Adel Ali pioneered the low-cost model in the Middle East when he set up Sharjah-based Air Arabia in 2003. Now he is working to expand the airline's empire further afield
Tie your camel, then place your trust. So goes the ancient wisdom that helps reconcile the concept of insurance within the Islamic faith, although Air Arabia chief executive Adel Ali does not feel obliged to wrestle over such philosophical points. Air Arabia does not sell alcohol on its flights - its Sharjah home is a dry emirate - but selling insurance as an ancillary product is fair game. "Insurance will never change destiny," Ali says. This may be debatable at cogitative level, but it makes a difference to the unambiguous black-and-white of Air Arabia's accounts- not that its profit line needs much assistance.
Created through a decree from the emirate of Sharjah, the Middle East's first low-cost, low-fare airline emerged in 2003. Air Arabia broke even in its first year, and has been profitable since, broadening its reach in the Arab world to a Moroccan operation in Casablanca last year and setting up a similar division in Egypt this year. It started with a pair of Airbus A320s, but intends to grow this to 50 by 2015.
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©All photos Etienne de Malglaive |
"The fact that we decided not to name the airline after a city or a country gave us the opportunity to expand," says Ali. But the real driver, he believes, has been a fundamental shift in access in the region and within India - the subcontinent accounts for 35% of Air Arabia's 4 million passengers. "I think there was very little hope for so many countries opening up and making the rights for air travel normal," says Ali. "It's given us much more than we could have asked for."
Middle Eastern services previously focused on fifth- and sixth-freedom operations, he says, with carriers more interested in the transit market in the Gulf than frequent services within the region. Ali says there was "massive" land transportation between the United Arab Emirates and areas such as the Levant.
"Airlines weren't advertising their prices to customers," he adds. "Their focus was on brand, it was all to do with how the aircraft looked, how the cabin crew looked. Pricing wasn't a part of it. If you compare that with today, there's a box for how much it costs to fly. That's the change we've brought to the industry. We've brought frequencies. You don't have to wait to travel, or travel in the middle of the night."
Air Arabia has shifted the traveller demographic, he claims. Those with lower incomes have become frequent flyers. Some 50% of the carrier's clientele are leisure passengers. Thirty percent travel on business - the carrier appeals to freelance workers and those on day trips for small-scale purchases - while the remaining 20% are sourced from labour markets. Sharjah's labour traffic is relatively low, and Ali prefers to tag the company as a "family airline", a carrier that enables relatives to travel to attend celebrations and gatherings, rather than one which is labour-driven.
| The Long Shot |
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| Air Arabia's neighbouring carrier, the mighty Emirates, has a business structure that capitalises on Dubai's geographic and operational advantages and allows the company essentially to conduct itself as a long-haul, low-cost airline. But adapting the short-haul budget model to the long-haul market is not simply a matter of deploying larger aircraft to fly a greater distance, and Adel Ali is reluctant to follow those who have tried to prove the concept can work. "In our businesses, it's very tempting to do everything," he says. "I think we have a long way to go with the three hubs we have." Four decades of budget airline travel have claimed several long-haul casualties, from the Laker Skytrain to Oasis Hong Kong Airlines, but left other specialist short-haul companies - Ryanair and Norwegian among them - undeterred. AirAsia chief Tony Fernandes introduced the low-cost, long-haul spin-off AirAsia X on the Kuala Lumpur-London Stansted route in March last year. "I think Tony has been brave," says Ali. "I hope it works out for him. I think a lot of current low-cost carriers will look [at their example]." But Ali, himself, is sceptical: "I feel, as soon as you do that, the benefit of a single fleet goes away. You get into a more complex long-haul business," he says. But Ali quickly clarifies: "It's unfair to say [long-haul won't work]. It's certainly different to the short-haul low-cost carrier. I have a feeling, in the long term, the economy cabin of conventional [aircraft] will become low cost. What's happening with AirAsia X could be a precedent to that." |
Irrespective of location, some of the rules of budget airlines are immovable. Kill the costs. Sweat the assets. Air Arabia's fleet is single-type; more conventional wisdom. Aided by Sharjah Airport's 24-hour operation, it works its 21 A320s for 14 hours per day, a rate that it claims far exceeds that of its competitors.
"It gives us much better utilisation. We don't have to park a lot of aircraft at certain times, and that gives us great flexibility," says Ali. "Sharjah has a much shorter taxi-way. It saves fuel, and gives a quicker turnaround time. You have to focus not just on cutting costs but utilising what you have; a lot of it is efficiency. Sometimes we wonder if Europe closes during the night. If you want to use that time valuably, you can't."
Certain carriers in the tax-liberal United Arab Emirates have drawn fire from European counterparts suspicious that they unfairly benefit from state assistance, either through favourable charges or cheap fuel. Air Arabia, privatised three years ago, is still 45%-owned by the Sharjah government. "Being successful doesn't mean everybody likes you," says Ali, pointing out that the airline pays international rates for its crews and engineers. "We've not been accused, but I think there have been assumptions. We're a private business and not subsidised at all. We had a plan to grow this company and make it a proper business."
Ali describes fuel-hedging as a "double-edged sword". Aggressive tendering with suppliers - such as BP, its main fuel provider in Sharjah - keeps expenditure in check. "We negotiate hard with every airport we go into, but that's no different from any airline. If you look at how much we spend, we pay the best market rate in every market we get."
Ducking global distribution charges through online booking "makes a big difference", says Ali, especially because banks are "giving away credit cards for nothing". But he admits the preference for call centres means online reservation still accounts only for 35% of business - although the figure in Morocco, he says, is much higher. "I think people just want somebody to talk to," he says. "They want to be confident it's happened."
