Saudi Budget Carrier Flynas To Become Profitable This Year

Saudi Arabia’s first and only budget airline, flynas, aims to grow at least 20 per cent annually and expects to turn profitable in 2014 after seven years of losses, the company’s chief executive said.

More than 64 million passengers passed through Saudi Arabia’s 28 airports in 2012, up nearly 19 per cent from 2011, according to the latest data available from the General Authority of Civil Aviation.

But the Kingdom, the biggest Arab economy and the largest country in the Gulf geographically, still has one of the smallest airline networks in the region relative to its size.

Saudi Arabian Airlines (Saudia), the national carrier, and privately held flynas, launched in 2007, are currently the only options for flying domestically within the country, and they are struggling to keep up with demand.

Several other domestic airlines, including a subsidiary of Qatar Airways, are expected to start flying in the next year or two as a result of deregulation.

But private carriers have had trouble boosting their profit margins because of price caps on domestic flights and high operating costs. In 2010, SAMA Airlines was forced to halt operations after incurring a loss of about $300 million.

“Until now we are actually not making a profit, but we hope to cross over this year. We have to grow very quickly and get critical mass,” flynas CEO Raja Azmi said in an interview.

“We need to grow at least 20 per cent a year. God willing, we hope to make a profit this year – it won’t be much but it will be a profit.”

Riyadh-based flynas is 37 per cent owned by Saudi investment firm Kingdom Holding and the rest by National Airline Services Holding.

Flynas currently carries three million passengers annually and claims 15-18 per cent of the domestic air travel market; its growth plan envisages achieving a market share of 30 per cent over the next two years and passenger numbers hitting 20 million annually by 2020, Azmi said.

Azmi, who managed a low-cost airline in southeast Asia before joining flynas in 2013, declined to specify how much the company would invest in growth, beyond saying it would require hundreds of millions of riyals over the next five years.

TENSIONS

The growth plan will focus on increasing the number of flights to the airline’s 21 current destinations and targeting the long-haul sector with five to six new destinations including London, Manchester, Kuala Lumpur and Jakarta, using the Red Sea city of Jeddah as a hub.

The company will expand its current fleet of 18 aircraft to 27 with six Airbus A320 and three A330 planes.

This will help the company overcome the impact of Middle Eastern geopolitical tensions in countries such as Syria and Egypt, Azmi said.

“One of the reasons we have decided to go long-haul is that we would be less vulnerable to geopolitical factors. We used to have daily flights to Damascus and Aleppo, now we don’t fly there anymore. This has affected us financially of course…to the tune of tens of millions of riyals.”

Financial markets have been speculating that flynas could conduct an initial public offer of shares by the end of this year or in 2015, but Azmi ruled out this year and said of next year, “it depends.”

“We would like to go through the IPO, but we need to be on a firm footing in terms of profitability and operations first, and we hope to get there in the next few years,” he said.

“To be clear, we will go on with IPO if we have the right valuation, and to get the right valuation obviously we have to be in a good financial position.”

Azmi said flynas would be able to cope with the competition from the new entrants expected in the market, as long as his company remained passengers’ second or third choice.

“In reality right now we are in some way competing with Saudia, and if you ask me (the competition) is not level because we don’t get the (fuel) subsidy they take…Some cannibalisation will happen, but I think it will affect Saudia more than us.”

The country’s domestic air travel market, currently 25-30 million passengers annually, is expected to grow six per cent per year, Azmi said.

Exploiting this growth will depend partly on whether the government brings down high costs for fuel and the use of aviation infrastructure. The situation may improve over the next three years as new airports come online, Azmi said.

“Until then, our operations will be affected in terms of cost so we will not be able to offer lower fares…The obstacles are there. But we can work around them.”