Cheap thrills

By Julian Rogers, Deputy Editor

Accounting for just five percent of all air transport in the Middle East, the budget sector has the potential to reach new heights. Andrew Cowen, CEO of rising star Jazeera Airways, is confident his business can capture a greater market share in these turbulent economic times as passengers give legacy carriers the cold shoulder in favour of budget alternatives.

“The management team was able to ride the economic buffeting that we saw last year with fuel prices, which led to the profits we announced”
-Andrew Cowen, CEO, Jazeera Airways

Low-cost, low-frills air travel is a somewhat nascent market that is gradually filling a void in the Gulf’s aviation industry. For years, legacy carriers ruled the skies until a wealthy investor and successful businessman stumped up the cash to get a budget airline off the ground in Kuwait. Founded in 2004 by Chairman Marwan Boodai, Jazeera Airways was the first privately-owned airline in the Middle East, ending a 50-year dominance in Kuwait held by national carrier Kuwait Airways. The results have been impressive too: Kuwait Stock Exchange-listed (KSE) Jazeera has flown 3.6 million passengers since it first took off in 2005, while profits soared last year by 94 percent to US$15.3 million compared to 2007. It boasts a fleet of eight leather-seated Airbus A320s flying to 29 destinations in 16 countries from hubs in Kuwait and Dubai, but will take delivery of another 32 aircraft between now and 2014. With this aggressive growth strategy it is little wonder that Jazeera is perceived as being a catalyst for popularising budget air travel in the region.

“This is an airline that is maturing and expanding,” CEO Andrew Cowen states confidently during an interview at his office in Kuwait. Cowen arrived six months ago to take up the newly created position after Boodai decided to relinquish the duel Chairman/CEO role. “I previously built an airline [Sama] up from scratch in Saudi Arabia and took it as far as I could,” says Cowen, “So Marwan wanted me to take over the day-to-day management of Jazeera and take the company through the next stage of its development.” Cowen, who describes Boodai as a “serial entrepreneur”, says the chairman’s investments [under the Boodai Group umbrella] are about identifying gaps in markets. “The low cost business model was spreading across the world so he though ‘why not the Middle East’?” According to Cowen, his chairman quickly cottoned on to the fact that the aviation industry in Kuwait was ripe for liberalisation and it seems investors were falling over themselves for a piece of the action, too. Boodai raised US$34 million through an initial public offering (IPO) that was oversubscribed 12 times. At the time, one in 25 Kuwaiti citizens owned a slice of the company.

Reaching for the stars
Even after Jazeera’s rapid ascent and last year’s impressive results, Cowen still aims to be flying 60 percent more passengers this summer compared the same period in 2008. “Although that might seem very aggressive growth, we are playing to consumer concerns that they need to watch their money a bit more,” he remarks. “Given these more uncertain times, we think the business model is particularly attractive and resilient and we hope to gain from this through significant growth and market share.” Indeed, with a global downturn exerting a vice-like grip on business budgets the corporate bean counters are looking to save dinars and dirhams where they can. Jazeera, which aims to crowbar passengers away from the more expensive legacy rivals, has secured a number of corporate contracts for air travel, including National Bank of Kuwait. “We are seeing an awful lot of companies who have cut back on travel, but with their essential travel they are looking to book with Jazeera. With business travel bans and consumers looking to make their travel budgets go further, they perhaps find lower fares that much more attractive.” He goes on to say: “We wouldn’t say that we are the silver bullet but, if people are not travelling to make business deals then deals don’t happen, which contributes to the economic slowdown.”

Jazeera recently launched ‘Happy Hour’ on its website, allowing customers to take advantage of different selected reduced fares and specific routes between 1pm and 2pm, seven days a week until summer 2010. It’s about drumming up business on the less popular flights and meeting those ambitious passenger targets. “The reality for most airlines is that you have to work very hard to get good passenger loads and sometimes you get 24 or 48 hours before a flight and for one reason or another it is just not selling,” explains Cowen. “We only cancel flights as a last resort because it is very damaging for customer service so ‘Happy Hour’ is a way of saying that there is going to be cheap fares on a flight and passengers with time flexibility can take advantage of it, while for us it creates incremental revenue that wasn’t there before. Happy Hour has taken off very well because it suits students or someone wishing to visit a relative in Dubai, for example.”

