Sama to cease operations; airline unable to obtain Saudi government or investor support

The decision was also reportedly taken after the airline recorded a loss of SAR1 billion (USD266 million), suffering heavy losses between Oct-2009 and Mar-2010, due to declining airfares and reduced passenger demand. It has also been reported that Sama, which received SAR200 million as a loan from the government to cover fuel costs and SAR500 million from shareholders, fell short by SAR300 million to keep the operations on track.

Announcing the situation, Mr Ashby commented: "The decision to stop flying was not taken lightly, but we have spent many months seeking alternatives, and now this is the only option remaining to us. We had been awaiting a significant aviation relief package with respect to fuel subsidies, subsidies for PSO routes, a gradual lifting of domestic fare caps, and additional funds to support the past losses and growth of our business. In addition, we sought for, and found, more than one potential new equity investor willing to inject cash into the business. Unfortunately, none of these alternatives came together in the required timeframe".

The CEO continued: "Sama, and all other airlines throughout the region, experienced very low fares and somewhat slow demand for regional travel during the winter season (October 2009 through March 2010). Although revenues were up sharply during the summer peak season, it has not been enough to offset the heavy losses we suffered during the winter. We deeply regret any inconvenience caused to our customers, but we must do what is necessary to preserve the integrity of our operations. Since January 2009 we have run a safe, reliable airline that flies on time and we have received broad-based support for our plan of measured growth".

Mr Ashby concluded optimistically, stating: "We remain hopeful that a financial solution will be found that will allow us to restart operations in the coming few days".

Saudi Arabia - a tough market for LCCs

Sama, up until now, has competed with Riyadh-based National Air Services (also known as nas, the first LCC in Saudi Arabia to receive an operating licence) and state-owned Saudi Arabian Airlines in the Saudi market.

The 2007 launch of LCC operations in Saudi Arabia by Sama and nas air transformed the national aviation market. However, since their launch LCCs have struggled in the market, dealing with the monopoly legacy of national carrier, Saudi Arabian Airlines, and regulatory policies (such as a domestic fare cap and a requirement to cover operations to main domestic airports) not designed to accommodate a new era of competition.

The LCCs have also complained that they are not on an equal footing with Saudi Arabian Airlines, especially in fuel costs, which the national carrier obtained at subsidised prices (Mr Ashby has previously stated that Sama pays approximately ten times as much for its domestic fuel as Saudi Arabian, which "benefits from a long-standing fuel subsidy not available to Saudi Arabia's private airlines").

The carrier stated in late 2008 that the combination of fare caps and mandatory domestic routes to smaller destinations risked "having an enormous amount of capacity tied up in routes that had no economic value". The carrier, in a dramatic move in Sep-2008, also stated it could end Saudi domestic operations altogether unless "the [domestic] situation improves and a reasonable return can be made".

Sama, at the beginning of this year, also announced the discontinuation of its Public Service Obligation (PSO) operations from Feb-2010, due to a "long-running delay in the formulation of a comprehensive aviation policy" within the country. Sama's PSO routes include Dammam-Hail, Hail-Gurayat, Hail-Rafha, Hail-Tabuuk and Dammam-Bisha.

Mr Ashby at the time stated the LCC had incurred more than SAR50 million (USD13.3 million) in losses related to PSO operations since its startup in Mar-2007, added that the carrier receives no subsidies or fee waivers for the services, unlike government-owned Saudi Arabian Airlines (However, Sama in 2009 did receive a USD53 million long term loan from the government in 2009 to assist the carrier in "clearing old debts and provide a solid ongoing base for operations").

Network of 14 destinations; fleet of six aircraft

Prior to suspension, Sama operated a network covering 14 domestic and international points, including short-haul destinations in Saudi Arabia, Egypt, Jordan, Syria, Sudan and the UAE. The carrier operated a fleet of six 148-seat B737-300s at the time of suspension (and had, in Oct-2009, also stated it would acquire 20 new B737-800 or A320 aircraft over the next four years) to allow it to expand to provide approximately 164 weekly services.

Breakdown of Sama capacity share (seats) by route: Aug-2010 (prior to suspension of operations)

Source: Centre for Asia Pacific Aviation and OAG

Sama Destinations: Aug-2010

Source: Sama

Sama was founded in 2005 by Investment Enterprises Ltd, chaired by HRH Prince Bandar bin Khalid al Faisal. The carrier's first commercial flight took place on 18-Mar-2007, with initial investment received from 30 major Saudi private and institutional investors, including Olayan Financial Co, Xenel Industries Ltd, Saudi Industrial Services Co, Sara Development Company Ltd and Modern Investment Company for Trade and Industries.

Although the concept was undoubtedly one which will become an integral part of Saudi Arabia and the region's aviation system in future, Sama's apparent demise sends a clear message to regulatory authorities that adjustments need to be made to what is an outdated system, if aviation is to achieve commercial sustainability and popular usage.