02 November 2011
DUBAI/KUWAIT: Middle Eastern airlines have devised a success formula for resilience in the midst of a globally anemic financial cycle and turbulence across the region - two current misfortunes that are driving the gloomy outlook for the industry. According to the world's largest aviation watchdog, International Air Transport Association (IATA), the Middle Eastern airlines have posted a surge in international traffic and capacity growth while international airlines are undergoing a slump in passenger demand.
In the words of Dr Majdi Sabri, IATA's Regional Vice President for the Middle East and North Africa, the figures for September show that Middle Eastern airlines are quickly adjusting capacity growth in response to economic uncertainty in the region and globally. "International passenger traffic recorded at 9.1 percent above 2010 levels. Capacity growth stood at 8.5 percent. It was the only region where demand growth outstripped growth in supply," Sabri said during an aviation forum held in Jordan this week.
Flydubai, the world's fastest growing airline, presents a good case study of the recession-proof business model that has conquered the Middle Eastern aviation landscape. The 28-month-old low-cost carrier aims to make a profit in 2012, according to Ghaith Al-Ghaith, flydubai's Chief Executive Officer. Speaking to a group of journalists from Kuwait at a press conference held in Dubai last week, he said that the budget carrier is soon going to break even.
We are going to make profit by the end of 2012," he said elaborating that flydubai's policy is to attract more people and travelers. "We could have achieved profit from day one (but) we did not care only about achieving profits. Customer loyalty is also a priority for us. Our size is important so we can absorb any capacity," Al-Ghaith said.
Organic growth
The profit mode of flydubai is tied to the airline's strategy based on flexibility and organic growth. "We plan to grow, and make money when we are planning t. We are reinvesting into the business to reach to this optimum size and we are almost there," Al-Ghaith said. Today's money-starved times and regional disturbances have not prompted the need for a change of the airline's strategy. Al-Ghaith explains the reasons like this: "Our strategy will never need rethinking. Our strategy is to fly to the Arab wo
rld." Taking the point further he explained that safety and security are flydubai's number one priority.
In case there is any turbulence in some destinations we will not fly (there)," he said. Asked if the regional disturbances have opened up opportunities to discover new destinations, Al-Ghaith said, "We are part of a very dynamic and flexible business. If there is a problem you can always take a flight from one place to another place." Al-Ghaith also related the adjustment of capacity to the airline's commercial interest saying, "We have to look at the routes. If a route is not making as much profit as we want or there is a problem, we reduce the number of flights.
The dynamic and flexible nature of the low-cost airline business contributes to such capacity adjustment. "We are now at a size that allows us to observe and operate at a far more efficient way. We are bigger and that works to our advantage. We are in the airline business - the easiest business to re-strategize. You can take capacity from one place and put it in another place," Al-Ghaith observed. "For God's sake, you can park your aircraft and you will save half of your cost. As long as we have the right size we are okay. This is what helps us," he said.
A UK-based aviation consultant echoes a similar sentiment. "History has shown that low cost airlines fare much better during troubled economic times than the big network carriers. Small companies can switch aircraft much more quickly to more profitable routes rather than their larger competitors. A marginally profitable route for a large carrier can be a very profitable route for a low-cost airline and as the larger full-fare carriers consolidate in the face of a financial crisis, this opens the door for s
maller carriers to take up the slack," said Phillip Butterworth-Hayes from PMI Media, an aviation consultancy.
Star power
When the global aviation industry is struggling, Middle Eastern carriers have marked a prolific growth. To the trimming flights aimed at matching the steep decline in demand of air travel globally, panicked fleet cuttings and thinning demand for premium travel, regional all-economy carriers answer by shifting the gear upward.
Aviation analysts attribute the forecast for the sector's growth to a confluence of factors that have endorsed the success factor in the Middle East air travel, one of the highest growth areas in global aviation. They pinpoint the dearth in alternative modes of transport, the unique demographic dynamics and high disposable income as the building blocks of the regional airlines' DNA, making them resilient and helping bypass the impact of the regional turmoil.
