SAUDIA; Down to Earth from its “Royal Flight”

Saudia Airlines (JED) operates 156 RPT aircraft to 126 destinations Saudi Arabian Domestic, Middle-Eastern Regional, international mid-haul and long haul services. It is the third largest Middle-Eastern Airline by revenue, and is an active member of the Skyteam alliance since 29th May 2012. The airline also holds its own cargo division, and a fleet of dedicated aircraft for Royal Family and Diplomatic charters. With a history of fragmented operations, high number of aircraft types, lack of focus beyond the domestic market, safety concerns, and overall costly mismanaged operations, the airline begins a slow turnaround for profitability and sustainability in operations after studies of privatization and restructuring for the carrier since 8th October 2000 (as per signed by Prince Sultan bin Abdul-Aziz Al Saud).

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As regulatory reins resume to liberalize within the kingdom for economic development, the Saudi Arabian General Authority of Civil Aviation (GACA) opened the flood gates for new AOCs for airlines to compete within the domestic market in 2007. Flynas (founded in 2007 as an LCC), Al Maha opening its doors in 2016, privatization bids for major Saudi Arabian Airports, transit rights of local carriers, and possible future of 8th freedom operations by international airlines, are some of the liberalized undertakings within the Saudi Arabian marketplace. This hence resulted in a surge of growth. Saudia is hence placed in an evolutionary stage where investment, growth, controlled consolidation and production of efficiencies/scale is desperately needed to keep the airline infrastructure alive in the region. This has been done through the shedding of MD-80s, 747s and A300/A310s, simplifications of fleets to induce commonality and savings, transfer of ownership to other businesses (such as Royal Flight or freighter-conversions for cargo operations), and announcing newer aircraft with better products to retain local customer base, and grow the airlines.

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Since the Saudi Arabian Government ended the monopoly of national carrier Saudi Arabian Airlines (Saudia) in 2007, the aviation market in the Kingdom of Saudi Arabia has been one of the Middle East’s most rapidly evolving market. The country has the largest domestic market in the Middle East, with a population of 29 million people spread over 2.1 million sq km, but has not been able to replicate the rapid growth its GCC neighbours have enjoyed because of regulatory impediments. A longstanding protectionist policy supporting Saudia is giving way to a scenario in which competition and growth are key elements Saudia needs to consider to avoid excess market spillage. Some of the protections post-2007 included government mandated domestic fare caps (heavily traveled routes) for maximized accessibility for domestic flyers on key trunk services at the expense of profitability and business (especially for full service carriers against LCCs), dedicated services and entry restriction of other carriers on domestic services, and lack of accessibiity for partners. This forced consolidation/break-down of government funded airlines with inability to produce deregulated subsidiaries, and government withholding traffic rights and foreign investment capability. Other issues include:

