INTERVIEW: Khalid Abdullah Almolhem, Saudi Arabian Airlines

Kuala Lumpur
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Ask yourself this question: which are the three biggest carriers in the Middle East? Easy - Emirates, Qatar and Etihad Airways.

Wrong. You've forgotten Saudi Arabian Airlines. With revenues of $4.9 billion last year, the Kingdom of Saudi Arabia's flag carrier is no minnow. In fact, it is the region's second-largest player by turnover behind the mighty Emirates. It remains significantly larger than Qatar Airways in revenue terms, and twice as large, at the moment, as fast-growing Etihad. Even when measured by traffic Saudi Arabian is number three in the region behind Qatar Airways and Emirates.

It is easy, however, to overlook Saudi Arabian. This is a shy carrier. It hardly ever sends out a press release. It never holds a press conference or hosts a press trip. Its executives seldom take to the conference platform or make a speech.

Much like the country it serves, Saudi Arabian is more than happy with this low profile. "We used to be a very big airline and a major player in the business," says its director general Khalid Abdullah Almolhem.

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 ©Billypix

Compared with the new entrants, Saudi Arabian is an old hand. The carrier began operations in 1945 with a single Dakota DC-3, given to King Abdul Aziz as a gift by US ­President Franklin D Roosevelt.

Saudi Arabian is, of course, still a top 50 carrier in the Airline Business World Airline Rankings, but is being overtaken by Emirates, Etihad and Qatar Airways. The carrier and this deeply religious and conservative country are comfortable with this state of affairs. Saudi Arabia does not want to become a leisure destination, like Dubai, or a bustling Middle East transit point, like Abu Dhabi, Doha or Dubai.

"We are not a flamboyant airline. We want to be an Arab airline with traditional Arab hospitality," says Almolhem, speaking during an interview during the IATA Annual General Meeting in Kuala Lumpur in June. This is perhaps just as well considering the enormous cost of achieving a global profile. Saudi Arabiantried this once, pioneering the involvement of Middle Eastern carriers with Formula 1 motor racing, backing the Williams team in the late 1970s and early 1980s.

Today it is content to let Etihad and Gulf Air, along with Formula 1 country race hosts Abu Dhabi and Bahrain, take the lead role. "We don't really have the financial muscle to go after some high-profile glamour sponsorship," says Almolhem. "We do our job as a regional power in a very quiet way - we don't ask for thanks."

Saudi Arabian may be happy with its mission, but donot be deceived into thinking that this carrier is plodding along being overtaken by its ambitious neighbours. It is reinventing itself from a stodgy state institution into a privatelyowned airline, capable of delivering consistent profits and modest growth.

Almolhem speaks with conviction about his task, which began in 2006 when he took over from long-serving chief Khaled Ben-Bakr. "I want to do my job at Saudi Arabian which is to privatise it and put it on the right footing." He has a strong business track record in the country, having led the privatisation of Saudi Telecom in 2003. The airline's privatisation is in line with Saudi Arabia's long-term economic strategy of moving state companies to private ownership.

Almolhem's job was to kick start the privatisation process, which had made some progress but needed greater impetus. It is a mission that has the highest level of state backing, with the privatisation master plan agreed by the country's Supreme Economic Council. "It has been left to me to undertake the privatisation process at my speed," he says.

When he arrived at the carrier's Jeddah headquarters, Almolhem found an airline with a "very good history" but with many challenges. "A lot of the drive was from the operational side, rather than marketing and the customer satisfaction side," recalls the Saudi Arabian chief. "When I looked at the commercial side there was a lot to be desired, to say the least."

Almolhem's first action was to review the plan set out by the company's financial advisors, Paris-based BNP Paribas Bank. There was a framework, but a "lot of work had not been done to prepare the airline for privatisation. There was no strategic plan, no fleet plan, no IT master plan and no human resources planning. Investors want to know all this.What was required was action. The first thing was to put in place a very strong, aggressive timeline," says Almolhem.

This was developed in his first six months and saw the Saudi Arabian Airlines group being divided into a few large businesses. The maintenance, catering, cargo, training and ground handling operations were separated into individual units with a view to being sold off. "We would be left with an airline dominated by flying airplanes and sales and marketing. Everything else would be outsourced to these companies," says Almolhem.

The first move saw a 49% stake in the group's catering company sold to a consortium of local players led by the Al Hokair Group and Al Fozan Group in partnership with global catering firm Newrest. A 30% holding in its cargo operation was sold in 2008 to a Saudi-based group called Tarabut Air Freight Services.

