The Middle East's low-cost carriers (LCCs) – eight of them established within the past six years – have generally held close to their expansion plans despite difficult conditions in 2008. This indicates a strong sign of future growth, according to the Global LCC Outlook Report 2009 by Centre for Asia Pacific Aviation (Capa).

Covering more than 130 LCCs from around the world, the report revealed that the Middle East carriers maintained solid growth late into the decade, despite the global recession.

"Low-cost leadership and modern aircraft will help shape the outcome of competition, and ensure that low fares sustain medium-term growth," said Peter Harbison, Executive Chairman, Capa. He said the early success and ambitions of these airlines in a large and rapidly growing regional market and strategic inter-continental location points to "significant future competition, both with established full service carriers (FSCs) and among the LCCs themselves".

Globally, meanwhile, low cost airline movement has undergone a fundamental change of direction in the past two years, but as the Capa study suggests, the biggest shifts in the model are coming. In most of the more likely scenarios, "yield will become increasingly attractive as a refuge for all, but the lowest cost operators," said Harbison.

"High fuel prices – the main threat – are the most likely catalyst of change in the short term. With the unlikely levels already experienced despite the global financial crisis, speculative activity is tipped to push prices even higher as the economy improves. Surges in price can be highly destabilising and one of the few risk management options that most low-cost operators have to guard against this is to search for higher yields," he said.

"This and other uncontrollable externalities – both in cost and demand – will relentlessly force most low-cost airlines towards reconstituting the network model, domestically and internationally," Harbison added.

Market performance

The Middle East has seen a strong drive for growth by FSCs such as Emirates, Qatar Airways and Etihad Airways over the past decade, stated the Capa report, adding that regional growth has been "healthy". However, the focus of FSCs has been on services into Europe, Asia, and North America, developing the Middle East as a hub for inter-continental travel, it added. LCCs have begun to play though, according to the report, evident in regional and African traffic, and introducing services between the Middle East, North Africa and Europe.

"They still only account for eight per cent of capacity in 2009, with prospects likely to be shaped by short- and medium-haul services compared with the long-haul orientation of the FSCs," the report pointed out.

Air Arabia

Having commenced operations in 2003, the Dubai Financial Market-listed Air Arabia – operating across the Middle East, North Africa, the Indian subcontinent and Central Asia – maintained profit growth in 2008 despite the significant increase in fuel costs and consequent decline in yield. The carrier achieved a 32 per cent year-on-year profit growth in the first quarter of 2009, based on 26 per cent passenger growth and an 81 per cent load factor, said the study.

The carrier has also recorded strong growth, up from five destinations, three aircraft and 550,000 passengers in 2003 to 44 destinations, 16 new Airbus aircraft and almost 3.6 million passengers in 2008.

And its regional growth aspirations are evident in the recent establishment of joint ventures such as Air Arabia Maroc this year, and the launch of its third hub, Air Arabia Egypt, due to take off in March 2010.

The airline's chief executive, Adel Ali, recently said that Air Arabia expects its third-quarter earnings to be "satisfactory", but does not see yields improving until the beginning of the first quarter of 2010.

Air Arabia posted a 10 per cent rise in second-quarter 2009 net profit as excess capacity diluted yields.

The airline is facing growing competition from other regional budget carriers such as Dubai-owned flydubai and Kuwait's Jazeera Airways, besides from bigger carriers struggling to boost global passenger travel.

Flydubai

Dubai's first budget carrier, flydubai, which started operations in June with two Boeing 737-800 aircraft and orders for another 48, yesterday said it would add a ninth destination to its route network by launching flights to Baku, the capital of Azerbaijan, from November 20.

The carrier has been on a rapid expansion plan. It had previously stated plans to concentrate on 12 undisclosed "popular, high demand destinations" in the six GCC nations, before expanding to other markets, according to the Capa report, with an aim to capitalise on more than two billion people living within five hours flight time from Dubai, serving 70 destinations by 2014.

Jazeera Airways

Kuwait Stock Exchange-listed Jazeera Airways, 30 per cent funded by Boodai Group and 70 per cent by public listing, is perhaps the only LLC in the region that offers premium seats.

It currently flies to 29 destinations in 16 countries in the Middle East, North Africa, South Asia and Europe (Cyprus and Turkey) with a fleet of 10 A320 aircraft, with 10 more on order, Jazeera Airways also has a strong focus on the sale of ancillary products such as hotels and rental cars, as per the Capa study.

In a short span, Jazeera Airways has managed to replace Kuwait Airways as the largest operator from Kuwait Airport, Capa said. It added that despite high fuel prices, Jazeera Airways was profitable in 2008, having reduced costs per passenger and increased yield.

"This performance underlies an expectation of 2.5 million passengers in 2009 and the confidence to continue with plans to substantially expand capacity with a target of 59 destinations by 2014," the report said.

Other LCCs in the region

Saudi Arabia's two budget carriers, Nas Air and Sama Airlines – both established in 2007 – are well on their growth path. Nas Air, formed by National Aviation Services, currently operates to 11 domestic and five international destinations but is in the middle of an expansion programme intended to lift destination network to 20 and weekly services to more than 350 by the end of 2009.

Sama Airlines, the second LCC established in the kingdom, is a short-haul carrier serving nine domestic destinations and seven elsewhere in the Middle East.

Furthermore, Bahrain Air, a joint venture between Saudi and Bahraini investors, is aiming to launch an initial public offering (IPO) in 2010, as per the Capa report. While promoted as a low-cost, point-to-point operation, it offers a small number of premium seats on its six A320 and A319 aircraft.

The other budget carriers in the region include Yemen-based Felix Airways, currently serving seven domestic destinations with operations to 15 cities in the region, and EgyptAir Express relying on sales through EgyptAir.

Future outlook

The Middle East has established itself as a significant aviation hub, and is set to extend this role, according to the Capa study, which stated that LCCs may complement FSCs in this respect LCCs can be expected to be better placed to weather any resulting downturns than their FSC counterparts, it added.

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