Jyoti Singh, Senior Rating Associate Manager with Capital Standards in Kuwait identifies the boon for the industry to be: the young population, lack of rail network, high disposable income and the large number of expat population living in the region who travel to their respective countries. Oussama Salah, a UAE-based industry expert shares the same claim that "the low-cost carriers market in the GCC is driven by expatriates visiting their home countries or going on vacation.
Al-Ghaith illustrates a similar argument providing statistics about the travel habits of the population in the UAE. He says that some 80 percent of the people who live in the UAE are expatriates and they travel to their home lands at least once a year. "The locals themselves travel at least three to four times a year. The ratio of travel per capita in this part of the world must be the highest," he stresses.
On a slightly different note Singh spotlights, "Overall the Middle East aviation is not just about the region, but has changed into a global network connecting all the continents, thus diversifying geographical risks. Flydubai connects to cities in India like Ahmedabad and Lucknow which though sends a sizeable Indian expat population to the Middle East are not on the radar of the major airlines.
What's in a LCC?
In the embryonic low-cost carriers market of the Middle East the rational for an airline is straight-forward: cheaper airfare encourages traffic and leads to a surge in capacity. It also alters the travelers' habits. Flydubai taps on this huge demand in the short-haul sector and contributes to the explosive growth in passenger traffic. Like Al-Ghaith puts it, "We are growing aggressively because this is our plan and we are following our plan. Every time we add capacity we consolidate our network because (i
n this way) we make it stronger. The more routes, the stronger your network.
Contrary to IATA's predictions o a global economy shrink that would lead to industry profits slashed by 30 percent in 2012, optimism rules across the low-cost segment. Al-Ghaith, who has a long track record in the airline industry, says, "I am even more optimistic now." In taking the point further he asserts, "IATA are the masters of all the airlines and they are always accurate. When it comes to our part of the world, the Middle East, they always get it wrong.
He further reasoned that the aviation industry in this region is still growing and in a growing market it is very difficult to make a prediction. "I don't subscribe to problems especially for us. Maybe because I am anticipating that this year we will be making money; but maybe our profit will be more if the (cost of) fuel was lower. I don't think a slash in the profit means that the growth in the region and the success of our airline will diminish," he said.
As the intra-regional traffic demand in the Middle East is projected to grow, analysts alert that fuel prices could bring forth some uncertainty. To which Al-Ghaith adds a different argument, "The fuel price impacts the industry the most. Fuel is the only cost that all airlines pay the same. Nobody pays less than the other and vice versa. When fuel cost rises all airlines increase prices. People are aware of this. They understand that if fuel increases prices rise too.
Standing out and well-located
What makes flydubai standout in the aviation turf are - location, simplicity and fleet. "We are in the UAE where we have so many touristic attractions. We focus on tourism. We are confident that if we were in any other country we would not have (had) the same success," says Al-Ghaith. Simplicity, Al-Ghaith observes, is our aim in positioning ourselves in the market. Also, flydubai's fleet flies new cost-effective airplanes which do not need to be fixed; this brings the cost down, he says.
The airline's hub strategy in Dubai, currently being the fourth-busiest international airport for international passenger traffic, facilitates the budget carrier's network expansion and overall growth. The plans for the future look even brighter as Dubai is slated to become the world's busiest international airport by 2016. Its proximity to the emerging markets in the Far East and its connectivity with the rest of the world has positioned it as a leading destination for business, leisure and foreign invest
ments.
Dubai's pioneering low-cost carrier has played a significant role in helping position Dubai as an international business hub with its aggressive network expansion to key markets. However, having the UAE's second city as a hub also serves as a boon for the airline's growth.