The airline has also removed its fuel surcharge – another welcome move for customers looking to score a bargain. Any airline’s biggest outgoing is fuel and this past year has seen crude prices spike at US$147 a barrel before plummeting more than US$100 in the space of a few months. Cowen says abolishing the surcharge was more sensible than slashing fares and confusing customers. The price of oil currently hovers around the US$60 mark but Cowen admits that a prolonged rise above US$65 could see the surcharge reintroduced.

However, to protect itself from a repeat of last summer’s crude price surge Jazeera has a 25 percent hedging requirement for the second quarter. “We want to protect ourselves against another oil spike so we have cautiously gone back into the hedging market.” Cowen explains. “I say cautiously because we are trying to avoid any speculative aspect as this is about limiting the business risk.” He describes hedging as a “double-edged sword” when discussing how a number of airlines paid the price for wrongly hedging at the top of the spike. “They lost sight of the downside and took quite a financial hit. We think we have quite a robust hedging strategy and we try to take as much human guesswork out of it as possible and look at the momentum of prices and so on.” For the time being opinion remains divided on where crude prices will head next. “Clearly there is a bit going on between worldwide economic conditions and productions cuts, particularly among the OPEC members, but quite where it will end up, we don’t know, nor are we going to use guesswork.”

Another particularly astute manoeuvre by Jazeera’s management was to take financial pressure off the business and lease the jets from Sahaab Leasing, established by Jazeera Airways, DVB Bank and National Bank of Kuwait Capital. This separates aircraft ownership from the day-to-day management of the business. Cowen likens this system to how some global hotel chains operate. “Intercontinental Hotels sold off all their properties to specialist asset or property management companies but still maintained the management contracts on those properties. There is recognition here that different skills are required to operate an airline versus operating and financing an asset.” The leasing decision was a shrewd move because it took costly aircraft off Jazeera’s balance sheet. The timing was excellent, according to Cowen: “When all these things came together it meant that the management team was able to ride the economic buffeting that we saw last year with fuel prices, which led to the profits we announced.”

Air wars
While Jazeera’s profits for 2008 were impressive, Boodai and Cowen are all too aware that competition is going to intensify in the region. To reinforce this point, flydubai – a low-cost airline formed by the government of Dubai – is set to launch this summer. The fleet will consist of just two aircraft but flydubai has made a US$4 billion firm order for 50 Boeing planes. It will join Jazeera and the likes of Sama, Air Arabia and Bahrain Air in flying to key destinations in the Middle East and North Africa. Whether or not we see more airlines, especially those privately-owned, turning up on runways depends on the GCC governments, suggests Cowen. “For more airlines to appear there has got to be aviation deregulation, says Cowen, “And places like Kuwait were very forward thinking with this by allowing Jazeera to come into being. However, it is unlikely that the current number of budget airlines will stay at the current level – there is almost certainly going to be more but how many exactly is hard to tell.” But could the legacy carriers be about to launch a counter strike in a bid to stop their budget rivals from cornering the market? In the previous issue of BM, Qatar Airways CEO Akbar Al Baker said he was against the concept of low-cost airlines but would be forced to launch a budget business if Qatar Airways’ market share became significantly eroded. Time will tell if the turbulent economic conditions hasten this decision.

However, with two thirds of the people currently residing in Gulf states registered as expatriates and foreigners, air travel can only blossom – especially low-cost travel. Cowen is relishing the opportunities that lie ahead. “There is still a huge amount of opportunity for this airline because low-cost penetration is only around five percent of the market in the Middle East,” he explains. “In Europe this figure is 25-30 percent so there is no reason in my mind why we can’t see the same level of growth for the low-cost model – not least in the current economic conditions. It comes back to businessmen and women, or Joe Public, looking to reduce their costs. budget airlines facilitate this and so help keep the economy moving,” he concludes.