But cost-cutting has its limits. Ali acknowledges Ryanair's success but is not prepared to go to the same extremes to remove costs, arguing that stripping away every comfort has little overall effect on expenditure. Air Arabia is fitting simple in-flight entertainment to its fleet - it "keeps kids quiet", Ali says, and with volume advertising it "tends to pay for itself".
"[Ryanair] must do a lot of good things. It would be wrong of me to say it's right or wrong," he says. "I'd rather focus on different items. We pride ourselves on offering quality, the best economy-class cabin. Quality is my problem, not the customers' problem. People are interested in value for money. We'd never cut costs to [reduce] service quality."
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Ancillary revenue was "not our first choice" when the airline started, says Ali, but the income stream has "become more important". Air Arabia has no in-house catering, although it holds shares in a catering venture. Its Internet site carries a 'Sky Café' allowing travellers to select their choice from a menu before their flight. Now mobile phones are among new revenue sources under consideration, says Ali. "Sometimes the best ideas come from our passengers," he adds. "Lots of people had an interest in selecting seats. One person said: 'Why not charge a premium for selection?' We created a system, and it makes us a reasonable amount of money."
Air Arabia serves 46 cities from Sharjah, from where it concentrates on Middle Eastern, Indian and northeast African routes. "There's not an airport every hundred miles. We're always going to get that limitation," says Ali.
The desire to expand beyond the airline's self-imposed 4.5-hour flight radius and penetrate other markets spurred the formation of Air Arabia Maroc in which the group has a 29% share. Using three of Air Arabia's 21 A320s, Maroc serves a dozen European destinations from Casablanca - a hybrid network of primary hubs, Paris Charles de Gaulle and Barcelona El Prat among them, and secondary airports such as Brussels Charleroi and Istanbul Sabiha Gökçen - and expansion to Marrakech is a possibility.
Establishing a network out of Morocco has been relatively painless, Ali admits, owing to the country's pioneering agreement with the European Union, signed in late 2006, which removed all capacity restrictions. As a result, Air Arabia Maroc's development has been "very satisfactory", he says, and its operational and financial performance has "exceeded expectations".
Less of a pushover will be the African market into which Ali intends the Maroc division to be the springboard. "We're discussing traffic rights into Africa. Africa is going to be a pretty big [operation]," he says. While customer interest is encouraging, the pace of bilateral negotiations is less so, and Ali adds that competing carriers will not willingly surrender ground on lucrative African routes. "We are working closely with the authorities in Morocco. It takes time," he says. "That's not to say it's to my liking, but I have to be patient. Africa would be like Sharjah, six years ago, when we thought we'd never get into India."
| Banking's Loss |
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| "I've been an aviation person all my life," says Adel Ali. "I studied economics. I probably should have gone into a bank." Instead, the graduate of the UK's University of Manchester returned to his home state of Bahrain in the early 1980s to find himself heading British Airways' prestigious Concorde operations in the Gulf state. His relationship with the supersonic aircraft marked the beginning of a 20-year career with BA, during which he occupied several senior regional posts and rose to become its general manager for the Middle East and North Africa. Ali joined Gulf Air in 2001, as a vice-president, but left to set up Air Arabia after 18 months. Secretive about his age - "late 40s" is all he's willing to concede - Ali describes himself as "quite a sociable person". Formerly a keen squash player, Ali has lately turned to long walks for leisure, and he professes to love the creative opportunities of cooking. "BBC Lifestyle," he grins. "It's a good channel." |
Air Arabia is not marketing connections across its three divisions. "It's our job to make the network and frequencies sufficient," says Ali. "If customers decide to connect and pay the fees, it would be inappropriate to turn back their business. In every low-cost carrier today, the customer is smart enough to make connections. Just tell people what airports you go to and they'll sort it out themselves."
While Air Arabia has joint ventures in training, travel and airport services, Ali appears content to let the passenger airline operation stand alone. Saudi Arabia's National Air Services toyed with a possible easyJet franchise before launching NAS Air, but Ali says he has "never been fond" of such arrangements. "No-one will give you their name for free," he points out. "They don't tell you their secrets. If they do, you don't need them."
He is unconvinced by codeshares, dismissing them as "things of the past". Such a partnership "isn't going to take off" with a conventional airline, he says, and Air Arabia would only entertain a tie-up if it wasn't "just a sexy marketing thing". But he is more open to consolidation. While Jazeera Airways has declared its intention to find a partner this year, Ali believes the market has yet to mature. Air Arabia's passenger numbers rose 14% in 2009, but budget airline penetration on intra-Middle East routes, by number of seats, was still only around 8%. "I think [consolidation] will happen at some stage. If you're not doing well, you have to help each other," Ali says.
Middle Eastern passengers may be catching the low-cost bug, but airports are not. "Some airports charge more just to deter you because you're low-cost," says Ali, adding that few airports on Air Arabia's network provide dedicated low-cost services. "I think it's overdue. You get jammed into an international airport, paying for five-star facilities you don't want. You can keep prestige for whoever wants it. But I can't believe all the people that have [moved to budget services] east and west of the Middle East are wrong. Why spend 10 or 20 billion in concrete at an airport when you can do it with a couple of hundred million?"
Not everything Air Arabia has touched has crystallised. Its Nepalese joint carrier FlyYeti lasted only a few months before political uncertainty left it in limbo. But Ali says being first off the mark means risking being first to fall headlong into the pit-trap. "I think the hardest lesson is to choose the right partner," says Ali. "Don't talk about things until they're done. And get it written down on paper." In other words, first tie your camel.
Middle East carriers: still on a growth path, despite the crisis.
Source: Airline Business
