AIR TRANSPORT

hen Jazeera Airways posted an annual loss of KD8.2 million ($28.4 million) in 2009, the outlook appeared bleak for Kuwaits fledgling private aviation sector. The emirates much-vaunted liberalisation drive had now produced two struggling private carriers also including Wataniya Airways, which was months away from bankruptcy and flagcarrier Kuwait Airways continued its twodecade-long run of almost uninterrupted annual losses. For Jazeera chairman Marwan Boodai, however, the finger of blame was pointing squarely outside of Kuwait. He believed that larger regional competitors were dumping capacity in the emirate in order to re-route traffic through their own hubs. The success of Jazeeras subsequent turnaround plan appears to have validated that judgement. Until 2009, we had been profitable every single year since our inception, Boodai noted. But in 2009 we had a huge over-supply of capacity in the marketplace, due mainly to the big three Gulf carriers [Emirates, Etihad and Qatar Airways]. Kuwaits domestic airlines shouldered some of the responsibility. Jazeera had commitments for 40 Airbus A320s at the time originally targeting a multi-hub model across the Gulf while Wataniya had signed for seven aircraft, despite its niche focus on all-premium cabins. But it was the regions larger carriers that pushed capacity over the edge. Amid a deepening global financial crisis, average load factors in Kuwait fell to just 51%.

Mammoth orders

It was a perfect storm. With all the mammoth orders that were placed [by Gulf airlines] in the mid-2000s, they simply didnt have a place to operate these aircraft, Boodai recalled. They couldnt even park them. So they were just throwing capacity left, right and centre. Jazeera responded by sacrificing growth for profitability. The airline slashed its order book from 40 to 15 aircraft; it withdrew low-yielding services to the Indian sub-continent; and it acquired Sahab Aircraft Leasing Company. Though the latter move cost KD25.6 million, it gave Jazeera the ability to scale back its fleet without selling aircraft during a downturn. We transferred all our assets into Sahab and within four months we had deployed almost half of our fleet internationally, Boodai said. We knew we couldnt remove excess capacity just by re-allocating our fleet within the Middle East. The market simply wasnt there. At the time of writing, the groups fleet consists of 13 aircraft. Seven are placed with Jazeera, while Sahab has leased four to Virgin America, one to Sri Lankan Airlines and one to Saudi Arabias Nas Air. Another aircraft was due to be delivered in October 2013, while the final unit will arrive in May 2014. As well as boosting flexibility, Sahab allows Jazeera to continuously rejuvenate its fleet with

more fuel-efficient units. We have a very simple model. When we buy new aircraft, we deploy them in Jazeeras regional network, Boodai explained. Then we take out the older aircraft and redeploy them through Sahab into the international market. Capacity cuts continued into 2011, with Jazeera reducing available seat kilometres (ASKs) by a further 28%. Through tight capacity management and network rationalisation, the airline has grown yields by 2.5 times since 2009. These higher returns have offset its still-modest 70% load factor, paving the way for restored profitability. The airline has now been in the black for 12 consecutive quarters. Although Jazeera styles itself as a low-cost carrier, burdensome regulations in the Middle East necessitate tweaks to the no-frills model. Visa restrictions, closed skies policies and ground

service monopolies push up cost structures, so the emphasis is on passenger value rather than just volume. Our focus is not just on load factor, but on getting costs as low as possible, Boodai affirmed. In order to reach [load factors in the] 80s wed be sacrificing yield, and thats something we dont want to do. In pursuit of higher yields, Jazeera provides many services that go beyond the traditional low-cost carrier offering. Passengers are given 40kg of free baggage allowance plus complementary meals, for example. They want to have the full package, Boodai said. If you provide a service that customers appreciate, they will be willing to pay extra. The airline also has a European-style business class product consisting of vacant middle seats, plus benefits like lounge access and 60kg of luggage. The seat pitch is consistent throughout the aircraft, giving Jazeera the option of deploying

