Gulf Growth 2.0
This time, it’s the region’s LCC’s sporting grand ambitions.
Some said it couldn’t last. It didn’t.
By around 2015, Gulf carrier hyper-expansion was on the wane. No more voracious plane buying. No more hyperactive network expansion. No more billions spent on infrastructure. One of the global airline industry’s most important storylines of the 2000s and early 2010s had reached its final chapter.
But today, another important storyline is developing on that same sandy Persian Gulf peninsula. Low-cost carriers — much more so now than their extravagant globe-trotting peers—are gearing up for a giant expansion of their own. While the likes of Emirates and Qatar Airways remain important players in the global airline industry, they’re no longer the ones making the biggest waves.
Instead, the waves are emanating from carriers like Air Arabia. Based at Sharjah’s airport just outside of Dubai, the LCC has fewer than 60 planes today. But at the Dubai Airshow in November, it gave Airbus an order for 120 aircraft, all from the A320 NEO family. More specifically, Air Arabia will take 73 A320 NEOs, 27 A321 NEOs, and 20 A321 XLRs.
What will it do with all those planes? Many will of course fly from Sharjah. Others will find missions with Air Arabia’s Moroccan joint venture, based in Casablanca, or its Egyptian joint venture, based in Alexandria. The fact is, the wider Middle East and North Africa region remains littered with vulnerable state-owned legacy carriers and outdated regulatory barriers ripe for removal. These realities alone should ensure plentiful growth prospects. Of course, Air Arabia’s bases are within reach of other markets too, including the Indian subcontinent, Europe, sub-Saharan Africa, Russia, Turkey, and Central Asia.
The XLR planes will only expand its geographic reach. Already, Air Arabia is using a handful of A321 LRs to reach cities like Kuala Lumpur in the Far East. The XLRs will have a widebody-like range of about eight-hours, suggesting new market opportunities as far afield as Johannesburg, Beijing, or Jakarta. It’s almost more useful to ask what markets will not be out of reach from the Middle East once XLRs arrive. It’s pretty much just markets in the Americas and Australasia.
Widebodies, when you can fill them, will still have superior economics to narrowbodies on longhaul routes. They’re also better for serving premium travelers. For low-cost carriers like Air Arabia though, intent on sticking to a single fleet type catering to price-sensitive fliers, the advent of longer-range NEO narrowbodies presents an enticing opportunity for growth.
As it happens, Gulf economies are no longer booming like they were when oil prices ran wild from 2000 to 2014, minus the relatively brief decline during the 2008-09 recession. That makes travelers in the region, including many business travelers, more likely to forego frills and fly a low-fare carrier. Unlike the region’s widebody-toting globetrotters moreover, the region’s LCCs have in general produced strong profit margins. Air Arabia’s operating margin last year was an incredible 20%.
Gulf governments are taking notice. Abu Dhabi, just as oil prices were taking off at the turn of the millennium, disengaged from Bahrain’s Gulf Air, launching its own airline instead. In some ways, this new airline — Etihad — was the most aggressive Gulf carrier of all, not just ordering legions of planes from Airbus and Boeing but also buying large ownership stakes in airlines abroad. Unfortunately, from the very time of its founding in 2003, Etihad was too aggressive for its own good. Losses swelled to monumental levels — nearly $5b in red ink for just the fiscal years covering early 2017 to early 2019. Rival U.S. airlines, in their campaign against Gulf carrier subsidies, claimed Etihad received some $18b in state handouts from 2004 to 2014.
And its overseas investment strategy? Let’s just say that getting involved with carriers like Alitalia, Air Berlin, and Jet Airways wasn’t the finest example of airline corporate strategy.
Etihad survives in slimmed-down form today, and with greatly diminished ambitions. But Abu Dhabi, far from disavowing the aviation sector as a means for economic development, has a new plan that happens to involve Etihad. But more interestingly, it also involves, yes, Air Arabia. Next quarter, the two carriers hope to launch a joint venture airline called Air Arabia Abu Dhabi. As the branding suggests, it will adopt Air Arabia’s low-cost business model, using A320-family aircraft. This represents another big growth opportunity for Air Arabia, and another justification for its big November NEO order.
Abu Dhabi clearly wants to develop its tourism sector as an economic diversification tactic. Its reliance on oil exports feels increasingly uncomfortable in a world pressured to reduce its use of carbon-heavy, climate-changing fossil fuels. But its plan doesn’t just involve Air Arabia. It involves a low-cost carrier from outside the region. A very successful low-cost carrier from outside the region.
