University of Connecticut - School of Business: interview on aviation opportunities in the GCC and Africa

I was recently honoured to be chosen by Sebastien Perraud - School of Business University of Connecticut - to provide the intel for his paper on trends and opportunities in the GCC and African airline markets.

I was impressed by the level of knowledge of an 'academic' in matters of practical business, and especially in start-up strategies. The whole conversation grew into a very pleasant interview and I do hope that my ramblings assisted in providing an interesting framework for his paper.

It should be noted that the expressed thoughts and concepts are entirely Sebastien's view so please give him the credit that is due. Sebastien, thank you again for your patience!

Interview Report on Trends

Recent trends & opportunities in the airline industry: Start-up companies in the emerging markets of GCC and Africa

I. Overview of the industry

With 239 IATA member airlines worldwide and hundreds of non-IATA affiliated, the airline business has been a constantly changing industry since its existence. In the United States, the Airline Deregulation Act of 1978 allowed entrepreneurs like Southwest Airlines’ founder Herb Kelleher to compete with major carriers such as the now defunct Eastern, TWA and Pan Am by trying new avantgarde business models (e.g. no-frills low cost carriers). To this day, most business models for flight operations have been experimented and many such as business class-only carriers proved unsuccessful. Majors airlines have to constantly produce new ideas to stay ahead of the competition and most investors in the industry are now looking at emerging markets.

This healthy discussion confirmed the general idea that engaging in the establishment of a new venture in the airline industry in the developed world was not only risky but presented very poor prospects of profitability in the long term. Even though some airlines established in the US during the last decade such as JetBlue or Virgin America have fairly succeeded, most failed. We have to keep in mind that many of these capital intensive structures manage to keep afloat thanks to parent companies (Virgin America). Some European start-up airlines such as Norwegian Air Shuttle, EasyJet or Ryanair have also managed to become market leaders in 20 to 25 years of existence. It will be however interesting to note that these three case examples benefit from factors such as lower oil prices (agreement between Norway’s Statoil and Norwegian), EasyJet employees are paid in average 30% lower than the industry average and Ryanair treats both its customers and employees badly (high fees, trade unions forbidden and arguable EU regulations compliance when it comes to safety rules and labor laws).

II. Introduction of the interviewee

After completing an MSc in Electrical Engineering in his home country, the Netherlands, Alex de Vos attended a flight school and began his career as a pilot and joined Continental after a few years of flying experience. Continental Airlines has been the only major airline/company he worked for. He later continued his career flying private jets in smaller companies, where he also held management positions such as head of the marketing department and operations department. This ground experience gave him the tools to pursue entrepreneurial opportunities in the Middle East, including Saudi Arabia and Bahrain, where he founded a consultancy company serving charter airlines. Mr. de Vos also completed an MBA at the University of Wales. He later founded Eastern Express, a regional airline operating scheduled flights from the United Arab Emirates and sold its shares a few months ago to finance the establishment of another consultancy company, Al Hajjar Aviation.

III. Discussion of the trends and changes

"I would like to express my gratitude to Mr. de Vos for his patience and kind assistance. This interview would not have been made possible without his sharp insight and spontaneity. Thank you."

1. Could you briefly explain the direct effects of the GFC to the attractiveness of the market and the industry?

The airline industry as a whole hasn’t had generated tremendous profits for the last 50 years. Start-up airlines must always produce new ideas to compete with established major airlines, which involves great risks. Emerging markets are less affected by the side-effects of the Great Financial Crisis, while we can qualify present times for established airlines in the developed world as ‘fairly catastrophic’.

2. In recent years, major airlines (Qatar, Emirates, Etihad) of the region have been growing significantly. Do start-up airlines operating regional and business jets also benefit from lower oil prices and operating costs?

