Saudi Arabia’s flyadeal Pursues Rapid Domestic Expansion

Transcript

Con Korfiatis:Where we are today, we have 8 A320ceos in our fleet. They've been in our fleet since May of this year. That's enabled us to increase frequency quite dramatically, I think, since we last spoke. And so we're up, we're on to 10 domestic routes right now, 10 of the big thick routes in Saudi Arabia. And we're operating 56 flights a day with the 8 aircraft, so we're getting very good productivity out of the aircraft as well. Fleet-wise, we committed to 3 more Airbus A320ceos coming into the fleet during December, all 3 of them. That increases our flying by almost 35% in the new year, so we'll be significantly adding to the frequencies. At this stage, we're looking at starting a new domestic base with these 3 aircraft that are coming, and therefore, as a result of that, we're— Where? pushed back our launch of international into 2019. So it'll be a case of connecting the dots. We're putting those 3 aircraft into Riyadh, and those 3 aircraft will enable us to unwind some, you know, patterning that we do out of Ajeddah base to get flights that actually launch out of Riyadh and back to Riyadh. So that'll improve some efficiencies internally from an operational point of view, but it'll enable us to increase the frequencies, increase the number of cities that are served from Riyadh, and then start to increasingly join the dots We do have 2 or 3 planned new routes as well, which we haven't announced what they are yet, but there'll be some more additional domestic routes with those aircraft. So that'll enable us to increase frequencies on existing routes, and as I said, we'll be adding some more new points domestically as well. We've also been thickening up the largest route, which is Jeddah-Riyadh. We're up to 12 flights a day on that route right now. But we— with the loads, the way they're building, and how that market's just sapping up each time we add frequency to that route, we're confident about taking more capacity. We have plans to increase the frequency on Jeddah-Riyadh even further. We're running a business too at the end of the day, so we're mindful of trying to do the best for our bottom line as soon as we can in the business. And the dilemma we have at the moment, being such a young airline and a small fleet, and just so many flying options that are available that ultimately we will move into, the challenge for us is how we sequence them. And what we've seen in building up, for example, on our Jeddah-Riyadh route, building up frequency, which is really needed on a route that's that thick to be attractive in the market and not have to be you know, beyond reasonable deep discounting to get people to fly with you. It's helped us improve our yields significantly. And therefore, you know, in terms of the contribution to the bottom line, it's very positive. I think we've always said as well, you know, we're a Saudi Arabian airline. It has the largest domestic market in the Middle East. And from that point of view, you know, we need to have a solid offering and a solid network in our home market before we want to stretch ourselves too far and get offshore. These 3 additional aircraft in December give us, you know, 35% is a significant more addition in capacity. And that starts getting us to the point where we think we've got about enough aircraft employed domestically. Obviously not for the long term because there's still a lot more growth, but enough of a depth in the market and an establishment of the market to then start looking at taking ourselves internationally. So it's just that dilemma of we can put it in so many places. What do we do first? Our average stage length right now is marginally over an hour. So we have actually very short average stage length. Despite that, we're getting just over 12 hours a day on the current fleet. So given the average stage length, that's amazing. What going further out and starting international will allow us to do is move that to about 14 hours a day flying, and that's fantastic utilization for a narrow-body aircraft. Depending on where we want to go to, some of the markets that we have an initial interest in, I think we're just going to apply some common sense. Our first wave of international flying, we're not going to do 5, 6-hour sectors out. We'll try and keep it within, you know, the 3, 3.5 mark. And the markets that come into play there are very thick markets for Saudi Arabia, so most definitely there's traffic and business to be done there. But, you know, slots are still a challenging something, so we're just starting those discussions with a number of international airports in the region and just looking at timing and what could work, and in the context of keeping our utilization high ultimately with whatever we go forward with. Look, ideally we would have made this decision a number of months ago. What's taken so long? The challenge has been These are new generation aircraft and more importantly new generation engines, and for both of the manufacturers they haven't been in service with anyone particularly long in the world, and as a result of that, you know, there was a lot of analysis for us to understand the differences from, for example, in the Airbus product between the CEO and the neo, and in the 737 product, the Boeing product, between the NGs and their new generation MAXs, and I think just coming to grips with that, having some time to talk to some operators and really doing some deep dive. They're both not as well-known commodities as their, if you like, previous aircraft, so just want to make sure we make the right decision. And of course, we're really keen to drive the best deal that we can for flyadeal as well, and we've been pushing both manufacturers very hard in terms of what we need as a package, and it's taken a bit longer than what we would have liked, but the outcome we get, I think, at the end of it all has been worth the wait. So I think no secret, both manufacturers have a very large backlog of orders for both their narrowbodies, their new generation narrowbodies, and accordingly the production slots that are being offered to us aren't for a few years yet for both of them. So, but the importance of the decision now is obviously to lock those deliveries in for a few years' time. But what it also enables us to do is for the aircraft we're looking to add to the fleet during 2019, we go to market knowing that the long-term aircraft is either a neo or a MAX. And we'll be