Shifting sands of time - a new LCC wind blows across the Middle East

13 March, 2018

Any discussion about aviation across the Middle East tends to focus on the major airline players in the region, but behind these network giants an evolving low cost sector is helping to meet increasing point-to-point demand, stimulate new markets and support a wider country-level narrative to diversify economies away from oil and gas industries. While nobody can question the innovative nature of Gulf carriers such as Emirates Airline and Qatar Airways, which passenger data shows have already changed the way we fly, new low-cost entrants are set to open air travel to a larger market.

It will continue to be known as the home of the premium 'super connectors' and expansive airport hubs, the Middle East is now actually on the periphery of a revolution already seen in the Asia Pacific, Europe and North America - That is, the uprising of Low Cost Carriers (LCCs). New start-up airlines are bringing a pure low cost product to the region.

While on a much smaller scale than regional counterparts, LCCs in the Middle East are still attracting a new market of flyers and increasing overall accessibility to air travel. These new entrants also act as supporters to the diversification of Middle Eastern economies which are now seeking to be established as tourism destinations in their own right.

The Blue Swan Daily analysis of OAG schedule data shows that the number of Low Cost Carrier (LCC)seats from the Middle East has increased 12-fold over the last ten years, more than tripling since the start of the decade. The LCC market now accounts for a 14.6% share of the departure seats from the region, having grown at double-digit rates year-over-year between 2009 and 2016. This growth shallowed to +7.3% in 2017, still a healthy rate of growth and faster than the +5.9% recorded by mainline operators.

CHART - There are now more than 35 million annual LCC departure seats from the Middle East as the sector continues to evolve across the regionSource: The Blue Swan Daily and OAG

Of course, LCCs are not new in the Middle East with the likes of Air Arabia pioneering the model in the region and Air India Express providing key budget connectivity with the Indian sub-continent. However, the market is changing as the more established LCCs have developed into the hybrid business model and opened the door for another level of low-cost start-ups that are purely focussing on costs, like the LCC model that was first conceived in other parts of the world.

Two relatively new entrants to this market are flyadeal in Saudi Arabia and Salam Air in Oman. Both are linked via common ownership to the nations' respective flag carriers - Saudi and Oman Air - but are operated at arm's length under independent management teams.

After securing its operating licence in Sep- 2017, flyadeal opened reservations on its initial flights from Jeddah's King Abdulaziz International Airport on September 19, 2017, selling more than 10,ooo tickets in the first 24 hours with an offer of one way fares from SAR48 (USD12.80).

The airline's CEO Con Korfiatis recently imparted a set of thought provoking opinions and facts about the Middle East and the LCC sector, at the CAPA Global LCC Summit in Singapore earlier this month. For example, Mr Korfiatis argues global alliances are "seeming to lose relevance" and there is "far more focus on bilateral relationships".

CHART - The Middle East has yet to be conquered by the global alliances which appear to offer less relevance to the region's airlinesSource: CAPA - Centre for Aviation and OAG (data: w/c 12-Mar-2018)

Looking to the Middle East, it is understandable where Mr Korfiatis bases his argument with more than two thirds of system seats not linked to any of the global alliances. Compare this to the market share of unaligned carriers in Asia Pacific (49.6%) or Europe (50.2%), two regions abundant in LCCs which are generally thought to be the forerunners in unaligned operations.

Mr Korfiatis also believes flyadeal may be the only "pure" LCC in the Middle East. With some long running Middle Eastern LCCs, such as flydubai with lie-flat bed business class, Mr Korfiatis instead emphasises flyadeal does not intend to move away from a pure LCC model even when it expands from its current domestic roots and expands into international services by the middle of this year.

CHART - While LCC seats are on the rise in the Middle East, domestic LCC seats fell slightly in 2017 as the sector focused more on international expansionSource: CAPA - Centre for Aviation and OAG

Established by Muscat National Development & Investment Company in 2016, Salam Air is a start up eager to support Oman's growing craving for air transport, which is expected to increase 40% by 2019. The airline handled more than 500,000 passengers in its first year of operations after commencing flights at the end of Jan-2017. Salam Air is slightly ahead of flyadeal in its evolution and already operates internationally, with its three aircraft serving two domestic destinations, four other cities in the Middle East and three Asia Pacific routes. The carrier has already announced plans to further destinations served in 2018, with regular flights to Baku, Dhaka, Kathmandu, Kuwait, Riyadh and Tbilisi.

Salam Air expects to break even after three years of operations "if everything goes according to plan," according to CEO Mohamed Ahmed. The carrier intends to add three or four aircraft p/a to expand its fleet to 20 aircraft by 2022. flydeal, meanwhile, is a little less patient - expecting to operate a fleet of 11 aircraft by the end of 2018 and a fleet of 50 aircraft by 2023 and has already issued an RFP to manufacturers to source around 50 new aircraft.