MIDDLE EAST

AVIATION OUTLOOK
2009
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Contributions by:
Peter Harbison, Derek Sadubin, Simon Elsegood,
Neha Mathur, Liz Thomson & Jennifer Tian

© February 2009 Centre for Asia Pacific Aviation

No part of this publication may be reproduced, or transmitted in any form
without the prior written permission of Centre for Asia Pacific Aviation.

Disclaimer: Centre for Asia Pacific Aviation has made every effort to ensure
the accuracy of the information contained in this publication. The Centre
does not accept any legal responsibility for consequences that may arise
from errors, omissions or any opinions given. This publication is not a
substitute for specific professional advice on commercial or other matters.

Note: There are many definitions of what constitutes the ‘Middle East’,
reflecting geographical, economic, cultural, social and other considerations.
For the purposes of this aviation study, we have included the following
countries in our analysis: Bahrain, Egypt, Iran, Jordan Kuwait, Lebanon,
Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen. Their
common features include their geography, but they are also defined by a
similar aviation-philosophical trend, by the internal links between them and
eg moves towards a common aviation market. More importantly, for the
purposes of this report, is their combined potential to effect change in global
aviation markets through applying new aviation norms.
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Saudi Arabia
Even in a region that has been averse to change, Saudi Arabia’s national
aviation sector has long lagged the field. In the very recent past, however,
the Government has shown a strong, unprecedented commitment to the
process of reform. As the Government begins moving forward with the long-
delayed unbundling and privatisation of the flag carrier, the licensing of two
new domestic LCC competitors and possibly the corporatisation of the
airports, the Kingdom’s aviation sector has positioned itself to experience a
near-total renaissance.

Saudi Arabia Locator

Source: Centre for Asia Pacific Aviation

Saudi Arabia – Population and Economy: 2008

Population
Nationals (‘000) 22,570
Non-citizens (‘000) 5,576
Total (‘000) 28,146
Growth Rate 1.9%
Demographics
0-14 yrs 38.0%
15-64 yrs 59.5%
64+ yrs 2.4%
Median Age 21.5
Urbanisation 95%
GDP
USD (billions) 546.0
Per capita (USD) 19,800
Growth 3.5%
Source: Centre for Asia Pacific Aviation, CIA Fact Book & UN
Note: GDP measured in Purchase Power Parity terms

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Saudi Airports – building fresh capacity and drifting

toward privatisation
General Authority of Civil Aviation (GACA) took a key step forward in
realising its long term goals of reforming Saudi Arabia’s aviation sector,
officially awarding two foreign companies a total of USD154.8 million in
management contracts for its three busiest airports in late 2008.

Germany’s Fraport was awarded two contracts for the commercial

management of Riyadh King Khaled International Airport and Jeddah King
Abdulaziz International Airport while Singapore-based Changi Airports
International (CAI) was awarded a USD42 million management contract for
Dammam King Fahd International Airport (KFIA).

GACA president, Abdullah M Al-Ruhaimy, confirmed all three contracts are

for six years during which the companies will invest their technical
knowledge to develop the existing facilities and qualities of services.

The contracts are also part of the government’s broader plans to transform
the airport sector, opening it to investment and enhancing its attractiveness
to tourists, both domestic and international. Saudi Arabian traffic growth has
been sluggish in recent years, averaging just 3.4% over the last decade,
although domestic traffic rose 5% in 2007 and international increased 8.4%
thanks to the arrival of new entrants Sama and nas air.

Saudi Arabia total passenger traffic (domestic & international):

1997 to 2007

Source: Centre for Asia Pacific Aviation & General Authority of Civil Aviation

Mr Al-Ruhaimy stated he would next like to see the privatisation of the

country’s airports, arguing it will fulfil his vision of establishing Saudi Arabia
as an aviation hub in the region, offering improved airport services and
generating more passenger traffic to the country. He stated, “GACA's policy
is to move toward the most liberal aviation position with countries around
the world, compatible with our national interest and this means that we will
face increasing challenges from competing airlines and airports. Bringing
Fraport and Changi to support our international airports is a key element of
this strategy".

However, Mr Al-Ruhaimy recognises the path to privatisation is likely to be a

lengthy and challenging process, and is likely to face opposition from
companies used to their “protected lifestyle”. He stated, “of course, we
cannot expect the airports and airlines to move from their current position to
the full force of global competition overnight. We have planned to gradually
open up and liberalise the sector so that they can adapt themselves during
the course of time”.

