Flying high: Working to keep up with demand in aviation

The aviation sector in Saudi Arabia is growing rapidly. In 2013 annual passenger numbers topped 68m for the first time. In the decade since 2003, the Kingdom’s four main airports – Jeddah, Riyadh, Medina and Dammam – have all recorded annual double-digit passenger growth. Medina, expanding most rapidly, achieved an average annual growth rate of 15%. At the same time, the liberalisation of the domestic market and gradual moves towards privatisation of the state-owned carrier, Saudi Arabian Airlines (Saudia), have brought the prospect of additional investment and competition to the sector.

The International Air Transport Association (IATA) expects Saudi Arabian international passenger traffic to rise at a compound annual growth rate of 6.9% between 2012 and 2017, making it one of the fastestgrowing markets in the world. Faisal Ghazi Kayal, managing director of Saudia Private Aviation, told OBG, “There is a strong correlation between GDP growth and the aviation industry as air traffic increases when the economy is doing well. With solid GDP growth forecast for the next several years, we expect this industry to grow alongside it.”

Speaking to OBG, Nader Khalawi, the managing director of Saudia Aerospace and Engineering Industries, also noted that Saudi Arabia differs from other rapidly growing markets for air travel in the region, such as the UAE and Qatar. “Saudi Arabia is a unique market in the Gulf when it comes to aviation. Unlike its neighbours, the Kingdom has significant domestic operations with 350 flights per day travelling between 27 airports,” Khalawi told OBG.

In addition to domestic demand, the regional aviation industry is also expected to see strong growth. For example, Boeing forecasts regional demand for 2610 aircraft at a value of $550bn up to 2030, compared to 35,000 worldwide at a cost of $4.8trn.

Talal Ageel, the managing director of the Prince Sultan Aviation Academy, told OBG, “The aviation industry in the Middle East is currently undergoing a period of tremendous growth, very much in contrast to the rest of the world. This will allow for the training facilities of the region to play a significant role in the future of the industry.”

DOMESTIC: It is hardly surprising, therefore, that 2014 is expected to be another big year for the aviation industry. Currently, Saudia is the dominant force in the market, with almost 475,000 weekly seats in mid-January 2014. Its nearest rival, Flynas Airlines, the only other domestic operator, had just over 83,000 weekly seats. Across the market, weekly seats were up 17.7% over the same period of 2013.

However, while Saudia’s dominance is reinforced by heavy subsidisation, its market share may begin to decline in the coming years. Flynas (formerly Nas Air) entered the market during its initial liberalisation in 2007 and will be joined in the coming year by two additional operators. The General Authority of Civil Aviation (GACA) has provisionally approved national carrier licences for Qatar Airways (under the brand Al Maha Airways) and Saudi Gulf Airlines to launch domestic and international flights to and from Saudi airports. The two companies are currently working to finalise the necessary requirements for obtaining the licences.

The expansion of the domestic market to four operators will bring welcome competition. Middle Eastern airlines are expected to see profits increase by 50% to $2.4bn in 2014, boosting profit margins from 3.8% to 4.7%, according to IATA.

PRIVATISATION & NEW ROUTES ABROAD: With the national carrier looking towards privatisation and expanding its international routes, there should be ample opportunities for new entrants. Saudia is continuing the gradual privatisation of its services and is expected to launch an initial public offering for its cargo unit in 2014 and for its maintenance business the following year.

Nabil Khojah, the CEO of Saudia Cargo, told OBG, “The privatisation and increased deregulation of the aviation industry in the Kingdom is making the sector more efficient and more competitive, thereby providing better services to the end-users.”

Saudia is also about to embark on an aggressive international expansion drive as well. In February 2014 it announced plans to increase its operations to more than 200 destinations worldwide. Abdul Aziz Al Hazmi, CEO of Saudia, told a press conference, “We want to reinforce our presence in Europe, North America, Asia, especially in China and Indonesia, as well as open new markets in Russia, Mexico, Japan, Vietnam, Taiwan and the Czech Republic.”

Fleet expansion is also creating opportunities for companies in related areas like equipment and services. Abdullah Al Omari, CEO of Middle East Propulsion Company, told OBG, “The engine business here is huge, both civilian and military, and offers serious room for growth as Saudia and the Ministry of Defence are expanding their air fleets.”

INFRASTRUCTURE: Given the introduction of new carriers and the general trends in passenger numbers, it is hardly surprising that the Kingdom is also working to upgrade the aviation infrastructure in the country. Saudi Arabia’s two main airports in Riyadh and Jeddah are both being expanded, and a new airport in Medina is also being built.

The King Khalid Airport in the capital is being upgraded in two phases. The first phase, which is expected to be completed in 2017, will see capacity raised to 35.5m passengers per year (three times the current level) and a new terminal – Terminal 5 – constructed. In May 2013 it was announced that TAV Construction of Turkey had been awarded the $400m design and build contract for the terminal in conjunction with its local joint venture partner Al Arrab. In phase two the airport’s capacity will be boosted to 47.5m passengers per year.

Meanwhile, King Abdulaziz International Airport (KAIA) is being expanded in three phases. The first, which will boost capacity to 30m passengers, will be completed by the end of 2014 and operational by mid-2015. The two main contracts under the first phase are worth $7.2bn. The second phase will increase total capacity to 43m, and phase three with see this nearly doubled to 80m by 2035.

“The demand right now on KAIA gives a clear indication that we expect to move forward with Phase II immediately after the completion of Phase I,” Mohammed Abed, assistant vice-president for projects at GACA, told OBG. The shortlist for an international operator for the airport is currently being reviewed and there is an expectation that it will be in place by the first quarter of 2015.

A new airport is also being built in Medina, Prince Mohammed bin Abdulaziz Airport, which will be the first airport in the Kingdom to be constructed under a build-transfer-operate model. Capacity will be 8m passengers per year in the first phase, which is set for completion in 2015, rising to 12m in the second.

GROWTH NICHES: As air infrastructure upgrades in the Kingdom move forward, niche areas, such as business and private travel, are likely to benefit. Saad Wallan, CEO of Wallan Aviation, told OBG, “With the government spending to upgrade the Kingdom’s airports and build new ones, there will be increased ability to travel via business aircraft between primary and secondary cities in Saudi Arabia.”

Hashem R Jamalallail, acting general manager of ARABASCO, an elite provider of aviation services in the Kingdom, echoed this sentiment, telling OBG, “The outlook of the business aviation sector is bright. We’re seeing growth of 5-10% to the fleet each year.”

Speaking to OBG, Salem Al Muzaini, managing director of Alpha Star Aviation Services, highlighted the growth potential of private aviation. “The private aviation sector is growing in line with the overall economic growth of the Kingdom.”

The rapid development of KAIA is a clear sign of the good health of the Kingdom’s aviation industry and its strong position in the regional and global markets. “Transit passengers coming from Europe to East Asia are driving demand here,” said Abed.

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The Report: Saudi Arabia 2014

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