New Saudi Airline Aims to Dethrone Gulf Heavyweights

Madhu Unnikrishnan

July 19th, 2021 at 12:01 AM EDT

Saudia Arabia’s government made news earlier this month when it hinted at plans to build a global airline, based in the kingdom, to take on regional powerhouses Emirates, Qatar Airways, and Etihad. But will Saudi Arabia be able to dethrone Dubai and Doha as the world’s airline crossroads? The plan could be harder to execute than the country’s rulers might think, no matter how much money they throw at the problem, and it is likely fueled by regional tensions more than any economic imperative.

Details are scant, but Airline Weekly understands that Crown Prince Mohammed bin Salman, Saudi Arabia’s de facto ruler, intends for the new airline to be part of the $130 billion investment he’s spearheading to transform the kingdom into a global transportation and logistics hub. The investment is part of his multi-trillion dollar blueprint to wean Saudi Arabia off of oil and diversify its economy.

But this could be harder than Prince Mohammed thinks. Saudi Arabia historically struggled to win over both domestic and international tourists due to societal limitations, including a strict no-drinking policy and restrictions for women. Riyadh hadn’t welcomed international tourists for so long that its infrastructure remained underdeveloped. Even locals complained of a lack of venues.

Until last year, authorities forbid local restaurants and malls from playing music. Although officials eased some of these restrictions, much of that doesn’t apply to residents. Because the local culture doesn’t allow for much intermingling between the sexes, most Saudis enjoy the freedoms of being in unknown territories in cities such as Dubai, Cairo, London, or Paris. Moreover, Saudi Arabia continues to face global opprobrium for its alleged role in the 2018 murder of dissident journalist Jamal Khashoggi in Turkey.

There’s more to the new airline than just tourism, analysts say. Saudi Arabia just recently papered over its tensions with Qatar by ending a years long regional blockade, which required Qatar Airways to fly circuitous routes to avoid the airspace of the blockading countries. But fissures still remain, as Qatar did not accede to all of Saudia Arabia’s demands, among which was reining in its often critical news outlet, Al Jazeera.

But tensions more recently have flared with one of Saudi Arabia’s allies in the blockade, the United Arab Emirataes (UAE), home to both Dubai and Abu Dhabi and long a Saudi stalwart. OPEC+, which includes 10 countries led by Russia that are not formal members of the oil cartel, aimed to limit production to keep oil prices high as the world emerges from the worst of the Covid-19 pandemic. The UAE bucked the cartel by saying it wants to raise production and has further accused Saudi Arabia of bowing to Russia’s demands, Airline Weekly has learned.

It’s no secret that Prince Mohammed has long coveted the global business success and prestige Dubai has and aims to replicate it in Saudi Arabia. The country has broken ground on a new tech-focused city in the desert, Neom, with an aim of attracting massive foreign investment and to further diversify the economy. Now, the tensions with the UAE are fueling the drive for a new Saudi airline, one that would knock both the troublesome Qatar and Dubai off their perches.

It is understood that the new airline — yet unnamed and reported first in English by Reuters — would be a premium global superconnector, like Emirates, Qatar, and Etihad. The number of air routes from the kingdom would go up from about 100 now to 250. A difference from previous ambitions for Saudi Arabia’s airlines is that the new carrier would supplant Saudia, which would focus on religious traffic bringing pilgrims to the country’s holy sites, especially during the Hajj pilgrimage. Budget carriers Flynas and Flyadeal would then concentrate on low-cost domestic and regional travel and near-international routes. It remains unclear if any of the three existing airlines would feed traffic to the new airline.

First, the new airline’s potential strengths. Prince Mohammed’s plan to transform the economy includes making Saudi Arabia, which has struggled to attract foreign visitors, a tourist destination. The country has reformed its visa regime to allow more visitors and, in 2019, began issuing tourist visas for the first time, instead of just business and religious pilgrimage visas. The Covid-19 pandemic has put those efforts on ice, however. A new global airline would play into that new market and funnel tourists to the kingdom. The country itself is large for the region, with a population of about 35 million people, which provides it with significant pool of passengers, especially when compared with neighboring countries, like the UAE, with a population of about 10 million, and Qatar, with just 3 million.