The GCC is a small region and these airlines’ growth comes at a price for some of them. Gulf Air has been in deep financial trouble for the past decade, Oman Air is not performing better than a loss-making US-based carrier, Kuwait Airways has been in a time of great turmoil and Saudi Airlines is very conservatively managed, which has as a direct consequence a business model with poor growth prospects. The GCC region as a whole is not performing better than the US or Western Europe. Even though Emirates and Qatar are good examples of wealthy companies, their main objective is actually to support the sister companies in the country, which might generate financial losses but creates profit for the whole GDP (airport taxes, tourism, etc.). Their strategy is to expand beyond any geographical limit by all means, translated into a tremendous growth rate on paper but also an unhealthy cash flow.

3. Incentives for entrepreneurs: is the Gulf Region a good place to start a business?

Definitely, though it has its shortcomings. For example, the legal system is not as developed towards entrepreneurship as it is in the US or Europe since industrial life here has started around the 1940s. However, you are in general fairly certain to find funds for an airline even though it is a capital intensive industry. Petrodollars make the money available in the region and some routes are underserved or simply non-existent. For example, GCC carriers have always focused on long-haul flights and there was no dedicated airline flying domestically in the region. Our second opportunity was that there was no airline established airline based in Fujairah airport, where the infrastructure was state-of-the-art.

The nature of competition in it, and the attitudes and preferences of the customers it serves

4. Who are your main competitors for your consultancy and ad-hoc charter flights activities? What are the general trends in preferences and tastes of customers you serve and how does Al Hajjar Aviation attract and keep them?

Our main competitors are established operational consultancy companies from Europe and the US. People in the region do prefer to see regional or local companies taking part of the economic development process. Basically, regional start-up companies like us compete with large established companies of the Western World, though some happen to fail because of the completely different legal and corporate systems. We have a fairly good advantage over industry leaders such as Lufthansa Consulting because we are trading under local owners, sponsors and names: Al Hajjar refers to the highest mountain range in the UAE.

5. Benchmarking: could you give an example of a major process, product or any other idea you borrowed from a competitor?

When we set up the predecessor of Al Hajjar Aviation, we did not look at potential competitors so we tried to establish the best approach. We have our own and different expertise, which concentrates on the operational aspects of an airline and aerospace design. As a small company you need to focus on a niche.

What new opportunities have these changes created:

6. What new opportunities have these changes created for your activities?

Offering flights from the UAE to Somalia under the name of Eastern Express. It was a war-torn country and our objective was to pioneer in Somalia to get aviation off the ground in a safe manner. Our establishment opened doors for catering and airport management. Our vision of entrepreneurship is to open doors both for you and the others.

7. Which significant regional macro-level market changes have benefited the industry including Al Hajjar Aviation?

Even though the country was facing a reasonable amount of fighting, we saw the end of the civil war in Somalia as an opportunity. Moreover, the country was trying seriously to get out of a war-transition state towards a ‘normal country’. We considered the country safe enough to do business even though we came to the conclusion that we had to implement special safety procedures for our crew, passengers and local partners. Concerning the macro-level market attractiveness, average salaries are extremely low in Somalia and 95% of the population cannot afford an airline ticket so there was a dramatic need to consider a lengthy period of time without positive net income on ticket sales, hence we had to find ways to make profits. The group thus expanded to airline-related operations such as ground handling, which was nearly non-existent in Somalia.

8. With a yearly average growth of 5%, Africa has begun to become the primary focus for new market-seekers in the airline industry while African countries hold close business and diplomatic relations with the UAE: are you going to follow GCC-based companies’ moves to look for new opportunities?

Africa is a fairly large landmass and the Horn of Africa should be the most difficult region to do business. Aviation safety standards are poor and we had to invent the whole process of running an airline from scratch. With traditional cultural links between the two regions, it is no surprise that many GCC-based companies from various industries such as real estate or engineering expand there.

9. In conclusion, would you think the industry presents strong opportunities for those aspiring to establish a start-up airline?

Worldwide-seen opportunities for flight operations is getting more and more difficult, since most models have already been tried. There is no strong opportunities for the industry worldwide unless no major improvement in technology, e.g. revolutionary fuel-efficient jet engines. There are however plenty of opportunities even on established markets on the supplier front, i.e. airport handling or consulting. In consultancy, there is a need of having a certain level of wealth to make yourself successful. If you jump into a market at its very early stage, then the wealth is not sufficient to attract third party consultancy services.

