Oman Air plans ambitious fleet expansion as 787s & 737s are acquired while ATRs & Embraers are axed

This is the first in a two-part series of analysis reports on Oman Air. This report looks specifically at Oman Air's new fleet plan. The second report will examine Oman Air's recent performance and outlook, in particular its pursuit of more transit traffic, as it continues to expand rapidly.

Oman Air began new expansion phase in late 2014

Oman Air passenger numbers have grown five-fold over the last decade from less than one million in 2004 to 5.1 million in 2014. But passenger traffic grew by only 2% in 2014, representing the slowest growth in over a decade and the first time since 2006 that growth was in the single digits.

Oman Air annual passenger numbers: 2004 to 2014

Source: CAPA - Centre for Aviation & company reports

But in late 2014 Oman Air began implementing a new expansion phase which will result in the resumption of rapid passenger and capacity growth in 2015. Oman Air took delivery of seven aircraft in 4Q2014 - including three A330-300s, three 737-800s and one 737-900ER. Oman Air ended 2014 with a fleet of 35 aircraft consisting of six A330-300s, four A330-200s, 17 737-800s, one 737-900ER, one 737-700, four E175s and two ATR 42-500s.

The six aircraft delivered in 4Q2014 were the first batch of new aircraft under an expansion plan that was initially approved by the Omani Government in 2013 and envisions a fleet of 70 aircraft by the end of 2020. The three A330s delivered in late 2014 were also the first to feature Oman Air's new long-haul business and economy products while the 737s were the first to feature a new short/medium-haul product in both classes.

Oman Air began operating the new aircraft in late 2014, using the 737s to increase capacity in its regional network and using the A330s to add Jakarta and Manila. The Dec-2014 launch of services to Indonesia and the Philippines expanded Oman Air's long-haul network to 10 destinations including six in Europe and four in Southeast Asia. Its total network grew to 47 destinations including 37 short/medium-haul regional destinations (sectors of up to five hours) across the Middle East, Africa and South Asia.

But as the expansion did not start until late in the year, Oman Air only recorded a 2% growth in ASKs in 2014. Oman Air CEO Paul Gregorowitsch said at a 30-Mar-2015 event in Singapore that the carrier's ASKs are projected to grow by 35% in 2015.

Oman Air to add four destinations in 2015 including first destination in North Asia

A large portion of the capacity growth for 2015 will be generated by capacity which was initially added in late 2014. But Oman Air also plans to add four more destinations in 2015 and add capacity to several existing destinations as it continues to take delivery of new aircraft.

Oman Air says it plans to take two 737-800s, four 737-900ERs and two 787-8s in 2015. The two 737-800s and one of the 737-900ERs were already delivered in 1Q2015. Oman Air expects two more 737-900ERs to be delivered in May-2015 and one more in Nov-2015 while the two 787-8s are slated to be delivered in Sep-2015 and Nov-2015.

Mr Gregorowitsch said the first batch of 787-8s will be used to launch service to China. Oman Air has not yet disclosed which Chinese city it will serve but intends to make an announcement on this in Apr-2015.

The new service to China will give Oman Air 51 destinations at the end of 2015 including 12 long-haul destinations. Singapore became Oman Air's 11th long-haul destination and 48^th destination overall on 29-Mar-2015. Unlike Jakarta and Manila, the launch of Singapore did not require additional widebody aircraft as Oman Air has converted its previous daily Muscat-Kuala Lumpur turnaround service to a new daily Muscat-Singapore-Kuala Lumpur-Singapore-Muscat service.

Oman Air also plans to launch in early Apr-2015 four weekly services to Goa in India. It also has unveiled plans to launch four weekly flights to Dhaka in Bangladesh on 01-Aug-2015. Dhaka and the one destination in China are the only new destinations in Oman Air's plans for 2H2015.

But capacity expansion on several existing routes is expected including to London Heathrow, which Oman Air intends to upgrade from daily to double daily from the start of the northern winter season at the end of Oct-2015. Mr Gregorowitsch said Oman Air is still working on trying to secure a second pair of slots at Heathrow but is confident it will have the new slots in hand by Oct-2015.

