90 per cent monopoly.
Worse still, by prohibiting airlines from raising prices close to departure dates, the fare cap leaves no scope for running 'earlybird' discount promotions - a staple feature of any healthy low-cost airline market.
The Saudi Arabian General Authority of Civil Aviation (GACA) is aware of the problem, having been lobbied by everyone up to and including Saudia's director general, Khalid Abdullah Almolhem. But no action has been taken, with authorities wading through a deluge of interrelated regulatory and bureaucratic flotsam.
Among GACA's more pressing concerns are its own restructuring (as an independent body, outside the defence and aviation ministry); the overhaul of the kingdom's ageing infrastructure; and Saudia's privatisation. Privatising a flag carrier long accustomed to state support is no mean feat, as evidenced by the recent failure at Kuwait Airways, but to GACA's credit there is at least a roadmap in place.
Work to de-nationalise the airline began in 2000, though it was not until 2006 that the framework for privatisation was publicly laid out. The Saudi Supreme Economic Council determined that the airline should be split into six separate companies - cargo, maintenance, catering, training, ground handling and the core airline business. Once the five non-core subsidiaries had been partially or fully sold off, the mainline operating unit would then be floated in an IPO (Initial Public Offering).
"We would be left with an airline dominated by flying airplanes, and sales and marketing," Almolhem told Airline Business magazine three years ago, acknowledging that the Company had traditionally focused too heavily on operational matters. "Everything else would be outsourced to these companies."
There has been some progress to date, with 49 per cent of the catering unit being sold in 2007 and 30 per cent of the cargo division going private the following year.
Plans have been outlined to release more catering shares, but recurrent deadlines for offloading stakes in the other divisions were missed following the financial crisis. With the ground handling unit alone employing 5,500 people, it is perhaps easy to see why invitations for tenders have often fallen on deaf ears.
Until its subsidiaries are absorbed into the private sector, Saudia has little hope of elevating its brand to the level of its Gulf competitors. The airline freely admits that in recent years it has lost ground to Qatar Airways, Dubai's Emirates and Abu Dhabi's Etihad, whose respective governments have placed aviation growth at the heart of their economic strategies. But hosting the Hajj pilgrimage each year means Saudi Arabia is no stranger to mass transportation, and the kingdom has large-scale infrastructure plans of its own afoot.
A nationwide overhaul of 24 international and domestic airports is already underway, with Jeddah's King Abdulaziz International Airport (KAIA) being the centrepiece of the project. Some SR27 billion ($7.2 billion) has been earmarked for developing KAIA, which has seen average annual traffic growth of 5.8 per cent since 1999, driven in large part by inbound Muslim pilgrim traffic.
The hub routinely operates beyond its intended capacity - handling more than 17 million passengers per year - and long delays have become the norm at its dedicated Hajj Terminal. But by 2014 it will have space for up to 30 million people, boasting 46 new gates as well as road and rail links with the holy cities of Mecca and Medina. It will also be accessible to the double-decker Airbus A380, easing pressure on air traffic controllers during the annual rush, which last year witnessed 10,650 flights crammed with 2.5 million pilgrims.
Though progress has been slow, GACA recently began issuing sukuk, or Islamic bonds, to finance the project. Investment on the ground comes alongside a major fleet renewal programme in the skies, as Saudia replaces dozens of its ageing jets with medium-range Airbus A320s and long-range Boeing 777s and 787 Dreamliners.
The fleet upgrade illustrates ongoing efforts to raise standards before Saudia enters the 15-member SkyTeam alliance, partnering with the likes of Delta, AeroMexico, Air France-KLM, Kenya Airways and China Southern. Saudia's Middle Eastern footprint fills a gaping hole in their shared route networks, but even with modern aircraft some observers are concerned about the compatibility of the newcomer's product.
Under standard SkyTeam interline agreements, American travellers beginning their journey with Delta will soon find stopping over in Jeddah to be a convenient way of reaching destinations across the Middle East. Many westerners will be sceptical, however, recalling last summer's media furore about possible discrimination against transit passengers who wear Jewish religious items.
Equally, there are pressing operational concerns about just how symbiotic the relationship will actually be. In theory, alliance partnerships between two regions should be mutually beneficial. Saudia should enjoy stronger demand on its short-haul Middle Eastern network - thanks to the influx of western travellers treating Jeddah as a hub - and in return Air France should fill up its European flights with Saudis. But in practice, alliance partners often step on each other's toes.
Saudia has ordered far more widebody jets than are necessary to replace its old Boeing 747s, suggesting that boosting regional services may not be its top priority. If the airline uses its new 777s and 787s to increase frequencies to Paris, for example, it risks cannibalising Air France's Jeddah-bound traffic, thereby cancelling out one benefit of SkyTeam membership. Comparable arguments can be made against Air France operating services to Dammam or Riyadh, which undermine demand for Saudia's domestic connections.
With its international expansion facing headwinds, it is unfortunate that the flag carrier's home market offers no silver lining. GACA will this month open up domestic routes to foreign airlines through a Request for Proposal (RFP), with media reports suggesting that Emirates and Bahrain's Gulf Air are the front-runners.
Standalone cabotage, as it is known in the industry, or the unofficial ninth freedom of the air, is exceptionally rare outside the European Union (a special case, due to its open skies agreements). By allowing foreign companies to take over domestic air services, the ninth freedom is typically regarded as an admission of failure. Iran is the only other regional power to adopt the policy, having commissioned Qatar Airways to service its domestic flights in response to the crippling effect of US sanctions on Iranian fleet maintenance.
When GACA implements cabotage, the move will inject some competition into the domestic market. But it will also crystallise the perception - already widely held among 27 million Saudis - that the aviation sector is in disarray. Coupled with the flag carrier's new focus on courting global alliance partners, it seems the kingdom has resigned itself to dependency on outside support.
© The Gulf 2012