Saudi Arabian's maintenance unit is being prepared for sale either in the fourth quarter of this year or the first part of 2010, says Almolhem. "We are talking to a few industry leaders in MRO [about the sale]. The stake sold will be from 30-49% - we are flexible."

Almolhem is pleased with the prices he has achieved on the sales so far [although these are not made public], and he believes there are opportunities to find sound investors and good strategic partners for these and the other business units. "I know what investors are interested in and I know what the government wants to do with the privatisation," he says.

There will be sales of further stakes in the catering and cargo businesses as well, via initial public offerings. The catering sale will take place in 2010 or early 2011, says Almolhem, while the cargo IPO will be delayed until growth in this sector returns. The ground-handling unit is being prepared for sale this year too and is likely to be consolidated with other local players in this field, he explains.

The plan all along has been to privatise the airline last. "We are soliciting financial advisors at the moment. The hope is to do it in 2011," says Almolhem. The private winning bidder is likely to be a financial rather than strategic partner in the shape of an airline group, he believes.

However, there is a lot of work needed to reshape the carrier before that happens. This includes an on-going redundancy programme, with nearly 5,000 staff taking early retirement so far, says Almolhem. The airline's workforce has dropped from a peak of 25,000 in 2004 to under 18,000 today. Saudi Arabian is also ripping out its old reservations platform, based on an outdated TWA system, and replacing it with Amadeus technology and an enterprise resource planning system.

A complete overhaul of the carrier's fleet is underway, with large orders for Airbus A320s and A330s going a long way to rationalising a fleet list that almost has one of each type you could ever think of buying. The A320s will replace a large fleet of Boeing MD-90s for its narrowbody requirements, and it is also looking at acquiring the larger A321, says Almolhem. Saudi Arabian has four Boeing 787-9s on order from the manufacturer and plans to lease another eight from Kuwait's Aviation Lease and Finance Company.

Until the new aircraft arrive Saudi Arabian will continue with its policy of a wet-leasing short-term capacity, which gives it a lot of flexibility in these uncertain times.

 saudi map (200)
The carrier is evaluating other options for its fleet and "looking to place orders in 2010", says Almolhem. Further orders for aircraft with the range and size of the A330 are being studied. In particular the carrier does need to bolster its capacity with larger aircraft for the massive traffic surge that occurs for the Hajj and Umrah pilgrimageswhich Muslims make to the holy city of Mecca in the west of Saudi Arabia.

The airline will be divided into three basic units, serving different market segments, says Almolhem. The scheduled airline business will feature a domestic operation which will handle at least 10 million local passengers and an international side that will carry about six million passengers. There will also be a VIP unit for transporting royalty and other dignitaries.Finally, there will be an airline unit which caters specifically for religious traffic, in particular for the Hajj and Umrah pilgrimages.

"This is one of the biggest opportunities for Saudi Arabian. Last year we carried 2.8 million and we can grow by 100% a year for the next five years," says Almolhem.

The group made a small profit in 2008 and it expects to handle more passengers in 2009 than last year's 18 million. "My aim is to put the business into a situation where it is commercial and makes decent money, but also does not forget you have competition to meet," says Almolhem.

He is realistic about the limitations Saudi Arabian has as a business, which does have an obligation to provide connectivity for the country it serves. "We're not going to be hugely profitable as an airline but we will be reasonably profitable," he says.

The threat to Saudi Arabian's profitability comes from a price cap on domestic fares and falling yields on international services. "There is over-competition from our neighbours principally because they are price dumping in the Saudi market," says Almolhem.

The Gulf carriers seek to transfer Saudis over their Abu Dhabi, Doha and Dubai hubs to their final destination. "They leak traffic at very low pricing. This is a marginal business for them, but it is a core business for us," says Almolhem. His carrier is fighting back by selling the advantage of being able to fly direct where possible at a better price, he says.

Saudi Arabian will keep its capacity steady this year compared to 2008 and, apart from route launches to the Indian cities of Bangalore, Calicut and Lucknow, it will not add any further destinations during this tough year. On the alliance front, Saudi Arabian remains independent,preferring codeshares with various partners.

Surprisingly for this conservative nation, Saudi Arabia is one of the most progressive states in the Arab world when it comes to permitting low-cost carriers into the market. According to Andrew Cowen, the former chief executive of Sama, one of those start-ups: "It has deregulated further than many countries in the region, other than perhaps Kuwait."