More new routes are expected in 2016 as Oman Air continues to implement a plan to grow its network to 75 destinations by the end of 2020. The growth of the long-haul network will continue to focus on Asia, including potential services to Korea and Japan.

Oman Air looking to order more widebody aircraft

Oman Air should be able to pursue further long-haul growth in 2016 as it now expects to take three more 787s, giving it a fleet of 13 widebody aircraft at the end of 2016. Similar long-haul growth is expected in 2017 through 2020 as Oman Air gradually expands its widebody fleet to 25 aircraft.

So far Oman Air has committed to acquiring nine additional widebody aircraft, a mix of 787-8s and 787-9s. Mr Gregorowitsch said Oman Air will look at placing more 787 orders and will evaluate the A330neo as it reviews its options for reaching it target of 25 widebody aircraft.

One option to be considered will be transitioning the widebody fleet to an all 787-operation. Oman Air is attracted to the synergies and benefits which would come with operating a simplified fleet consisting of only two families - the 737 and 787.

Seven of Oman Air's A330s are slightly older aircraft (between four and six years) and are expected to be replaced over the next few years. Keeping only the three A330s which were delivered in late 2014 would not make sense although it is not likely these aircraft will be replaced until early next decade even if a decision is made to transition to an all-787 widebody fleet.

Oman Air will also consider maintaining two widebody types of aircraft and three types overall. Under this scenario Oman Air will most likely end up with 787s, A330s and A330neos. It plans to evaluate the A330neo but is not expected to give much consideration to the A350.

Oman Air to take 787s in three different configurations

Oman Air initially committed to acquiring six 787-8s in Nov-2011 and ordered the recently delivered batch of three A330-300s in Dec-2013. But Mr Gregorowitsch told CAPA at the Singapore event that its 787 order now consists of two 787-8s and six 787-9s.

He said the two 787-8s will be delivered in Sep-2015 and Nov-2015 in two-class 267-seat configuration consisting of 18 lie-flat business class and 249 economy seats. These aircraft are intended for long-haul routes with thin premium demand, including China.

Mr Gregorowitsch said three of the 787-9s will be delivered in a 242-seat three-class configuration consisting of eight first class suites, 30 business seats and 204 economy seats. The other three 787-9s will be delivered in a 288-seat two-class configuration featuring 30 business and 258 economy seats. All three of three-class aircraft are slated to be delivered in 2016 while three two-class 787-9s are slated to be delivered in 2017 and 2018.

Oman Air to use three-class 787-9s on Muscat-London Heathrow sector

If Oman Air opts to order more 787s as part of its five-year plan for a 25-aircraft widebody fleet they will also likely be in the two-class configuration. The new suites product which will be introduced in 2016 is primarily intended for the London market, where Oman Air sees enough first class demand to support first class.

Oman Air plans to transition both of its two daily London flights to the three-class 242-seat 787-9 in 2016. Oman Air currently uses three-class A330-300s on its single daily London service.

Mr Gregorowitsch said the three A330-300s which are currently in three-class configuration will be retrofitted as the new three-class 787-9s join the fleet in 2016. The retrofit will see the elimination of the first class cabin and the installation of the new business class seat from B/E Aerospace which was introduced with the delivery of the three new A330-300s in late 2014.

The three newly delivered A330-300s are in 289-seat configuration featuring 265 economy and 24 lie-flat business class seats. Oman Air's older fleet of three A330-300s are currently in three-class 230-seat configuration with six first class, 20 business class and 204 economy seats. Oman Air's other four A330s are smaller -200s in 216-seat configuration including 20 business class and 196 economy class seats.

The business class in all of Oman Air's A330s feature full lie-flat seats. But in the older A330-300s and the A330-200s the business class seats are in a four-abreast configuration while in the newer A330-300s the seats are in a six-abreast configuration. Both business class products include 17in seatback IFE monitors while the economy cabin has 10.4in monitors in the older aircraft and 10.6in LCD screens in the new A330-300s.