IV. Opportunities emerging in the airline business

There are new opportunities in both established and emerging markets. For instance, Japan has always been one of the hardest markets to penetrate for newcomers. Two main major airlines (namely JAL–Japan Airlines and ANA–All Nippon Airways) have been duopolizing the market for both domestic and international routes. Japan is in fact a challenging market: it has one of the
strictest aviation safety regulations and customers expect a very high quality of service. However a dramatic change occurred in early 2012 with the launch of three low-cost carriers: Peach Aviation, AirAsia Japan and Jetstar Japan; the first one is partly owned by ANA, while the second one is a joint-venture between JAL and Malaysia’s AirAsia (which is also Southeast Asia’s leading low-cost carrier) and the third one is a joint-venture between JAL and Australia’s Qantas Group. They have been so far successful on legs such as Tokyo - Okinawa or Osaka - Sapporo especially among low-budget students. Services both in air and on ground are minimal, even though punctuality and a decent customer service are culturally critical factors, things that most European low-cost carrier passengers are less regarding about.

The interview gave us an overview of the market in the Horn of Africa. I personally think that there is also a great deal of opportunities in West and Central Africa, especially in Senegal, Ivory Coast, Ghana, Nigeria, Cameroon, the Republic of Congo and Gabon among others. These countries in particular present cultural advantages compared to other countries on the continent: they are either English-speaking or French-speaking. They are natural resource-rich since they produce and export crude oil, precious woods, cocoa beans, phosphates, and ore in large quantities. The average growth in the region is of 5% and the literacy rate is slightly over 60% of the population. The rising middle class and a somewhat wealthy proportion of the diaspora in Europe compose a growing market. These politically instable and corruption high countries have more or less taken efforts towards a democratic transition but the main beneficiary is the corporate world: foreign direct investment is highly encouraged and free economic zones are created to attract investors and start-ups.

South African Airways, Egyptair, Royal Air Maroc, Ethiopian Airlines and Kenya Airways are among the top 500 African companies and link the continent to the world. They are competing directly with western airlines such as AirFrance-KLM, British Airways and Lufthansa Group on North-South routes thus are more profitable on transcontinental routes. Since the collapse of Air Afrique in 2002, a number of countries have lacked of a flag carrier, which gives many opportunities for entrepreneurs: in recent years, many domestic and international start-up airlines such as CamairCo (Cameroon), Arik Air (Nigeria), Equatorial Congo Airlines (Congo-Brazzaville), Air Côte d'Ivoire, Korongo Airlines (D.R. Congo) and Senegal Airlines have emerged, mainly because of their predecessors’ poor management and bankruptcy or ‘democratic transitions’. In many cases, these airlines are partly-owned by established parent companies such as Brussels Airlines and AirFrance or regional investment funds. Despite high airport tariffs and a highly regulated market–liberalization of intra African tradehas not been governments’ main objective so far – niches are likely to exist both for airlines and industry-related companies (i.e. airport management and consultancy). Culturally speaking, local companies are favored since lowly conscious western conglomerates face anti-imperialist resentment (e.g. Royal Dutch Shell), though European brands in the region are known for being reliable (e.g. Orange, AirFrance). I do not necessarily see new opportunities by adding another airline on the playing field but rather on reshaping it. Freshly founded start-ups in the region can develop and catch up with already established airlines by providing a locally-tailored high quality product at a reasonable price, provided that they encourage intraprenarial behaviors and get full support from government agencies. I have also noted that these companies have a fairly poor and outdated online/marketing exposure. On the supplier side, African airlines will be in need of more expertise and globally-minded human capital in order to grow internationally: hence there might be a future for consultancy companies in this market. All we can hope for the industry and the region as a whole is better governance (less corruption), more regional cooperation for liberalizing markets (lowering or abolishment of tariffs) and more public-private partnerships: macro-level evolutions and social and economic progress will do the rest.

Thank you for your attention.