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 102

Fraport officially awarded Riyadh and Jeddah airport

management contracts
Fraport will take on the task of managing and operating two of Saudi
Arabia’s largest airports at Riyadh King Khaled International Airport and
Jeddah King Abdulaziz International Airport.

Fraport stated it had already positioned employees at the airports, with

plans to focus on developing the airports’ infrastructure, improving service
quality, and achieving sustainable traffic growth. The German company
earlier stated it plans to conduct an ongoing extensive training programme
for all levels of management at both airports.

There is no investment requirement included in the contract, with the

specifications much the same as the one pertaining to the Fraport
management contract in Egypt (Cairo). Egypt’s Ministry of Civil Aviation
signed a contract late in 2004, after a year of negotiation, with Fraport to
operate Cairo International Airport for eight years. On that occasion, Fraport
beat off competing bids from Spain’s AENA and Aeroport de Nice/Sufavria.

Clearly, Fraport is building up sought-after expertise at this level of foreign

airport management, recently also expanding its presence with projects in
China and India. As Frankfurt International Airport’s own Airport City is a
highly regarded example of its kind globally, Fraport may be positioning
itself early and well to benefit from such opportunities in the Middle East.

Jeddah launches expansion programme in Dec-08

Fraport is steering Jeddah King Abdulaziz International Airport’s (KAIA)
aggressive USD4.8 billion expansion programme, which will increase
capacity to eventually handle 80 million passengers p/a, a massive increase
from the current capacity of 15 million passengers p/a. Details of the airport
Master Plans includes the construction of two new terminals, expansion of
the existing South Terminal facility and a new concourse with 25 gates.

Jeddah King Abdulaziz International Airport traffic: 1997 to 2007

18
Millions

15

12

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Hajj Domestic International

Source: Centre for Asia Pacific Aviation & General Authority of Civil Aviation

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Jeddah King Abdulaziz International Airport capacity breakdown by

carrier: Week commencing 19-Jan-09

Pakistan
3.2% Air India
2.0%
Egyptair
Saudi Arabian 2.0%
69.9%
Gulf Air
1.8%

Other
21.1%

Source: Centre for Asia Pacific Aviation & OAG

One of the terminal facilities planned was scheduled to commence

construction on 29-Dec-08, with details including:
• 42 departure gates with 74 connecting gangways;
• Aircraft hangars;
• ATC tower;
• Aircraft loading area with capacity to handle three million tons p/a;
• 25,000 space car parking facility.

In Jul-08, the GACA awarded Aeroports de Paris a EUR137 million contract to

design new facilities for the airport, including a new terminal, aircraft
parking areas and new tarmacs, a railway station and a car park. Additional
contracts for the airport development will be signed on a “priority basis”.

The airport’s development is being fast tracked to accommodate the

increasing levels traffic witnessed in the last 12 months under the GACA’s
aviation liberalisation programme. Saudi LCCs, Sama and nas air, have
handled more than 2 million domestic and international passengers between
them since they launched services in late 1Q07.

Dammam King Fahd International Airport

CAI awarded “land mark” contract

Dammam Airport is positioned as the gateway to the Eastern province of the
country, with current capacity to handle 11 million passengers p/a, with
aims to increase capacity to 16 million under Phase II of the airport’s
expansion programme (further details not disclosed).

Dammam King Fahd International Airport (KFIA) is Saudi Arabia’s third

largest airport, and is currently growing at an average annual rate of 5%
p/a. In 2007, the airport handled 4.4 million passengers, representing 9% of
the country’s total traffic.

The Dammam management contract marks the largest project CAI has ever
won, and its second success in the Middle East following its “master
planning” contract at Jordan’s Aqaba King Hussein International Airport.

CAI CEO, Wong Woon Liong, described the contract as a “land mark deal”,
strengthening the company’s strategic presence in the Middle East. He
stated, “we are indeed privileged to be given this opportunity to help
transform KFIA into a commercially and service oriented premier
international airport. This is the first time a foreign airport operator has been

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 104

tasked to manage KFIA, in line with the Saudi Arabian government’s decision
to give the state-owned civil aviation sector greater autonomy”.