On November 4, flydubai will launch its flights to Tbilisi, Georgia - an underserved destination that adds to the currently established routes and that offers a myriad of business and tourism opportunities. Belgrade is also high on the radar of the no-frills carrier. The airline has also made the Indian subcontinent a key pillar of its no-frills, short-haul strategy.
Further, the airline's five daily non-stop flights between Kuwait and Dubai turn it into a preferred destination for business, leisure and day-tripping tourism. The extended network of destinations flydubai spreads wings to is viewed as one of the examples for strategic growth. And with the forecast of the capacity of Dubai International Airport to increase from 60 million passengers to 90 million by 2018 there is untapped potential for all - conventional and economy carries - in the market.
Owned by the Dubai-government, prudent financial values it seems, lie at the foundation of flydubai's growth strategy and the way the carrier views competition. Like Al-Ghaith says, "We believe that as long as you manage your business properly, you know your cost and work at a lower cost and you are actively focusing on developing the market I believe there is room for everybody and there is enough business. There is room for more players.
Legacy carriers vs no-frills carriers
In Al-Ghaith's viewpoint, there is no reciprocity between a plunge in premium travel and the growth of all-economy seats. "It is not a race where somebody wins and somebody loses. In our business, we all complement each other. Low-cost airlines drive and encourage new business. I am sure the other airlines will benefit from this because more people will travel. It is not a game," Al-Ghaith argues.
Who will win the aviation race between budget airlines and their network carrier counterparts? In response, Al-Ghaith puts it succinctly, "Anybody who manages their business most effectively wins. You have to react to what is going on. You have to manage your business the best.
Analysts also bring about positive forecast for the low-cost segment in the region. In making predictions about the aviation industry in the Middle East, Salah says, "Once the political situation in MENA stabilizes and hopefully oil prices with Libya coming back online and hopefully Iraq also, the airline sector will grow maybe not in double digits but in the high single digits with South America, Far East and China, India and Australia being the markets to watch." It remains to be seen if flydubai will further spread its wings to any of these destinations.
DUBAI/KUWAIT: Middle Eastern airlines have devised a success formula for resilience in the midst of a globally anemic financial cycle and turbulence across the region - two current misfortunes that are driving the gloomy outlook for the industry. According to the world's largest aviation watchdog, International Air Transport Association (IATA), the Middle Eastern airlines have posted a surge in international traffic and capacity growth while international airlines are undergoing a slump in passenger demand.
In the words of Dr Majdi Sabri, IATA's Regional Vice President for the Middle East and North Africa, the figures for September show that Middle Eastern airlines are quickly adjusting capacity growth in response to economic uncertainty in the region and globally. "International passenger traffic recorded at 9.1 percent above 2010 levels. Capacity growth stood at 8.5 percent. It was the only region where demand growth outstripped growth in supply," Sabri said during an aviation forum held in Jordan this week.
Flydubai, the world's fastest growing airline, presents a good case study of the recession-proof business model that has conquered the Middle Eastern aviation landscape. The 28-month-old low-cost carrier aims to make a profit in 2012, according to Ghaith Al-Ghaith, flydubai's Chief Executive Officer. Speaking to a group of journalists from Kuwait at a press conference held in Dubai last week, he said that the budget carrier is soon going to break even.
We are going to make profit by the end of 2012," he said elaborating that flydubai's policy is to attract more people and travelers. "We could have achieved profit from day one (but) we did not care only about achieving profits. Customer loyalty is also a priority for us. Our size is important so we can absorb any capacity," Al-Ghaith said.
Organic growth
The profit mode of flydubai is tied to the airline's strategy based on flexibility and organic growth. "We plan to grow, and make money when we are planning t. We are reinvesting into the business to reach to this optimum size and we are almost there," Al-Ghaith said. Today's money-starved times and regional disturbances have not prompted the need for a change of the airline's strategy. Al-Ghaith explains the reasons like this: "Our strategy will never need rethinking. Our strategy is to fly to the Arab wo
rld." Taking the point further he explained that safety and security are flydubai's number one priority.
