WORLD AVIATIONYearbook 2013middle east

2 2 aiRliNe leadeR | MAR-APR 2012

PROFILES

middle east tOP 10 aiRliNesSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

middle east tOP 10 aiRPORtsSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Middle EastOutlookEvEn for a rEgion as fast

dEvEloping as thE MiddlE East, few years could match the changes wrought during 2012. The year saw the most influential

carriers in the region engage with the rest of the airline industry in a way that has profound implications for global aviation. 2013 will be the year that this dramatic reshaping begins to make its effects felt on the global competitive landscape ...

middle east caPacity seats PeR weekSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

Emirates

Saudia

Flydubai

Air Arabia

Qatar Airways

Etihad Airlines

Oman Air

Gulf Air

Others

21.0%

12.2%

9.9%

5.8%3.9%2.9%2.6%

2.5%

39.2%

RaNkiNg caRRieR Name seats

1 emirates 138146

2 saudi arabian airlines 88275

3 Qatar airways 65680

4 etihad airways 38904

5 Flydubai 26073

6 Oman air 18768

7 air arabia 17982

8 gulf air 17136

9 el al israel airlines 16796

10 iran air 14941

RaNkiNg caRRieR Name seats

1 dubai international airport 1,639,176

2 doha international airport 604,630

3 Jeddah king abdulaziz international airport 568,138

4 Riyadh king khaled international airport 466,557

5 abu dhabi international airport 394,258

6 tel aviv-yafo Ben gurion international airport 265,145

7 kuwait international airport 241,591

8 muscat seeb international airport 211,896

9 Bahrain international airport 208,001

10 cairo international airport 176,202

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middle east FleetSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

middle east PROJected deliveRy dates FOR aiRcRaFt ON ORdeRSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

middle east Fleet BReakdOwN FOR aiRcRaFt iN seRviceSOURCE: CAPA - CENTRE FOR AVIATION | WEEk STARTINg 31-MAR-2013

middle east mOst POPulaR aiRcRaFt tyPes iN seRviceSOURCE: CAPA - CENTRE FOR AVIATION

middle east caPacity seats shaRe By alliaNceSOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | WEEk STARTINg 31-MAR-2013

iata middle east PRemium tRaFFic: 2009-2013SOURCE: CAPA - CENTRE FOR AVIATION AND IATA

Widebody Jet

Narrowbody Jet

Turboprop

Military Transport

Small CommercialTurboprop

Regional Jet

Piston EngineAircraft

47.7%

35.0%

6.5%

5.7%3.5%

1.6%0.1%

A320

777

A300

A330

737

Others

747

A340

21.8%

17.8%

9.3%7.3%

7.3%

4.3%

4.0%

28.1%

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12-20

-10

0

10

20

30

40

Prem

ium

Tra

ffic

Gro

wth

%Unaligned

SkyTeam

oneworld (affiliate)

oneworld

Star

62.6%16.0%

14.2%

7.2%0.0%

1,250

1,000

750

500

250

0

1,1796

45

699

In service In storage On order

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

0

50

100

150

A320 A330 A350 A380 737

787 777 ERJ170 CRJ

4

... Outside of this competitive re-ordering, the region continues to produce outstanding levels of growth. During 2012, Middle Eastern airlines lead growth rates for international passenger and cargo traffic. With the global economy slowly warming up again, particularly in advanced economies, the rest of the world will catch up, although the region is still expected to lead growth in 2013.

the Big three: the super connectors take sides

A generation ago, travellers to Europe swapped aircraft in London, Paris, Frankfurt or Amsterdam. Travellers to Asia connected in Hong Kong, Singapore or Bangkok. They flew typically with Lufthansa, British Airways, Cathay Pacific and Singapore Airlines. Increasingly though, these traditional carriers and their hubs have been superseded by Dubai, Doha and Abu Dhabi and their home carriers: Emirates, Qatar Airways and Etihad Airways.

The rapidity of the shift has been breathtaking. In the past five years, London Heathrow, Paris Charles de Gaulle, Frankfurt and Amsterdam added a total of 11.7 million new passengers between them, growth of just 5%. In Asia-Pacific, Hong Kong, Singapore and Bangkok Suvarnabhumi have added 34.4 million passengers over the same period, an increase of 27%.

In comparison, the three upstart Middle East hubs have added 35 million passengers, an increase of just under 60%. In 2012, the three Middle East hub airports handled 93 million passengers. In 2013, if their traffic projections are correct, the three hubs will handle a combined 110 million.

Dubai, the largest hub in the region and almost wholly dedicated to international traffic, has seen its traffic increase from 34.5 million in 2008 to 57.7 million in 2012. The airport is now the third largest hub in the world by international passengers, and plans to eclipse London Heathrow as the largest international airport within five years.

The transformation is being wrought by three state-owned but commercially focused airlines. Emirates, Qatar Airways and Etihad Airways are not only there to funnel traffic into and

lcc caPacity shaRe (%) OF tOtal seats: 2001-2013SOURCE: CAPA - CENTRE FOR AVIATION WITh DATA PROVIDED by OAg

middle east tRaFFic: 2008-2013SOURCE: CAPA - CENTRE FOR AVIATION AND IATA

Increasingly though, these traditional carriers and their hubs have been superseded by Dubai, Doha and Abu Dhabi and their home carriers: Emirates, Qatar Airways and Etihad Airways.

0.1%0.9%

1.9%

3.5%

5.6%

7.4%8.3%

11.6% 11.3%

13.3%

15.3%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Mar

2013

0

2

4

6

8

10

12

14

16

18

Jan-09Jul-08Jan-08 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-130

5

10

15

20

25

30

Reve

nue

Pass

enge

r Ki

lom

etre

s %

5

of the Middle Eastern hub carriers. This advantage means that these airlines have been able to tap into the burgeoning global travel growth, capturing an ever-increasing share of international long-haul traffic, particularly the important business and premium market segments.

Like the shifting centre of gravity of global economic power, the balance of global aviation is gradually moving east. For years, the traditional hub carriers, as well as some governments, fought a vocal battle to stem the shift and the threat of the Middle Eastern sixth freedom carriers. However, 2012 saw them move away from antagonism and more towards embracing their opponents.

In doing so, each of the three Middle Eastern carriers picked a different strategy. Emirates chose to enter a partnership with Qantas, in a deal that will see the Australian carrier shift its European transit hub from Singapore to Dubai, ending a 17-year strategic codesharing agreement with British Airways, as well as another codeshare deal with Cathay Pacific. Emirates is also eager to enter a tie-up with American Airlines, although a partnership may depend on the outcome of the carrier’s merger with US Airways.

During 2012, Etihad Airways also entered a major partnership, this time with Air France-KLM. Less than a month after the Emirates-Qantas deal, Etihad Airways and the Franco-Dutch airline group sealed a joint codeshare deal covering destinations in Europe, the Middle East, Asia and Australia. As a part of the deal, Air France also entered a new codeshare agreement with airberlin, Europe’s through their hubs, they are also there to make money. The airlines, and

the forward and far thinking governments behind them, have married geographic advantage, modern and integrated infrastructure and tourism support from their home governments along with ambitious expansion plans.

Around 80% of the world’s population lies within 10 hours flight of Dubai. This puts the fast growing economies of China, Southeast Asia, Africa and India, along with their rapidly expanding and increasingly travel-inclined middle classes, within the extended catchment areas

euROPeaN, asiaN aNd middle east huB aiRPORt tRaFFic: 2008-2012 SOURCE: CAPA – CENTRE FOR AVIATION & AIRPORT REPORTS

middle east glOBal PRemium tRaFFic maRket shaRe: aPR-2008 tO aug-2012 SOURCE: IATA AND CAPA – CENTRE FOR AVIATION

The transformation is being wrought by three state-owned but commercially focused airlines.

2008 2009 2010 2011 20120

50

100

150

200

250

300

Middle East hubs Asia Pacific hubs European hubs

15%

14%

13%

12%

11%

10%

9%

8%

7%

6%

Premium traffic share 12 month moving average

110millio

nprojected passenger through-put for abu dhabi, dubai and doha in 2013

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sixth largest airline, in which Etihad Airways holds a 29.21% stake.

Since its launch in 2004, Etihad Airways has built an extended network of codeshares, investments and strategic agreements, developing what it terms the world’s first “equity alliance”. Aside from airberlin, it controls shares in Air Seychelles, Virgin Australia and Aer Lingus.

The relationships have allowed Etihad Airways to dramatically expand its global coverage. The airline now boasts a total of 248 codeshare destinations, compared to just 86 destinations it serves with its own metal. The equity alliance looks set to expand in 2013, with Etihad interested in a 24% stake in Jet Airways, an investment estimated at around USD300 million. The carrier could take its shareholding up to 49% – the limit allowed under Indian regulations – at a later date.

Qatar Airways has chosen a third route, announcing that it will join the oneworld alliance in either late 2013 or early 2014. The airline will join Qantas, Cathay Pacific and British Airways in the grouping. After Emirates, Qatar Airways was the second largest full-service airline in the world not involved in one of the three major global airline alliances. The carrier’s move into the alliance will allow oneworld to redirect much of its east-west traffic through Qatar Airways’ Doha hub, providing superior routing alternatives across many hundreds of city pairs.

the Middle East lCCs

2013 will see the 11th year of the low-cost model in the Middle East. In 2012, LCCs in the Middle East reached a milestone 10% of overall regional capacity. Even with the rapid growth the LCC model remains under-developed in the region. In Europe, North America and even in developing areas such as Southeast Asia and India, low-cost carriers

2004 2005 2006 2007 2008 2009 2010 2011 2012

0

2

4

6

8

10

12

14

16million

Intra-Middle East To/from Middle East

middle east lcc caPacity: 2004-2012 SOURCE: CAPA – CENTRE FOR AVIATION & OAg

BOeiNg 737Ng RaNge chaRt SOURCE: bOEINg

account for a far greater proportion of traffic. A number of bankruptcies have seen smaller, privately-owned LCCs

fall by the wayside, with Sama and most recently Bahrain Air declaring bankruptcy. There are only four LCCs left in the Middle East regional market, down from six a few years ago. However, the surviving carriers represent the fastest growing segment in a region characterised by high levels of growth. If anything, the impact that LCCs have in the market belies their status.

Most LCCs in the Middle East deploy the majority of their capacity to destinations within the region. This is perhaps a surprising statistic given the fact that there are two billion people within 4.5 hours flying time of Dubai. However, the region’s fast growing population and developing tourism markets, as well as the number of underdeveloped markets, have ensured the strong growth.

There are only four LCCs left in the Middle East regional market, down from six a few years ago.

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of SkyTeam during the year. The ascension of these airlines fills a long-standing Middle East black spot in the alliance’s global network coverage. For the airlines, it holds the promise of boosting yields by increasing their attractiveness to foreign travellers and business passengers.

growth is likely to continue unabated

Growth continues in the Middle East at a rate that has confounded the critics of airlines in the region. According to IATA, airlines in the Middle East contributed almost a third of the growth in international passenger travel in 2012. The region also led the world in terms of freight growth, defying the global contraction in cargo traffic.

There are still areas that carriers in the region can improve. Compared to developed markets such as North America and Europe, load factors, particularly on inter-regional flights remain low. Secondary airports, particularly ones favourable to the low-cost carrier models, are a rarity in the region, stifling the potential for growth in some of the larger domestic markets. Government ownership and government protectionism remains high in the Middle East, with state-owned carriers controlling all of the largest markets.

Despite the unparalleled levels of aircraft on order in the region, passenger and freight traffic levels in the Middle East in 2012 grew ahead of capacity. The trend indicates that the upward trajectory of the region is sustainable and part of a re-ordering of the way the world travels.

There are a number of opportunities for further development in 2013. Even with their dwindling numbers, the Middle East LCCs are still entering new markets, taking more aircraft into their fleet and offering their customers an enhanced and increasingly sophisticated array of product and services.

developing markets and ailing airlines, the rest of the Middle East

Outside of the Gulf sixth freedom carriers and the LCCs, airlines in the Middle East suffer a variety of mixed fortunes. The region has few listed airlines, but those that are – such as Royal Jordanian – have generally been profitable. The smaller state-owned carriers have typically struggled with heavy losses, which were only exacerbated due to the disruption of the Arab Spring period. These carriers are typically over staffed, under financed and saddled with ageing fleets and inefficient business structures. The results are losses that would be unsustainable without state support.

However, there is hope yet for the region’s smaller state-owned carriers. Efforts are under way at perennial loss-makers of the region to transform them into commercially viable airlines. For some, such as Kuwait Airways and Saudia, this is taking place via thorough modernisations ahead of planned privatisations, although political pressures have ensured that the process is a drawn-out one. Others, including Gulf Air, Iraqi Airways and Oman Air, are undergoing bottom-up restructurings, often in the face of politically and socially painful choices.

The Middle East became increasingly connected to the alliance network in 2012. Apart from Qatar Airways’ impending membership of oneworld, Saudia and Middle East Airlines both became members

Compared to developed markets such as North America and Europe, load factors, particularly on inter-regional flights remain low.

The trend indicates that the upward trajectory of the region is sustainable and part of a re-ordering of the way the world travels.

shaping an informed discussion through knowledge sharing

At CAPA, we don’t just ‘do’ conferences. We live and breathe the content. It’s our industry, our expertise, our constant focus.

So at CAPA Knowledge Events, you’ll hear from airline CEOs, CFOs and other industry thought leaders. CAPA Knowledge Events offer great

content and networking opportunities with the people that truly shape the direction of our industry.

We shape an informed discussion based on the latest research from our global team.

CAPA’s 2013 knowledge forums include:

Sydney, 7-9 August 2013

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Dublin, 11-12 April 2013

A CEO Gathering

Seoul, Korea, 4-5 September 2013

Amsterdam, 25/26 November

Our CAPAbilities – helping you keep yourfinger on the pulse of global aviation

Need to know more? Visit our website: www.centreforaviation.com

Insight. Interaction. Information. Follow us @CAPA_Events

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aiR aRaBia ....................................................................pp.11“air arabia reports another six months of profit and consistent growth”First published on www.centreforaviation on 21st august, 2012

emiRates .......................................................................pp.19“how emirates and friends will soon reshape american aviation”First published on www.centreforaviation on 11th may, 2013

etihad aiRways ............................................................pp.31“etihad jolts the status quo again – Jet airways and (wait for it) air canada are its newest partners”First published on www.centreforaviation on 27th april, 2013

FlyduBai .......................................................................pp.39“flydubai has bright outlook after recording first profit and emerging as close partner to emirates”First published on www.centreforaviation on 19th February, 2013

MIDDLE EAST:Selected airlines

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gulF aiR ........................................................................pp.51“gulf air turn around plan offers a glimmer of hope for the beleaguered flag carrier”First published on www.centreforaviation on 2nd may, 2013

JaZeeRa aiRways .........................................................pp.60“could Jazeera airways, a small and nimble carrier, come to the rescue of kuwait airways?”First published on www.centreforaviation on 9th may, 2013

Nas aiR ..........................................................................pp.69“nasair plans ambitious expansion in 2013 ahead of further liberalisation in saudi arabian market”First published on www.centreforaviation on 22nd april, 2013

QataR aiRways .............................................................pp.77“Qatar airways set to join oneworld by late 2013”First published on www.centreforaviation on 1st may, 2013

saudia ...........................................................................pp.86“saudia faces new competitive threats in 2013 as saudi arabia loosens the regulatory reins”First published on www.centreforaviation on 6th may, 2013

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Air  Arabia                      Key Data Fleet and Orders Air Arabia Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Air Arabia projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Air Arabia international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Air Arabia top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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Premium/Economy profile Air Arabia schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Share price 2012/2013

Source: CAPA - Centre for Aviation and Yahoo! Financial

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Air Arabia reports another six months of profit and consistent growth Air Arabia continues to prove it is one of the Middle East’s most consistently profitable airlines. While other carriers in the region have suffered through the vagaries of the regional economic climate and the various social and political disruptions, the carrier has continued to report solid results, despite the external shocks buffeting it and mounting competition in the market space it pioneered in the Middle East. With its low-cost operation, solidly installed passenger base and nimbleness in exploring new routes and reallocating capacity, the carrier soldiered through the high oil prices and Arab Spring period with comparative impunity. Although the regional political climate is far from settled, economic conditions are improving and the carrier is now looking to capitalise on renewed traffic in the Middle East. 2012: A return to double-digit margins? 2012 is looking likely to be a significant improvement on 2011 in terms of both traffic and the bottom line. Air Arabia’s net profit for 1H2012 was AED115 million (USD31.3 million), an increase of 22% on the previous period in 2011. The net result is the carrier’s best since 1H2009, although the 2011 figures were dragged down slightly by the carrier continually adjusting operations to deal with the unrest in the region. Net margin was 9.6%, up slightly from 1H2011. Air Arabia first half revenue and net profit: 1H2008 to 1H2012

Source: CAPA – Centre for Aviation & Air Arabia Revenue grew 22% in the six-month period, to a record AED1300 million (USD354 million). The airline handled 1.3 million passengers for the half year, at an average load factor of 85%. This is an improvement of 3ppts on the same period in 2011, and a particularly strong result for the first half of the year.