So build it and they will fly? Not so fast. Although Saudi Arabia is pouring billions into the airports in Riyadh and Jeddah, it will take more than just airports to create a hub. Emirates, Qatar, and to a lesser degree Etihad, have spent decades building their brands, networks, and products, Craig Jenks, founder of consultancy Airline/Aircraft Projects, points out. Those three airlines have a corner on flows to Africa and much of Asia. Nearby, Turkish Airlines has built a vast network that, in addition to Asia, Africa, and Europe, handles East-West passenger flows to many former Soviet republics. Not far away, Ethiopian is building a lucrative franchise in Africa-China traffic flows.

And just throwing money at an airline is not the answer: Etihad tried to buy its way into the big league and has since had to retreat. At an industry conference a few years ago, Qatar Airways CEO Akbar al-Baker famously told the CEO of Oman Air that it was “too late” for the sultanate to build a superconnecting airline. Fabulously wealthy Saudi Arabia is no Oman. But al-Baker’s point remains salient: The field is crowded, and any new entrant would be decades behind the competition.

Although it is not yet free-wheeling Dubai, the prince has relaxed some of Saudi Arabia’s more stringent social rules and brought the morals police to heel. But has it been enough to attract inbound travel or a talent pool needed to run a global airline? This remains an open question. The three big Gulf carriers rely on foreign employees at almost every level, from flight attendants to the C-suite. But living in cosmopolitan Doha or Dubai (or close to, in Etihad’s case) has always been an easy sell for foreign talent. Would conservative Riyadh attract the same talent?

If it is built, will passengers fly it? Saudi Arabia, for all its recent liberalization, remains deeply conservative. Will premium globe-trotting passengers fly an airline that doesn’t serve wine with meals or that may require a dress code? Saudia, after all, does not serve alcohol and does enforce a dress code. By contrast, alcohol is readily available on other airlines in the region, and female passengers are not required to cover their arms, nor male passengers barred for wearing shorts. Lingering horror over the Khashoggi murder won’t help in attracting flyers.

If price is right, the network is convenient and far-reaching, and the passenger experience is top-notch, people will fly it … eventually. And therein lies the rub. Emirates, Qatar, Etihad, Turkish and Ethiopian, to name a few regional examples, not to mention Singapore Airlines, Lufthansa, Air France and a host of other intercontinental airlines will not sit still while the new Saudi airline ramps up. In other words, creating a premium superconnector airline from whole cloth may be a more intractable problem than Saudi Arabia’s billions can solve.

Madhu Unnikrishnan

Delta Confident in Autumn Recovery as Business Travelers Return

Domestic travelers are returning to the skies at a pace that even a seasoned executive like Delta Air Lines CEO Ed Bastian said was surprising, so much so that the airline, which lost money in the second quarter, expects to return to profits in the second half of the year.

The pace of the domestic recovery is a welcome change but one that required Delta to step up its hiring. “It’s taken us a little bit of time to catch our breath,” Bastian said. The carrier expects to hire about 4,000 people from now to the end of this year, many of whom are replacing employees who took voluntary separation or early retirement during the depths of the pandemic last year.

Unlike some of its competitors, Delta has not been plagued by debilitating pilot and cabin crew shortages. But its reservations and ticketing operations staffing has come up short, with reports of six-hour wait times on customer-service cals. Part of this Bastian attributed to passengers having more questions about traveling during the pandemic and changing travel plans, thanks to more flexible ticket-changing policies. Part, though, lies with staffing, and Delta says half of the 4,000 people it plans to hire will be in customer service.

In the short term, the airline has tapped retirees to step in and help with the call volume, which has outstripped anything seen in 2019, and is stepping up its training programs to ensure it is staffed up to handle the number of calls.  Delta expects wait times to return to normal by September as employees are fully trained and in place, Bastian said.