In case there is any turbulence in some destinations we will not fly (there)," he said. Asked if the regional disturbances have opened up opportunities to discover new destinations, Al-Ghaith said, "We are part of a very dynamic and flexible business. If there is a problem you can always take a flight from one place to another place." Al-Ghaith also related the adjustment of capacity to the airline's commercial interest saying, "We have to look at the routes. If a route is not making as much profit as we want or there is a problem, we reduce the number of flights.
The dynamic and flexible nature of the low-cost airline business contributes to such capacity adjustment. "We are now at a size that allows us to observe and operate at a far more efficient way. We are bigger and that works to our advantage. We are in the airline business - the easiest business to re-strategize. You can take capacity from one place and put it in another place," Al-Ghaith observed. "For God's sake, you can park your aircraft and you will save half of your cost. As long as we have the right size we are okay. This is what helps us," he said.
A UK-based aviation consultant echoes a similar sentiment. "History has shown that low cost airlines fare much better during troubled economic times than the big network carriers. Small companies can switch aircraft much more quickly to more profitable routes rather than their larger competitors. A marginally profitable route for a large carrier can be a very profitable route for a low-cost airline and as the larger full-fare carriers consolidate in the face of a financial crisis, this opens the door for s
maller carriers to take up the slack," said Phillip Butterworth-Hayes from PMI Media, an aviation consultancy.
Star power
When the global aviation industry is struggling, Middle Eastern carriers have marked a prolific growth. To the trimming flights aimed at matching the steep decline in demand of air travel globally, panicked fleet cuttings and thinning demand for premium travel, regional all-economy carriers answer by shifting the gear upward.
Aviation analysts attribute the forecast for the sector's growth to a confluence of factors that have endorsed the success factor in the Middle East air travel, one of the highest growth areas in global aviation. They pinpoint the dearth in alternative modes of transport, the unique demographic dynamics and high disposable income as the building blocks of the regional airlines' DNA, making them resilient and helping bypass the impact of the regional turmoil.
Jyoti Singh, Senior Rating Associate Manager with Capital Standards in Kuwait identifies the boon for the industry to be: the young population, lack of rail network, high disposable income and the large number of expat population living in the region who travel to their respective countries. Oussama Salah, a UAE-based industry expert shares the same claim that "the low-cost carriers market in the GCC is driven by expatriates visiting their home countries or going on vacation.
Al-Ghaith illustrates a similar argument providing statistics about the travel habits of the population in the UAE. He says that some 80 percent of the people who live in the UAE are expatriates and they travel to their home lands at least once a year. "The locals themselves travel at least three to four times a year. The ratio of travel per capita in this part of the world must be the highest," he stresses.
On a slightly different note Singh spotlights, "Overall the Middle East aviation is not just about the region, but has changed into a global network connecting all the continents, thus diversifying geographical risks. Flydubai connects to cities in India like Ahmedabad and Lucknow which though sends a sizeable Indian expat population to the Middle East are not on the radar of the major airlines.
What's in a LCC?
In the embryonic low-cost carriers market of the Middle East the rational for an airline is straight-forward: cheaper airfare encourages traffic and leads to a surge in capacity. It also alters the travelers' habits. Flydubai taps on this huge demand in the short-haul sector and contributes to the explosive growth in passenger traffic. Like Al-Ghaith puts it, "We are growing aggressively because this is our plan and we are following our plan. Every time we add capacity we consolidate our network because (i
n this way) we make it stronger. The more routes, the stronger your network.
Contrary to IATA's predictions o a global economy shrink that would lead to industry profits slashed by 30 percent in 2012, optimism rules across the low-cost segment. Al-Ghaith, who has a long track record in the airline industry, says, "I am even more optimistic now." In taking the point further he asserts, "IATA are the masters of all the airlines and they are always accurate. When it comes to our part of the world, the Middle East, they always get it wrong.