15

Air Arabia quarterly revenue and net profit: 2008 to 2012

Source: CAPA – Centre for Aviation & Air Arabia Second quarter results were notably strong, and indicate positive momentum for the important third quarter. During 2Q2012, Air Arabia reported a net profit of AED66 million (USD18 million), an increase of 31% year-on-year. Turnover for the quarter was AED729 million (USD198.5 million) an increase of 23%. Yield levels were up 11%, with the carrier reporting strong demand despite regional competitors continuing to expand apace. Capitalising on underserved markets Air Arabia chairman Shaikh Abdullah Bin Mohammad Al Thani attributed the recent strong results to the carrier’s ability to identify and capitalise on underserved routes in the Middle East. During the first six months of 2012, the airline added new routes to Taif in Saudi Arabia and Salalah in Oman, both secondary regional destinations that have shown impressive traffic growth. Saudi Arabia in particular has become a core market for Air Arabia: the carrier operates 66 weekly frequencies to seven Saudi Arabian destinations: Madinah, Riyadh, Jeddah, Dammam, Qassim, Taif and Yanbu. During 1H2012 the airline also increased capacity to Dammam, Riyadh and Kuwait, primarily from its Sharjah hub. Also seeing increased capacity was Nagpur.

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Air Arabia destination map: Aug-2012

Source: Air Arabia There are plenty of markets that Air Arabia has yet to fully develop in the Middle East and further afield. The carrier has only two routes into Iran – Shiraz and Tehran – and the Iranian market remains a major growth opportunity, even with the uncertain political environment. Air Arabia is also yet to add any routes into the fast-growing Iraqi market. Regional low cost rivals such as flydubai and Jazeera Airways are already serving the Iraq market. Outside of the Middle East, South Asia remains Air Arabia’s core market. The airline has an extensive network in India, operating to 11 destinations, but its network into Pakistan is comparatively underserved. Pakistan is an important migrant worker market for GCC countries, but Air Arabia’s operations into the country are limited to Pashawar and Karachi. Pakistan International Airlines already operates to Sharjah from Sialkot and Turbat. Similarly, connections into Northern and Eastern Africa are yet to be properly explored; outside of Morocco and Egypt, the carrier’s only African destinations are Khartoum and Nairobi. Multi hub strategy proving its worth Air Arabia’s multi-hub strategy of using local joint-venture partnerships to operate Air Arabia branded carriers adds another layer to its strategic options. The carrier’s Morocco and Egypt hubs are recovering well after the disruption of 2011. Both have reached cash flow and profitability break-even and are operating in excess of 70% load factors. From hubs in North Africa, the carrier has easy access to Western and Central Europe. Having taken delivery of its fourth A320 in Jun-2012, and launching a new route to Milan, the carrier is also assessing the possibility of adding more European destinations. Air Arabia Egypt launched a successful charter operation between the Red Sea and Europe in 2011, and the carrier sees enormous potential for leisure travel between Egypt and Europe.

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Thanks to the open skies agreement between the EU and Morocco, Air Arabia Maroc already operates to 18 designations in the EU, 13 of them year-round. The carrier reportedly plans to introduce Nador-Bologne service and is also looking at a London service from Casablanca, although the UK is not a major market for the carrier despite no carrier having a stronghold. Ranking of carriers serving the UK from Morocco (seats per week): 20-Aug-2012 to 26-Aug-2012 Rank Airline Total seats 1 U2 easyJet 1932 2 BA British Airways 1892 3 AT Royal Air Maroc 1398 4 FR Ryanair 1323 Source: CAPA – Centre for Aviation Eastern Europe is also an attractive option for Air Arabia, particularly Russia and the CIS states, which have a combined market of more than 175 million people. Air Arabia already operates to Moscow, Kiev, Donetsk and Almaty from Sharjah, but is looking at additional routes, possibly as seasonal destinations. Both Sharjah and Alexandria are viable options to serve and Egypt is a popular tourist destination for Russian nationals. A major unresolved strategic question for the carrier is its fourth hub in Jordan, which remains on hold for the moment. The launch of the new hub was suspended last year due to the Arab Spring disruption. The present instability related to neighbouring Syria makes it unlikely the carrier will add to its Amman hub until regional stability returns and the global economic climate improves. Solid outlook for 2012 While net margins are down on the 20% plus levels seen in 2008 and 2009, Air Arabia is still consistently profitable and has largely managed to avoid the creep in unit costs that has affected some of its contemporaries. Unit costs were up 10.4% in 2Q2012, behind the increase in unit revenue of 9.9%. However, excluding fuel, Air Arabia managed a 6% reduction in per passenger unit costs. Air Arabia unit revenue and unit costs: 2004 to 2011

Source: CAPA – Centre for Aviation & Air Arabia

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Fuel costs remain a concern, with overall 1H2012 costs up 15% and fuel costs continuing to challenge regional carriers, according to Air Arabia CEO Adel Ali. Air Arabia has hedged 25% of its expected fuel acquisitions for 2012 at USD90.45 per barrel, and is taking a conservative approach to its fuel strategy. In May-2012, Mr Ali said oil at USD85-95 per barrel would be good for the aviation industry and that “plus or minus USD100 is reasonable for the seller and the buyer”. He does not expect a return to the USD70-80 per barrel oil prices seen earlier this year. Air Arabia fuel hedging strategy: Aug-2012

Source: Air Arabia Air Arabia started 2H2012 with record monthly traffic: Jul-2012 passenger numbers rose almost 10% year-on-year to 477,839. The busy summer holiday travel period is the key to profitability for the airline. Generally, the carrier earns between 35% and 45% of its profits in the quarter. With strong Jul-2012 traffic and solid forward bookings promising record passenger levels in the vital summer travel period, the carrier has a positive outlook for the full year period. According to Mr Ali, the airline is witnessing “significant customer demand” across its network. Air Arabia will target growth into Central Asia, Russia the CIS and Eastern Europe from its Sharjah hub. Egyptian operations will be grown organically, focusing on the Gulf region, Europe and Africa. Moroccan operations will expand into Europe, and the carrier will seek further flying rights to Africa. The low cost market segment is a growing part of the Middle East’s aviation ecosystem and complements the sixth-freedom, and often long-haul focused, behemoths. Air Arabia plans a continuous expansion over the next few years. LCC market penetration in the Middle East is still only 6%, so there is plenty of room for growth and Arab intra-regional traffic shows increasing demand for air travel as local economies develop.

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Emirates                                      Key Data Fleet and Orders Emirates Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Emirates projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Emirates international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata Top routes table Emirates top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile Emirates schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

21

How Emirates and friends will soon reshape American aviation

Shortly after Emirates Airline announced its remarkable breakthrough partnership with Qantas in Sep-2012, Emirates CEO Tim Clark said he had also been talking to American Airlines for some time and publicly expressed hopes that the two would also establish a close relationship. This was despite the fact that American already had an extensive codeshare relationship with Etihad; and the third Gulf carrier, Qatar Airways, has since been invited to join the oneworld alliance – which American leads.

The Gulf airlines, and particularly Emirates, have had a devastating impact on European long-haul hub carriers. The impact will be different for US airlines, but despite the different geography, it will be much bigger than most expect. For one thing they will cut across the developed boundaries of the global alliances.

Emirates is the world’s largest international long-haul operator by a wide margin; even on a seat basis, only three European airlines (Ryanair, easyJet and Lufthansa) head it, thanks to their high density short-haul operations. World top 20 international airlines (ASKs)

Source: CAPA – Centre for Aviation, Innovata

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Emirates’ all-widebody 200-strong fleet already contains, among others, 32 A380s and some 120 Boeing 777s. Moreover, it continues to grow at a remarkable rate.

Another 191 widebody aircraft (currently including 58 A380s, 70 A350s and 63 777s) are on order. The delivery schedule provides for more than two of these aircraft entering service every month for the next five years.

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Inevitably, with this global coverage, Emirates has numerous airline partnership opportunities, aside from the Qantas joint venture. This is no minor operation either. (Despite Australia’s small population there is a high propensity for international travel and the country’s relatively strong economy means that several sixth freedom airlines each fly around 100 widebody weekly services into Australia; Emirates operates around 11,000 seats daily into that market.)

Necessarily, the bulk of Emirates’ traffic is networked over its Dubai hub (although a growing amount is now end-to-end; Dubai receives more inbound tourists than India). Emirates’ geographic position and increasing ability to disperse over a wide range of global points (currently to 119 cities non-stop) encourages massive flows between the Indian subcontinent (“South Asia”) and Europe, for example. Given the relative geographical differences the dynamics of the US market are different, but they are no less potentially compelling. The US-Emirates proposition differs from the European hub geography As can be seen from the graph above the US is still underdone when it comes to Gulf carrier penetration. This is both because it is early days and because the hub proposition is different for the US. Although Emirates is undoubtedly well placed to service Indian travellers between the US and the sub-continent, the hub value for the US market deteriorates the further east the origin point is. So, few would think of flying between Shanghai and San Francisco via Dubai; but Shanghai-New York over the Gulf becomes potentially competitive, as a search on Expedia will show. And, the further south the East Asian point, the more competitive it becomes – for example, a daily Ho Chi Minh City service by Emirates over the Gulf, one-stop to New York offers a direct

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challenge to any other product (as a combination of elapsed time, inflight quality, frequency, network coverage, price etc). Then, for Bangkok, where Emirates has a five-times daily operation, or Singapore, with thee daily non-stops from Dubai, connecting with three-times daily New York flights, the “product”, especially for business/premium travellers, emerges as a winner for travellers to the Big Apple. This is one reason the Gulf airlines, with their extremely high quality inflight product, are capturing the lion’s share of global premium traffic, just as many airlines are cutting back on front-end capacity. For the still small, but fast growing and high yielding African market, the Gulf carriers are becoming a more and more attractive proposition from US points. Their extensive networks in the region and their explosive entry into partnerships with many of the key African carriers are positioning the Gulf airlines to compete aggressively with European hubs, where the rare direct services are not available. Yet it takes time to build network strength. For the time being the US (and Canada) does not have adequate capacity, frequency and network to have the pulling power the hub carrier enjoys in Europe. Thus, strategically, Emirates must achieve two goals:

• First, enhance its partnership/reciprocal codeshare linkages. This will allow it to feed its network via third party airlines, both providing Emirates with more traffic and its partner with greater access to a global network; then

• Secondly, having constructed its foundation, expand its own services. As European, Australian and African based airlines have learned, the first part of this equation becomes almost unavoidable, on the basis of “if you can’t beat them join them”. Air France for example had been so sternly opposed to the expansion of the Gulf carriers that, when the carrier last year agreed to codeshare with Etihad, IAG CEO Willie Walsh described the about-face as being the equivalent to Air France “talking to the devil.” Mr Walsh had meanwhile persuaded Qatar Airways to join oneworld and Emirates was dealing with Qantas. Consequently, working with Emirates offers a highly attractive alternative, even though it may appear to limit the longer term options of the foreign airline. And, if it does so limit the airline, well, the reality is that the Gulf carriers have changed the world – there is no looking back. The new partnerships will cut across the previous evolution of the multilateral alliances This development is occurring just as the major airlines (and their host airports) have begun to settle into a regime where there are three global teams, each with their various allegiances and internal connectivity. The upshot will be upheaval for airlines and, in many cases, airports alike. As the post Sep-2012 world unfolds, enormous changes are occurring beneath the surface. Things may look the same, but they are not.

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For one thing, Emirates had, prior to its Qantas deal, eschewed the concept of partnerships, beyond a number of codeshares and some FFP cooperation. It saw itself as being large enough to achieve its goals without resort to other airlines – and certainly was not going to constrain its freedom of movement by allying with Star, SkyTeam or oneworld. In this respect oneworld co-founder American Airlines is in the tantalising position that it will now become a bellwether of the future pattern for alliances. As American emerges from its relatively brief hibernation in Chapter 11, now under new ownership, it finds itself at the centre of a love triangle in what could be pivotal moves in the worldwide alliance regime. American has an important and extensive codeshare agreement with Etihad; meanwhile its British Airways partnership and oneworld membership point it in the direction of oneworld member-elect Qatar Airways. Yet, as part of Emirates’ new approach to US expansion, Mr Clark, last year publicly expressed hopes that a deep partnership could be established between his airline and American. The intriguing prospect that American/US Airways now faces is the opportunity to partner with all three of the Gulf carriers. In a previous world, this would have been unthinkable, with such a formidable assortment of potential conflicts. Today perhaps the real issue is how to manage those conflicts, not how to avoid them. If conflict management becomes the corporate thinking, there will indeed be a revolution afoot. At that stage others become impelled to respond; as has happened in Europe in 2012, one such move can quickly trigger a chain reaction. The fast spreading role of pragmatic partnerships is changing the world, as Emirates announces a Milan-New York service Yet another dimension was added to Emirates’ operations when on 08-Apr-2013 it announced the launch of the airline’s first trans-Atlantic (Europe-US) operation since it dropped Hamburg-New York in 2008. Emirates from 1-Oct-2013 will operate 777-300ER service between Milan and New York JFK as an extension of one of Emirates’ existing three times daily Dubai to Milan flights, making for a total of three times a day service by Emirates into New York (the other two being non-stop from Dubai). Mr Clark said at the announcement, “Operating a trans-Atlantic route has been on our agenda for some time. Having carefully monitored traffic flows we have identified strong demand for both a direct connection and, importantly, for the Emirates product. The route is currently underserved, particularly with a strong premium product offering this is where we see a clear opening for Emirates. We intend to capitalise on this opportunity, stimulating further demand and encouraging additional traffic flow in both directions.” The partnership dynamics are made even more intriguing as Emirates will also leverage its relationships with JetBlue (also an American partner) in the US and, in Europe, its frequent flyer partnership with easyJet to help feed each end of the operation.