The Singapore-based company was selected to improve airport operations

and boost passenger traffic and commercial revenue. Under the terms of the
contract, a team from CAI will be based in Dammam to assist in the
management and development of the airport, and will be responsible for
areas including, passenger and cargo terminal operations, commercial and
airport network developments and staff training.

Dammam International Airport passenger numbers and passenger

numbers growth: 2001-2007

4.5 Million PAX 16.0%

14.0%
12.0%
4.0
10.0%
8.0%
3.5 6.0%
4.0%
2.0%
3.0
0.0%
-2.0%
2.5 -4.0%
2001 2002 2003 2004 2005 2006 2007

PAX PAX growth

Source: Centre for Asia Pacific Aviation and Changi Airports International

Changi Airports International (CAI) is a wholly-owned subsidiary of the Civil

Aviation Authority of Singapore (CAAS), which operates and manages
Singapore Changi Airport. CAI is also currently in the process of acquiring a
29% stake in China's Nanjing Lukou Airport, subject to approval.

Dammam International Airport capacity breakdown by carrier: Week

commencing 19-Jan-09

Etihad
6.6% Gulf Air
5.9%

Air India
5.2%

Saudi Arabian Klm

56.4% 4.6%

Other
21.3%

Source: Centre for Asia Pacific Aviation & OAG

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GACA to open bids for Medina Airport

In Dec-08, the General Authority of Civil Aviation (GACA) announced plans

to invite bids for the new Muhammad bin Abdulaziz International Airport
project, Medina, under a Build-Operate-Transfer (BOT) contract. The project
involves the construction of terminals and the development of runways,
covering three stages.

The first phase is scheduled for completion in 2019 and aims to increase the
airport’s capacity to 12 million passengers p/a. This phase includes the
construction of a new 256,000 sqm passenger terminal, a second runway,
14 aerobridges, new 87 m air control tower, new airport road, security wall,
parking areas for 27 large, medium and small aircraft and a mosque, as well
as the preparation of a general expansion plan. The current runway will also
be expanded in this phase.

The second phase, to be carried out from 2019 to 2029, will increase
capacity to 18.4 million passengers p/a. This phase includes the construction
of an additional 172,000 sqm passenger terminal, new runways, 10
aerobridges, parking areas for another ten aircraft and an area for Pilgrims.

The third phase, to be carried out from 2029 to 2039, will increase capacity
to 30 million passengers p/a. This final phase includes the construction of
another 84,000 sqm passenger terminal, four aerobridges, parking area for
13 aircraft and new runways.

The airport was transformed to an international airport in Jun-06. Plans for

its expansion arise from the growing number of pilgrims visiting Medina each
year. GACA hopes the development will reduce the pressure on Jeddah King
Abdulaziz International Airport (KAIA).

The development is also part of the Saudi Arabian Government’s plans to

transform the airport sector, opening it to investment and enhancing its
attractiveness to tourists, both domestic and international. Saudi Arabian
international traffic growth rose 8.4% in 2007, well up on the 3.4% average
annual increase over the last decade.

Saudi Arabia passenger traffic growth: 1998 to 2007

9.0%

6.0%

3.0%

0.0%

-3.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total growth Domestic growth International Growt

Source: Centre for Asia Pacific Aviation & General Authority of Civil Aviation

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Saudi Arabian Airlines – preparing to adapt

After successfully conducting the partial privatisation of its catering unit in
2007, Saudi Arabian Airlines (SAA) Director General, Khalid Bin Abdullah
Almolhem, has reassured staff that the future of the airline is “extremely
promising” and that the privatisation process, currently in its eighth year, is
“proceeding smoothly”.

Saudi Arabian Profile

Founded 1945
Bases Jeddah
Destinations 76
Profitable? No
Listed? No
Owners Govt of Saudi Arabia – 100%
Website www.saudiairlines.com
Online bookings? Yes

While the privatisation may be proceeding smoothly, it is moving with

anything but haste. It has now been more than 12 months since SAA
received final approval from the Saudi Government to convert its strategic
units into six separate and wholly-owned companies, as a prelude to full
privatisation of its mainline passenger operations.

Under the privatisation plans, SAA will act as a holding company, with
subsidiaries running its operational units, including catering, cargo, ground
services, technical and civil aviation services and an aviation academy.
Strategic partners will also be offered shareholdings in the new companies,
ahead of domestic IPOs for the units, planned within two to three years of
their sale. However the carrier and reportedly the Saudi Government have
been slow to act on the plans after an initial flurry of activity.