He further reasoned that the aviation industry in this region is still growing and in a growing market it is very difficult to make a prediction. "I don't subscribe to problems especially for us. Maybe because I am anticipating that this year we will be making money; but maybe our profit will be more if the (cost of) fuel was lower. I don't think a slash in the profit means that the growth in the region and the success of our airline will diminish," he said.
As the intra-regional traffic demand in the Middle East is projected to grow, analysts alert that fuel prices could bring forth some uncertainty. To which Al-Ghaith adds a different argument, "The fuel price impacts the industry the most. Fuel is the only cost that all airlines pay the same. Nobody pays less than the other and vice versa. When fuel cost rises all airlines increase prices. People are aware of this. They understand that if fuel increases prices rise too.
Standing out and well-located
What makes flydubai standout in the aviation turf are - location, simplicity and fleet. "We are in the UAE where we have so many touristic attractions. We focus on tourism. We are confident that if we were in any other country we would not have (had) the same success," says Al-Ghaith. Simplicity, Al-Ghaith observes, is our aim in positioning ourselves in the market. Also, flydubai's fleet flies new cost-effective airplanes which do not need to be fixed; this brings the cost down, he says.
The airline's hub strategy in Dubai, currently being the fourth-busiest international airport for international passenger traffic, facilitates the budget carrier's network expansion and overall growth. The plans for the future look even brighter as Dubai is slated to become the world's busiest international airport by 2016. Its proximity to the emerging markets in the Far East and its connectivity with the rest of the world has positioned it as a leading destination for business, leisure and foreign invest
ments.
Dubai's pioneering low-cost carrier has played a significant role in helping position Dubai as an international business hub with its aggressive network expansion to key markets. However, having the UAE's second city as a hub also serves as a boon for the airline's growth.
On November 4, flydubai will launch its flights to Tbilisi, Georgia - an underserved destination that adds to the currently established routes and that offers a myriad of business and tourism opportunities. Belgrade is also high on the radar of the no-frills carrier. The airline has also made the Indian subcontinent a key pillar of its no-frills, short-haul strategy.
Further, the airline's five daily non-stop flights between Kuwait and Dubai turn it into a preferred destination for business, leisure and day-tripping tourism. The extended network of destinations flydubai spreads wings to is viewed as one of the examples for strategic growth. And with the forecast of the capacity of Dubai International Airport to increase from 60 million passengers to 90 million by 2018 there is untapped potential for all - conventional and economy carries - in the market.
Owned by the Dubai-government, prudent financial values it seems, lie at the foundation of flydubai's growth strategy and the way the carrier views competition. Like Al-Ghaith says, "We believe that as long as you manage your business properly, you know your cost and work at a lower cost and you are actively focusing on developing the market I believe there is room for everybody and there is enough business. There is room for more players.
Legacy carriers vs no-frills carriers
In Al-Ghaith's viewpoint, there is no reciprocity between a plunge in premium travel and the growth of all-economy seats. "It is not a race where somebody wins and somebody loses. In our business, we all complement each other. Low-cost airlines drive and encourage new business. I am sure the other airlines will benefit from this because more people will travel. It is not a game," Al-Ghaith argues.
Who will win the aviation race between budget airlines and their network carrier counterparts? In response, Al-Ghaith puts it succinctly, "Anybody who manages their business most effectively wins. You have to react to what is going on. You have to manage your business the best.
Analysts also bring about positive forecast for the low-cost segment in the region. In making predictions about the aviation industry in the Middle East, Salah says, "Once the political situation in MENA stabilizes and hopefully oil prices with Libya coming back online and hopefully Iraq also, the airline sector will grow maybe not in double digits but in the high single digits with South America, Far East and China, India and Australia being the markets to watch." It remains to be seen if flydubai will further spread its wings to any of these destinations.
© Kuwait Times 2011