  1. Unique to the Middle Eastern Airlines, Saudia faces issues on balance of airport hubs, and the implied operational diversification, yield management and economies/traffic of scale the airline can produce/retain. With bases primarily in Jeddah, Riyadh and Dammam, while also operating domestic and regional-international operations from secondary hubs across Saudi Arabia, the airline struggles to withhold organic high-yield O/D nonstop traffic at the expanse of high-volume connecting traffic (and vice versa). For example, would SV want to fly passengers from Manila to Riyadh directly, or with a stopover at Jeddah or Dammam? Can passengers and the airline afford it?
  2. From a yield perspective, the balance of capital investment (to retain operating bases) and high operating costs to retain high-yield traffic has been a major challenge for the airline. With much of the connecting traffic market to Saudi Arabia favourable (product and price-wise) to other carriers such as Emirates/Etihad/Qatar-Airways from the east, and Turkish/LH-group/BA/Egyptair, Saudia is forced in a yield/cost conundrum that could damage the RASK.
  3. The lower economies and traffic of scale (and induced revenues and lower mean seat factors) as product of hub-decentralization for high-yield traffic also plays a key issue in the yield-conundrum
  4. Saudi Arabian Airports as locations for connecting flights internationally is of lower standards in transit-traffic facilitations and product-complementation, in sharp contrast to neighbouring airports such as Dubai, Abu Dhabi and Doha. This is naturally due to lack of passenger services (namely poor lounges, poor retail, high queuing times, food/beverage range, and poor staffing). Furthermore considerably worse for passengers transiting from international to domestic services, with major airports of Dammam, Jeddah and Riyadh having poor immigration facilities, terminal transfers and overall poor product on domestic flights.
  5. With neighbouring carriers such as the ME3 looking into consolidating and gathering surged scale of traffic/economies, Saudia looks to diversify its business model to facilitate niches of domestic organic traffic development.
  6. With muti-hub operations, network development and range to more destinations takes a major hit. This also impacts the airline’s ability in managing frequencies and size of aircraft.
  7. With CASK of smaller aircrafts naturally higher than larger aircraft, higher frequencies or multi-hub operations can result in higher costs, higher risks and potentially lower margins impacting profitability.
  8. Depreciation/ops-constraints/leases is another major concern associated to aircraft rosters. SV is prone to operational variety, higher-cycles and induced uneven depreciation of its aircraft. This is seen with long haul aircraft like the 777/747s being placed on short-haul domestic missions, and A320 aircraft operating aircraft near-capability where inefficiencies may be induced. This can also impact lease rates Saudia has to pay on aircraft thanks to further relaxed parameters the aircraft can be operated on.
  9. Multiple crew/MRO bases to facilitate Saudia’s multi-hub operations can result in higher manpower requirements, infrastructures, assorted costs, higher excesses/overheads and greater overall risks associate to the business.
  10. Capacity and seasonality management are major concerns for the airline. With Saudi Arabian aviation traffic highly seasonal (especially during Hajj when Saudia taps into the market of 2.84M O/D passengers arriving/departing Jeddah within 1 month, along with Umrah traffic (tweaked towards Ramadan periods), the Saudi Arabian market is highly seasonal from most (if not all) types of passengers. The Saudi Arabian market also faces natural volatilities from poor tourism, domestic/foreign policies, terrorism/disease issues, and market favourability to travel and do business within the Kingdom. Saudi Arabia also plans to open year-round Umrah-visas 10-fold to 60 million, while also planning to expand Hajj visitor profiles to Jeddah after swift safety audits, and expansion of current infrastructure.
  11. Traffic rights associated to volatilities of traffic, business and operations another issue, especially in international highly-regulated markets.
  12. Fragmentation of business operations to allow tender for privatization and value-acquisition.
  13. Partnership management and liberalized access and accessibility of inventories to partner carriers, while facilitating further in-depth partnerships, is an issue Saudia eventually aims to manage. Multi-hub operations give Saudia and Skyteam members unparalleled opportunities to manage operations jointly to maximize catchments, yields, traffic and demand-fluctuations while also minimizing risks. Saudia will need to do all it can take to mature and rationalize partnerships. Its own Skyteam partner Delta, with international bases within USA in the dozens, utilizes international partner hubs such as Amsterdam and Paris (AF/KL) as bases for flexibility in aircraft rosters and flexible turnarounds. Similarly, this is ever so much required for SV to allow adequate and flexible operations for the airline. Some examples of partners would be China Southern/Eastern to manage the Chinese and North Asian Market, Garuda for the lucrative Indonesian and associated ASEAN markets, Delta across the Atlantic, Kenya Airways for Africa, and Air France – KLM for the European expansion

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During the Paris Airshow on the 15th of June, Saudia firmly committed to the current common family members the airline currently operates regionally within the Middle East, the subcontinent and Europe. On that day, Saudi Arabian flag-carrier Saudia is committed to 20 of the regional version of the Airbus A330-300, under an agreement which will also include 30 baseline A320s. The carrier had already been revealed as an initial customer for the new lower-weight A330 variant A330Regional, which is being aimed at high-density shorter routes thanks to lower near-200T MTOW (and hence lower landing/parking/apron/over-flight costs), and 9-abreast regional configuration (upto 16.8” width). Airbus has confirmed that Saudia, which already has 12 A330s in its fleet, will be the first operator of the type. The aircraft, which will benefit from technology derived from the A350 and A380, is being developed to serve routes up to 3,000nm. No engine selections have been given but Saudia’s current A330s are all powered by Rolls-Royce Trent 700s while its A320-family fleet is fitted with CFM International CFM56s. Saudia has not detailed the intended configuration of the regional A330, but current A330s feature 36 business (mix flat-bed / recliner) and 250-265 economy class seats already at 16.9” seats and wide aisles (hence compatible for the 9-abreast seating). The A320 currently feature a relaxed cabin of 12-20 business class and 96-120 economy class seats (although this order, especially because of being last few batch discounted A320ceos, could be associated to regional applications, hence denser configurations). Director General Saleh bin Nasser Al-Jasser says that the “unique flexibility” of the aircraft, and its “high capacity”, will allow the airline to expand its domestic and regional network. Airbus chief operating officer for customers John Leahy says the airframe sees a “significant market opportunity” for the regional version of the twinjet. No delivery date has been given by either side for the A330s or A320s. Airbus had expected the regional A330 to enter service in 2015 but, nearly two years since the type’s formal launch, Saudia is the only customer for the aircraft to have emerged. Saudia’s financing will be under Islamic Financing through the International Airfinance Corporation (Dubai)