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KUWAIT
corresponding period three years ago before the revolution. We believe that Egypt is now going in the right direction and actually we see it as an opportunity, Boodai said. We havent had a slowdown, but we have had a loss of opportunity just imagine how much more capacity we can deploy on the same routes once things settle down. Future growth of the network will hinge on Jazeeras ability to grow its hub at Kuwait International Airport, which is also home to flagcarrier Kuwait Airways. The gateways annual footfall of nine million is modest when compared to other Gulf hubs. But Boodai noted that in Dubai, which handled a total of 58 million people last year, just 10 million touched ground in the city. The proportion of origin-and-destination traffic at Kuwait is far higher. So nine million is a big, big number given the size of the local market, he argued. It is easy to see why so many people in Kuwait are flying. About 68% of the emirates 3.8 millionstrong population are expatriates, creating a strong visiting-friends-and-relatives (VFR) market.

Jazeera Airways is cautiously readying itself for growth following a two-year turnaround plan focussed on reducing capacity and boosting yields. Martin Rivers hears more from chairman Marwan Boodai.

Jaz hits the right note...

an all-economy, 165-seat configuration on certain routes. With its hybridised product delivering consistent profitability, Boodai is turning his attention to the possible resumption of growth from 2017 onwards. Jazeera will issue a request-for-proposal for more aircraft in the third quarter of 2014. We havent really decided what the right number will be yet, the chairman admitted. He said that deferring deliveries will allow the market to test all the teething problems of new types like the A320neo and Bombardier CSeries. The pace of expansion will be determined by Jazeeras on-going strategic master plan, (STAMP), which took the baton from the turnaround plan in early 2012. Running for a three-year period, its emphasis is on preserving profitability while exploring new growth opportunities. Boodai said the route network will not change profoundly under STAMP. We dont need to go beyond our 19 destinations, he insisted, while admitting that at least a dozen other major cities specifically including Tehran fall within Jazeeras average two-hour flight radius. Frequency changes are more likely. The suspension of the airlines three Syrian destinations, for example, was followed by an uptick in flights to Jeddah, Cairo and Dubai. Egypt remains the most important country in Jazeeras overseas network, due largely to the 450,000 expatriates who live in Kuwait and regularly fly home. The airline serves six destinations in Egypt Cairo, Alexandria, Sharm el-Sheikh, Luxor, Sohag and Asyut accounting for 49% of ASK capacity. Political upheaval in the country has not significantly affected demand for Kuwaiti flights. In the first half of 2013, passenger numbers on Jazeeras Egyptian routes were higher than in the

Buoyant demand

Among its 1.3 million nationals, high disposable incomes also ensure buoyant demand for air travel. Kuwait has the worlds eighth highest GDP per capita, and 94% of its citizens work in the public sector. Their salaries were increased by 25% last year alone. The countrys oil-rich economy is not without its downsides, however. Generosity by the government has fuelled inefficiency at flag-carrier Kuwait Airways, whose long-running privatisation shows little sign of getting off the ground. Boodai confirmed that Jazeera remains keen to invest in the airline, but he said previous attempts at finding a buyer had been grossly mishandled. Sovereign wealth fund the Kuwait Investment Authority messed it up in 2011 by not fully disclosing the balance sheet, he complained. Jazeera is definitely interested in the aviation sector in our part of the world. If it is offered at the right price, then yes there is merit in Kuwait Airways, he said. We would always consider investing. Governments should be in the business of governing, not flying aircraft or driving buses. Elsewhere in the region, regulatory hurdles continue to block Jazeeras former multi-hub aspirations. The forced closure of its Dubai hub in 2009 highlighted on-going protectionism by government-owned airlines, and Boodai has little interest in pursuing Air Arabias joint-venture model. His lobbying for a GCC one sky based on Europe has yet to gain traction. Instead, Kuwait will for now remain Jazeeras only hub. The airline will continue focusing on high-yielding regional flights, and it will explore ways to complement Kuwait Airways long-haul network. Growth is back on the agenda, but the key word is still caution.

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