Two new carriers have begun operations in the Gulf and more are set to follow. But is there room in the region to accommodate them all?

While most airlines are in the teeth of recession, feeling the effects of war and terrorism, and focused on survival, those in the Gulf are undertaking major growth (see chart opposite). Carriers have been adding capacity and new airlines are joining the fray. But some observers are questioning whether the region can absorb all the additional capacity, particularly as one of the new carriers - Abu Dhabi government-backed Etihad Airways - has the potential to become a major player on the scale of Qatar Airways, Gulf Air or even Emirates.

Etihad Airways is one of a new generation of airlines based in the United Arab Emirates, the federal Gulf state consisting of the seven emirates of Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaymah, Sharjah and Umm al Qaywyin. Etihad Airways' launch from Abu Dhabi in November came shortly after Air Arabia began low-fare flights from its Sharjah base in October.

More may follow: two planned low-cost carriers, Menajet and Transgulf Express, are awaiting air operator's certificates. Can newcomers take on established carriers in the Gulf as successfully as they have in North America and Europe, or will they be stifled by state constraints and the sheer size of their competitors?

By far the most important development is the launch of Etihad Airways. Set up in July under the official decree of the Abu Dhabi government, it has a capitalisation of 500 million dirhams ($136 million). The airline is initially operating two Airbus A330-200s leased from Brazilian carrier TAM, in a three-class configuration. It plans to add another two aircraft in January, and increase its fleet to six to eight A330s by the end of 2004.

All aircraft will be leased "in the short term", but the airline will discuss a possible purchase with Airbus and Boeing at the Dubai air show. The carrier cites favourable lease rates, flexibility, and the need to get the airline running on schedule with instantly available leased aircraft as reasons for choosing leasing rather than buying. "We had only two and a half months after the Emir's decree to get the airline going," says Etihad's marketing manager Richard Bate.

State ownership

Like most Gulf carriers, Etihad is fully state-owned: its only shareholder is the government of Abu Dhabi. However, the government is also a 33% shareholder in Gulf Air, which shares its hub at Abu Dhabi with Etihad. The emirate is also the base for Gulf Air's recently created all-economy operation Gulf Traveller.

The two airlines will share more than a hub. Etihad launched on 12 November with a service to Beirut, and plans to follow this with services to Damascus in December, followed by Amman and Cairo. In the new year, Etihad will start flying to unnamed destinations in the Indian subcontinent, and in April will open a route to London Heathrow. On all these routes Etihad will be entering a market already served by Gulf Air. Etihad's planned destinations are also served by Emirates from Dubai and by Qatar Airways from Qatar, although they do not share the same hub and are therefore not direct competitors for an airline that intends to take most of its passengers from the Gulf states.

The big question over Etihad's future, therefore, is its relationship with Gulf Air (and, to a lesser extent, the other established Gulf carriers), and whether their common owner will decide to take one side or the other. Bate says: "We are completely independent of Gulf Air and will be in competition with it," but qualifies this by saying that "we look forward to working with other Gulf airlines". Etihad chairman Dr Sheikh Ahmed bin Saif al-Nahyan is already discussing codesharing with Qatar Airways, but co-operation with other Gulf airlines is not as far advanced, Bate adds.

Improved service

On an operational level, Etihad's approach could seem strange to observers from Europe or North America, used to seeing start-ups like EasyJet or JetBlue undercut the larger flag carriers with low prices and no-frills services. Etihad intends to overcut its established rivals, wooing UAE customers - a "significant majority" of passengers will originate in the UAE, Bate says - with higher standards of service rather than lower fares. "We are a service-led airline, not a price-led carrier," Bate says, adding that Etihad "can start with a clean sheet: we don't have 20 or even 50 years of baggage like the others" and will be able to develop higher standards of service on all three classes. "There is significant pent-up demand for improved service," Bate adds.

On a more symbolic level, Etihad is even claiming Gulf Air's title of "national airline of the UAE", pointing out that it is based in the UAE capital of Abu Dhabi and exists thanks to the patronage of Shaikh Zayed - who is both ruler of Abu Dhabi and president of the UAE. To a large extent, Etihad is Abu Dhabi's airline as Emirates is Dubai's, and will expand as fast as the government lets it. The inaugural service in November took advantage of the bilateral open skies agreement between the UAE and Lebanon, but the decision to open subsequent services to other destinations followed intergovernmental negotiations to expand the UAE's permitted flying rights. In one sense, this is good news for Gulf Air - at least it is not losing flying rights to its rival. But it also gives the impression that Abu Dhabi's ruler is taking a closer interest in Etihad than in Gulf Air, which in 2002, in the words of chief executive James Hogan, was given "the minimum amount of cash needed to stay in business" and left to push through its own restructuring (Flight International, 1-7 April).

Gulf Air admitted earlier this year that there was a conflict of interest in Abu Dhabi's dual stakeholding, but refuses to say how it might be resolved. One solution could be for Abu Dhabi to follow Qatar's lead and give up its shareholding in Gulf Air to concentrate on its own national carrier - as Qatar did in 2002 to focus on the reborn Qatar Airways - once it was clear that Etihad was going to succeed. But this would lead to a reduction in Gulf Air's presence in Abu Dhabi, as it has in Qatar.

Another possibility is that Etihad is part of a strategy to increase the significance of Abu Dhabi's airport as an alternative regional hub, and that the government believes both airlines can flourish on the same routes by splitting the market on price grounds. Etihad's strategy of operating on Gulf Air routes implies that its founders believe there is room for another premium airline, taking passengers who would otherwise fly via Dubai on Emirates or on a non-Gulf carrier directly from and to Abu Dhabi.

Market gap

In contrast to Etihad, Air Arabia is unashamedly a low-cost airline, flying 162-seat Airbus A320s. Fully owned by the government of Sharjah (60% by the department of civil aviation and 40% by the airport authority), it also aims to fill a market gap, but rather than aiming at premium travellers not satisfied by the existing carriers, Air Arabia believes it can sell tickets to people who would otherwise not have flown - 85% of the population, according to chief executive Adel Ali.

"Our market is the general public. We are seeing a lot of conversion from surface travel - people are flying with us who would otherwise be taking buses to Beirut. Students are travelling more frequently and the expatriate population are serious potential customers - that is the reason for our plans for the Indian subcontinent and Sri Lanka," Ali says. He does not plan to compete with Gulf Air's regional jet fleet, due to start high-frequency short-haul operations in the Gulf by 2005 to serve the business market (Flight International, 14-20 October). "Business jets are high cost and intended for the business market paying high fares," he says. "We are creating a new market."

Air Arabia launched on 28 October flying from Sharjah to Bahrain, initially operating two secondhand A320s leased from International Lease Finance (ILFC). The network also includes Beirut, Damascus, Kuwait and Muscat, Oman. The fleet will be replaced in February with four new A320s, also from ILFC, and new destinations from April could include Amman, Cairo, Colombo, Doha, Khartoum, three Iranian points - Isfahan, Shiraz and Tehran - Sana'a in Yemen and cities in Saudi Arabia.

Its low-cost strategy includes selling food and drink in flight, operating single-class aircraft, and offering seats through a call centre and its website. The figures suggest that this strategy will be easier in the UAE, where 36% of the population are internet users, than in some European countries, such as France (28%) and Italy (33%) - although it is less easy to measure the acceptability of online commerce, rather than email or other internet applications, in different countries.

Internet surprise

"We were pleasantly surprised to get 23% of our business in the first three weeks through the internet," