Saudi Arabia: New Airlines Enter Market Benefiting Consumers but Growth Dependent on Resolution of Significant Challenges

The Saudi General Authority for Civil Aviation (GACA) recently announced that it had selected Qatar Airways and Bahrain-based Gulf Air to operate domestic flights within the Kingdom. These two airlines are entering a market of 27 million individuals whose national air travel needs have until now been supported by two airlines: Saudi Arabian Airlines (SAA) and National Air Services (NAS). While there are a number of airlines that provide international flights from Saudi Arabia, only these two provide domestic flights and their service standards and limited range leave much to be desired.

Allowing non-Saudi airlines to enter the local market will provide a number of benefits for consumers, aircraft manufacturers and the government. Ideally, increased competition would force SAA and NAS to improve their services and lower ticket prices. However, these changes will only be achieved if Riyadh allows them to take place. For example, the Saudi government sets the price of jet fuel charged to foreign airlines while subsidizing it for SAA thereby increasing the costs for the airlines and placing them at an immediate disadvantage. On a positive note, there have been reports that GACA is in discussions with Saudi Aramco to reduce the price charged to foreign airlines.

The other question is why Qatar Airways and Gulf Air were selected from the fourteen companies – some airlines and some hoping to start airlines – who had applied for the domestic airline licenses. Qatar’s economy is on par with that of the Kingdom, its airline is renowned for its service, and Doha’s political strength is second only to Saudi Arabia. Selecting this airline, therefore, makes sense from an economic, business and political perspective. Gulf Air, on the other hand, is not as well regarded but Bahrain is a strong Saudi ally and the Kingdom is always looking to provide economic opportunities to Manama; consequently, the selection of this airline is also not surprising.

It is conceivable that other airlines will soon join Qatar and Gulf Air in serving the Saudi market although, given the cultural issues, I would be surprised if any of them were western. Regardless, airplane manufacturers should see some sales growth as these airlines may require more planes to support the new routes.

Ostensibly, the reason behind the liberalization of the Saudi air travel market is to further the government’s goal of diversifying the Saudi economy from its dependence on oil revenues. A robust air sector will help a number of other industries such as tourism, manufacturing and services.

However, despite the positive intentions, this goal simply cannot be achieved without a corresponding improvement in the supporting infrastructure. Fortunately, the Saudi construction industry is more than capable of managing the development of the necessary structures to support the air travel industry and the country has the resources to fund their development.

The true challenge lies in the appropriate training and manning of the staff needed to support this new infrastructure and industry. While providing a heretofore untapped opportunity, the success of the government’s plans will depend on how successfully Riyadh is able to ease the visa process and increase the service standards at its airports. The former will allow more people to visit the country – beyond those who simply come for religious pruposes – and help diversify the industry, while the latter will make their visit more comfortable. Simply put, all the airlines and airports won’t mean much if people cannot get into the country and, even if they do, are treated harshly by the Saudi staff.