Air Arabia lags flydubai in the battle for Middle East LCC supremacy, but opportunities abound

In Feb-2014, Air Arabia chairman Sheikh Abdullah Bin Mohammad Al Thani said the carrier was "extremely confident about the long-term fundamentals of the aviation sector in the region and believe we have the right business model, operating base and infrastructure in place to cement our position as the region's leading low-cost carrier operator."

flydubai CEO Ghaith Al Ghaith, commented in Apr-2014 that there is "much untapped opportunity for us". The carrier's recent fleet order for 75 Boeing 737 MAX 8s, as well as another 11 737-800s shows its "appetite for further expansion and the continued demand for our flights" according to Mr Al Ghaith.

Air Arabia is losing the growth race, but widening its operating base

When it started operations in 2003, Air Arabia brought the LCC revolution into the Middle East. Since its launch, it has enjoyed a position as the region's largest low-cost carrier. However, the carrier has not been able to match the growth of the emirate of Dubai-backed flydubai,

Even before flydubai launched its first flights in mid 2009, it was apparent that the carrier's intention was to become a major player, not just in the Middle East's LCC sector but in the region's aviation market as a whole. In 2008, the airline ordered 52 737NGs and announced it would operate to routes within a five-hour radius of its hub, a catchment area of around 3 billion people.

In terms of passenger traffic and seats on offer, flydubai surpassed Air Arabia during 2H2013. For the full-year flydubai handled 6.82 million passengers, with passenger numbers surging by a third compared to 2012. Air Arabia handled 6.1 million passengers. Its growth of 15.2% was better than the regional average of 12.4%, but still modest compared to that of its rival.

Despite flydubai's move into the top spot, Air Arabia still has an advantage in its diversified and larger network. With three hubs operational and a fourth due to start imminently, the carrier operates across 91 routes in better than 30 countries (compared to 66 routes operated by flydubai).

66 of Air Arabia's routes are operated from its main base at Sharjah, with capacity predominantly operated into destinations in the Middle East and South Asia. Air Arabia also has a significant number of routes into Western Europe from its Moroccan hub, as well as across North Africa from its hub at Alexandria.

Air Arabia will add a second UAE base at Ras Al Khaimah

A major growth area for Air Arabia this year will be its new operation at Ras Al Khaimah International Airport. Following the collapse of RAK Airways in late 2013, Air Arabia agreed to become the flag carrier for the emirate, a role it takes on in addition to its existing status as flag carrier for the emirate of Sharjah.

Air Arabia will initially base two A320s at the airport. The carrier has announced it will launch operations from Ras Al Khaimah on 06-May-2014, with routes to Cairo, Islamabad, Jeddah, Lahore, Muscat and Peshawar. The carrier also plans to add service to Dhaka (Bangladesh) and Khozikode shortly after, although a timeframe has not been disclosed.

Air Arabia CEO Adel Ali noted in late Mar-2014 that the increase in tourists and overall visitors in the northern emirate of Ras Al Khaimah "suggests solid potential for developing the emirate travel and tourism sector exists."

Ras Al Khaimah International Airport is showing rapid growth in its tourism and business travel sectors, albeit from a small base compared to Sharjah, Abu Dhabi or Dubai.

The emirate has grand plans for its development as a passenger and cargo hub. However, its ambitions had been frustrated by the less than stellar performance of RAK Airways, which failed in 2009 and then was restarted in 2010, with significant but ultimately unfulfilled expansion planes. Ras Al Khaimah Department of Civil Aviation chairman Sheikh Salem Bin Sultan Al Qasimi said the new agreement is "a natural step in the next stage of Ras Al Khaimah's aviation development."

Ras Al Khaimah is roughly 90 km from Air Arabia's main hub at Sharjah International Airport. While the new hub operation could be seen as offering a potential threat of cannibalisation and a duplication of effort, Air Arabia is confident it can make it work as a secondary hub for the UAE. The carrier will grandfather in its existing operational and management structures, thanks to the uniformity of aviation regulations across the UAE. It has been working with the Ras Al Khaimah Department of Civil Aviation to ensure that it can quickly grow the required economies of scale at the airport.

flydubai outpaces Air Arabia in Russia and the CIS

Outside the UAE, one of the key battlegrounds for Air Arabia and flydubai has been Russia and the CIS (comprising Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan, as well as Ukraine and Turkmenistan as participating members). Both carriers have been building capacity into the region. The rapidly emerging economies, with expanding business links and underdeveloped tourism links, are tempting targets for the low-cost carriers.