Europe’s Wizz Air, fast earning a reputation for Ryanair-like profitability, will also come to Abu Dhabi. It will own 49% of a new NEO-flying, Wizz-branded LCC formed jointly with a government-backed entity. It plans to launch in the second half of this year. Neither Air Arabia nor Wizz Air have disclosed any routes they plan to fly. But Wizz said it’s initially targeting markets throughout eastern and western Europe, with the Indian subcontinent, Africa, and the Middle East itself on the long-run radar. Does Abu Dhabi need two low-cost carriers? It seems to be betting not just on increased tourism but also the prospects of becoming an alternative airport for Dubai as the main airport there nears full capacity. Dubai’s grand plans for World Central Airport, located roughly mid-way between Dubai and Abu Dhabi, are alas on hold.
Dubai itself of course, launched FlyDubai a decade ago. It too has bold expansion plans, supported by a 225-plane mega-order placed in 2017. Unhappily, the planes it ordered were B737 MAXs, meaning multi-year delays to its growth plan. It’s perhaps another reason that Abu Dhabi, Air Arabia, and Wizz Air see now as a good time to get started with their new ventures.
Abu Dhabi and Dubai aren’t alone in their LCC zeal. Ras Al Khaimah, also part of the UAE, once courted Air Arabia itself. That led to the carrier’s decision to base planes there in 2014, supporting service to about 10 destinations within the Middle East and to the Indian subcontinent. That’s been scaled back a lot however, and current schedules show Air Arabia nonstops from Ras Al Khaimah to just Egypt’s capital Cairo and three cities in Pakistan. Undeterred, the emirate has now found another LCC partner: India’s SpiceJet. In October, the airline announced plans to establish a new Ras al Khaimah-based airline sometime in 2020. Interestingly, it spoke of the project as a strategy to connect Europe with India via the UAE, something it can’t do (because of geography) from any Indian cities. This raises the important point that all the LCC activity transpiring in the Gulf right now has implications beyond just point-to-point traffic. LCCs there are competing for transfer traffic too.
Saudi Arabia, another oil-rich Gulf state eager to welcome more tourists, saw its state-owned airline Saudia launch a low-cost unit called Flyadeal in 2017. It’s flying just domestically for now, but that’s likely to change when the first of as many as 50 A320 NEOs start arriving next year. Flyadeal competes with Flynas, another Saudi LCC with even more NEOs on order. How many? No less than 90. And of those 90, 10 will be XLRs. So yeah, add Flynas to the list of bullish Gulf LCCs.
Oman, too, is getting in on the low-cost action with Salam Air, launched in 2017. And then there’s Kuwait, which allowed Jazeera Airways to challenge state-owned Kuwait Airways as early as 2004. But it was always extremely conservative when it came to growth. As late as 2017, it flew a mere seven A320s. But it added two more in 2018. Then four more in 2019. And this year, Jazeera plans to add another five, all A320 NEOs.
If that doesn’t capture its sudden taste for ambition, then look at the new service it’s offering to London Gatwick. It’s the first example of a low-fare airline offering nonstops between London and the Gulf, taking advantage of Kuwait’s geography and the NEO’s range capabilities. Jazeera is simultaneously jumping headlong into the Indian subcontinent.
According to Air Arabia, LCCs already accounted for 17% of all 2018 seat capacity in the Middle East, up from just 8% in 2009. That figure now appears set to jump even higher — perhaps significantly higher — as carriers like Air Arabia make blockbuster plane orders reminiscent (in volume terms anyway) of the Gulf Big Three ordering of an earlier era. Foreign LCCs like Wizz and Spice will provide additional fuel for the fire. For one set of Gulf carriers, the moment has passed. For another, the moment is just arriving.
Largest Airlines of the Middle East and North Africa
|Airline||12 Months Seats (through Feb.)||Y/Y|
|10||Royal Air Maroc||10,754,478||4%|
|14||Air India/AI Express||8,542,434||14%|
|25||Middle East Airlines||4,057,312||3%|
Ranked by seats scheduled for the 12 months through February
- Big Three Gulf carriers no longer growing much, if at all
- Turkish Airlines the biggest Middle Eastern player from outside the region
- Ryanair not flying to markets like Israel, Jordan, and Lebanon from points throughout Europe