in the lease market for '19 for either the neo or the MAX. So we've been staying aware of availability of both aircraft types in the market for '19 and '20. We know what's out there, and the minute we've decided on which aircraft we move forward with, we'll be immediately into the lease market to start securing some deliveries from next year. And I think given the fact that there's still a few years out to first production delivery, we actually haven't made any decisions around how we're going to finance the aircraft. We've got several options on the table, none that would be surprising, but we haven't pulled the trigger on a decision on any of them yet. So I think that the financing decision will come later. We've been talking about trying to get to a fleet of around 50 aircraft in about a 5-year timeframe from launch. The reality is that because this decision has taken us a few more months than what we expected, realistically we're probably not looking at first half deliveries, round about middle of the year to the end of the year, and therefore it'd be sort of half a year's quota of what we would have expected to take. 5 to 7 aircraft for '19, and then maybe sort of 8 to 10 from '20 onwards. Our load factor has been very consistent, very high. No one discloses load factor, so I won't give you a number, unfortunately, but they're very full aircraft, have been from the very first flight in September last year, and it's continued irrespective of seasonality. You are right, though, however, seasonality and even day of week demand does give a different yield. It is, it can be material at times, but certainly, you know, in maneuvering and applying the, you know, the best low-cost concepts and the best revenue management principles, we keep the airlines full year-round, and we've managed that now for 13, 14 months. We don't see much deviation in the load factor month to month. Honestly, I haven't thought about it all that much. We've been so preoccupied with the narrow-body campaign, it's just taking all of our resources. I think at a group— I mean, this is also not just a flyadeal consideration, but at a group level as well. What's the right widebody strategy from a group point of view, given, you know, we're part of the Saudia Group, is relevant. And that work hasn't happened. And my guess, and it's just my guess, you know, that's probably at least 6 months away or 4 to 6 months away as a minimum. Well, look, if we achieve that on an average of 6 aircraft, if you say, being used for over the 13 months, or maybe just under, it's about 5-point-something. So if you think of an annualized 11 aircraft, which was what we'll have for the full calendar 2019, and look at the, you know, you carry 2 million with that, and what it looks like, it's almost a double. So effectively it means we're looking at 3.5 to 4 million customers for 2019. That's an incredible number of customers for a 2-year-old airline. It's amazing, but it's a testament to the strength and what's there as a market and a market opportunity. You guys know, you publish a lot of very good data on your own website. On the 10 routes that we operate today, we're close to just under 20% seat share in those markets. So that's again within 13, 14 months of startup. That's very significant. And I guess that's, that's one of the reasons for the incredible success that we've had, that we've been able to, to build up to offer some scale in a pretty short period of time. No, I see more domestic expansion because that capacity share figure I mentioned is on the routes we operate. If we look at the totality of the domestic market, we're probably around half of that. So, and I think we need to be far more significant for that in the market. A lot of it, maybe there's not, you know, 20 new dots to add domestically, but there are more than 2 or 3 more. And what we haven't done a lot of, we're building reasonable networks out of Jeddah and Riyadh as a base, But what we're not doing is connecting those cities directly, and we're not looking to set up a hub-and-spoke domestically. We do want to provide point-to-point. So there's a lot of dots for us to join up over the coming, you know, year or 2 or 3 as well. It is a young demographic. It won't surprise you. Almost 3 quarters of our customers are between the age of 20 and 40, and then the rest sort of, you know, taper off on either side of that bracket. Not surprising given the Saudi demographic, entirely consistent with it, in fact. We're seeing first-time flyers, which we also expected. We're seeing people who maybe flew once a year, once every 2 years, who are flying now 3, 4, 5, 6 times a year. We're seeing some sort of quasi-business traffic. And what I mean by that is, you know, there's quite a significant number of people that are either domiciled in Jeddah or Riyadh and work in the other. And, you know, historically they may have gone home once a month or their families have come over once a month or once every couple of months. I've met a number of our customers on board who are flying back every weekend and they pre-book, you know, 2-3 months out at a time and they're travelling much more frequently back home over the weekends to spend time with family. So I call that a little bit of a quasi-business element to it. So we're seeing that and we're also seeing some small and medium enterprise business owners, private owners who we're seeing on board too. So it's again, none of that is surprising, but it is, it's a bit of a diverse demographic. Yeah, certainly you do see a different demographic on our aircraft than if you got on our sister airline's aircraft, for sure, and that was always the intent. We're not far off half of our customers being repeat customers already, and we've only been flying 13 months, so that in itself is an incredible feat, and it means it's resonating well and people are trying it for the first time, they're liking it, and they're coming back again. Firstly, there's a significant expatriate population in Saudi Arabia. I think out of the population of 32+ million people that we have, I think about 25 or 26 are Saudi. So there's a significant expatriate population. We have lots of people from the region that fly in from surrounds or come in through other entry points and do domestic travel. So we've got many nationalities that travel on board. Saudis would be the majority, but it's not 100% actually. No, no, it's quite a bit less than 100%.

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