Air Arabia and flydubai Russia and CIS seats per week by country (week commencing 21-Apr-2014)

Country	Air Arabia	flydubai
Armenia	656	1512
Azerbaijan	0	1134
Kazakhstan	3608	0
Kyrgyzstan	0	1134
Moldova	0	756
Russia	5576	10962
Tajikistan	0	756
Turkmenistan	0	2646
Ukraine	4264	4914
Total	14104	23814

Source: CAPA - Centre for Aviation

Air Arabia has five destinations in Russia, four in Ukraine and four across the rest of the CIS nations. The carrier launched service to Shymkent, its third destination in Kazakhstan, in Mar-2014. It has not announced any future route to be launched in the region for 2014, as the start-up of operations from Ras al Khaimah will absorb much of its new capacity from May-2014 onwards.

flydubai entered the Russian market in 2010 and has since added flights to 18 destinations in the Russia/CIS region. In 2013, flydubai doubled its network in Russia, adding four new destinations: Krasnodar, Mineralnye Vody, Rostov-on-Don and Volgograd. flydubai plans to add a ninth Russian destination in Sep-2014, with Dubai-Moscow service. It has not yet revealed which Moscow-area airport it plans to operate to.

With the addition of Moscow to its route network, flydubai will operate to all 11 destinations that Air Arabia does in Russia and the CIS. In addition, it has added a range of destinations that Air Arabia does not operate to.

Russia and CIS destinations: Air Arabia and flydubai seats per week (week commencing 21-Apr-2014)

Destination	Country	Air Arabia	flydubai
Yerevan	Armenia	656	1512
Baku	Azerbaijan		1134
Almaty	Kazakhstan	2296
Astana	Kazakhstan	656
Shymkent	Kazakhstan	656
Bishkek	Kyrgyzstan		1134
Chisinau	Moldova		756
Kazan	Russia	984	1890
Rostov-on-Don	Russia	656	1134
Ufa	Russia	656	1512
Yekaterinburg	Russia	984	2646
Krasnodar	Russia		1134
Mineralnye Vody	Russia		1134
Moscow Domodedovo	Russia	2296
Samara	Russia		1512
Volgograd	Russia		756
Dushanbe	Tajikistan		756
Ashgabat	Turkmenistan		2646
Donestk	Ukraine	656	756
Kharkiv	Ukraine	656	756
Kiev Boryspil	Ukraine	2296
Kiev Zhuliany	Ukraine		2646
Odessa	Ukraine	656	756

Source: CAPA - Centre for Aviation

Low LCC penetration and the wide range of route options should mean there is plenty of growth potential for both LCCs

The Middle East's LCC sector is still underdeveloped by global standards - LCCs in the Middle East account for only about 16% of traffic within the region and 10% of capacity to/from the region - and there are opportunities to develop short-haul routes to underserved regional economies.

Thus Air Arabia and flydubai still have the potential to grow without treading too heavily into each other's territory.

Middle East LCC capacity share (seats): 2003-2013

Source: CAPA - Centre for Aviation

Air Arabia's distributed hub network in particular provides it with a multitude of expansion opportunities. Air Arabia is now looking at widening its network even further, opening up new regions. Ukraine, Russia, Kazakhstan and Armenia will remain a focus for the carrier's Sharjah hub and more routes in the GCC and wider Middle East are planned for 2014.

China and JVs are on the radar for Air Arabia

In Oct-2013, CEO Adel Ali stated the carrier is hoping to launch its first flights to Chinese destinations in 2014. It has a number of cities it is interested in, including Chengdu and Kunming. At five to six hours flight time, the routes would be a stretch for the carrier's A320s, but are technically possible. Western African routes are also on the agenda for 2014, as part of a diversification of routes for the carrier's Casablanca operation.

Air Arabia will also continue to search for more local JV opportunities, and may even expand its brand beyond the Middle East and Africa. The launch of the carrier's Levant hub has been indefinitely suspended for several years due to the instability surrounding Syria and Libya. However, there are plenty of other opportunities in the Middle East, Africa and even Central Asia. Turkey, with its booming economy and fast expanding LCC travel segment, has also been raised as a possibility. Saudi Arabia remains a possibility as well, although further liberalisation would be necessary in the market.

flydubai can't hope to match Air Arabia's geographic distribution, but its hub at Dubai comes with certain advantages. The airport's massive and diversified passenger flow - over 1Q2014, Dubai International Airport managed to outstrip London Heathrow as the world's busiest airport in terms of international passenger traffic - funnels considerable traffic into flydubai's network, formally and informally.

Both Air Arabia and flydubai expect the 2014 operational climate will remain much the same as last year. With new routes and aircraft being added, the carriers are optimistic there remains plenty of growth still to be tapped.