Oman Air improves short-haul product with new 737s

Oman Air also introduced a new short/medium-haul product in both cabins with its last batch of 737NGs.

Oman's last five 737-800s, three of which were delivered in late 2014 and two which were delivered in early 2015, are in 162-seat configuration with 12 business class and 150 economy seats. The business class features 46in pitch recliner style seats in two-by-two configuration while the economy seats have 30in pitch. These five aircraft were initially ordered from Boeing in Jun-2013 and prior to delivery were sold and leased back from Pembroke and SMBC.

Oman's 737-900ERs feature the same products and pitch in both cabins. But as the -900ERs are larger aircraft they are in 183-seat configuration with 12 business and 171 economy seats.

Oman Air ordered five 737-900ERs in Jun-2013 and took the first of the type in late 2014. It took its second 737-900ER in Mar-2015 and is slated to take the remaining three aircraft by the end of 2015.

Oman also operates 14 older 737-800s that are in 166-seat configuration with 12 business class and 144 economy seats. These aircraft only have dropdown IFE monitors. Seat pitch is a tighter 40in in business but a slightly more spacious 31in to 32in in economy.

Oman also still operates one 737-700s in 116-seat configuration with 12 business and 104 economy seats. This aircraft has the same pitch and dropdown IFE product as the 14 737-800s.

Oman Air fleet: as of 31-Mar-2015

Aircraft	In Service
Total:	37
Airbus A330-200	4
Airbus A330-300E	6
ATR 42-500	1
Boeing 737-700	1
Boeing 737-800	19
Boeing 737-900ER	2
Boeing 787-8	0
Embraer E175LR	4

Source: CAPA Fleet Database

Oman Air previously operated some of its 737s in single class configuration but in 2014 completed a retrofit programme. This enabled Oman Air to introduce a premium product on several routes, primarily to South Asia. Oman Air's attempt to position itself as a premium carrier ahead of the possible launch of a new low-cost carrier in the Oman market will be looked at as part of the second installment in this series.

Oman Air to phase out ATR 42s and E175s

Oman Air also operates its fleet of four E175s in 71-seat two-class configuration, including 11 business class and 60 economy seats. Both cabins feature IFE monitors at every seat. Only Oman's fleet of ATR 42s are in all-economy configuration.

Mr Gregorowitsch said Oman Air is in the process of phasing out its ATR 42 fleet. The first aircraft was removed from service on 29-Mar-2015 and the second turboprop is expected to be removed from service in about three months. Oman Air has been using the 42-seat ATR 42, which is by far the oldest aircraft type in Oman's fleet, on domestic routes.

Mr Gregorowitsch said Oman Air also recently decided to phase out its E175 fleet. He expects the last of the E175s will be phased out by late 2015 or early 2016.

The E175 is currently used on two of its three domestic routes and some regional international flights within the Middle East including Abu Dhabi, Bahrain and Dubai. Oman Air's E175s are four years old or less, according to the CAPA Fleet Database. Oman Air ordered the E175s in Nov-2009 as part of a deal that originally included five firm aircraft and five options. The first aircraft was delivered in Apr-2011.

Oman Air has determined it is not worth operating regional aircraft due to the cost of carrying the additional types. It sees operating only two turboprops and four regional jets as inefficient. Oman Air looked at expanding the turboprop or regional jet fleet to give it better scale but ultimately decided that eliminating the two types altogether was the better option.

The routes which are now operated with the turboprops and regional jets will be up-gauged over the next year to 737s. A reduction in frequencies is planned for its main domestic route, Muscat to Salalah, but Oman Air believes this is manageable as there are now eight daily frequencies.

Oman Air's other two domestic routes, Muscat to Khasab and Sohar, are currently served with two daily ATR 42 flights and two weekly E175 flights, according to OAG data. Sohor became Oman Air's fourth domestic destination in Nov-2014 after the opening of a new airport in the northern Omani city. Sohor is located only about 230km from Muscat while Salalah, located in the south of Oman, is about 1,000km from the capital. Khasab is also located in the far north of Oman and is about 500km from Muscat.