In Sep-07, SAA sold 49% of its profitable catering unit, (although it had
already approached the market for bids more than 12 months earlier).
Following that, the partial sale of the cargo unit, originally scheduled to be
completed before the end of 2007, was delayed until a winning bid was
selected in Jan-08, and then finally confirmed in Sep-08.

SAA plans to privatise the 30-40% of the remaining four units, with the
ground handling and the MRO unit next up for tender, followed by the Prince
Sultan Aviation Academy. The technical and civil aviation services business
will be the last to on the privatisation schedule, although no timeframe has
yet been given.

Privatisation plan slowed by the need for turnaround?

In Jan-08, Mr Almolhem announced that the carrier could undergo
privatisation of its core passenger business within the next 18-24 months.
The announcement was a radical break with the previous privatisation
guideline, which was to have seen a phased, five to six year programme.
Several factors now look to favour a later rather than earlier privatisation.
Chief among these is the world economic situation. But, the scarcity of credit
has not been helped by the slow pace of the sell off of SAA’s business unit,
the scope of the required turnaround at Saudi Arabian, and the ambitious
nature of the redevelopment and restructuring plans that the carrier has
unveiled. The two-year timeframe, now almost halfway passed, is looking
increasingly unlikely.

To quote the Director General, SAA has “many other plans in the pipeline” at
the moment. The point to be made is that perhaps it has too many to allow
it to successfully concentrate on the privatisation process. SAA’s turnaround
ambitions, necessary if the carrier is to ensure consistent, long-term
profitability and attract investment, may be a driving force delaying the
privatisation. SAA’s traffic performance has been lacklustre over the past
few years, and 2008 may be even worse.

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 107

Saudi Arabian Airlines passenger traffic (mill): 2002 to 2007

Source: Centre for Asia Pacific Aviation & airline reports

The carrier slashed its domestic operations by 50% (where it was reportedly
losing approximately USD480 million per year), handing them over to new
domestic LCCs, nas air and Sama, after the government ended its domestic
monopoly.

Saudi Arabian Airlines capacity share by region:

Week commencing 12-Jan-09

India
Subcontinent
7.0%
Africa
4.0%

Middle East Europe

86.4% 2.2%

North America
0.3%

Asia Pacific
0.2%

Source: Centre for Asia Pacific Aviation and OAG

Ten year modernisation plan progressing

At the same time as its domestic monopoly was ending in early 2007, Saudi
Arabian Airlines embarked a ten-year modernisation plan. This aims to
address all aspects of its operations, from its fleet, to its IT and service
infrastructure to staff culture and work practices, including the politically
charged issues of women and foreign nationals at the carrier.

It has placed several large aircraft orders in the past 18 months, for both
narrowbody and widebody aircraft, and now has orders and options for more
than 70 aircraft. Tellingly, the vast majority of orders are for A320 aircraft,
suitable for domestic and regional operations.

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 108

Saudi Arabian Airlines current fleet and orders: Jan-09

In On
Manufacturer Type Service Order Storage Total
Airbus A300 6 6
A320 45 45
A321 4 4
A330 8 8
Boeing 747 28 1 29
757 6 6
777 23 23
787 4 4
737 (JT8D) 2 2
Boeing
(McDonnell-
Douglas) MD-11 4 4
MD-90 29 29
Dassault
Aviation Falcon 7X 4 4
Falcon 900 2 2
Embraer 170 15 15
Gulfstream
Aerospace Gulfstream II 1 1
Gulfstream III 2 2
Gulfstream IV 6 6
Hawker
Beechcraft Hawker 4000 2 2
Total 125 63 4 192
Source: Centre for Asia Pacific Aviation and Ascend

Saudi Arabian clearly – and sensibly – has no plans to be a global network

airline. But it does appear to see a future in short-medium haul services as
Middle East liberalisation spreads.

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nas air – Saudi Arabia’s first LCC

nas Air Profile
Founded 2007
Bases Riyadh
Destinations 5
Profitable? No
Listed? No
Owners National Air Services – 100%
Website www.flynas.com
Online bookings? Yes

Despite the drop in demand witnessed in the region recently, nas air has
three new A320s scheduled for delivery between Feb-09 and May-09. The
new aircraft will increase the carrier’s seating capacity by approximately
40%, and allow it to reinforce its network with additional frequencies on high
demand international routes.