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The often-restrictive ENAC (Italy’s Civil Aviation Authority) has authorised the Milan-New York operation “on an extra-bilateral basis”. The fifth freedom route approval was somewhat unusual, as the Milan-JFK route is also served on a daily basis by home-grown Alitalia (which is frequently protected by the Italian administration) as well as by Delta, United and American itself. The decision was specifically made on the basis that it would deliver “significant economic benefits for the Italian economy, exporters, tourism and airports”. This is a seemingly obvious driver for governments, but in international aviation it represents an important shift in emphasis away from supporting the national flag carrier, regardless of the negative impact the policy had on other stakeholders. In the present context it is a fundamental change which allows Emirates and the other Gulf carriers to gain the access they need to expand their networks. And it is the other key piece of the jigsaw that opens the door to Emirates and the others negotiating on such powerful terms with the established flag carriers. In the case of the Emirates-Qantas JV (and others like it formed by Etihad) the key to liberal access is utilising so-called third country codeshare rights (where a third country’s airline “metal” is used in exercising bilateral rights between two other countries); the Italian example goes a step further up the liberalisation path, using fifth freedom rights. And, if Italy, not renowned for its liberal approach to air services rights, is prepared to allow third country airlines to support a local economy, how long will it be until other regional communities in European countries argue for similarly enlightened access? Protectionist barriers are eroding quickly, but there are still some holdouts Despite the enormous shifts in global attitudes to market access, there are however still a few major logjams for Emirates’ expansion. Not all countries are so enlightened. These simultaneously present short term barriers to entry, while holding out the promise of mid-term future opportunities as liberalisation inevitably erodes government support for nationalist protectionism. Austria is a case in point, where Lufthansa-owned Austrian Airlines is able to use obscure bilateral wording to prevent either Emirates operating its A380 into Vienna or allowing partner Qantas to offer seats on a third country codeshare basis – despite Australia having bilateral access rights. As noted above, Air France and its government also maintained a typically protectionist / mercantilistic approach against admitting the Gulf carriers. But once Etihad secured a toe in the door with its announcement of a codeshare agreement with Air France, the opening is likely to be followed by fellow SkyTeam member Kenya Airways also joining forces with the Abu Dhabi carrier. This does not directly help Emirates, but it indicates clearly that the last defences are crumbling. In Europe Emirates makes the point forcefully that protecting the relatively lower economic value of the national airline is illogical where Emirates is the largest single buyer of Airbus aircraft and notably of the iconic A380. In Apr-2013, Mr Clark noted that his airline contributes EUR200 million annually into the French economy as a result.

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Canada too occupies a position at the protectionist end of the spectrum, although, as with Air France, an Apr-2013 announcement that Air Canada signed an MoU with Etihad with a view to future codesharing again accentuates the pressures on national administrations (and the partnership potential for airlines) to open doors to the highly attractive consumer opportunities offered by the Gulf carriers. Lufthansa, although it once came close to breaking ranks and dealing with Etihad, is now instead electing to work with fellow Star member and neo-Gulf carrier, Turkish Airlines, itself embarked on a rapid growth trajectory. Lufthansa and Germany consequently are the standouts in the European market as far as liberalised access is concerned. Even with a supportive government, airport and airways infrastructure is still a problem where airline growth is so rapid But even the Gulf carriers are hostage to infrastructure limits. The rapid growth trajectory of Emirates (and other airlines operating into Dubai airport) has placed enormous strains on Dubai Airport to expand to accommodate future growth while maintaining day-to-day operational integrity. Added to the expansion of Dubai Airport, a second, massive airport, is in construction nearby, but there is more to the challenge than simply laying concrete. Inevitably Emirates’ remarkable expansion has done wonders for the airport’s growth. For the full year to 31-Dec-2012, Dubai handled just under 57.7 million passengers, making it the fourth largest airport by international traffic, after London Heathrow, Paris Charles de Gaulle and Hong Kong. Unlike its main competitors though, Dubai is still experiencing high growth levels. Passenger numbers exceeded five million for the fourth consecutive month in Mar-2013, handling a record 5.8 million passengers in Mar-2013. Passenger traffic grew a phenomenal 20.6% year-on-year, the highest growth since Aug-2012. Cargo volume increased 14.7% to 213,248 tonnes and aircraft movements increased 8.3% to 31,713 (reflecting both higher load factors and larger gauge aircraft when measured against the much bigger increase in passenger numbers). For the first three months of 2013, passenger traffic increased 15.6% to 14.3 million. According to CAPA’s airport rankings, applying weekly seat capacity from Innovata, Dubai Airport’s international seat offering was at the end of Apr-2013 only 20,000 less than London Heathrow, so Dubai is poised to soon become the biggest international airport in the world. Dubai Airport's world ranking based on weekly seats, ASKs and frequencies: as of 6-May-2013

Source: CAPA – Centre for Aviation and Innovata

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Dubai International Airport annual passenger traffic and growth rates: 1996 to 2012

Source: CAPA – Centre for Aviation and Dubai Airports Traffic has doubled at Dubai in less than seven years while seat capacity has almost tripled since 2004. The airport is projecting traffic of over 65 million passengers for 2013, an addition of nearly eight million passengers over last year. Traffic at the airport has already outstripped the airport’s own 2010 projections and is now close to a year ahead of estimates. Dubai International Airport passenger traffic growth projection

Note: based on Dubai Airports 2010 estimate Source: CAPA – Centre for Aviation and Dubai Airports The UAE’s open skies policy and the simple fact of increased transfer activity has increasingly attracted foreign airlines to serve Dubai, progressively reducing the total market share that Emirates holds. As partnerships and connectivity opportunities expand, so the share will diminish further.

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Meanwhile, on CAPA’s rankings, Qatar Airways’ base of Doha Airport is 20th largest globally in international seats offered and Etihad’s home airport Abu Dhabi stands at 35th. With each expanding at similar rates, the pressure on the region’s ANS systems is immense. There is no shortage of funding, or of the political will, to expand the respective airports, but it is the air traffic control systems that are proving the real Achilles heel of the system. Here multinational politics, as always, creeps in. The multiplicity of ANS jurisdictions, along with a substantially reduced airspace thanks to military restrictions, is beginning to inhibit growth, causing sometimes substantial delays. For hub operations this can become a very costly impediment, where on-time arrival and departures are not possible. The problems will be solved, but they are proving complex and time consuming. Shifting the global axis, as access is made easier Emirates will overcome these obstacles, seemingly expanding remorselessly. As the partnership changes filter through the US system and Emirates and friends increase their presence, unthinkable things begin to occur on long-haul connectivity. The carrier’s initial A380 “flagship” deployment strategy was based around key destinations such as New York, London and Sydney, which feature exceptional traffic volumes and a high proportion of premium travellers. Key aviation ‘megacities’ – to borrow Airbus’ term for destinations with more than 10,000 long-haul passengers per day – formed the backbone of the carrier’s A380 network. At present there are 39 of these aviation megacities according to Airbus’ estimates. By 2031, Airbus estimates that this number of aviation megacities will increase to 92, and 95% of long-haul traffic will operate on routes to/from or via these destinations.

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Meanwhile, the carrier’s ubiquitous 777s serve numerous smaller cities. Once the main city gateways are secured and frequency is locked in, supporting the overall network, the second phase of expansion begins. This next stage, as experienced in Europe, can be even more startling. The second phase of Gulf airline expansion targets regional centres At first when Emirates began serving non-capital “regional” cities such as Manchester and Birmingham in the UK, or even Dublin (with its population of just over a million), there were cries of “capacity dumping”. The market response has generally given the lie to that, as new global one-stop travel opportunities opened up.. Today, Greater Manchester, with a population of around 2.5 million, and only 290km (180 miles) from London, is host to seven widebody services each day from the three Gulf carriers: an A380 and two 777s from Emirates; two A330s from Etihad; and two A330s from Qatar Airways – well over 2,000 seats daily. These airlines have the power to transform the landscape, and not just around major hubs. They are accordingly – and Emirates in particular – highly dangerous competitors and, by the same token, increasingly attractive airline partners. Their expanding presence in the world market will continue to be highly disruptive. As a result, this change process will continue not just to redirect passenger flows, but also to transform the fundamental nature of alliances and partnerships. The past year has proven that, for alliances, the unlikely becomes commonplace and the impossible a reality. Who knows, by this time next year, Emirates may well be Lufthansa’s new best friend. And the distinctive tail, in its UAE colours, will be much better known across the North American continent, as well as the EK code on US airlines’ flight information displays. Partnership conflicts will abound, as new equilbria are built – and rebuilt. And soon it will not just be the major gateways that are chasing Emirates tails.

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Etihad  Airways                              Key Data Fleet and Orders Etihad Airways Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Etihad Airways projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Etihad Airways international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Top routes table Etihad Airways top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile Etihad Airways schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013 Source: CAPA - Centre for Aviation and Innovata

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Etihad jolts the status quo again – Jet Airways and (wait for it) Air Canada are its newest partners By purchasing a large minority share in Jet Airways in Apr-2103, Etihad enormously entrenches its long term global position, as it secures intimate access to one of the world’s fastest growing markets. The deal is accompanied by expanded bilateral access and a new US pre-clearance facility at Abu Dhabi Airport. The near-billion dollar deal will not only radically shake up the Indian market – to the substantial disadvantage of now-marooned Air India – but the ramifications will be felt well beyond Indian borders.

And right on the heels of this announcement comes the remarkable news that staunch Gulf airline opponent Air Canada is to codeshare with….Etihad. For now the scope is limited – but it will expand, as Etihad’s virtuous circle spreads.

With the far-reaching purchase of Jet Airways, the UAE is entrenched as India’s main international hub, although as Etihad/Jet expands, Emirates’ powerful position in the Indian market will be eroded.

Other sixth freedom airlines, notably Lufthansa, whose gateway access is limited to a handful of points and is subject to capacity controls, will see their roles significantly diluted.

Etihad's growing virtuous circle develops: a remarkable sequence

Etihad is moving so fast to tie up new arrangements, almost all of which are ground-breaking in their own right, that it becomes increasingly hard to interpret the implications – there are so many new permutations being created with each new move. But, assuming that the array of deals can be effectively managed, the momentum is now such that it is almost creating a virtuous circle.

Each piece that “UAE’s national airline” now adds to its jigsaw of alliance relationships begins to have – usually very positive – knock on impacts for other partnerships.

For example, as CAPA has previously wondered aloud, what happens in the American Airlines “love triangle”? Here American, recently bought by US Airways, is at the apex of all three major Gulf carriers.

Close partner Qantas/oneworld has eloped with Emirates; and equally close British Airways/Iberia have tied up with Qatar Airways. American is at the heart of oneworld’s US market access. Yet Etihad has a vital (for Etihad) and extensive codeshare arrangement with American. Although today’s world is becoming much more complex than a contest between the apparently simple three global alliance teams, it strains credibility that American could have a deep and meaningful relationship with all three, Emirates, Etihad and Qatar. Alliance promiscuity can only go so far before conflict arises; but today's question perhaps becomes more about how to manage that conflict rather than how to avoid it.

Until the Jet Airways purchase – and an extremely important Abu Dhabi US pre-clearance agreement – Etihad looked like an easy call for American to walk away from. Not any more.

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The combination of easy US passenger access and a much stronger hold on the large and growing Indian market not only makes Etihad much more attractive for American, but also Abu Dhabi soars as a desirable transfer point. In this respect, there are few better holistic examples of airline-airport-government policy working together. European governments take note.

The US-India market is not small, with around a million passengers in each direction and roughly evenly distributed origin and destination; importantly it is growing fast – and US airlines have a relatively small part of the action. Non-stop service is possible, but to establish a combination of frequency and city pair access, intermediate stops outside India will remain an attractive proposition. If pre-clearance is possible too, the attraction of Etihad and Abu Dhabi increases considerably.

India-US in one-way passenger numbers

Source: IATA MarketIS

The Etihad-Jet Airways deal, 24-Apr-2013 in a nutshell:

• Etihad will invest USD600 million in Jet Airways; • This includes an equity investment of USD379 million, giving Etihad Airways 24% of an

enlarged share capital of Jet Airways; • A further USD220 million will be injected “to create and strengthen a wide-ranging

partnership between the two carriers”. As part of this Etihad Airways previously announced it had paid USD70 million to acquire Jet Airways’ three pairs of Heathrow slots through the sale and lease back agreement announced on 27-Feb-2013. Jet Airways continues to operate flights to London utilising these slots;

• Etihad will also invest USD150 million to buy a majority equity share in Jet Airways’ frequent flyer programme "Jet Privilege". Etihad has majority ownership of airberlin’s frequent flyer programme too. And Etihad has leased two A330s from Jet;

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• Codeshare expansion will significantly extend Etihad’s reach into India’s fast growing 42 million passenger travel market, feeding Etihad’s Middle East, North American and European destinations, and opening up Jet Airways' access from up to 23 Indian cities;

• An expanded India-UAE bilateral access agreement gives Jet the lion's share of almost 40,000 new seats weekly;

• Together the carriers will establish “a Gulf gateway for flights to the US, Europe, Africa and the Middle East”;

• The respective frequent flyer programmes will be "fully integrated", with reciprocal ‘earn-and-burn’

Jet Airways’ future is now assured, if India's politicians deliver

In an overall deal encompassing around a billion dollars, Jet Airways’ previously fragile position is greatly enhanced. The size and scope of the agreement also means that Etihad will seek to ensure that the partnership will work to their mutual benefit.

Accompanying the purchase arrangements, an essential part of the equation was to secure adequate support from the Indian government too.

India has a sad reputation when it comes to practical implementation of foreign investment measures introduced by its relatively forward looking leaders, so Etihad and its government owners were anxious to ensure that this major addition to the airline’s armoury would not be unravelled by the usual prevarication and obstacles. The UAE had previously fallen foul of India’s waywardness (with a negative experience by the UAE telco in India), and so was seeking an Investment Protection Treaty; however because these can take a long time to negotiate it was eventually dropped as a pre-condition, but remains on the agenda.

Expanded UAE-India bilateral access sealed the deal

However bilateral access became a central feature of the deal. If Etihad was to spend several hundred million dollars buying into Jet, it was essential that they be able to leverage market access. India and Abu Dhabi agreed to the revised bilateral agreement shortly before announcement of the purchase, and within 24 hours the Jet-Etihad deal went ahead. The short-notice negotiations displeased some in the Indian industry, but is merely another example of India’s ad-hoc “policy” implementation.

Under the revised terms, each side has been granted an additional 36,670 weekly seats, taking the current 13,330 entitlements to just 50,000. The increased entitlements will be phased in over a period of two years, with 11,000 additional seats effective immediately. There are now 23 designated points of call in India – all of them in principle available for use by the Jet-Etihad partnership.

The bilateral agreement does still have to be approved by Cabinet and, given the likely severe impact on Air India, political opponents will undoubtedly seek to exploit this as a reason for reneging on the deal. Prime Minister Manmohan Singh has however continually stressed the importance to India’s overall interests in abiding by its international commitments, as repeated failure to do so in the past has seriously jeopardised inbound investment.

Also, the other Gulf carriers, along with European carriers, are likely to seek additional concessions, apart from increased seats, as a result; for example, Lufthansa and Emirates are

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currently not permitted to deploy A380s in the Indian market and will almost certainly now request that access. Meanwhile too, Turkish Airlines is seeking an increase to 56 weekly frequencies (to allow double dailies to each of the six main cities). Previously, Etihad, Emirates, Air Arabia and Qatar Airways had together been seeking approximately 150,000 additional weekly seats in total, so it can be expected that the noise will intensify now.

Agreement on US pre-clearance in the UAE will also be a major asset for Abu Dhabi Airport and for Etihad

The intricate details accompanying this major move by Etihad further enhance the value of the Jet purchase to Etihad and the UAE. Important among these is a US-UAE agreement to establish a US Customs and Border Protection (CBP) pre-clearance facility at Abu Dhabi International Airport. The US is India’s biggest air market by far and Indian (and US) travellers are forced to endure the less than tender mercies of America’s immigration and security authorities. If these processes can be provided in a civilised way by flying through Abu Dhabi, that is an enormous incentive for travellers to use the joint services of Etihad/Jet Airways.

There are currently 15 CBP pre-clearance facilities in Canada, Ireland and the Caribbean and all have been well patronised.

Understandably, this has already invoked the envy – and wrath – of European airlines, whose trade body, the Association of European Airlines (AEA) has argued this will provide a competitive advantage to Etihad Airways and will be "detrimental to a level playing field in the transatlantic aviation market…European airlines are forced to change their flight schedules in order to avoid rush hours at the customs clearance in the USA, putting connectivity, commercial opportunities and passenger convenience at stake. The measure in Abu Dhabi has a distortive effect on the liberalised EU-US transport market, which is the largest in the world with clear benefits to industry, consumers and the economy. AEA calls on constructive discussions between the respective parties in order to deal with this issue and to avoid further conflicts."