The strength of the domestic leisure travel recovery this summer is remarkable. Delta reports that demand is back to 90 percent of summer 2019. The carrier returned to profits for the first time since the pandemic began in June and expects to be “more sustainably profitable” in the second half, Bastian said. Delta’s hubs on the two coasts — Boston, New York, Seattle, and Los Angeles — as business travel collapsed and due to stricter Covid-19 restrictions in those regions. That has begun to reverse, auguring well for the second half, the carrier said.

The picture is different for Delta’s international network. Demand also is strong to short-haul Latin American markets, and has even exceeded 2019 levels for Mexican leisure destinations. Long-haul markets in Latin America still are behind as countries in South America grapple with new outbreaks of the disease and vaccination roll outs remain slow.

International demand is growing across the Atlantic, with load factors returning to historical norms in the 80 percent range. Europeans still are barred from visiting the U.S., so the bulk of the traffic across the Atlantic originates in the U.S. Because of this, the carrier has shifted its network to focus on European leisure destinations popular with U.S. tourists; Delta this month launched its first New York-Dubrovnik, Croatia flights, for example. Bastian expects transatlantic travel to grow even more rapidly when the U.S. government lifts restrictions on inbound European travel, but he offered no timeline for when that might occur.

Flights across the Pacific, however, are not faring as well, due to a rise in infections in many Asian countries and continuing stringent travel restrictions. Delta does not expect the Pacific network to recover until the end of next year or early 2023.

Business travel, at least in the U.S. and to Mexico, is recovering more quickly than expected. Delta recently surveyed its largest corporate clients on their travel plans. A little more than one-third said they expect to return to pre-Covid levels of travel by 2022. Another 21 percent expected their travel to return to those levels by 2023. Five percent of Delta’s corporate clients said they intend never to return to pre-Covid travel levels, and 38 percent said it is too soon to say when they intend to restore their travel budgets. The strongest business-travel segment remains small- and medium-sized enterprises, a trend that started last year.

Delta believes that business travel will rebound in earnest this autumn, after schools reopen and when companies recall workers to their offices. “The surge is coming,” Bastian said. “There is enormous pent-up energy and demand for [business] travel.”

Despite the confidence Delta’s management projected, the reality is the carrier lost $881 million in the second quarter, a stunning reversal from the $2 billion profit it reported in the second quarter of 2019. The carrier did report a profit in June, but that included more than $1.5 billion in government payroll support during the quarter.

Bastian acknowledged that the federal government’s support has helped buoy the company during the pandemic, but said he is confident the carrier will be profitable in the second half even after the payroll support program expires on Sept. 30. “One can debate the length of the federal support,” he said. “It was critical for keeping our industry afloat and keeping our employees employed and being in the position for a recovery.”

Another note of reality was that Delta’s second-quarter revenue of $6.3 billion was half of what the carrier earned in 2019. The airline flew 39 percent fewer seats in the second quarter than it did that year.

Madhu Unnikrishnan

Volaris Looks South as Mexico Recovers

Volaris is grabbing growth opportunities at home and venturing further south in Latin America as travel rebounds from the Covid-19 pandemic.

The airline plans to add 25 Airbus A320neo family aircraft to its fleet by the end of 2022, when it anticipates flying 113 planes total, fueling elevated capacity growth that will surpass pre-crisis levels. These planes will allow Volaris to increase its share in the key Mexico City market; expand in other Mexican cities, particularly Guadalajara and Tijuana; and launch a new subsidiary in El Salvador.

“We’re one of the most profitable airlines worldwide with room to grow,” said CEO Enrique Beltranena during a quarterly earnings call last week. The airline reported a rare pandemic profit free of government aid of MXP 1.54 billion ($78 million) in the second quarter.

Domestic Mexican growth is Volaris’ top priority over the next year-and-a-half. The carrier has the unique opportunity to fill the gap left by Interjet, which suspended flights in December 2020 and few expect to resume operations, and cuts at Aeromexico that is restructuring under U.S. Chapter 11 bankruptcy protection. Volaris is actively adding flights in slot-constrained Mexico City where, as executive vice president Holger Blankenstein put it, they see the “biggest capacity gap compared to pre-Covid levels.”