However, a domestic fare cap, which has been in place for 15 years, is crippling Saudi Arabian and its low-fare competitors alike. "We have the cheapest local fares in the world. Cheaper than Pakistan or Sudan, anywhere you like. It is one of the biggest significant value destructors to the airlines," says Almolhem. "Now there is market competition it should be left to the market and not the government to decide."

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 ©Billypix
The problem for the government is that travellers in this oil-rich nation enjoy the benefits of cheap fuel, whether in the guise of subsidised air tickets or subsidised fuel for their cars. Saudi Arabian itself enjoys subsidised fuel prices too, which help offset the pain caused by the fare restrictions. Almolhem says that in May the local, privatelyowned low-cost players Sama and NAS Air were given the fuel subsidy.

In the meantime Almolhem is lobbying for the fare cap to be lifted. "Without this we will have a very anaemic sector," he says. The cap means Saudi Arabian makes a loss on transporting 10 million passengers on its domestic network. If the cap is not lifted, "I can tell you the two other local airlines will not make it and be forced into bankruptcy", he warns.

Almolhem is more optimistic on the prospect of the fare cap going because of the airline's privatisation process. A natural by-product of this move would also be that Saudi Arabian and any others would lose their fuel subsidy. "This will disappear fairly soon, with privatisation," says Almolhem. "Hopefully it will also put pressure on the fare cap to disappear."These market distortions have no place in a deregulated and privatised market. "To be honest, I would rather run a fullyfledged commercial business than one based on some form of support," says Almolhem.

That is a refreshing outlook in a region where support of one form or another simply goes with the territory. Saudi Arabian has some distance to go before it reaches such a state, but it is on the journey towards greater independence and there is no turning back.

For an reminder on how the Middle East landscape looked last October, see:

flightglobal.com/AACO2008

PRIVATE MISSION

"I hope this is the last one as well," jokes Khalid Almolhem, Saudi Arabian's affable director general, of his first job in the airline business. "This is a difficult industry because the lead time it takes to do things is longer than anywhere else. It is an industry that needs a lot of help from its partners and an industry that runs on very, very low margins."

It is a big contrast to the telecommunications industry, where he led Saudi Telecom to privatisation. "Both are service industries, but in telecoms you can do things very quickly. You can cut capacity in a very short time."

After studying in the USA for an electrical engineering degree, Almolhem worked as a project manager in the Saudi Air Force before joining the Saudi Industrial Development Fund. His career progressed into the banking sectorbefore the role at Saudi Telecom arrived.Almolhem is the current president of the Arab Air Carriers Organisation and is a member of IATA's board of governors.

LOW-COST INFLUX

Situated at the crossroads of Europe, Africa and Asia, the Kingdom of Saudi Arabia is the largest country in the Arabian Peninsula. With a population of over 28 million people and a limited rail network, air travel is a critical component ofthe country's economic development. It was with this in mind that the state warmed to the idea of allowing privately owned low-cost competitors to rival Saudi Arabian Airlines in the middle of this decade.

The first to start was NAS Air in February 2007, followeda month later by Sama. Initially these carriers were obliged to focus on various trunk routes in the underserved domestic market by the Saudi authorities. They expanded quickly, Sama with Boeing 737-700s and NAS Air with Airbus A320s.

When oil prices were lower the country's fare cap, and the fuel price subsidy given to Saudi Arabian, were not a major problem. This has all changed. "Now the low-cost carriers are in a dreadful squeeze, particularly when oil prices pushed up," says Andrew Cowen, the former chief executive of Sama, who came from consultancy Mango Aviation which helped the local investors establish the carrier.

Sama highlighted just how bad things were last year, publishing figures that showed it lost $10,000 per flight on services between Dammam and Riyadh. "The only way to avoid this was to expand aggressively on international routes," says Cowen. Domestic routes were also cut. The international push was supported by the state and both Sama and NAS Air have several routes to regional points today. "The downside [of this move] is that much-needed additional capacity on Saudi domestic services is not yet realised," says Cowen. All players agree that the fare cap and the fuel subsidy need to go for a "normal" market to function in the country. This is being discussed in government circles, according to Saudi Arabian chief Khalid Almolhem, who is hopeful they will be lifted. But there is no firm timetable and it is an issue that has been on the table for a couple of years.