While this neglects to point out that the exclusive US-Europe liberalisation had also previously delivered a powerful advantage to European airlines, it also sends a message to European governments to work to support the interests of their national industries – airports and airlines.

Meanwhile, US airline pilots, always fast to jump at any improvement in the system that could possibly affect their well-being, have, through the Air Line Pilots Association (ALPA), actually called on the US government to repeal the agreement. The Association is, somewhat quaintly, concerned that no US airline currently services Abu Dhabi and therefore cannot benefit from it (although US airlines will now certainly see the agreement as an added incentive to operate to the airport). ALPA argued the US government was "putting US airlines and American jobs at great risk" with the agreement and called on Congress to act if the Department of Homeland Security does not rescind the agreement.

The Air Canada codeshare is potentially a major breakthrough for Etihad

Following an acrimonious aviation policy dispute between the governments of Canada and the UAE which resulted in a series of diplomatic spats, peace has now been restored and Air Canada has tentatively embarked on a whole new realpolitik course. A staunch member of the Star Alliance, Air Canada has strictly adhered to the historic application of bilateral air services terms,

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where capacity is to be allocated reciprocally, based on third and fourth freedom traffic flows (these are the provisions described by a former IATA CEO as “archaic”; most countries now regard consumer interests ahead of flag carrier protection).

The codeshare announced by both airlines on 25-Apr-2013 relates mainly to these end-to-end flows, with long-haul reciprocal codesharing limited to the Toronto-Abu Dhabi sector, both non-stop and via London. Etihad also has codeshares on Air Canada metal over Toronto. One result is apparently to allow Etihad effective daily service to Toronto; its capacity-limited three times weekly non-stop service to Toronto will now be able to be augmented by one-stop codeshare operation on Air Canada over London. If the London routing is to be useful this would however imply that Canada is now prepared to grant Etihad additional one-stop capacity. Technically, the two parties have "signed a Memorandum of Understanding (MoU) for a commercial cooperation agreement", so it is still subject to potentially substantial elaboration.

But – and here again the magic of the virtuous circle may come into play – once Etihad/Jet is able to deliver high levels of traffic from 23 points in India, the proposition for Air Canada to become more intimate with Etihad becomes very powerful. Currently, Air Canada does not serve the large Indian market non-stop, preferring to codeshare on – once again, the virtuous circle – Jet Airways over London. It also connects with Lufthansa over Frankfurt and Swiss over Zurich.

According to the airlines’ media releases, “the two parties have commenced discussions to finalise details with the objective of introducing codeshare services in the third quarter 2013.” It would not be fanciful to think that the passage of another few months will see further evolution of this fast moving alliance scene, as Jet falls increasingly into line with a wider Etihad strategy. There will now be much for Air Canada to gain from a closer relationship with Etihad, in ways that its Star partners may not be able to deliver, both in India and elsewhere.

Domestically, Air India, along with Delhi and Mumbai Airports lose ground – but the wider outcome is generally positive

Etihad’s investment was made possible since India recently, after much delay, moved to allow expanded foreign airline ownership of Indian carriers. Ironically, the long delay in introducing the change was mostly due to Jet Airways’ influential opposition, as it feared that its own position would be eroded if other airlines like Kingfisher were strengthened by receiving foreign airline support.

Now, in the current circumstances, with Kingfisher out of the picture, the impact of the Etihad-Jet combination will be devastating for the country’s largest international carrier, Air India, just as it was starting to show signs of improvement.

The logical response, if it is unable to compete, is to allow Air India to fail – or at least drastically downsize – but logic is rarely the first refuge when national flag carriers are concerned. Nonetheless it will become increasingly difficult to justify injecting a billion dollars a year into an airline that now has a negligible prospect of independent survival, now that Jet has been so substantially empowered. And, so long as the Indian Government's policy incoherence continues, there is little hope for a reversal. This surely must be the last nail in the flag carrier’s coffin.

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And Etihad continues, criss-crossing the global alliances with its 'new business model'

Although India is the object of this week's developments, the real story here is however Etihad's remarkable expansion path. Aside from the investment in Jet Airways, over the past year Etihad has acquired stakes in airberlin (nearly 30%), Air Seychelles (40%), Virgin Australia (8.56%) and Aer Lingus (nearly 3%), the airline "will continue to explore opportunities where they make financial and strategic sense", according to CEO James Hogan, who believes “the new business model delivers benefits which previously were available only through full mergers or acquisitions”. The high level of involvement in Air Seychelles for example (which announced an important codeshare with South African Airways on 25-Apr-2013) has de facto provided additional market access for Etihad in capacity limited Hong Kong, as well as generally being a highly positive outcome for the Seychelles' previously ailing airline.

Etihad’s equity ownership

Airline Region Shareholding airberlin Europe 30% Aer Lingus Europe 3% Air Seychelles Africa 40% Jet Airways South Asia 24% Virgin Australia South Pacific 8.6% (Note: Etihad has non-equity based codeshares with another 40 airlines)

In addition to these direct equity stakes in its airline partners, Etihad has also been quietly accumulating majority shareholdings in the frequent flyer programmes of some of its acquisitions (although foreign airline ownership is subject to restrictions, no such inhibition exists on FFPs). Etihad's growing network creates synergies that expand the value of the programmes, while at the same time making them available for data mining. As loyalty programmes assume greater intrinsic value, the possibilities in this still relatively young marketplace may be extensive.

The fast pace of Etihad's ascension to a major player and game changer has been accompanied by this suite of equity investments and, while the efficacy of minority shareholding connections remains unproven in the airline industry, it increasingly appears that Etihad's combination is working well for it. Notably, where the airline invested in is in a weaker position, Etihad's ability to deliver it sustainability creates a greater reliance on the UAE flag carrier – and therefore the minority shareholding takes on greater significance, almost in proportion to the weakness of the acquired airline.

In the process of establishing its partnerships, equity or otherwise, Etihad, like its Gulf siblings, has been careless of global alliance affiliations; relations with the leader of SkyTeam, Air France-KLM, go side by side with its extensive codeshares with oneworld's American and its acquisition of oneworld's airberlin; Star Alliance members, led by arch enemy Lufthansa, have been more resistant, but a budding partnership with Air Canada may alter that status, along with its proxy codeshare with SAA through Air Seychelles.

The result, for the global system, is disruption, something the airline industry badly needs if it is to move towards profitability. That path will not be smooth and not all can follow it, but it is surely inevitable sooner or later.

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flydubai                              Key Data Fleet and Orders flydubai Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

flydubai projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

Route area pie chart flydubai international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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Top routes table flydubai top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile flydubai schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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flydubai has bright outlook after recording first profit and emerging as close partner to Emirates flydubai has recorded its first annual profit and is preparing more rapid expansion for 2013 and beyond. flydubai, which has already surpassed Sharjah-based Air Arabia as the largest low-cost carrier in the Middle East based on seat capacity, is now looking at placing a new order for 50 narrowbody aircraft. It is already committed to growing its fleet from a current 28 737-800s to at least 50 aircraft by the end of 2015. flydubai has grown rapidly since being launched in 2009 by the Dubai government, which also owns Emirates. Over the years it has adopted a hybrid model which allows it to fill, in some respects, a role as a regional carrier for its bigger full-service sister carrier. The hybrid approach has resulted in rapid and profitable expansion as flydubai has entered short and medium-haul markets that are too small for Emirates’ all-widebody fleet but in many cases have sufficient yields to support a full-service carrier. At the same time flydubai has been able to stimulate demand by offering low fares and is able to successfully operate alongside Emirates on some of the biggest routes within the Middle East. flydubai has been in the black since 2H2011 flydubai reported on 13-Feb-2013 that it turned a net profit of AED152 million (USD41 million) in 2012 on AED2,778 million (USD756 million) in revenues. The carrier says its EBITDAR operating profit margin reached 24% as passenger traffic exceeded five million. flydubai, which did not report figures for 2011, says it has been consistently in the black since 2H2011, or just over two years after its Jun-2009 launch. The carrier has quickly proven the need for a LCC in the fast-growing Dubai market, carrying 10.4 million passengers since its launch. It already links Dubai with 51 destinations, with two more destinations to be added in Mar-2013. More destinations are expected to be added later in 2013 along with capacity expansion to several existing markets as six additional aircraft are added for a total of 34 737-800s. The opportunities for further capacity expansion are tremendous as about half of flydubai’s routes are served with less than daily frequency. The demand will be there to support more frequencies as in many cases these are fast-growing emerging markets that are under-served and would benefit from increased connectivity with Dubai, and therefore the Emirates network. Slightly over half of flydubai’s destinations are not currently served by Emirates. While flydubai now has more destinations outside the Middle East than within the Middle East most of its capacity is still within the Middle East as its routes within the region are served much more frequently. flydubai currently allocates 70% of its seat capacity to its 21 routes within the Middle East, including about 55% within the Gulf Cooperation Council (GCC). The rest of its capacity is mainly allocated to South Asia (nine routes and 13% of seat capacity) and Eastern Europe (14 routes, primarily to Russia and other CIS countries, and 10% of capacity). The remaining

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capacity is allocated to Africa (five routes and 5% of seat capacity) and Central Asia (two routes and 2% of capacity). flydubai capacity share (% of seats) by region: 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata flydubai stated in its 2012 earnings release that its traffic within the GCC – which includes the UAE, Bahrain, Kuwait, Oman, Qatar and Saudi Arabia – grew by 63% in 2012. According to CAPA and Innovata data, flydubai now has a 26% share of capacity from the UAE to Kuwait, 23% to Qatar, 22% to Saudi Arabia, 19% to Oman and 16% to Bahrain. It is currently the largest low-cost carrier in each of these markets. flydubai stated that the total size of this market grew by 21% in 2013. Most of this growth occurred between the UAE and Saudi Arabia, which is by far the largest country pair within the GCC. According to CAPA and Innovata data, the UAE-Saudi Arabia market has seen a 46% increase in capacity over the last year to over 180,000 weekly return seats. The other UAE-GCC markets have seen modest increases or flat capacity over the last year. flydubai now serves nine destinations in Saudi Arabia In Saudi Arabia, flydubai has been successful at operating alongside Emirates on trunk routes and building up an operation in secondary markets that are not served by Emirates. Riyadh, Jeddah and Dammam are among flydubai’s 10 largest routes and are each served with between three and four daily frequencies. Emirates also serves these three destinations with roughly a similar number of frequencies. flydubai also now serves six secondary destinations in Saudi Arabia following the 13-Feb-2013 launch of service to Ha’il, joining Abha, Qassim, Taif, Tabuk and Yanbu. flydubai is currently the only carrier linking Dubai with any of these destinations in Saudi Arabia. Rival Air Arabia only serves half of these six destinations – Qassim, Taif and Yanbu – from its hub at Sharjah, which is only about 30km from Dubai. flydubai has nearly doubled seat capacity to Saudi Arabia over the last year from about 10,400 weekly one-way seats to just over 20,000 currently, according to CAPA and Innovata data. Its 22% share of the UAE-Saudi Arabia market is second only to Emirates’ 26% capacity share.

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Saudia is now smaller, with a 20% share, while the two other LCCs in the market, Air Arabia and Saudi Arabia-based NAS Air, only have a 12% and 7% share respectively. Saudi Arabia is the second largest market from the UAE after India. In late 2011, flydubai was only the fifth largest carrier in the UAE-Saudi Arabia market, behind Emirates, Saudia, Etihad and Air Arabia. UAE to Saudi Arabia capacity by carrier (one-way seats per week): 19-Aug-2012 to 11-Sep-2013

Source: CAPA – Centre for Aviation & Innovata flydubai helps Emirates compete against Qatar Airways in key Dubai-Doha market In the other GCC markets flydubai has been used to help its sister carrier compete with other Gulf carriers. As Emirates is the only Gulf carrier that does not have narrowbody aircraft in its fleet, Emirates in some cases is not able to offer the frequencies that competing carriers can offer. Frequencies are key in the intra-GCC market as business passengers make short trips within the region, often just for the day. For example between Dubai and Doha in Qatar, flydubai now operates nine daily frequencies while Emirates operates six. Qatar operates 11 daily frequencies, using a mix of widebody and narrowbody aircraft, giving it a better schedule than rival Emirates but less than Emirates and flydubai combined.

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Doha is the largest destination from Dubai based on seat capacity with over 37,000 weekly one-way seats. Doha-Dubai is the largest route based on seat capacity for Qatar Airways, the second largest for flydubai after Kuwait and the second largest for Emirates after London Heathrow. The three carriers have almost identical capacity on the route, with Qatar Airways accounting for 33% of capacity, Emirates 32% and flydubai 31% (United Airlines accounts for the remainder). Dubai-Doha is currently the seventh largest international route in the world, according to CAPA and Innovata data. In the broader UAE-Qatar market, Qatar has a leading 37% share of capacity. Emirates has a 24% share and flydubai 23%, giving the duo a strong 47% share. Air Arabia accounts for less than 5% of total capacity between the two countries. UAE to Qatar capacity by carrier (one-way seats per week): 19-Aug-2012 to 11-Sep-2013

Source: CAPA – Centre for Aviation & Innovata flydubai also helps Emirates compete against Oman Air and Gulf Air Between Dubai and Muscat in Oman, flydubai now offers four frequencies on most days compared to only two daily frequencies for Emirates. Combined, flydubai and Emirates are nearly able to match the schedule of Oman Air, which offers seven daily frequencies using a mix of 737s and Embraer E175 regional jets.

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Oman Air is the largest carrier in the Oman-UAE market with a 28% share, compared to 19% for flydubai and 15% for Emirates. But on just the Dubai-Muscat route, flydubai has a leading 33% share of capacity, while Oman Air has a 32% share and Emirates has a 24% share (with the remaining 11% share held by SWISS). UAE to Oman capacity by carrier (one-way seats per week): 19-Aug-2012 to 11-Sep-2013

Source: CAPA – Centre for Aviation & Innovata Between Dubai and Bahrain, flydubai now offers three to four daily flights alongside Emirates’ three. As a result the flydubai-Emirates combination is able to roughly match the seven flights operated by Gulf Air with A320s. Gulf Air currently has a 36% share of capacity between the UAE and Bahrain. Emirates has a 19% share and flydubai a 16% share, giving the duo almost as much capacity as their Bahrain-based rival. In the final GCC market, Kuwait, the competitive situation is different as Kuwait Airways is the weakest flag carrier in the region. As Kuwait Airways only operates two daily flights to Dubai and has only a 9% share of capacity between Dubai and Kuwait City, Emirates does not need flydubai to help compete on this particular large route. Instead the combination dominates the Dubai-Kuwait market. Kuwait City is flydubai’s largest route with 10 daily flights (see background information). Emirates also has between five and six daily flights between Dubai and Kuwait, making it the carrier’s second largest route based on frequencies (it is the third largest based on seat capacity). Emirates currently has a 42% share of capacity on the route while flydubai has a 33% share.

