As some carriers reassess their business model Air Arabia continues to explore new frontiers
The best is yet to come for Air Arabia
It seems like yesterday that the Arab world’s first low cost carrier took to the skies. Fourteen years later, Adel Ali the Bahraini chief executive and British Airways veteran is all smiles. His journey and that of Air Arabia, the largest low-cost carrier in the Middle East and North Africa, haven’t been as choppy like some of the region’s other carriers.
The track record of the airline has been impressive. The Sharjah-based carrier has been profitable since it started operations in October 2003. This month it beat analyst estimates and reported a 21 per cent increase in second quarter net profit after serving more than 2.05 million passengers.
By comparison Etihad Airways reported a $1.87 billion loss in 2016, Emirates, the largest airline in the world by passenger traffic, reported an 82.5 per cent annual decline in earnings and low-cost carrier flydubai recognised a 69 per cent drop in its 2016 earnings.
In some respects, Air Arabia, the only listed airline in the UAE, has been a bellwether of how the travel landscape is evolving. The trend, now anchored more than before is towards cheaper air travel. Emirates President was unreservedly vocal about that in an interview with The National last month. Like some of its budget pees in Europe, Air Arabia today has transcended conventional views of traveling with flights to destinations that include Bosnia and China.
In many respects Mr Ali, like British-Greek entrepreneur Stelios Haji-Ioannou, who started easyJet, has been a pioneer in changing the dynamics of the regional air travel.
In an interview with The National this month Mr Ali speaks about why the carrier has surmounted challenges other players haven’t. He talks about developments within the aviation industry and the future of the industry and low cost carriers.
Profits of regional airlines have been impacted, technology is changing business models, can you tell us how you’ve ben weathering challenging market conditions?
There is the industry and there is this region. We are lucky because we are spread enough. We are in this region, our business in Morocco is big to Europe, In Egypt we’re doing well. So if one region goes down another picks up.
In 2016 there was a massive capacity increase for the whole region. When you have all the airports over utilized, you put pressure on the yield. When you have pressure on the yield you have to manage the costs better. An airline like us that has cost management as part of our DNA, we’re in a better position to manage that period. A lot of airlines started to look at their costs at that time or put a number of measures in place to retry and restructure or manage the costs. Along with that we have to recognize because of the ongoing oil price challenges, it had an impact on the economy across the region and the world and that affects the premium business – something that we do not have.
There was a third item, which is currencies. We should not underestimate particularly the last quarter of last year and first quarter of this year when the euro and the pound dropped heavily and the [instability of the] Egyptian pound. All of these had an impact on a business. It was a multiple of things happening that led to a lower bottom line for a number of carriers in the region. For us, because our business is localized, no premium -- we have an ability to react to cost challenges very quickly we stayed ahead of it.
The yield for 2015 was down for everybody across the region by about 12 percent, 2016 was another 12 percent, the first quarter of 2017 was down and in the second quarter we started to see the recovery of the yield as capacity matured. There was pressure on the yield because of the increase in capacity. We also had some airlines from elsewhere into this region they started dumping prices. It was good for consumers in the short term. With some deals today it’s cheaper to fly than taking a taxi. Another big element that started in 2016, almost all the airports in the GCC put additional taxes or airport departure tax or service charges, that meant passengers were paying more, but the airlines were getting less because it was all going to the airports. This repeated a situation that happened in the 1980s in Europe. A number of things happened in 2016 that resulted in a more challenging [environment]. Having said that I think we’re in the recovery phase now; not just for Air Arabia but for most of the airlines in the region and quarter three should be positive.
When you say you were able to react quickly, what enables you to react quickly?
Our business model right from the beginning. Because we use a simple kind of aircraft there is much more flexibility on the routes. Our focus on efficiency is part of our daily work. Because of that we know what part of the business needs to be looked at. When you have a much easier way of managing, which is what low cost has been made to be, general conventional airlines are a very complex business to manage and therefore, it takes longer to do those cost recoveries and restructuring of the business.
Would you do anything today differently if you were launching the airline?
Not really. I would repeat the same thing. It’s been successful, it’s been 14 years of profitability, good passenger growth in double digits. It’s changed the whole philosophy and dynamic of travel in the region. It’s been a success story and I live on the philosophy of if it’s not broken don’t fix it.
Are you excited by the new technology, would you not consider the 737Max s part of a future fleet?
Both aircraft manufacturers are developing the same technology on their planes. We have the latest fleet. Half of our fleet has sharklets which brings fuel efficiency. When we look at new plane orders…we’ll be looking at both Airbus, Boeing and we’re also looking at Embraer. It’s work in progress. Our interest is very simple, to get the right level of business and grow it in the right path that a customer needs. We’ve been looking at ordering planes and we will continue to evaluate, the industry is changing, new technology is coming in, and at the right time we will put an order in.
Do you have any plans for any kind of debt financing?
At the moment no. At the moment the bank interest rates are attractive and we have been doing it internationally and locally.
How important is Qatar to Air Arabia?
Every market we go to is important. But it’s also important to recognize that in our business we also have to cut some places and add some places. What happened to Doha also happened to Nepal a few months before. It’s a normal part of our life and we adjust accordingly. We only had 3 flights a day to Doha.
How will the tie-up between flydubai and Emirates affect competition? Would you do something like that?
I’m sure they’ve done their homework. It will be good for the customer. Our business model is very different. We remain to be the only low cost airline in the region. Everybody else has changed their product to something else. We remain pure still, we find there is a demand and that’s what the customer wants.
What about the future of LCCs?
It’s very interesting times we’re going through. Norwegian in Europe, IAG (British Airways/Iberia) low cost based in Barcelona, Singapore Airlines developed Scoot, you have Air Asia. We are seeing a change in the industry. The future is for low cost. We are seeing more international low cost airlines popping up. We are also seeing conventional airlines changing their business models to match those of low cost because that’s what customers are demanding. I am still of the opinion, 10 years ago and still today that people want to travel at the best possible price.