Oman Air acquires 20 additional 737s

The elimination of regional aircraft means 737s will account for all 45 of the single-aisle aircraft Oman Air plans to operate by the end of 2020. Oman Air currently operates 22 737 family aircraft with the last three of the 737-900ERs that it has on order to be delivered by the end of 2015.

Mr Gregorowitsch said Oman Air recently committed to 20 additional 737s as part of a deal signed with Boeing recently but not yet booked by the manufacturer. The deal includes 10 current generation 737NGs for delivery in 2017 and 2018 and 10 737 MAX aircraft for delivery from 2019. Oman Air does not plan to take delivery of any narrowbody aircraft in 2016.

Oman Air is now talking to several leasing companies which would potentially help supply the 20 additional 737s. A breakdown on how many aircraft will be leased and how many will be purchased directly has not yet been determined. Oman Air also has not yet decided on a breakdown between -800s and -900s although plans to include both types in the new batch.

The 20 additional aircraft plus the 25 737s Oman plans to operate by the end of 2015 would amount to 45 aircraft, meeting its long-term narrowbody target. But Oman Air will still need to commit to at least a few more 737s to meet its goal of operating 45 narrowbody aircraft by the end of 2020 because the carrier expects to retire some of its older 737s over the next five years.

Oman Air's 737 fleet is on average less than six years old, according to the CAPA Fleet Database. The carrier's overall fleet is also on average less than six years old. But there are four 737s, including three -800s and the -700, which are already more than 10 years old. These aircraft will likely be retired (and perhaps several others that will be 10 years old by 2020) over the next few years, in line with Oman Air's ambition to keep its fleet young.

Oman Air average aircraft age by fleet type: as of 31-Mar-2015

Source: CAPA Fleet Database

Oman Air fleet expansion will lead to more intense competition

Doubling the fleet from 35 to 70 aircraft in only six years (from the end of 2014 to the end of 2020) is ambitious, particularly given the fact that smaller regional aircraft will be phased out and the widebody fleet will expand by 150%. While a simpler fleet is more efficient, operating smaller aircraft can be an important differentiator for smaller airlines in the Middle East. By operating larger aircraft and more aircraft overall Oman Air will inevitably face more intense competition against the main Gulf carriers.

Oman Air is currently the seventh largest full-service airline in the Middle East based on fleet size. It is also the seventh largest airline in the region based on widebody fleet size. Assuming it implements its current business plan it will likely become the fifth largest airline based in both these categories by 2020 behind only Emirates, Qatar Airways, Etihad and Saudia.

Top 12 Middle Eastern full-service airlines ranked by fleet size: as of 31-Mar-2015

Rank	Airline		Widebody	Narrowbody	Regionals	Total
1	EK	Emirates	232	0	0	232
2	QR	Qatar Airways	110	41	0	151
3	SV	Saudia	61	50	15	126
4	EY	Etihad Airways	78	29	0	107
5	W5	Mahan Air	28	0	12	40
6	IR	Iran Air	18	6	14	38
7	WY	Oman Air	10	22	5	37
8	EP	Iran Aseman Airlines	1	6	25	32
9	IA	Iraqi Airways	4	19	6	29
10	RJ	Royal Jordanian	9	12	8	29
11	GF	Gulf Air	6	22	0	28
12	KU	Kuwait Airways	14	8	0	22

Source: CAPA Fleet Database

Oman Air is banking the rapid expansion will improve its productivity and give it scale as it tries to turn the corner and become profitable. But such expansion also comes with huge risks as Oman Air starts to compete more for intercontinental long-haul connecting passengers.

With a fleet of 70 aircraft and without a regional niche, Oman Air will enter a new league that comes with prestige but also potential pitfalls.

In the second part of this report CAPA will look at Oman Air's recent performance and outlook, including its pursuit of more transit traffic