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Kuwait-based low-cost carrier Jazeera Airways, which operates four daily flights on the Kuwait-Dubai route, has a 12% share. In the broader UAE-Kuwait market, Emirates has a 34% share of capacity, followed by flydubai with 26%. Its LCC rival Jazeera only has a 13% share. Emirates and flydubai have complementary networks flydubai and Emirates also operate alongside in several other non-GCC markets within the Middle East including Amman in Jordan, Beirut in Lebanon, Sana’a in Yemen and Baghdad, Basra and Erbil in Iraq (the two carriers also both served Syria prior to the current crisis in Syria). flydubai exclusively serves two additional secondary destinations in Iraq, Al Najaf and Sulaymaniyah. The two carriers also operate side by side in two African markets – Addis Ababa and Khartoum – while flydubai also serves Alexandria, Djibouti and Port Sudan. In India, flydubai only serves three destinations including two secondary cities alongside Emirates (Ahmedabad and Hyderabad) and one that is not served by Emirates (Lucknow). As India is the biggest market from the UAE and is such an important component of Emirates’ network, the market is generally better served by widebody aircraft. India is a much bigger market for Air Arabia but Air Arabia’s position is different as it is an entirely independent LCC. Elsewhere in South Asia, flydubai also serves Colombo in Sri Lanka, Karachi in Pakistan, Kathmandu in Nepal, Male in the Maldives and Dhaka and Chittagong in Bangladesh. All these markets except for Chittagong are also served by Emirates. But flydubai is launching service in Mar-2013 to two secondary destinations that are not part of the Emirates network – Multan and Sialkot. Multan is currently linked with Dubai by one weekly Pakistan International Airways (PIA) flight. Sialkot is not served from Dubai but is served from Sharjah by Air Arabia, PIA and Shaheen Air. flydubai grows rapidly in CIS region In the CIS, flydubai has had huge success entering similar under-served markets. It currently operates to three destinations in the Ukraine and four in southern Russia. It also operates to one destination each in Afghanistan, Armenia, Azerbaijan, Georgia, Kyrgyzstan and Turkmenistan (not all these countries are considered part of the CIS but are in the same geographic region in the crossroads between Europe and Asia). It is these 14 destinations where flydubai has really added value to Emirates as none of them are served by Emirates. While flydubai only serves two of these destinations daily (Kiev in Ukraine and Kabul in Afghanistan) they have been among the carrier’s fastest growing and highest yielding markets. flydubai’s four markets in southern Russia – Kazan, Samara, Ufa and Yekaterinburg – have been particularly profitable as this region of Russia has a fast-expanding economy and strong links with the Middle East but are under-served internationally. At just over five hours, flydubai’s four Russian routes are very long for a LCC. Most narrowbody LCCs stay away from routes over four or four and a half hours as the operating costs are too high. But these routes have in some cases

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even higher yields than mainline Emirates routes and therefore can be profitable despite their long length. flydubai says its traffic to the CIS region grew at a 73% clip in 2012. flydubai will continue to expand rapidly in the CIS and Central Asia regions, adding capacity to existing markets and adding destinations where it can. There will be some limitations due to bilateral restrictions – for example the carrier has not been able yet to enter the lucrative Kazakhstan market. But over time bilateral restrictions should ease and flydubai will continue to grow its presence in the CIS, particularly southern Russia, and Central Asia. flydubai also serves three markets in the Balkans that are not served by Emirates – Belgrade, Bucharest and Skopje (the latter two were launched in 4Q2012). The only European market that flydubai operates alongside Emirates is Istanbul. While there is potential for more capacity in the Balkans the real goldmine is in the CIS. flydubai metamorphoses into regional LCC hybrid carrier flydubai’s strategy of entering thin but high yield markets has turned it into almost a regional arm of Emirates, following a model similar to that used by Singapore Airlines for its full-service regional subsidiary SilkAir. While flydubai is not technically part of the Emirates group, the two carriers work closely together and have a robust interline agreement. flydubai and Emirates operate at opposite sides of the Dubai airport. But transfers are facilitated with an airside bus connection between Terminal 2, the scruffy budget-focused terminal where flydubai operates, to Emirates’ Terminal 3. flydubai hasn’t hybridised to the extent of offering a business class or premium economy cabin. flydubai also has no intention of providing complimentary food or checked bags. The carrier will stick with its low cost base and focus on ancillaries, which accounted for 16.5% of its revenues in 2012, for value-added services including in-flight entertainment (IFE), seat selection, checked bags and cargo. But at the same time flydubai is more than willing to pay the extra costs associated with securing additional passengers beyond those that book on its website. In 2012 flydubai signed up with three major GDS providers – Amadeus, Sabre and Travelport. In late 2012 flydubai entered IATA’s BSP, allowing it to interline with other carriers serving Dubai. The GDSs, BSP and Emirates interline allows flydubai to attract high yield passengers, particularly on under-served routes to secondary cities. Very few carriers operating to western standards serve most of these markets. With its low cost base, these type of routes become highly profitable and easily cover the extra cost of offering a transfer service and paying GDS or BSP fees. The opportunities for a hybrid carrier in Dubai that takes the best of the LCC and full-service models are tremendous given the diversity of destinations within narrowbody range of the UAE. flydubai can serve these markets without overlapping with its sister carrier and is able to significantly improve the connectivity of the Dubai hub, which ultimately is the main goal for the flydubai and Emirates shareholder.

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With flydubai as a sister carrier, Emirates meanwhile gets valuable feed from fast-growing emerging markets that cannot yet support widebody service (primarily because of a lack of demand but in some cases because the airports can only accommodate narrowbody aircraft) and does not have to invest in establishing a regional subsidiary. While a regional full-service subsidiary with a premium cabin would provide a better and more closely aligned product, there is not enough demand to warrant the investment and the flydubai product, which includes seatback IFE (for a fee) is sufficient for most passengers. On short flights within the Middle East, there is not much pain involved with taking a LCC while on many of flydubai's medium-haul routes the reality is in most cases there are limited full-service options. More rapid growth in store for flydubai as 50 additional aircraft are contemplated It is no surprise flydubai is bullish on its prospects and is planning further rapid growth. Without even significantly extending its network the carrier will have a need for a much larger fleet just to support its current network of over 50 destinations as demand grows. At the press conference discussing its 2012 results, flydubai Chairman Sheikh Ahmed bin Saeed al-Maktoum said the carrier was discussing with Airbus and Boeing a new 50-aircraft order (Sheikh Maktoum is also the chairman of Emirates). flydubai made waves ordering 50 737-800s at the 2008 Farnborough Air Show – a year before it even launched services. The last of these aircraft are slated to be delivered in 2015. flydubai will need to soon order more aircraft, perhaps at the 2013 Dubai Air Show in November, to continue its growth trajectory beyond 2015. The A320neo and 737 MAX are under consideration. flydubai has already grown to become the largest LCC in the Middle East. As a group, Air Arabia has a slightly larger fleet (32 aircraft) and generated 6% more revenues than flydubai in 2012 while carrying about 2% more passengers. But when excluding Air Arabia’s subsidiaries in Morocco and Egypt, the Sharjah-based carrier is now smaller than flydubai based on revenues, fleet and current seat capacity (see background information). With LCC penetration rates in the Middle East still well below global averages, flydubai along with the region’s other existing LCCs – Air Arabia, Jazeera and Saudi Arabia-based NAS Air – are well positioned as the budget end of the region's market continues to expand. flydubai is particularly well positioned as it has an 11% share of capacity and about a 70% share of LCC capacity at Dubai. It is now the second largest carrier at the world’s second biggest international airport.

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Dubai capacity share (% of seats) by carrier: 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata flydubai’s close relationship with Emirates gives it an opportunity to grow rapidly while Emirates as well as the region’s budget market grows. Its hybrid model allows it to have the best of both worlds and capture multiple segments of traffic. With such a strong model, flydubai should be able to continue to pursue rapid and profitable expansion, maintaining its position as the Middle East’s largest LCC and potentially becoming one of the largest LCCs globally. BACKGROUND INFORMATION flydubai top 10 routes ranked by capacity (seats): 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata

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Top five low-cost carriers in the Middle East based on seat capacity: 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata Note: based on seat capacity to/from and within the Middle East Top five low-cost carriers within the Middle East based on seat capacity: 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata Note: based on seat capacity within the Middle East only Top 10 low-cost carriers at Dubai based on seat capacity: 18-Feb-2013 to 24-Feb-2013

Source: CAPA – Centre for Aviation & Innovata

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Gulf  Air                                        Key Data Fleet and Orders Gulf Air Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Gulf Air projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Gulf Air international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Top routes table Gulf Air top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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Premium/Economy profile Gulf Air schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Gulf Air turn around plan offers a glimmer of hope for the beleaguered flag carrier Gulf Air’s latest attempt at a turn around, launched in late 2012, appears to be quickly producing concrete results for the struggling Bahraini national carrier. The latest in a long line of revival attempts, the plan has dramatically downsized the Gulf’s oldest airline in an attempt to end the years of heavy losses. At the end of 1Q2013, Gulf Air announced it achieved a 21% cut in overall costs during the quarter, crediting the improvement to a reduction in aircraft leasing fees, cuts to flight-related charges and staff expenses and the closure of loss-making routes. Yields were up 21% year-on-year in the quarter, thanks to stronger traffic demand in the region and significantly higher sales in Bahrain, as well as its broader fleet and network restructuring. As a consequence, the carrier reported that losses in 1Q2013 were approximately half what they had been in 1Q2012. The result is 11% better than the carrier’s restructuring plan called for, an encouraging sign that the pain associated with the reshuffle is worth it. The carrier has also been consistently amongst the most punctual airlines in the region, a dramatic turnabout from its operations a few years ago. Despite the improvement, Gulf Air has a long way to go before it can be said to be commercially viable. According to the Financial and Economic Affairs Committee vice-chairman Abdulhakeem Al Shemri, Gulf Air has cost Bahrain approximately BHD1 billion (USD2.65 billion) over the past

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four years. The carrier’s owner, the national sovereign wealth fund, the Bahrain Mumtalakat Holding Company, attributed the majority of its 2011 losses of BHD270.1 million (USD717 million) to its ownership of the carrier. In 2009, Mumtalakat CEO, Talal al-Zain stated that the airline was an “unacceptable burden on the national economy” and existed only by the grace of government support. Arab Spring and competition weigh heavily on Gulf Air The global financial crisis, the Arab Spring and the continuing social unrest in Bahrain have not helped the carrier’s restructuring efforts over the past several years. Traffic levels in Bahrain dipped significantly between 2009 and 2011, with Gulf Air hit harder than many of its regional peers. Bahrain International Airport traffic: 2007-2012

Source: Bahrain Airport and CAPA – Centre for Aviation Traffic to/from Bahrain International Airport recovered 8.8% in 2012, but passenger levels have only just begun to return to their peak 2009 levels. Regional competition has also been relentless. The hubs of the Gulf’s largest sixth freedom carriers – Emirates, Etihad Airways and Qatar Airways – are all within 500km of Bahrain. It also faces stiff competition from low-cost carriers such as Air Arabia, nasair and flydubai. The bankruptcy and liquidation of privately owned Bahrain Air in Jan-2013 has relieved a little pressure on the national carrier, although the failure is not positive for the market in general.

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Bahrain International Airport capacity (ASKs) by carrier (week commencing 22-Apr-2013)

Source: CAPA – Centre for Aviation & Innovata Government bail out comes with strings attached In late 2012, the Bahraini Government approved a BDH185 million (USD491 million) financial aid package for the carrier. While this was less than a third of the size of the support the carrier had been seeking, the funds come with conditions attached. Bahrain's parliament only approved the funds injection with the stipulation that the carrier took strenuous efforts to curb its losses and turn around its operations. Prior to the funds injection, a number of options had been on the table for the future of the airline, including a sell off/dissolution of the carrier or the formation of a new carrier. Neither option was considered cost effective or politically justifiable, so a combination of downsizing and restructuring was chosen. In Jan-2013, the carrier unveiled the “rightsizing” of its operations, announcing cuts to its fleet, network and workforce and the introduction of a new performance framework. Gulf Air announced targets of a 24% reduction in costs by the end of the year, as well as a 9% improvement in revenue per ASK. The restructuring plan has seen Gulf Air cut its fleet from 36 to 26 aircraft, deciding on an all-Airbus fleet for the next few years. It has phased out its Embraer regional jets, and settled on a mix of A320 family aircraft for its Middle Eastern and medium-haul network. Six A330s have been retained to meet its long-haul commitments in Europe and Southeast Asia, as well as some high volume markets. Its average fleet age has been reduced to just 4.3 years. In concert with this, Gulf Air dramatically cut back and re-aligned its aircraft order book, which cut its long-term financial liability of USD5 billion by more than half. The carrier’s order for 20 A330s was replaced with an order for eight A320ceo aircraft – all of which are now in service – and 16 of the updated A320neo aircraft, which are due to be delivered towards the end of the decade.

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Its order for 24 Boeing 787s, long the subject of speculation, has been cut back to between 12 and 16 aircraft. The final number to be delivered will depend on the carrier’s “strategic requirements” towards the end of the decade. The 787s will be used to replace the A330s, as well as to open some new long-haul routes. Middle East remains network focus Along with the fleet restructuring, Gulf Air’s network has been slimmed down and realigned to focus on point-to-point operations. The carrier is concentrating on markets in the Middle East, where it operates one of the region’s more mature networks. The Middle East accounts for almost two thirds of the airline’s seating capacity and just under 24% of its total ASKs. The business hubs of Dubai, Doha, Kuwait, Damman, Riyadh, Jeddah and Abu Dhabi are its most important regional destinations. Gulf Air seat capacity by region: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Gulf Air continues to operate to selected destinations in Europe, Southeast Asia and around the Indian subcontinent. In terms of ASKs, London Heathrow remains Gulf Air’s single most important destination, followed by Manila, Bangkok and then Delhi.

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Gulf Air capacity (ASKs) by destination: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata The airline closed eight “commercially unviable” routes in late 2012 and early 2013 and has slimmed down its network from 49 destinations to just 33. The network pull-back is not as drastic as initially proposed in late 2012, when the carrier was expected to cut its network to less than 30 routes. European routes have been among the main victims of the restructuring. Geneva, Athens and Milan were all suspended in mid-2012, with Copenhagen and Rome following later in the year. The rest of the cuts have been more evenly distributed. Gulf Air pulled out of several South Asian markets, including Kathmandu, Dhaka, Colombo and Kabul. It has also suspended service to Nairobi. In the Middle East, services to Aden, Basra and Erbil have been cut. Due to political disagreements and the security situation, Gulf Air has still not resumed operations to its four Iranian destinations, which had been among the carrier’s most profitable routes prior to the Arab Spring. Gulf Air's labour troubles threaten to spill over into strike actions The turn around has not come without its troubles though, the chief among them is the carrier’s labour relations. The carrier is a major employer of Bahraini nationals and workforce cuts have proved a politically sensitive subject, particularly given the social unrest that is still prevalent in the country. When the bail out was approved, Gulf Air stated its workforce would need to be “aligned to meet the operational, maintenance and administrative needs of the revised fleet and network.” It reportedly aims to cut up to 1,800 staff under the restructuring. The reduction is being carried out via a combination of non-renewal of contracts, natural attrition, the introduction of a voluntary retirement scheme and the closure/restructuring of outstations.

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By the end of Feb-2013, the carrier had chopped its headcount back by 15%, without revealing firm numbers. At the same time, the airline’s ‘Bahrainisation’ levels at its head office reached a record high of 85%. The carrier had reported an overall ‘Bahrainisation’ level of close to 60%, with a stated goal of increasing this to 75%. While this is hardly an adequate criterion for improved efficiency, it is a political necessity. The carrier’s two main unions – the National Trade Union of Gulf Air (NTAGU) and the Gulf Air Trade Union (GATU) – have been vocally dissatisfied at the scale of job cuts under the plan, as well as by the way they have been carried out. Despite Gulf Air's commitment to conducting the rightsizing in a “fair and transparent manner” and “continuing to be a key employer committed to developing a national workforce of aviation professionals”, the GATU has formally rejected the workforce reduction plan. It has called on Gulf Air and the Bahraini lawmakers to secure jobs for nationals, accusing the airline of forcing some Bahraini nationals to take the voluntary redundancy packages. It's hard to run an airline by parliamentary vote The cuts at Gulf Air have been so contentions that at the end of Jan-2013, the Bahraini Parliament voted to temporarily freeze redundancies at the carrier, to protect the positions of Bahraini nationals. The parliament also put a stop to early retirements at the airline, forcing Gulf Air to offer larger payouts and better benefits to Bahraini nationals who had chosen to leave the carrier. The parliament has also recommended the hiring of around 100 Bahraini pilots, despite the fleet and network reduction. As dissatisfaction with the restructuring has built up, so have threats of strike action. Despite meetings involving union representatives, the carrier’s management and Bahrain’s Ministry of Labour to outline the nature of the restructuring, unions have been directly petitioning the Ministry of Labour and Parliament to halt the workforce rightsizing. Strike action has been put forward as an option by the GATU, but so far the unions have refrained from any concerted industrial campaign. Gulf Air has acknowledged that cutting its workforce is a difficult and politically unfavourable option, but it simply cannot reduce its losses without workforce reductions. The downsizing will continue as part of its restructuring process, but the reaction of unions and politicians remains unpredictable. A brighter future for Gulf Air, but still a long way to go Gulf Air intends to emerge from 2013 a much leaner and more commercially viable carrier, although losses are expected to continue in the interim. Given its prominence and its importance to Bahrain as an instrument of national policy, its restructuring and financial rehabilitation is a politically sensitive issue. Both the Bahrain Government and the Bahrain Mumtalakat Holding Company are adamant the turn around will follow commercial principles, although the Bahrain Parliament has tended to use the carrier as a political football and seemingly cannot resist interfering. The workforce rightsizing is due to be completed before the end of the year, although union intransigence and political interference may mean it takes longer.