The carrier launched its second route to Lebanon with Riyadh-Beirut service
on 01-Nov-08. Twelve new destinations, including Abu Dhabi and cities in
Egypt, India, Jordan, Sudan, Syria and Pakistan, are expected to be
launched over the next two years.

However, growth may be impacted by the economic slowdown. CEO, Walter

Prenzler, recently stated that with current market conditions the carrier may
have to make “some adjustments” to its ambitious expansion plans. nas air
has confirmed that it is developing measures to deal with the downturn,
including substituting smaller aircraft on lower-demand routes and
frequencies reduction or suspensions on more marginal routes.

nas air current fleet and orders: Jan-09

Manufacturer Type In Service On Order Total
Airbus A319 20 20
A320 4 4
Boeing 737 (NG) 1 1
Embraer 190 4 9 13
195 2 2
Total 11 29 40
Source: Centre for Asia Pacific Aviation and Ascend

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Sama – the Middle East’s newest LCC

Sama Profile
Founded 2007
Bases Dammam
Destinations 5
Profitable? No
Listed? No
Owners Investment Enterprises Ltd – 100%
Website www.flysama.com
Online bookings? Yes

Sama current fleet and orders: Jan-09

Manufacturer Type In Service Total
BAE SYSTEMS Jetstream 41 1 1
Boeing 737 (CFMI) 7 7
Total 8 8
Source: Centre for Asia Pacific Aviation and Ascend

The company, founded by Prince Bandar bin Khalid al Faisal in 2005,

conducted its maiden flight on 18-Mar-07. Sama was one of the first LCCs
spawned in Saudi Arabia, when the Kingdom removed Saudi Arabian Airlines’
monopoly, opening up domestic operations to new entrants.

Sama had planned to operate a fleet of 25 to 30 aircraft by 2010. The carrier

at the end of 2007, stated it expected to operate a fleet of 16 aircraft by the
end of 2008 and the 35 aircraft by 2010.

Sama’s new CEO, Bruce Ashby, joined the LCC on 01-Dec-08, succeeding
Andrew Cowen, also co-founder of the airline, after nearly four years leading Sama: “With Sama having achieved
the start-up and initial growth phase of Sama. Mr Cowen’s contract expired profitability in August and September of this
in Dec-08. Mr Ashby was previously President and CEO of IndiGo Airlines for year, with 1.5 million guests carried to date
three years through its launch and initial growth phase. Mr Cowen’s and with an international route network
departure comes as Sama faces a challenging operating environment, spanning the Middle East, now I believe is
characterised by the following pressures: the right time to hand over the day to day
leadership of Sama. I extend my best
a) Government-mandated domestic fare cap: Ultimately prevents domestic wishes to Bruce who takes on a great
carriers from passing on increasing fuel costs to passengers, which the
Sama team without which, none of Sama’s
carrier purchases at market rates. The fare cap has not been raised
considerable accomplishments would have
since its implementation at the beginning of the decade, even as
inflation in the country’s booming oil economy has accelerated over the
been possible,” Andrew Cowen, former
past eight years, and is expected to peak above 6.5% in 2008. To CEO and co-founder. Source: Company
resolve the problem, the GACA implemented a review of the fare cap in Statement, 26-Nov-08.
2008, although has refused to accelerate the pace of the review;
b) Fuel supplier payment deadlines: Fuel suppliers have requested early
payment of their contracts, as a result of the notable reductions in oil
prices over the past four months, which has negatively impacted the
Saudi economy. As a result, in mid-Nov-08, Sama was reportedly
struggling to pay its employees on time;
c) Fuel costs: Sama felt the effect of the fuel spike in 1H08, which was
further exacerbated as its main competition, Saudi Arabian Airlines,
received a fuel subsidy. According to Sama, Saudi Arabian’s discount on
fuel “represents [a] five times cost difference”, something Sama is
unable to compete with;
d) Middle East traffic decline;
e) Intense competition in liberalised market: Sama has also been vocal in
complaining about the state of competition in the newly liberalised
Saudi aviation market. In Sep-08, it stated it was considering
withdrawing from Saudi domestic operations altogether unless “the
[domestic] situation improves and a reasonable return can be made”.

There is clearly potential for expansion of the Saudi Arabian domestic

market. But the national regulatory and competitive structure is still
unwieldy, and probably constrains growth.

Middle East Aviation Outlook