Air Arabia is ready to grow

Air Arabia is enlarging its brand around the Middle East and has launched a third hub in Egypt.

The region's first budget airline stands to profit from the downturn as passengers seek less expensive flights. And its newer aircraft leave some state-owned rivals standing. Ivan Gale reports Air Arabia's third hub in Egypt signals an important new phase for the region's first budget airline as it expands from its Sharjah and Casablanca bases. As the growth out of its Sharjah hub is expected to slow, the airline is trying to use its wealth of experience, commercial success and also funds from its 2007 initial public offering as a springboard to expand around the region. It is franchising its brand around the Middle East, much as some of the great budget carriers worldwide have done.

Last week it launched Air Arabia Egypt, a joint venture with Travco Group, that will fly to destinations in Europe, the Middle East and Africa. Among the world's biggest budget airlines, Air Asia has eight hubs in South East Asia, while Ryanair of Ireland has branched out to 34 hubs in Europe to operate its 200 aircraft. As low-cost carriers, these airlines use the point-to-point model, or carrying passengers on one leg only. This allows them to maintain just one type of aircraft, as opposed to the big full-service airlines like Lufthansa, British Airways and Emirates Airline, which use a hub-and-spoke model to feed regional traffic into their hub and then carry them on higher-margin, long-haul flights to Asia and Europe.

Even though Air Arabia launched its Sharjah base six years ago, the Middle East is still under-represented by budget airlines, which account for about 7 per cent of regional air travel, according to research by Nomura Securities. This compares with about 25 per cent in Europe, Asia and North America. With hundreds of millions of potential customers in the Middle East, it is surprising there has not been more interest in launching budget airlines here for quick regional flights.

Short flights are relatively easy affairs, and passengers are generally unfussy if they only have to sit for a few hours. That means price is king, especially as the downturn has forced companies and individuals to fly less in business class and more in economy. "The economic slowdown classically favours the low-cost model," said Scott Darling, an analyst at Nomura Securities in Dubai. This would suggest that the first airline to branch out through the region and provide a punctual, low-cost and hassle-free flying experience stands to be a big winner.

To date, that airline would seem to be Air Arabia. It flies 24 Airbus A320 aircraft, with most based in Sharjah and a few of its new deliveries being used out of its second hub in Casablanca, which launched in May. In the coming years, however, Adel Ali, the group chief executive of Air Arabia, believes each of its three hubs could accommodate 25 aircraft each, and he is not stopping there. "If our plans for all the hubs that we have in mind in the next five years come up and are all approved, then Air Arabia will require up to 100 airplanes," Mr Ali said recently.

Air Arabia has a young fleet and this is one of the biggest things that differentiate it from its competition. By contrast, with the exception of some of the Gulf's modern and luxurious long-haul airlines, many of the state-owned carriers in the region have dismal offerings. In expressing his optimism with the Casablanca hub, Mr Ali has said his competition consists of other low-cost carriers cramming passengers into old aircraft or conventional airlines that charge too much.

This focus on new markets has meant that Air Arabia has slowed its pace of growth at its Sharjah operations, although he has said there is still enough demand to double its focus on some routes. But Air Arabia's expansion is by no means guaranteed and its plan to pioneer budget travel in emerging countries could see it face roadblocks. Last year, it formed a partnership with Yeti Airlines in Nepal to launch a budget subsidiary, flyyeti.com, but pulled out after only a few months, citing political instability and operational issues. With its success, Air Arabia will find itself increasingly competing with other lower cost players. In terms of traffic between India and the UAE, the budget carrier Air India Express is the second largest airline by weekly seat capacity, after Emirates.

Air Arabia is third, offering 13.1 per cent of total capacity, or 29,500 seats a week, Innovata says. Jazeera Airways also has grander plans beyond simply operating out of Kuwait City. It plans to open another hub in the Middle East and will announce its pick this year. Even flydubai, despite its name, has not explicitly ruled out more hubs, saying only that it is too early to discuss such matters.

The Dubai start-up, which launched in June, will also be a worthy competitor for travel to the Sharjah and Dubai greater metropolitan area, offering more convenience to Dubai residents because it flies out of Dubai International Airport instead of Sharjah, while also offering a comfortable, but low-cost product. Within a few years, flydubai will grow from its four aircraft to 50. When that happens, it is very likely that it will compete directly with Air Arabia on many of its main routes in the Middle East and Indian subcontinent.

But by that time, Air Arabia should be reaping the fruits of its current expansion efforts and recording growth at some of the Middle East's up-and-coming airports. [e-mail]