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The process is moving Gulf Air’s performance in the right direction, but outside national borders too the airline faces an unenviable competitive position. Compared to its regional rivals, its cost base is still very high and its product, although much improved, still requires further enhancement. It still cannot compete with either the large regional full-service carriers or the fast expanding low-cost airlines, so is striving to find its own niche. Even the exit of Bahrain Air from the local market – as much a victim of politics as Gulf Air – will do little to improve its position. The carrier’s objectives are clear: cut size and costs, raise yields and improve operational performance. 2013 will be a year of major challenges for Gulf Air, but if it can realise all three of its goals, it will have a solid platform to build on. After a decade of increasingly heavy losses, the airline desperately needs to remedy its ills, if only to stop the haemorrhaging of government money. The most recent plan to resurrect the airline is comprehensive, but it remains to be seen whether the institutional and structural problems at the carrier can be solved in the long term.

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Jazeera  Airways                                    Key Data Fleet and Orders Jazeera Airways Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Jazeera Airways projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

Route area pie chart Jazeera Airways international capacity seats by region: as at 8-Apr-2013 Source: CAPA - Centre for Aviation and Innovata

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Top routes table Jazeera Airways top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile Jazeera Airways schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Share price 2012/2013

Source: CAPA -

Centre for Aviation and Yahoo! Financial

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Could Jazeera Airways, a small and nimble carrier, come to the rescue of Kuwait Airways? In the Middle East, it may be impossible to find two carriers sharing a common hub that are more different than Jazeera Airways and Kuwait Airways. One is privately owned, nimble, low cost and highly profitable. The other is government owned, suffering from decades of losses and burdened with overstaffing and bureaucratic detritus. However the future for both carriers may about to become linked. Jazeera Airways chairman Marwan Boodai has announced that the carrier is definitely interested in purchasing a stake in the national carrier once it launches its long delayed IPO. In doing so, the small Jazeera may just provide a lifeline to the larger Kuwait Airways. Two airlines, two different stories in the same market Jazeera Airways was launched in 2006 as the Middle East's first fully privately owned airline and the region’s second low-cost carrier (after Air Arabia). In the past seven years, it has handled more than 28 million passengers. Its fleet of seven A320s operate a tightly controlled regional and international network, with an average flying time of just two and a quarter hours. In 2012, the carrier reported a new record profit of KWD13.9 million (USD48.4 million), making it one of the world’s most profitable airlines by size. Jazeera Airways quarterly profits: 2009 to 1Q2013

Source: CAPA – Centre for Aviation and Jazeera Airways

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Kuwait Airways, the national carrier, has in contrast been operating since the mid 1950s, but its glory days are well behind it. The carrier suffered a major setback during and following the Iraqi invasion of 1990, and continued a two-decade long run of red ink in 2012, despite suspending its privatisation plan in 2011 as part of renewed efforts to stem the losses. The Kuwait Airways fleet is one of the oldest in the Middle East and the carrier is cutting back its route network while rivals are expanding. It has suffered serious image problems at home and abroad due to maintenance and on-time performance issues. Compared to other state owned airlines in the region, it is undersized, under-capitalised and offers a product well below the standard set by its world benchmark neighbouring competitors. While the national carrier handled 2.8 million passengers in 2011 with a fleet of 17 aircraft, Jazeera Airways managed to handle 1.2 million with just six aircraft. The national carrier still operates more capacity the Jazeera Airways at Kuwait International Airport – particularly given its long-haul routes to Europe, Southeast Asia and even New York – but, even despite a slowdown in its growth, the LCC is narrowing the capacity gap. Kuwait International Airport capacity (seats): 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Kuwait Airways privatisation: An opportunity for Jazeera Airways and Kuwaiti aviation? Kuwait Airways Corporation was turned into a shareholding company in Oct-2012. In Jan-2013, the Kuwait parliament gave its final approval of the carrier’s privatisation legislation. Under the privatisation legislation, 35% of the carrier’s shares would be sold off to local private investors, or to foreign investors; 40% would be allocated for sale to Kuwaiti nationals through an IPO; 5% would go to the employees share ownership trust; and the Kuwaiti government would retain a 20% strategic holding in the carrier. The privatisation process is expected to take up to three years. In addition to the privatisation legislation, the Kuwait National Assembly also agreed to underwrite the airline's heavy losses. Kuwait Airways is estimated to have lost approximately USD560 million over the past two financial years alone. Kuwaiti Minister of Communications

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and Housing Salem Al-Othaina reported in late 2012 that the carrier had accumulated losses of USD1 billion over a four-year period. However, it did receive a USD500 million injection at the end of 2012, after Iraq and Kuwait settled a long dispute over damages to the carrier’s fleet and infrastructure during the Gulf War. It has also received approximately USD635 million in loans. According to Mr Boodai, Kuwait Airways has virtually abandoned the long-haul market, ceding the territory to the Middle East’s large and fast expanding sixth freedom carriers. Instead, the national carrier has opted to divert some of its capacity back into regional operations, something that Mr Boodai sees as hurting Jazeera Airways. The Jazeera Airways chairman sees great potential synergies between the airlines, with the national carrier responsible for long-haul operations and Jazeera handling regional services and other short-haul destinations. Kuwait Airways' uncertain financial position will be a sticking point, whoever buys A major sticking point is Kuwait Airways' uncertain financial position. Before any investment goes forward, Jazeera would need to perform detailed due diligence. While Kuwait Airways' losses are being covered by the Kuwaiti Government, the issue is internal; but Jazeera Airways would only be interested in the carrier “provided the financials are right“. Mr Boodai said Jazeera Airways may use its own cash for the proposed purchase, or may raise funds from the market. A combined Jazeera Airways-Kuwait Airways operation could be highly complementary, solving several problems for both carriers. For Jazeera, it would stop the national carrier dumping capacity into short-haul markets, as well as providing it with a high-low product mix, probably dedicating Kuwait Airways to longer-haul operations while it handles the short-to-medium-haul markets. At present, the carriers compete on nine Middle East regional routes, but Jazeera Airways’ policy has been to make sure it has a significant proportion of the market on all but the largest routes it operates. Jazeera Airways and Kuwait Airways capacity (seats) on regional routes: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata

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Acquiring Kuwait Airways would also give the carrier tremendous international access. Although Kuwait has an open skies policy, Jazeera Airways CEO Stefan Pichler complained that the Middle East aviation market still suffers from protectionism and needs to “overcome national sensitivities”, calling for the region to “develop a real open skies policy" to deliver its true growth potential. For Kuwait Airways, the funds from the privatisation would help it with its own restructuring and a much needed fleet modernisation effort. Kuwait Airways intends to lease 10-12 aircraft to meet its short term needs, and expect to make an order for around 20 within the next two years. Jazeera Airways' managerial expertise would also be invaluable for the carrier, particularly given the LCC’s successful turn-around efforts over 2009 and 2010 under Mr Pichler. The then-struggling carrier underwent a profound realignment during this time, downsizing its staff and fleet and raising profitability to record levels while returning to growth. A merged entity, or at least cooperation between the two airlines, would also give it sufficient size to meet competition from some of the region’s other small national carriers that are striving with their own turn around efforts, such as Gulf Air and Oman Air. Private LCCs buying government-backed airlines offer a limited success story A private and successful LCC buying a national carrier is unusual, but it is not unprecedented. In 2007 Brazilian LCC GOL bought out legacy flag carrier Varig after the fading national carrier had fallen into bankruptcy, been split up and faced liquidation. The carrier has since been fully incorporated into GOL’s operations. But not without considerable indigestion; GOL would perhaps not repeat the experience if it had the opportunity again. Irish LCC Ryanair has made repeated attempts to buy control of national carrier Aer Lingus over several years, although the Irish Government part-owner and the European Commission have rejected the efforts. In the case of the Irish airlines, it is the low-cost carrier that is the dominant partner in the market. Malaysia-based LCC Air Asia was interested in investing in Malaysian Airlines, although a proposed share-swap agreement between the two was abandoned in early May-2012, to be replaced by a more limited collaboration agreement. The initial experience was not fruitful, thanks to a combination of political and corporate cultural issues. Aer Lingus, where Ryanair control now looks extremely unlikely, is the only airline among these which is, or was, operating profitably. For a private airline to take on a loss making, legacy, government-owned, heavily politiicised airline is no small venture. So Jazeera will be entering any such transaction with its eyes wide open. Jazeera is building on its successful turnaround, improving yield and load factor After losses in 2009 and the first half of 2010, the carrier launched its turn-around plan – known as TAP – and cut capacity back heavily, slashing its network and staff. The result has been a record run of profitability – 11 quarters of positive results and counting. In 1Q2013, the carrier reported a net profit of KWD3.6 million (USD12.6 million), a record for the first quarter for the carrier and up 230% on the 1Q2012 net result. It has now moved beyond TAP and is progressing with STAMP – which lays out the carrier’s strategy for 2013 and 2014.

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STAMP is aimed at increasing the profitability of Jazeera’s operation without any major additions in destinations, aircraft or other costs. Its premise is increased profitability through a combination of load factor and yield enhancements, resulting in additional revenues. STAMP’s overarching goal is to increase the airline’s load factor to 68% by 2014. The turn-around of Jazeera Airways is one of Middle East aviation’s great success stories. After its launch, the carrier overextended itself and was caught short when fuel prices rose, global economic conditions changed and capacity flooded into the Kuwaiti market. In 2009, it was ejected from its second hub at Dubai – to make way for the Dubai-based flydubai low cost operation – forcing upon it a major reorganisation of its operations. The result was the carrier’s previous four-year run of profitability turning into two consecutive years of losses. Under the TAP programme, the carrier cut its fleet to six aircraft – as well as cancelling an order for 25 aircraft – and reduced its network to 19 destinations, most of them less than three hours flight time from Kuwait. Faced with overcapacity at its home hub, the carrier concentrated on improvements in revenue and yields at the expense of passenger volume. Load factors have risen significantly, from a dismal 44% in 2010 to 51% in 2011 and then to 66% in 2012. Yield management has been a key driver for Jazeera Airways. Capacity management and network nimbleness – as typified by the carrier’s rapid exit from Syria – as well as a very short booking cycle have contributed to the positive yield performance. Enhanced service offering, including improved baggage allowances, better business class offerings and free on-board meals have also enhanced yields. The result is that yields have doubled over a four-year period, driving revenue up strongly even when faced with falling passenger traffic due to capacity cuts. Jazeera Airways yield (Kuwaiti fils): 1Q2009 to 1Q2013

Source: CAPA – Centre for Aviation & Jazeera Airways Note: IKWD=USD3.5

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Its Sahaab leasing unit has generated revenue and allowed greater capacity flexibility Also crucial to the success of the turn-around was the carrier’s Sahaab leasing unit, which granted it great flexibility to its operations, allowing the carrier to channel its excess capacity, turning them into highly profitable assets. Originally launched as a joint venture partnership with NBK Capital, Jazeera Airways took sole ownership of the leasing unit in Feb-2010, investing KWD25.6 million (USD). In 2010, Sahaab took nearly half of the Jazeera Airways fleet, leaving the carrier with a half dozen of the newest aircraft. The older A320s were leased out to several carriers, including Virgin America and SriLankan Airlines. The leasing unit provided steady revenue to offset the seasonality of the group's airline business, and excellent profitability. Early on in the Jazeera Group turn-around effort, Sahaab leasing accounted for only 24% of the group’s revenue, but 52% of its net profits. Today though, Jazeera Airways is the group's primary profit earner. In 2012, the mainline airline was responsible for 59% of the group’s net profit, and 76% of total revenue. In 1Q2013, traditionally the weakest quarter for the airline, it still managed to contribute 60% of group profitability. Jazeera's slow and steady development path - and popularity with financial markets Outside the possible investment in Kuwait Airways, Jazeera is taking a slow but steady development path, focusing on cost minimisation and efficiency rather than expansive passenger growth to achieve improvements in its bottom line. The carrier’s STAMP plan is focused on maintaining the carrier’s core network of less than 20 destinations and increasing density and capacity for growth. Under Jazeera's cautious fleet expansion, just three aircraft are due to come to the carrier over the next two years and it has not given much away about possible new orders. As it receives new aircraft, it will lease out the older aircraft via Sahaab. The carrier’s late 2012 rights issue to fund its remaining aircraft acquisitions and increase its capital was 2.25 times oversubscribed. The carrier sold 178 million shares, effectively raising the company's capital by 74% to KDW42 million (USD148 million). It now has a healthy balance sheet, with KWD47 million (USD165 million) in liquidity. It has also sought European credit agency funding to help with its A320 purchases. For 2013, traffic growth will be focused around improvements in load factor and via increasing frequency across the existing network, particularly the more recently added routes such as in Egypt and Iraq. The carrier is also concentrating on improved operational efficiency, although its young, single type fleet already gives it high aircraft utilisation and fast turn-around times. The Kuwaiti market shows very strong growth indicators for travel within the region, and Jazeera Airways’ outlook for travel in the country is positive. Kuwait is a point-to-point market, which suits the airline’s business model and comparatively simple, localised product. Traffic at its Kuwait International Airport base has grown from around six million in 2006 to 9.5 million in 2012. Jazeera reported stronger than usual traffic growth in early 2013.

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Kuwait International Airport passenger traffic:

Source: CAPA – Centre for Aviation and Kuwait International Airport Kuwaitis have increasing amounts of disposable income and are showing increasing inclination to travel. Jazeera Airways is looking to improve its marketing and increase leisure travel, focusing on quality service in all its cabins. It is also aiming at capturing a better share of the business market, and is tailoring its product to offer more for premium passengers. Jazeera Airways expects moderate growth in 2013 and in 2014, when STAMP ends. Beyond that, the carrier is content to remain a small, nimble operator in a region dominated by large, government owned carriers. Its focus is on delivering growing profitability, and returns to its shareholders, rather than replicating the rapid passenger growth of other carriers in the region.