Meanwhile, Saudi is studying and negotiating into a high-density two-class oriented A380 for high-density services (especially during Hajj). Airbus has offered Saudia the high-density layout to be pioneered by leading A380 customer Emirates on its Copenhagen route next week, Habib Fekih, its head of sales for the Middle East, said in an interview. Just a “handful” of high-capacity double-deckers could help ease pressure on Saudi infrastructure “by many folds,” Fekih said in Dubai. Before this year, the densest A380 layout — also at Emirates — featured 517 seats. Saudia Chief Executive Officer Abdul Mohsen Jonaid said last month that he was evaluating the A380 as part of a plan to swell the fleet to 200 planes by 2020 from 119 now in order to add flights at the new Jeddah airport opening in 2017. The carrier declined to comment further on Fekih’s remarks. The second hand and lease market also looks soft, with leasing firm Amedeo, the only new A380 buyer in the past three years, said it’s involved in campaigns to find new users for superjumbos due to become available second-hand and views the plane as the best option for meeting the levels of demand facing Saudia on Mecca and Umrah pilgrimages. Malaysia Airlines (KUL) also plans on replacing its A388 fleet with A359/A339 aircraft, hence displaying their A380 on public tender. Turkish and Saudia are currently studying the aircraft.

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The purpose of ordering A330 regionals, A320s and A380s are to ensure:

  • Swift growth in the regional Middle-Eastern, European and subcontinental market place, and tackle competition head on (explained below)
  • Utilizing low acquisition costs and lease rates, reducing these cost footprints on profitability
  • Minimize depreciation of aircraft, or on the flip side, maximize the airline’s capability on varying rosters
  • Allow for seasonal and lower utilization

 

The expansion is also seen from manpower and training perspectives, with CAE announcing Boeing widebody simulators (787/777) with Saudia’s Prince Sultan Aviation Academy during the Dubai Airshow on 8th November this year. Prince Sultan Aviation Academy (PSAA) is the largest aviation training complex in the Kingdom of Saudi Arabia. PSAA became a Strategic Business Unit (SBU) of Saudia on the 7th of April 2010 that provides professional Aviation Advanced Training to Regional and Global commercial air carriers. PSAA has the latest Flight Training equipment including Full Flight Simulators, Fixed Training Devices, Computer Based Training work stations / classrooms, Cabin Emergency Evacuation Trainers, and Door Trainers. PSAA operates EMB-170, A320-200, B777-200, A330/A340, and B747-400 simulators, covering some of the most widely operated fleet types in the world; fitted to industry-leading specifications that permit training on most variants and sub-types. Based on 56 years of extensive training and management experience, PSAA provides professional and quality training to commercial air carriers in compliance with regulations of the Kingdom of Saudi Arabia, General Authority of Civil Aviation [GACA] and International Standards. The B777 simulator is a CAE 7000XR Series FFS, while the B787 simulator is a CAE 7000 Series FFS. The training devices include one Boeing 777 and one Boeing 787 CAE 500XR Series flight training devices. The complete training suite will be delivered and installed at Prince Sultan Aviation Academy (PSAA) training centre in Jeddah, Kingdom of Saudi Arabia in 2016.

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From a maintenance standpoint, Saudi Arabian Airlines is aiming to swell third-party sales at a maintenance arm it’s building into the biggest in the Middle East after securing a tie-up with the repair and overhaul division of Deutsche Lufthansa AG. Saudi Aerospace Engineering has 25 airline clients, and aims to lift contract values to 8 billion riyals ($2.13 billion) from 5.3 billion riyals after opening a new 1 million square-meter facility at Jeddah airport by the end of next year. Complete maintenance, repair and overhaul across more aircraft types in 2016, are planned to be offered. SAEI is also targeting an increase in overhaul work for the Saudi military, which has a potentially “huge” requirement, he said. Saudi Arabia has the largest defence budget in the Middle East and is engaged in a war in Yemen. The Jeddah facility is currently under development.

All this amounts to Saudia’s sight for expansive growth, and rationalization of hubs and operations, with plans to add more than 80 planes to its fleet by 2020, expanding its size by over two-thirds, a top executive was quoted as saying by state news agency SPA. Most of these expansions will be ordained by current aircraft technology at discounts for short hauls, while new innovative technologies at forefront of efficiencies and comfort for long haul. This all amounts to aims for Saudia to carry 28 million passengers from 2014, to 50 million conservatively in 2020.

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