Air Arabia faces its toughest low cost stress test

CEO Adel Ali might have made Air Arabia the most resilient airline the UAE in 2016. But new-gen ultra low cost carriers want to give the airline a run for its money
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Air Arabia's four percent drop in profits in 2016 was the best figure posted among Middle East airlines that have disclosed earnings for the year so far.
Air Arabia's four percent drop in profits in 2016 was the best figure posted among Middle East airlines that have disclosed earnings for the year so far.
Adel Ali has led Air Arabia since it started operations 14 years ago. He previously served at British Airways.
Adel Ali has led Air Arabia since it started operations 14 years ago. He previously served at British Airways.

On the back of what its CEO calls “an interesting year,” Air Arabia, the UAE’s only publicly listed airline, recorded a four percent drop in net profits during 2016.

It’s a remarkably better result than any of the country’s other airlines that have announced their results, making Sharjah’s low cost carrier, arguably, the UAE’s best performing airline and certainly its most resilient. Adel Ali didn’t expect for things to turn out this way, but he’s not surprised either.

“Low cost tends to do better when times are tough, because of the base it operates from,” says Ali, who has led Air Arabia since 2003. “The first part of the year was very strong, up till the summer. It was the last quarter where we experienced the impact of market forces. Still, our earnings per share in 2015 was 11 fils (AED 0.11), and that remained unchanged this year. The board and I were pleased with the result,” he says.

 

“We weather the storm better because we don’t believe in keeping around fat to trim later.”

 

Excess capacity, threats of protectionism, as well as economic and political concerns have created a perfect storm of sorts in 2016 that has continued in 2017–Aviation Business’ cover story last month discussed the various challenges facing the industry in detail.

The Middle East has been hit particularly hard, says Ali. “Yes there is an overcapacity in the system. But that isn’t the only reason profits are down. The airline industry is a dollar based business, and the currencies in Europe, the UK and Russia have all fallen by double digits. The Egyptian pound, for instance, is now half what it used to be. Then there are low oil prices, which are just like blood pressure; high is bad, low is bad. And our region is still very much linked to the oil economy.”

When I met Ali after the company announced its annual results this year, he was in high spirits and settling into a new office. It might have seemed odd timing; most airlines in the region are looking for ways to cut costs; some have signalled retrenchment by laying off staff.

But Air Arabia is a different breed of carrier, says Ali. “Why hire staff you’re going to have let go later in the first place?” he says rhetorically.

Air Arabia’s offices, too, buck the trend by foregoing the swank other regional airlines have grown used to surrounding themselves with. “They are smaller compared to others in the business. They also cost less than an engine, in fact, but help keep the employees happy.”

At the end of the day, Air Arabia is low cost, says Ali. “We weather the storm better because we don’t believe in keeping around fat to trim later,” he says.

However, a new generation of airlines thretens to derail Air Arabia’s resilience.

“I don’t think anyone can say airfares aren’t cheap right now. You can fly to anywhere in the region for less than taking a taxi to Abu Dhabi from Sharjah.

 

Emirates’ CEO Tim Clark has warned of a “gathering storm” of low cost international carriers getting ready to erode the margins regional carriers have been able to earn. Last month, Omani low cost carrier, Salam Air, announced flights into the UAE, from Muscat, starting at a mere AED 122.

A battle for the skies is beginning to rage over Sharjah, as well as the Northern Emirate of Ras al Khaimah, as competition begins to step onto Air Arabia’s doorstep.

India’s biggest carrier, Indigo, last month, announced 14 additional flights from the UAE for as low as AED 245. Indian carriers have also been making inroads into Ras al Khaimah. Capacity growth in Dubai is set to plateau, the carrier’s chief commercial officer, Sanjay Kumar told Aviation Business. “Sharjah is where we will see our next big phase of growth” he says.

For a while in February, Air Arabia too offered flights for as low as AED 69 to certain destinations in India. But fares that low are an unsustainable strategy, says Ali. “Any airline offering rates that low just won’t last,” he says. “I don’t think anyone can say airfares aren’t cheap right now. You can fly to anywhere in the region for less than taking a taxi to Abu Dhabi from Sharjah. It’s good for the consumer, from a competition point of view, but it’s massively affected the industry’s bottom line,” he says.

Bilateral agreements between the UAE and India last year allowed for the opening of routes from airports in multiple cities in either country. It’s a lucrative proposition for all, he says. “We haven’t been able to grow seats into the country for eight years.” And as India tries to develop its airports, more Indian flights into the UAE, “is good for us, as well as the Indian airports,” he says.

Air Arabia’s biggest challenge has been restrictions by Indian authorities from it flying into India from its other hub in Ras Al Khaimah, on the grounds that its home base is in Sharjah.

“There can be any number of excuses made but the fact is that we are a UAE national carrier and the agreement was made between the governments of two countries,” says Ali, voicing his frustration. “And this hurts no one more than Indian customers. This situation hasn’t affected us operating from RAK to any other country, be it Saudi, or Pakistan.

“I hope they don’t continue seeing airports as an easy way to continue raising money anytime they need.

 

Ali expects talks between the civil aviation authorities in both countries might yet bear fruit. Hopefully common sense will prevail,” says Ali.

“Realistically we’d like for more Indian carriers to fly in. We are in the reciprocity business after all. And the more Indian carriers that fly in, the more seats we get into India,” he says. “An airline like ours brings a lot of hard cash that can help their industry.”

What has helped Air Arabia’s cause is a combination of fuel hedging and a single medium haul fleet type–the carrier flies an exclusive fleet of 46 A320s–that have allowed it to keep its utilisation up.

Another card up Ali’s sleeve has been investing in hubs in Morocco, Jordan, Egypt, as well as other parts of the region. A flexible business model and pan-Arab nomenclature allow it to “shift its business depending on where demand is coming from,” says Ali. “Our name is Air Arabia after all,” he says. “Just by adding Maroc or Jordan after our name allows us to fly as the flag carrier for that country.” And Air Arabia grew its business in Morocco by 20 percent last year, he says.

However, if it weren’t for an increase in taxes on passengers, “we might have made even more,” says Ali. Airports across the Middle East imposed an estimated $1.3 billion in taxes on airline passengers last year, according to IATA. The new charges are a result of governments under pressure because of the economic situation, the regional chief of the airline industry’s lobbying body, Muhammad Al Bakri, said in an interview. “But by increasing charges to make more revenues in the short run, they would really be hurting their own industry,” he says.
The flat fees levied per passenger affect all airlines indiscriminately, but add significant weight to already low fares charged by carriers such as Air Arabia.

“The European model of managing airports is not good in our opinion,” says Ali. “I hope they don’t continue seeing airports as an easy way to continue raising money anytime they need. Because if it becomes too expensive, demand will fall,” he says. “And we are competing here with the rest of the world.”

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