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NAS  Air                                                  Key Data Fleet and Orders NAS Air Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

NAS Air projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart NAS Air international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Top routes table NAS Air top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile NAS Air schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata  

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nasair plans ambitious expansion in 2013 ahead of further liberalisation in Saudi Arabian market nasair has long been the junior partner in the Saudi Arabian aviation market, but five years into operations its fortunes have begun to change. In 3Q2012, the airline reported its first-ever quarterly profit. It also managed to breakeven in the final quarter of the year, ending 2012 with a small loss. Load factors have hit a record 75% and nasair has turned its operational performance around to generate more revenue. With the improving financial momentum and promising passenger traffic, the carrier is optimistic about its prospects for 2013. Sulaiman Al-Hamdan, Group CEO of NAS Holding – the parent of nasair – has announced the carrier is targeting a 50% increase in passenger traffic for 2013. As if that wasn’t ambitious enough, the carrier is also targeting a 100% increase in revenue and its first ever full-year profit. The low-cost carrier was launched in 2007, along with fellow LCC Sama. The arrival of two new carriers in the previous monopoly controlled Saudi Arabian domestic market promised a boom for the region’s largest domestic travel market. Since launch the carrier has transported more than 11 million passengers. However, nasair has struggled in the domestic market, competing against the much larger and heavily subsidised Saudia, and facing local challenges such as the domestic fare cap and airport infrastructure constraints. Sama declared bankruptcy in 2010, with debts of more than USD200 million, while nasair has yet to have breakeven over a 12-month period. Operational turn-around brightens future for airline The turn-around has been brought about by carefully re-matching of the airline’s capacity to its demand and a significant improvement in the carrier’s operational performance. A new business plan was approved in early 2013 and the carrier’s new CEO, François Bouteiller, who assumed his position in Mar-2012 and has been charged with executing the carrier’s expansion strategy. Mr Bouteiller's mission is to “open widely into the global perspectives and work to diversify revenue sources to increase profitability”. nasair’s average aircraft utilisation has increased from just 5.4 hours per day in 2009 to 11 hours in 2011 and better than 13 hours per day during 2012. During 3Q2012, the carrier reported aircraft utilisation of up to 16 hours per day. Part of the turn-around has also been a major switch in operational focus to shorter routes. In 2012, the airline abandoned services to its Indian destinations at Mumbai, Khozikode and Kochin. The services were tying up A320s that could be used more profitably elsewhere and the carrier was competing at a disadvantage against the high-capacity widebodies from other airlines.

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The Kochin route alone occupied a single aircraft for approximately 14 hours. Switching the A320s to shorter routes has allowed the aircraft to increase its revenues, at the price of a modest decrease in yields. According to Mr Al-Hamdan, nasair is able to operate up to six services to Dubai in the same time. Reinforcing international operations Unable to operate profitably in the domestic market, nasair has increasingly switched its focus to international routes. Its international network now covers Pakistan, the UAE, Kuwait, Jordan Syria, Lebanon, Turkey, Sudan and Egypt, with more destinations in the planning stages. The domestic market has not been forgotten completely. The airline operates 19 domestic routes in Saudi Arabia to six destinations. In 2012, the carrier’s management decided to significantly increase its domestic presence, with more flights from Jeddah, Riyadh and Dammam. In Jan-2013, it introduced Taif and Yanbu as new domestic destinations. Seat capacity at nasair is now split almost evenly between domestic and international markets. However, given the longer routes in its international network, overall ASKs are skewed towards international operations. nasair domestic/international capacity share by seats: 15-Apr-2013 to 21-Apr-2013

Source: CAPA – Centre for Aviation & Innovata nasair domestic/international capacity share by ASKs: 15-Apr-2013 to 21-Apr-2013

Source: CAPA – Centre for Aviation & Innovata

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The carrier will be using the new Al Maktoum International Airport in Dubai as one of its springboards for renewed international expansion. The new airport opens to passenger traffic in Oct-2013 and nasair has announced it plans to operate better than 50 flights per week between the new facility and “all major Saudi cities”. At the same time, the carrier will maintain its present operations between Saudi Arabia and Dubai International Airport. At present, the carrier operates a daily Jeddah-Dubai service with A320s and 18 weekly flights from Riyadh to Dubai with a mix of A320s and E190s. The Riyadh-Dubai route is nasair's largest international route. nasair top 10 international routes ranked by seat capacity: 15-Apr-2013 to 21-Apr-2013

Source: CAPA - Centre for Aviation Mr Bouteiller expects that the new services will stimulate a further increase in destinations between the new airport and other destinations in nasair's network, as well as encourage leisure traffic between Saudi Arabia and the UAE. Social media proved boon for expanding nasair and new GDS agreement The carrier is increasingly turning to the world of social media to ensure its gets the best possible value out of its publicity campaigns as it engages with its customer base. With soaring internet penetration rates in the country, the Saudi population is becoming increasingly engaged with social media. Almost a quarter of the population are now active users of Facebook, Twitter, LinkedIn or other social media channels, with more than 50% penetration in the 18-35 age demographic. At the start of 2009, only 9% of the airline’s bookings were made online. In early 2013, that figure had increased to 60%. While this is still behind the best European and American LCCs – in 2012 97% of easyJet’s bookings were made online, whole Southwest saw 81% of bookings made via its website – it is a strong performance for the Middle East, where just over 45% of ticket bookings were made online in 2012.

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According to a 2012 study by The Social Clinic and The Loft, Saudi Arabia has the highest Facebook user rate in the Middle East, with over six million users, two million of which use it exclusively on mobile devices such as smartphones or tablets. Twitter use exploded in 2012, increasing 3000%. Saudi Arabia’s population is the largest user of the micro-blogging site in the Middle East, with an average of 50 million tweets per month. The country is responsible for 30% of Arabic language tweets globally. In late 2012, nasair won awards for “most popular airline on social media” and “best social media engagement for a company”. Its Facebook and Twitter accounts are active parts of its marketing campaigns, providing information to travellers, promoting its latest specials and events and resolving travel problems. The carrier has around 61,000 followers on Twitter and around 1.17 million ‘Likes’ on Facebook. The carrier’s much larger national rival Saudia has also embraced social media with similar enthusiasm in the past two years. In addition to online distribution and social media, nasair is also reverting to some more traditional distribution channels. In Sep-2012, the airline signed a content agreement with Travelport. This is the first time that the Riyadh-based airline has chosen to distribute its fares through the GDS channel. The new multi-year agreement will give Travelport’s Galileo and Worldspan-connected travel agents worldwide access to nasair’s full fare inventory. In addition to new content agreement, Travelport and nasair have also sealed a strategic airline IT services deal. The carrier has selected Travelport’s e-ticket database hosting service, and Travelport will be offering a bank settlement plan (BSP) for nasair bookings in countries where nasair has joined the local BSP. Fleet expansion to support ambitions and an IPO in the wings To meet its 2013 goal of a 50% increase in passenger traffic, nasair is also undergoing a major fleet expansion. The airline currently operates a fleet of nine A320s and seven E190/E195 regional jets. It has also wet leased a 747 for pilgrimage services to destinations such as Malaysia and Indonesia. In early Apr-2013, the airline announced a lease agreement with Air Lease Corporation for three A320s. The three aircraft are contracted on six year leases and will be delivered in May-2013, Aug-2013 and Oct-2013. The new aircraft will be used for expanding the carrier’s route network, as well as increasing flight frequencies on their most popular markets, although specifics have not yet been forthcoming. In addition to the reinforcement of the A320 fleet, the airline is looking to divest its Embraer regional jets, in order to further reduce its costs and improve productivity. Settling on a single fleet type will simplify its planning and operations and cut its MRO costs. Originally introduced in 2009 to help serve the unprofitable domestic market, including required social routes, nasair operates six E190s and one E195. It has already disposed of one other E195. The aircraft will be phased out within the next two years. It plans to replace them with more A320s. By 2016, the airline expects to increase its operational A320 fleet to around 35 aircraft, increasing to 40 by 2017.

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To fund its fleet expansion, nasair is considering an initial public offering, possibly in 2014. An IPO has been on the cards for the carrier for a number of years, but the combination of continued losses, the global financial downturn and the regional instability in the Middle East affecting local markets has kept any offering from eventuating. In late Dec-2012, Mr Al Hamdan said the carrier was tentatively targeting a 1Q2014 date for the IPO. The listing would provide funding for approximately 15-20 new narrowbody aircraft. The carrier has announced the appointment of Saudi Fransi Capital as financial advisor for its planned IPO. Ambitious objectives, but profit needs to come first Increasing passenger traffic from three million in 2012 to 4.5 million in 2013 is not going to be an easy task for the airline. Neither is doubling its annual revenue. With the expansion of the fleet, and a renewed international expansion, the carrier is certainly making a valiant effort to reach its goals. Even if it doesn’t manage to get all the way to its revenue and passenger objectives, the carrier will be doing well if it manages to reach its goal of full year profitability. The carrier has sensibly abandoned plans for a second hub and delayed its IPO to allow it to concentrate on operating profitably. After five years of losses at nasair, NAS Group deserve some return for its patience with the carrier. nasair is no longer the new kid on the block in the Middle East and increasingly it is receiving better treatment from Saudi authorities. The carrier now needs to follow the example set by the other low-cost carriers in the Middle East – including Air Arabia, Jazeera Airways and flydubai – and move from loss to profit. The main threat to nasair is the fact that the Saudi domestic market is about to be opened up to foreign competition for the very first time, in the biggest shake-up of the market since the two LCC operating licences were awarded in 2007. Gulf Air and Qatar Airways will be permitted to operate both domestic and international services by the Saudi General Authority for Civil Aviation. The licences are due to be awarded during 2013, dramatically increasing the level of competition in the Saudi domestic market. When the two well-funded carriers start operating within Saudi Arabia, likely in late 2013, nasair will see a sudden reduction in its share of its home market. nasair has been able to build up its market share over the years, reaching 8% of total capacity (including 13% of domestic and 13% of international capacity).

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Saudi Arabia system-wide capacity by carrier: 15-Apr-2012 to 21-Apr-2012

Source: CAPA - Centre for Aviation & Innovata With the Saudi travel market growing and still under-served, Mr Bouteiller believes that competition could actually make things better for the airline: ending Saudia’s special treatment and reducing costs in terms of fuel and infrastructure. Mr Bouteiller said nasair would “encourage competition but on a level playing field".

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Qatar  Airways                                    Key Data Fleet and Orders Qatar Airways Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Qatar Airways projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Qatar Airways international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Top routes table Qatar Airways top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile Qatar Airways schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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Qatar Airways set to join oneworld by late 2013 Qatar Airways CEO Akbar Al Baker announced earlier this month the carrier intends to join the oneworld alliance by Oct-2013, only 12 months after it announced that it had been selected for membership. The 2012 announcement that the airline planned to join the alliance system sent ripples of reaction through the aviation landscape of the Middle East, as well as globally, helping to bring about a major commercial reshaping. Joining oneworld will usher in a new era for Qatar Airways. After years of setting its own path and growth trajectory, the airline has decided to hitch itself to the alliance system, albeit to the most loosely based of the international airline groupings. Its membership is being sponsored by British Airways. The airline’s membership in oneworld will see it coordinate flights, schedules and systems with other member airlines, including Iberia, Qantas, Royal Jordanian, Cathay Pacific, Malaysian Airlines, LAN and Japan Airlines. For Qatar Airways, the upside is that it gains access to a significantly broader global network via its oneworld partners. It will extend its codeshare agreements to include many of its new alliance partners, several of which had previously been vocally opposed to the expansion of the Gulf region’s sixth freedom carriers. Its membership in oneworld will offer the alliance improved east-west routings and connections through the carrier’s geographically fortunate hub in Doha, changing the way much of its traffic flows around the globe. Rapid expansion and service focus will promote it to the region's second biggest airline Qatar Airways is now well into its second decade of rapid expansion. It is able to boast of being not only one of the fastest growing airlines in the Middle East, but one of the fastest growing carriers globally. Since its re-launch in 1997, with a fleet of four aircraft, the carrier has been one of the trend-setters, both for the Middle East and the evolution of the Gulf sixth freedom carriers, and also for global aviation. As Qatar’s national carrier, the airline has expanded its global reach to more than 125 destinations on all continents. Its fleet has expanded commensurately, reaching more than 120 aircraft in early 2013. Qatar Airways passenger traffic: FY2003/2004 to FY2010/2011

Source: CAPA – Centre for Aviation & Qatar Airways

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In less than a decade, the airline has expanded its passenger traffic more than fourfold. In terms of overall traffic (measured in ASKs) Qatar Airways is currently the Middle East’s third largest carrier – behind the much larger Emirates and the much older Saudia. While it doesn’t hope to eclipse Emirates – which is double the Qatari carrier’s size and expanding just as quickly – Qatar Airways is close to taking over from Saudia as the region’s second largest carrier. In terms of international traffic, Qatar Airways is already far larger than the Saudi Arabian national airline, given the substantial domestic market in the Kingdom. Qatar Airways also threatens to eat into Saudia’s markets directly, as, under the new liberal access regime, it has been given a licence by Saudi aviation authorities to operate domestically, with flights expected to commence late in the year. Middle East 10 largest carriers by ASKs

Source: CAPA – Centre for Aviation & Innovata Cargo is also providing a major avenue for growth for the airline. The carrier’s cargo business has been expanding at around 20% p.a. and now accounts for 28% of revenue. In recent years, it has added dedicated Boeing 777Fs, to complement its smaller A330 freighters and add new destinations and significant volume to its operations. The airline has also announced it plans to acquire seven cargo aircraft in 2013, a move which would expand its overall cargo capacity by 40%. Qatar Airways has already taken three A330-200Fs on lease, allowing it to phase out its older A300Fs. Mr Al Baker wants service, not size, to set Qatar Airways apart While the headline traffic growth has been impressive, Qatar Airways' ambition is not to be the largest carrier in the Middle East. Instead, the carrier’s CEO, Akbar Al Baker, has set it the objective of being the benchmark airline, by which the standards and levels of service of others are measured. Mr Al Baker has even attributed some of his reluctance to join the alliance system

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over a fear of losing Qatar Airways' ability to set its own service and product standards, as well as conducting its expansion and operations on its own terms. The airline’s focus on quality has paid dividends. In 2009, it was the first carrier in the Middle East to be awarded SkyTrax’s five star rating. It has also received the airline rating company’s award for airline of the year in 2011 and 2012. The focus on a premium product has even seen it add a private aviation arm, as well as a dedicated terminal for Business and First class passengers at Doha International Airport. It also has a dedicated premium lounge at London Heathrow. Around 10% of the Qatar Airways seat capacity is offered in premium cabins (Business and First). This figure is well above the global average of 7.3%, spread across First, Business and Premium Economy classes. However, in terms of the proportion of premium seats per aircraft, the carrier lags behind the level offered by its Gulf rivals Emirates (15.8%) and Etihad Airways (11%). GCC sixth freedom carriers' proportion of premium traffic: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata Growth of Qatar Airways transforms national aviation The airline’s growth has seen its home at Doha International transformed into a major international hub in a period of less than two decades. As a national carrier – 50% owned by the State of Qatar and 50% controlled by private shareholders – one of the airline’s stated aims is to support the development of the Gulf State and promote its capital as one of the major hubs joining east and west. In 2012, Doha International Airport handled 21.2 million passengers, making it the second largest hub in the Middle East, after Dubai. With Qatar Airways' emphasis on international connectivity, the airport is now one of the world’s 25 largest airports, as measured by international passenger traffic. In terms of overall passenger numbers, it is around 60th.