Competitors also see an opening. Aeromexico is rapidly resuming flights and budget competitor Viva Aerobus is growing out of the crisis. In July, overall Mexican domestic capacity is down 2.6 percent compared to 2019 solely on the loss of Interjet, according to Cirium schedule data. However, capacity at Aeromexico is up 11 percent, Viva Aerobus nearly 30 percent and Volaris 18 percent.

Outside of Mexico, Volaris has its eyes set on Central and South America. The new El Salvadoran subsidiary will launch in either the late third quarter or early fourth quarter with flights to Mexico and the U.S., said Blankenstein. This will complement Volaris’s Costa Rica subsidiary that will receive a third aircraft — returning its fleet to its pre-crisis status — by the end of the year. And, new flights between Mexico City and Bogotá begin in October as the company’s first foray into South America. Additional service to Colombia from Central America is likely soon, added Blankenstein.

One market where Volaris is not growing is the U.S. This is the result of the Federal Aviation Administration’s decision to downgrade Mexico’s safety rating in May, which barred Mexican carriers from adding any new flights to the country. Volaris executives spoke little about the downgrade and focusing instead on domestic and Latin American opportunities, as well as adding new U.S. flights from Central America under its Costa Rican and El Salvadoran subsidiaries that circumvents the FAA limits on Mexican carriers.

Volaris’ rebound is impressive — but not surprising — given the lingering pandemic. By its own measure, only 16.4 percent of Mexicans are fully vaccinated. That’s better than the global average but middle of the pack in Latin America, and well below the 48 percent of Americans who are fully inoculated. And executives highlighted the spread of Covid-19 variants as a potential risk in the second half of the year that barred them from making many financial forecasts for the period.

But Mexico was the first country globally to recover to pre-pandemic travel levels in June, the latest Skift Recovery Index found. This rebound is driven largely by the lodging industry, which is likely fueled by a surge in pent-up demand from U.S. leisure travelers.

Volaris acknowledged this surge in leisure, as well as visiting friends and relative traffic, reporting that 90 percent of its seats to the U.S. were full in the second quarter.

“Good — great results, actually,” Deutsche Bank Analyst Michael Linenberg said of Volaris’ second quarter numbers in a rare moment of analyst praise.

The airline’s profit followed a 38 percent jump in revenues and a 15 percent rise in expenses in the June quarter compared to 2019. Its earnings before interest and taxes margin was 23 percent versus to just 7.9 percent two years ago. And, in a sign of things returning to something like normal, executives touted the nearly 22 percent increase in total unit revenues — or TRASM — instead of cash burn or other crisis metrics. Overall passenger traffic was up 13 percent and capacity up 14 percent versus 2019.

Edward Russell

French Bee Picks Up Where it Left Off With Network and Fleet Expansions

French Bee‘s plans to launch Newark-Paris Orly flights last year were put on ice when the world shut down due to the Covid-19 pandemic. But the French leisure carrier is making good on its expansion, with its first flight on the route returning to Orly on July 15.

“We think now that most of the crisis is behind us, because of vaccinations. the health recovery, and the restart of the economy,” French Bee President Marc Rochet told Airline Weekly. “Is it the best time [to start flights? Is it too soon by one month, or too late by one month,” Rochet wondered. “We don’t know, but we think it’s the end of the big crisis, and we think we will grow again.”

It may not be the right time, at least in one direction. The U.S. government still bars most European citizens from entering the country, while U.S. citizens are permitted to visit Europe. Because of this, loads on the outbound flight from Newark are three times what they are on the inbound flight from Paris. By the same token, French Bee suspended the San Francisco refueling stops on its Paris-Tahiti flights, because the U.S. prohibits transit passengers from Europe. That flight now stops in Vancouver, but Rochet said it will return to San Francisco “the minute President Biden signs” an order permitting Europeans to enter the U.S.

The carrier will start Newark service three times weekly on an Airbus A350 configured with 411 seats, 35 of which are premium economy. And this is the key differentiator between French Bee and its competitors. Air France operates three daily flights to New York, using both Boeing 787s and 777s, the latter of which are configured with 80 business-class seats. It will be years before Air France is filling that cabin with high-yielding business-class passengers, Rochet said, adding that French Bee does not actively seek business travelers in order to focus on its leisure and visiting friends and relatives (VFR) core market. “The market is totally different.”

