Saudi Arabia's only surviving private airline must overcome a difficult operating environment if it is to succeed, says chief executive Simon Stewart
Four years after Saudi Arabia liberalised its aviation sector, Simon Stewart, chief executive of the only surviving private carrier, Nas Air, remains optimistic about the "vast potential" for air transport in the kingdom. Ask him about the progress to date, however, and the former army pilot pulls no punches. "Saudi aviation is pretty much structured as it was in the old legacy days," he admits, and he doesn't expect things to change overnight.
Low-cost carrier Nas Air was created in 2007 along with another private airline, Sama, to end the domestic monopoly of flag carrier Saudi Arabian Airlines. It was hoped the new license-holders would mimic the success of Jazeera Airways, which grew rapidly after the Kuwaiti aviation sector was liberalised in 2005.
But four years on, the picture is anything but rosy. Annual domestic passenger numbers have remained virtually unchanged at 23 million. Sama has declared bankruptcy - so too has Nas Air's premium sister carrier, Kayala Airline. And in a troubling sign of the times, the Saudi civil aviation authority, GACA, is now "seriously considering" inviting foreign airlines into the country to take over domestic routes.
With Nas Air losing $210 million since launch, Stewart makes no bones about the prospect of following in Sama's footsteps. As he explains to The Gulf, however, cutting costs and boosting productivity will only take him so far in Saudi's regulatory environment.
"Initially the airline was set up to operate a number of PSO (Public Service Obligation) routes," he recalls, alluding to domestic air links deemed beneficial to broader society, irrespective of their profitability. "Now normally if you're offering aviation support infrastructure to a country, the government would put together some sort of stipend or contract, offsetting costs to ensure you're a viable business."
In Saudi Arabia, however, the authorities went the other way. "They imposed a fare cap," Stewart explains, artificially limiting the ticket prices Nas Air is allowed to charge customers. "When you link that with high fuel prices - as well as supplier monopolies for support services like catering and ground handling - we began losing large amounts of money on domestic routes."
Nas Air is not alone in opposing the domestic fare cap. Khalid Abdullah Almolhem, director general of Saudi Arabian Airlines, has complained that the price ceiling is "one of the biggest single value destructors to the airlines". In a nod to Nas Air, he added: "Now there is market competition, it [pricing] should be left to the market and not the government to decide."
Unlike Nas Air, however, the flag carrier does draw some benefit from market distortion. Saudi Arabian Airlines enjoys an extraordinary 90 per cent fuel subsidy.
By contrast, Stewart notes: "We pay the international rates for fuel. But that's further compounded inside the kingdom, where you have suppliers such as Aramco and Caltex adding their own surcharge on top. In the end we're paying on average 17 per cent more for jet fuel than neighbouring countries."
The combination of downward pressure on ticket prices and upward pressure on fuel costs is further antagonised by the country's overstretched airport infrastructure. While the kingdom has begun addressing this - setting aside $12.5 billion for airport-related investment over the next decade - progress has been painfully slow.
Traffic at Saudi's smaller domestic airports rose a disappointing 0.9 per cent last year. The picture at its four main hubs - Riyadh, Jeddah, Dammam and Medina - is barely better, with domestic passenger numbers rising just 2.8 per cent. "Both Jeddah and Medina have long reached their limits, and we urgently need increased capacity," Stewart warns.
Despite the internal pressures, Nas Air has recorded notable successes over the past four years. The airline continues to grow its customer base, serving two million passengers last year and forecasting 2.6 million for 2011. It also has one of the youngest fleets in the region, with an average aircraft age of just 3.1 years. But survival has come at a cost. The airline's raison d'être - to introduce competition in the domestic sector - has effectively been rewritten.
After suffering heavy losses on its PSO routes, Stewart recalls how the board, with the backing of its shareholders, "decided to abandon the Saudi market". Nas Air slashed the number of domestic routes it operates to just six, compared with more than 20 international destinations. Around 80 per cent of the airline's capacity is now deployed on international routes.
"[On domestic traffic] we still have a foothold through the door," the chief executive insists. "If the restrictions within the kingdom were lifted we would resume our core mission, which is to offer aviation services of the highest quality to the Saudi people. We don't want to leave the kingdom."
With Nas Air's new international focus, Saudi Arabian Airlines' domestic market share remains damagingly high at 91 per cent. Liberalisation has been so disappointing that in August GACA said it will consider offering domestic routes to foreign airlines - a desperate policy first conceived by an exasperated consumer body, the Association for Consumer Protection.
Saudi Arabia's 150-member Shura council, which formally advises the king on draft legislation, is already calling for a feasibility study. But Stewart says the unprecedented move would fail to resolve underlying problems holding the sector back.
"Unless the fundamental issues of the fare cap and high operations costs inside the kingdom are addressed, our cost base will remain high," he stressed. "Any competitor coming into the kingdom will have to deal with the same operating costs we do." Air Arabia chief Adel Ali, one potential beneficiary of the proposal, seems to agree. Reacting to the plans, he intimated that there must be a reason why no other country in the world has adopted the policy.
Ultimately, there is little debate in the aviation community over how to solve the Saudi problem. Greater competition is widely accepted as the only solution, but implementing reform and nurturing a viable private sector is proving far more difficult than envisaged.
Until conditions improve, Stewart says Nas Air will live up to its brand promise of being a "smart" airline. Securing interline agreements with rival carriers, and developing mini hub-and-spoke bases - neither of which are considered staples of the low-cost business model - are two innovations his management team is pursuing.
"If we get some traction on regulatory reform then we see vast potential for this airline," Stewart concludes. "But we soldier on regardless, and we do our best with the challenges we face."
© The Gulf 2011