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Doha International Airport passenger traffic: 2007 to 2013*

Source: CAPA – Centre for Aviation & Doha International Airport *2013 figures based on Doha International Airport projection For 2013, the airport expects to handle around 25.2 million passengers, growth of around 19%. Around three quarters of the passengers at Doha International Airport (DIA) will be handled by Qatar Airways this year. The next largest carrier at DIA, Emirates, has just 1.1% of seating capacity. Doha International Airport capacity share (seats) by carrier: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata

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Diversifying the Qatar network, with a new route every month for the next five years Over the next five years, Qatar Airways plans to add between 12 and 15 new destinations per year. The carrier’s network is highly diversified, a combination of short and medium-haul regional routes operated with a mix of A320s and smaller widebodies and an increasing amount of long-haul and ultra-long-haul routes, primarily operated with Boeing 777s. Its largest geographic region, with just under a quarter of capacity (as measured by ASKs) is Europe, followed by Southeast Asia with a little under a fifth of ASKs. India and the South Asian region is important too, with 15% of capacity. Qatar Airways capacity (ASKs) by region: 22-Apr-2013 to 28-Apr-2013

Source: CAPA – Centre for Aviation & Innovata North America is also proving to be an increasingly attractive target for Qatar Airways, as it has for the other sixth freedom Gulf carriers. Earlier in the year it added a service to Chicago, taking its number of passenger destinations in the country to four, after Houston, New York and Washington DC. Mr Al Baker has also announced that the airline would like to add Boston and Detroit within a year. Hamad International Airport: moving to a new home 2013 will also see one of the world’s most ambitious aviation projects come to fruition, the new Hamad International Airport. Once the airport opens for operations, it will massively increase the airport capacity in Qatar. With Doha International Airport at its design limits, the new facility will provide sufficient room for the next phase of growth for Qatar Airways and meet the country’s aviation ambitions for more than 50 years. Built on land reclaimed from the Persian Gulf, the airport will boast capacity for 24-29 million passengers p.a. and 1.4 million tonnes of cargo p.a. once it is in full operation. Construction delays and a decision to roll the first two phases of the airport into one has seen the opening delayed multiple times, first from 2009 to 2011, then to 2012 and finally to mid-2013. Qatar Airways plans to move to its new home by the end of the year, gradually shifting its operations over the second half of 2013.

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The third phase of the USD15.5 billion project will see capacity expanded to 50 million passengers p.a. by 2017. Subsequent expansions could see capacity expanded beyond 75 million, should it prove necessary. As well as being Qatar Airways CEO, Mr Al Baker is also responsible for the development of the new airport project and the philosophy of Qatar Airways has been carried over with him. Mr Al Baker wants the new airport to set new standards for quality and benchmark facilities globally in terms of facilities, services and finishings. Expansion has been dogged by aircraft delays Qatar Airways plans to add better than one aircraft per month to its fleet, provided aircraft manufacturers are able to meet their delivery schedules. It has more than 200 aircraft on order or option, most of them the latest generation of aircraft offered by their manufacturers. Qatar Airways outstanding aircraft orders

Source: CAPA Fleet Database Over the next five years, the airline is due to take delivery of more than 80 aircraft, predominantly widebodies. Qatar Airways aircraft delivery schedule: 2013-2017

Source: CAPA Fleet Database Not everything has gone the carrier’s way when it comes to its fleet expansion however. In order to meet its growth ambitions, the carrier has been a serial purchaser of next-generation aircraft types.

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Several lengthy and high profile delays from Airbus and Boeing in delivering their new types, as well as issues with new aircraft when they enter service, notably the 787 and the A380, have seen the airline’s fleet growth struggling to meet its ambitions. As a result, it has not grown as rapidly as Mr Al Baker would have preferred, a point on which he has publicly been unambiguous. The carrier was the first in the Middle East to take delivery of Boeing 787s, but even then the aircraft was more than two years later than the carrier had originally expected. The recent high-profile grounding of the aircraft has only increased his level of frustration. The carrier’s Chicago route launch was reduced from daily to three times weekly because the 787s were not available. Mr Al Baker has refused to take delivery of any of the 10 A380s that the carrier has on order from Airbus until the manufacturer incorporates a permanent fix for the wing bracket cracking issue. The carrier's first A380 is due to arrive in late 2014. Qatar is also the launch customer for the A350 XWB. Airbus has already pushed back first delivery of the aircraft by six months and has described its new mid-2014 in-service target as “challenging”. If Airbus is unable to meet its promised targets, Qatar Airways will be left waiting once again, without the aircraft it needs to fulfil its plans. Profitability is a challenge, with such high growth rates, so IPO is on hold On the commercial side, profitability remains sporadic for Qatar Airways. In FY2009/2010 and FY2010/2011 the carrier was solidly profitable, even with its tremendous rate of expansion. In FY2011/2012, the carrier reported a small net loss – without revealing actual numbers – due to climbing fuel prices. The carrier’s on-again, off-again IPO is on hold again until somewhere in the 2017 to 2020 timeframe. Gaining access to a significantly broader global network via its oneworld partners may deliver easier financial rewards, despite the accompanying risk of diluting Qatar's high service standards. It will extend its codeshare agreements to include many of its new alliance partners, several of which had previously been vocally opposed to the expansion of the Gulf region’s sixth freedom carriers. In return, its oneworld membership will offer the alliance improved east-west routings and connections through the carrier’s geographically fortunate hub in Doha, changing the way much of its traffic flows around the globe. For state-owners Qatar, there is no intention of selling off a prized national asset and a major economic enabler, as well as an integral part of the nation’s growth strategy. With 50% state ownership, its overwhelming priority is not the bottom line, at least at the moment. However, having a national carrier that is not only rapidly growing but profitable as well is an achievable goal, as demonstrated by Emirates and, more recently, Etihad Airways.  

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Saudia                                                              Key Data Fleet and Orders Saudia Fleet Summary: as at 9-Apr-2013

Source: CAPA Fleet Database

Saudia projected delivery dates for aircraft on order: as at 8-Apr-2013

Source: CAPA Fleet Database

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Route area pie chart Saudia international capacity seats by region: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Top routes table Saudia top ten international routes by seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

Premium/Economy profile Saudia schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013

Source: CAPA - Centre for Aviation and Innovata

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Saudia faces new competitive threats in 2013 as Saudi Arabia loosens the regulatory reins The Saudi Arabian General Authority of Civil Aviation (GACA) has confirmed that Qatar Airways and Gulf Air will launch domestic operations in the country before the end of 2013. The granting of the licences to two foreign carriers to operate domestic service is an unparalleled move of openness in the Middle East. It will start a new era for travel within the country. The opening of the Saudi Arabian market presents a new challenge to national airline Saudia. However, after several years of facing competition from domestic carriers and a thorough modernisation ahead of its entry into SkyTeam in 2012, as well as the extended international reach that alliance membership offers it, the carrier is in a better position now to meet the latest threat. Saudia, the domestic giant faces a new era of competition With a Saudi Government-approved monopoly in place for more than 50 years, the Saudi domestic market had long been stunted by a lack of capacity growth from Saudia. In an attempt to remedy the situation and promote growth of its aviation market, in 2007, the GACA granted operating licences to two new carriers (nasair and Sama), ending Saudia’s decades long government mandated monopoly with the aim of triggering new growth in the local and international travel market. Along with these new carriers, Saudi regulators have implemented a number of policies to encourage more travel and support the local aviation sector. After an initial spurt with the launch of the two new airlines, the hoped for growth has failed to occur. Since the granting of the new operating licences, domestic traffic has grown at an average of only around 2%. Saudi Arabia domestic traffic: 2006 to 2012

Source: CAPA – Centre for Aviation & Saudi GACA

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Saudia controls 94% of the Saudi domestic market, the largest local travel market in the Middle East, while its surviving domestic rival nasair handles the remaining 6%. The second LCC, Sama, declared bankruptcy in 2010, after accumulated losses of nearly USD220 million. The carrier cited the uneven competitive landscape and unfavourable operating conditions, and held under 2% of the domestic market when it ceased operations. While nasair has not yet managed to report a break-even year, the carrier has high hopes for 2013, after stronger financial performances in the second half of 2012 and during early 2013. The sluggish growth in the domestic market is in direct contrast to the international travel market, which has seen persistent double-digit traffic growth over the same period. Saudi Arabia domestic passenger traffic: 2006 to 2012

Source: CAPA – Centre for Aviation & Saudi GACA Saudia handles approximately 84% of the international traffic handled by Saudi-based carriers, while nasair has 14%. However, foreign carriers provide more than 60% of the total international traffic to/from Saudi Arabia, and the foreign carrier share has been growing, even despite a relatively conservative international access regime. Domestic vs foreign carrier share of Saudi Arabian international passenger traffic: 2002-2011

Source: CAPA – Centre for Aviation

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Pricing regulation has constrained domestic pricing flexibility With a government mandated domestic fare cap in place, ticket prices have generally been below profitable levels for all but the most heavily travelled domestic routes. The maximum fare between Riyadh and Damman is just SAR150 (USD40). This now-outdated policy was designed to prevent monopoly price gouging while Saudia was the only operator. But restricting pricing freedom for LCCs prevents them from offering a range of very low prices, while ramping up as departure dates approach. As a result, nasair has switched the majority of its capacity to international routes, which offered no such fare limitations. Also mitigating against domestic growth have been the subsidies provided to Saudia, which were not available to the new LCCs. According to Sulaiman Al-Hamdan, Group CEO of Nas Holding, it remains cheaper for the carrier to purchase its fuel at overseas stations, despite the fact that Saudi Arabia is the world’s largest producer of oil. Not so for Saudia. Saudi Arabia’s lack of adequate domestic aviation infrastructure, particularly for secondary and smaller regional destinations, is also mitigating against successful domestic operations. After decades of having Saudia dominate most aspects of airport operations, the smaller airports were unprepared to adapt to the low-cost operating model. New airlines enter a market ripe for continued growth, as government policy and infrastructure investment support domestic travel Despite the problems, the Saudi market has tremendous potential for growth. Both nasair and Saudia have reported that the increase in passenger demand, both domestic and international, outweighs their ability to add capacity into the market. The country’s population is young and affluent and increasingly inclined to travel. The Saudi Government is also heavily promoting domestic tourism and investing to build tourism infrastructure. General aviation infrastructure, particularly air traffic control and airport capacity, has been significantly upgraded over the past few years. The Saudi Government has outlined a plan to invest more than USD30 billion in its airports by 2020, including USD10 billion in private investment for the sector. More than USD12.5 billion has already been earmarked for the country’s four main international airports at Jeddah, Riyadh, Dammam and Madinah. These four airports handle 91.5% of total air travel in the country, including 72.5% of domestic travel.

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Saudi Arabia largest airports by passenger traffic: 2011

Source: CAPA – Centre for Aviation & GACA Alongside this, another USD5.4 billion has been committed to the development of the country’s domestic airports. Several of the mid-size domestic airports such as Al-Gassim, Abha, Tabuk and Yanbu have been granted permission to handle limited international traffic, relieving some congestion at the main facilities and encouraging direct flights to some tourism destinations. Transformation is continuing at Saudia, but much of the hard work is already completed Outside of the opening of the domestic market to more competition, Saudia has made major strides operationally. Its transformation was crowned in May-2012, when the carrier formally joined SkyTeam alliance. Saudia became the alliance's 16th global member and its first member in the Middle East. Membership of SkyTeam, along with Lebanon’s Middle East Airlines joining too, filled the long-standing Middle East black hole in the SkyTeam Alliance’s global network coverage. Rivals Star and oneworld already had members from the Middle East/North Africa region. Qatar Airways is due to join oneworld by the end of the 2013. Ahead of its ascension to alliance membership, Saudia underwent a thorough modernisation. The carrier significantly updated its in-flight product, in order to meet the standards required by the alliance. The carrier also transformed its IT and reservation and distribution systems, signing major global distribution system deals with Travelport and Sabre and an IT agreement with SITA.

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The carrier also shed most of its older aircraft – primarily 747s and MD-80s – and acquired a large fleet of new narrowbodies, through orders with Airbus as well as leasing agreements. The airline has ordered 90 new aircraft, 62 of which have already been delivered. Another 12 aircraft are due to be delivered to the carrier this year. Saudia fleet delivery schedule: 2013-2016

Source: CAPA Fleet Database In the next few years Saudia will start to take delivery of large numbers of next generation widebodies. In 2010, the airline ordered 12 777-300ERs, as well as options for another 10 aircraft, which it has already exercised. It also ordered eight 787s at the same time, which are due to start delivery either in late 2015 or early 2016. The carrier's caro unit, Saudi Airlines Cargo, is also expanding with next generation widebody equipment. It took delivery of two 747-8Fs in Mar-2013. The first of these is due to go into service in May-2013, followed by the second in Jun-2013. Both aircraft will serve the Asia to Europe market, filling demand for greater capacity on these routes. They will serve alongside the carrier's fleet of 15 older widebodies - comprising four MD-11Fs, four 747-400Fs, two 747-200Fs and one A310F. Saudia expects to add 12 new aircraft in 2013, but has announced only modest passenger targets for 2013. After traffic jumped 13.3% in 2011 – up by 2.85 million to 24 million – Saudia is only projecting passenger numbers of 26 million this year. Saudia's privatisation process crawling along While the carrier’s operational transformation has been making visible progress, Saudia’s privatisation process has dragged on for the best part of a decade. Under the privatisation plan, the airline has been split into six corporatised entities, which are progressively being sold off piece by piece. The catering, cargo, maintenance, private aviation, flight academy and ground handling entities will all undergo partial privatisation, with privatisation of the mainline commercial operation to follow at the end. The formal go-ahead for the division of the carrier into strategic business units was granted in 2006. However, it wasn’t until 2010 that Saudia signed letters of intent with Al-Ahli Capital and Morgan Stanley to become financial consultants for the privatisation of the core airline unit.

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The pace of the privatisation process has been at best fitful, upset by the regional unrest and the global economic slowdown, but mostly by airline and bureaucratic inertia. Some 30% of the carrier’s cargo unit was sold in 2008, followed by the sale of 30% of its catering unit in 2012, for approximately USD350 million. Several deadlines for partial sales of its MRO unit came and went through 2009 and 2010. Deadlines for a further sale of shares in the cargo unit, as well as partial sales of the ground services and aviation academy were also passed in 2011. Next in line to be sold is the MRO unit. In late 2012, the carrier confirmed that the MRO unit is in the final stages of privatisation. The carrier projects that the unit will be valued at up to USD1.9 billion, with the process expected to be completed during 2013. The MRO market is booming in Saudi Arabia, both for commercial and private aviation and business jets. Saudia projects its MRO operation will expand more than 40% over the next five years, employing more than 8,000 staff. Meanwhile, Middle East Propulsion Company (MEPC), a joint venture between Pratt & Whitney and a group led by Saudia, opened its new aircraft-engine MRO unit in Riyadh. A new challenge in a familiar market as foreign airlines enter - but the fare cap still protects Saudia Saudi Arabia faces a major new competitive paradigm from the end of 2013 onwards. After warming up with nasair and Sama, Saudia will face two well-established carriers with brands that are well recognised in the region. In addition, the airline is slowly being weaned off government support, in order to assure the new entrants of a level playing field in the domestic market. According to the GACA, all domestic operators will be sold jet fuel at equal rates. The authority has promised fuel prices will be substantially less than in neighbouring countries. For the new entrants, the major sticking point in the Saudi market remains the domestic fare cap. Both Saudia and nasair have reported that they are unable to operate the majority of their domestic routes profitably. They have attempted to use smaller Embraer regional jets for the routes, with Saudia pioneering the use of the E170/E190 for commercial services in the Middle East. However, the GACA plans to address this too, having promised in late 2012 that it would look at the domestic pricing policy and develop a comprehensive strategic plan for the introduction of the new carriers into the market. Qatar Airways is the greatest looming competitive threat in this respect. It is one of the Middle East’s best regarded and fastest expanding carriers, with a service ethos that is of the highest level. It has an order backlog of more than 200 aircraft, including current generation and next generation narrowbodies which it could easily deploy in the Saudi market. It could also deploy widebody aircraft into the market, to compete with Saudia’s domestic 777 and A330 services. Another entrant, Gulf Air, is not it such a strong position. It doesn’t have the same size, financial strength or the extensive order backlog. The carrier’s management has its hands full with its restructuring and cost cutting efforts, accompanied by a mass of political issues at home. However, if the carrier feels that the Saudi market is sufficiently attractive, it could easily divert a portion of its narrowbody strength or move to lease aircraft to use for Saudi operations.

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Neither carrier has yet unveiled where they will base themselves in Saudi Arabia, or the aircraft and routes they will operate. Both carriers will also be eager to operate international routes to/from Saudi destinations. The terms of the new operating licences allow the airlines the same route rights as any other Saudi Arabian based airline (although it is less than clear on the ownership limits that these airlines will face in other markets).    

1 AIRLINE LEADER | FEB-MAR 2013

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