Another way the market is different is the growing importance of cargo. Although the inaugural flight from Paris this week had few passengers, it carried more than 10 tons of cargo. “This was part of our decision to restart Newark,” Rochet said. “There is a surge in this market.”

Another way the market is different — and one that benefits French Bee in Rochet’s eyes — is that it’s less saturated now. Before the pandemic, 10 airlines served the New York-Paris route. Now, Norwegian Air, XL Airways, and Level have exited the market, and the legacy carriers are operating far fewer flights. “I think it’s a big opportunity for us,” Rochet said. “We have a niche for one or two years ahead of us,” he said, referring to the present lull which will last until the legacy carriers restore their pre-pandemic frequencies on the route. Air France, for example, operated eight daily flights on the route before the crisis.

Rochet is not concerned about the failure of other low-cost long-haul airlines, arguing that French Bee has a less complex fleet than Norwegian did, for example, and can offset the winter seasonality of the transatlantic with North-South routes to French Polynesia, Reunion Island, and the Caribbean through its sister carrier Air Caraibes. Reunion and Tahiti also see significant VFR traffic from Metropolitan France. “It is not a 100 percent perfect game, but we are being smart and flexible enough,” he said.

Although Rochet is confident that French Bee’s pricing and product offering make it competitive on the Newark-Paris route now, he is concerned that Air France could use some of the billions in state aid and loans it got during the pandemic to undercut other carriers’ pricing. “At the moment we cannot say state aid to Air France have been in a manner that could distort the market,” Rochet said. “If they use the money they got from the state to lower pricing, we will be very aggressive.”

But Rochet ruled out the Ryanair tactic of pursuing relief through the courts, noting that the Irish discounter has lost almost every case it has pursued. Ryanair’s tactics may have more to do with marketing and press than actual relief, he observed.

French Bee did not furlough or lay off any employees during the crisis, but instead got its unions to agree to 10 percent pay cuts in exchange for not reducing headcount. Employees also were eligible for wage support from France. Rochet credits this strategy for why the carrier can resume its pre-pandemic plans so quickly. “We are ready to start again.”

The carrier has also resumed its fleet growth. Before the crisis, French Bee had a fleet of three A350s. It took delivery of a fourth last year and paused the rest of its fleet expansion. But now, it has committed to take delivery of an A350-1000 this year and another in the middle of next year, bringing its total fleet to six of the type, where it had expected to be by now.

French Bee has an interline agreement with Alaska Airlines for itineraries through San Francisco, which now have been paused. But Rochet said it is looking for a similar partner on the East Coast for connections via Newark. On the French side, the carrier is facilitating self-connecting passengers, a practice much more common in Europe than in North America. Rochet noted passengers at Orly can also connect to 17 routes on the French high-speed rail system, the TGV.

Madhu Unnikrishnan

In Other News

  • It’s official: the new state-owned Italian carrier carrier Italia Transporto Aereo (ITA) will begin operations on October 15, according to Corriere Della Sera. Long ailing Alitalia will operate its final flight the day before. The new airline will operate 52 aircraft, including seven widebodies, with plans to grow its fleet to as many as 105 aircraft by end-2025. However, under a deal with the European Commission, ITA will be forced to divest some of Alitalia’s slots at Milan Linate, Rome Fiumicino and other European airports. And the carrier will face robust competition: both Ryanair and Wizz Air have doubled down on their Italian operations, adding bases and flights.
  • Ryanair suffered another setback in its quest against European state aid to the continent’s airlines. The European Union General Court ruled that aid to Austrian for losses and cancellations during the Covid pandemic were compatible with the bloc’s rules on state aid. In June last year, Austria granted €150 million ($177 million) in loans and aid to the carrier. The court ruled that the amount Austrian received was deducted from the amount Lufthansa got from Germany, therefore making Austria’s aid in line with EU rules. The court further ruled that the aid did not discriminate against other carriers that operate in Austria.

Edward Russell & Madhu Unnikrishnan

Madhu Unnikrishnan

July 19th, 2021 at 12:01 AM EDT