Coursework - Introductory Module

Challenges of setting up Gulf Based All Business Class LCC 04 05 Nov 2008, Bahrain

MSc Air Transport Management City University Bahrain

Submitted by Mr. Jijoo Jacob Varghese Contact: Tel: +971 6 5315896, Mob: +971 55 8178233 Email: jijoov@gmail.com / Jijoo.Varghese@gulfair.com

Case Study: The Challenges of setting up a Gulf, Business Class only, Low Cost carrier. Abstract:This course work deals with the case study of the challenges of setting up an All Business Class Low Cost Carrier in the Gulf Region. The case study mainly focuses on the pros and cons and various factors which can and cannot make it a viable option in this part of the globe i.e. the Gulf Region. Introduction:Aviation is a very complex and demanding industry and setting up an airline whether it is an All Class Legacy carrier or a Low Cost No Frills carrier, requires intense study of various factors which could make it a successful venture. It involves huge capital requirements for procuring/leasing of aircrafts, setting up the infrastructure for operation, manpower requirements, meeting regulatory authorities requirements, viability study of the competition with other major already established players. Following are some considerations to take into account to study the actual viability of an All Business Class Low Cost Carrier 1) Competing with the already established Legacy Carriers as well as the No Frills Low Cost Carriers in the region. 2) Marketing strategy. 3) Investor confidence. 4) Legality, Government permissions, Routes etc. 5) Aircraft choice. 6) Manpower 7) Operational Cost. Constrains:The aim of the case study is to have an in-depth understanding of the above considerations and reach a conclusion; weighing the pros and cons. 1. With already established Legacy carriers like Gulf Air, Emirates Airlines, Qatar Airways etc and No Frills airlines like Air Arabia, Al Jazeera, Bahrain Air; starting another airline and surviving, is a challenge in itself. The already established players do have an advantage in that they have tried and tested the market and succeeded. Passenger loyalty is another factor they have to their advantage. 2. To woo customers to an all business class carrier would require a product that is novel, attractive and different from the already available options. The ticket pricing would definitely be a consideration that a prospective

customer would give priority to. At the same time, being an all business class product, there certainly has to be a balance between cost and quality of service. An indigenous well strategic marketing plan has to be devised to penetrate the existing market. 3. Due to the huge financial requirements for the initial procurement/leasing of aircrafts, setting up of the basic and vital infrastructure, recruitment of key management personnel, setting up a maintenance facility, basic spares and support thereof; prospective investors have to be convinced that their investment is safe and would produce results in terms of profitability at least in a year or two. 4. Satisfying legal requirements of international as well as local regulatory authorities is another major consideration due to the stringent requirements governing airlines operations. Due to the already congested airspace of the region, the regulatory authorities have to be satisfied with the infrastructure setup, qualifications of the key management personnel, manpower resources, maintenance facility, proposed routes and frequency, aircraft choice and number, proposed date of commencement, etc, before they can grant an Air Operators Certificate. 5. For a low cost carrier with routes in and around the region, a suitable aircraft choice is of utmost importance. The few aircrafts that have proved their adaptability to this region are the Airbus 319/320 and the Boeing 737, when short routes are taken into consideration. Due to the success of these aircrafts there is a huge demand in the market which the manufacturers are unable to meet with regards to production. Aircraft availability in the market depends on the already existing orders for the said aircrafts. Many existing carriers have ordered these aircrafts in large numbers in the recent air shows and exhibitions. 6. Recruiting of suitably qualified flying and maintenance personnel is another important factor to be considered. Due to the rapid expansion of many of the existing carriers there is huge demand for Pilots, Engineers, Cabin crew and Ground staff. With a low cost budget and limited privileges offered, the difficulties encountered in recruiting qualified and well experienced personnel is a major issue with so much horse trading already prevailing in the market. 7. The main factors in consideration with regards to operational costs are aircraft utilization, catering, quality and safety management, passenger check-in and handling, baggage handling and lost baggage management, maintenance(unscheduled and scheduled), insurance, optimization of aircraft operation with respect to minimizing ATC and Airport charges and choice of the operational base.

Argumentation/Discussion: The main reason for any business venture is of course the monetary benefits. Setting up an All Business Class Low Cost Carrier in the gulf region has many challenges as per the considerations formulated in the constrains. With major Legacy carriers and well established Low cost carriers in the region, to carve a niche for themselves in the existing market, would take not just a very good marketing strategy but a product well worth considering, for a prospective customer. Since low cost carriers do not depend on travel agents for promoting their product, its an added challenge during the initial stages to promote and establish a good customer base. With the present economic recession, there is not much scope with regards to fare reductions and operating cost reductions, in comparison with the existing players. Every one has started to revamp their product in order to retain their existing loyal customers and also attract new ones. Cost cutting and organizational re-structuring in order to optimize operational cost is being considered very seriously world over. Every body has learned from their mistakes and is desperately trying to bring positive changes in the organization so as to be able to survive in the stiff competition. In a world of the survival of the fittest, a novel project is very hard to succeed unless it is fail proof Government and regulatory authorities are being a bit more wary in giving permission to new ventures because of the alarming rate of unsuccessful new operators who were unable to survive the fierce competition. In the past they had to deal with issues like bankruptcy, un-employment caused due to sudden closures of such low cost carriers and also the legal entanglements. The past experiences of other regions have taught the authorities to have a more stringent scrutiny of applications for new low cost carriers. The availability of aircrafts in the market whether new or leased is another major issue for even the existing carriers aspiring to expand and increase their operation. Both Airbus and Boeing have almost equal outstanding orders for their short range aircrafts; the Airbus A319/320 and Boeing 737, and it would a while before new orders can be honored. Even getting aircrafts on lease is not an easy option since there is an increased demand for aircrafts in the region with the Asian aviation growth showing an upward trend and predicted to grow for at least the next five years. With not much to offer in regards to perks and privileges, recruiting a whole team of well experienced and qualified personnel in the current already starved market is a major consideration that any new business has to seriously think about. Since a good professional team is the key to the success of any business, especially a new and challenging one like a low cost carrier, the present carriers are going all out to rope in qualified and experienced professionals to make their organization effectively and efficiently run, thereby reducing losses due to low productivity. Today the Pilots and Engineers have more options to choose from and the ones to offer the best benefits are able to get their required manpower

and at the same time retain them. In such a market a low cost carrier will certainly find it difficult to get quality staff to join them. Operational cost is the deciding factor whether an airline will make profit or even break even. Aircraft utilization plays a major role in the total operational cost. For the best aircraft utilization it is preferable to have new aircrafts since delays due to technical issues are comparatively less. Also the airports into which they operate are also a major consideration. An All business class low cost carrier do not have much option in these two regards due to the cost constrains and good connectivity requirements for the business class passengers. Choosing the right operations base is also critical for a business class carrier. Conclusion:Taking into consideration the pros and cons of the above discussion, we can come to the conclusion that the present market conditions is not at all conducive to start an All Business Class Low cost carrier in the gulf region and effectively steering it to a successful venture. There are so many aspects that need more clarity and the economic situation also need to improve before one could think about venturing on a high risk project. Probably in the years to come the changes in the demand of the business community may pave way for such a vision to take shape and actually be a success story.