The Oxford Business Group - Countries : Oman : Weekly Briefing, Volume 6

Oman, June-1 Volume 6.
03.06.2004

Low Cost, Any Profit?

Back in April, when a fully restored 1929 triple propeller seaplane splashed down in Oman on a round-the-world fund raising drive for UNICEF, the South East Asian Airlines-owned aircraft joined a chorus of foreign airlines that have recently been making inroads into the Omani aviation scene.

With the maiden voyage of the region's first no-frills airline - Air Arabia - in December 2003, others are also now looking to use the low-cost formula to turn profits. European budget airlines Ryanair and EasyJet have revolutionised the low-cost airline market, and Middle Eastern companies are looking to replicate their success in the Gulf.

The Sharjah-based Air Arabia is government owned, providing the necessary support to get operations off the ground. Another low-cost airline, MenaJet (a privately owned Saudi Arabian and Bahraini joint venture) has also been eagerly anticipated, but up to now, there has been no word of when (or if) the company will start operations.

Initial indicators suggest that there is a demand for low-cost airlines in the Gulf. The proximity of the Gulf Cooperation Council (GCC) countries to one another and the lack of reliable land borders would seem to make regional cheap flights potentially popular. Before Air Arabia arrived on the scene, the only interregional flights were expensive, leaving cost-conscious travellers with driving as the only option. However, crossing borders by car is time consuming, with the inevitable traffic jams at the visa checkpoints.

Other obvious benefits are the ease of booking and the saving of money. Air Arabia keeps its costs low by using online booking - eliminating the need for paper tickets and large sales staffs. Travellers with the internet at home can choose their destination and buy their ticket in five minutes.

Air Arabia also saves money by charging for in-flight meals and having its flight crews usually return to their home bases at night, reducing layover accommodation and transportation costs.

But while the process of finding a ticket online, purchasing it, and getting to the airport is easy and cost effective, Air Arabia suffers from hidden costs and delays. The most obvious problem is that all flights out of Muscat, and any other city, must go through Sharjah in the United Arab Emirates. Travellers looking to make connecting flights to other destinations often have long layovers - and sometimes the only way to make a connecting flight is to stay overnight in Sharjah.

Although the airline is trying to counteract possible additional hassles by offering a free 96-hour visa, which is available only to passengers on Air Arabia, it may not counterbalance the inconvenience. In addition, the prospect of a free visa obviously does not appeal to members of GCC countries who don't require one anyway.

The state-owned Air India is also doing its best to wedge itself into the Omani market. It plans to open an offshoot budget airline, Air-India Express, that will fly initially to the Middle East and South-east Asia. The new airline expects to slash current prices by about 25% on international flights from India to Oman.

This is not Air India's first foray into the Omani market. Last month, the airline made headlines - and angered the Association of Travel and Tourism Agents of Oman (ATTAO) - when it offered a "companion flies free" deal. The committee claimed that the ticket sales "violated the Yield Improvement Committee [YIC] fares". This pledge was decided during an October 2000 meeting of the main competitors of the sought-after Indian market: Oman Air, Gulf Air, Air India and Indian Airlines. To prevent dirt-cheap flights on Indian carriers from undercutting more expensive Omani carriers, the group decided on minimum prices for tickets and to adhere to a "zero discount" policy.

"The price war was ruining our industry," one seasoned travel operator responding to the 2000 deal told the OBG.

Therefore, Omani travel agents were banned from selling the "companion flies free" tickets and any ticketing office caught selling them was liable to have them confiscated. "Further penalties pertaining to the agreed upon rules of the YIC" were also warned. However, for some time, this did not deter Air India from continuing to sell the tickets from the Central Business District in Ruwi.

As of May 31, though, the deal has been off the market - it is not clear whether due to Omani pressure or decisions from the central office in New Delhi. Nevertheless, the issue highlighted the growing issues of competition, which are likely to get more complicated with more airlines vying for similar routes.

Meanwhile, with the problems that already exist among the current carriers, the big question is, can the market sustain the injection of three low-cost airlines into an already well-rounded market? Gulf Air, partly owned by the Omani government, has been a carrier in Oman for over 30 years and has seen the market grow exponentially.

Speaking to the OBG this week, Gulf Air CEO James Hogan commented, "I've always said that there are too many airlines in the region... does that mean that you're going to see some airlines leave the scene? I don't know."

Many newcomers to the sector hope to answer Hogan's question with an emphatic "no". Oman is banking on a tourist boom to fill the rapidly expanding air industry. Most airlines have the luxury of being backed by plenty of government money capable of absorbing short-term losses while waiting for the long-term profits to appear. But governments can only carry dead weight so long, and no one is sure how many airlines are too many for the Gulf.

Also, increased expansion into the European markets by non-European state-backed airlines - like certain Middle Eastern and US carriers, has triggered protests from private European airlines which are not subsidised. If the private carriers have their way, there will be more "cutting loose" of airlines and the risk of elimination by bankruptcy.

In the meantime, carriers just have to make sure the passenger numbers increase each year. Companies like British Airways can count on the large British ex-pat communities going back and forth to the UK, but besides foreigners, there are very few residents of Oman that are regular travellers. Oman is very dependent on foreign visitors coming to the country and spending money. In effect, a lot of the success of the airlines depends on how well Oman markets itself internationally as a tourist destination.

But there are definite signs of progress on the tourist front. Oman Air is selling around 600 packages a month for flights into Oman and this figure is expected to triple by the end of 2004. Regional vacations - where a visitor flies into Dubai and can visit several of the countries - are a good way to increase tourist volumes. Oman Air has begun services to Salalah and Khasab from Dubai to encourage people to hop over to Oman for a couple of days during their stay in the UAE.

This sort of regional tourism allows the Gulf to operate as a single unit, rather than many individual parts.

"Customers have the opportunity to fly into Bahrain and spend two or three days here, then fly to Oman and spend two or three days there and then drive to Abu Dhabi and fly out," says Hogan. "There's much more flexibility than in single destination or package tourism."

Many feel that the influx of low-cost airlines will not flood the market, but make travel more available to people not willing to pay high flight prices. Sources in the airline industry say that the low-cost airlines are targeting a completely different type of customer than conventional airlines like Gulf Air and Oman Air.

Yet, even if there are enough customers to go around for all of the airlines, there are still tough times ahead. Air Arabia fully admits that it doesn't plan to break even for at least two years. As it stands, very few airlines in the Gulf turn profits now, but many are banking on this changing in the near future.

But in the face of regional instability and rising oil prices - which hit airlines particularly hard - the air industry, which only now is recovering from the September 11th attacks, SARS, and the war in Iraq, remains especially vulnerable to events outside its control. Until tourism booms, oil prices drop, or the region gets more secure, government-backed airlines should remain under the watchful eye of their benefactors.

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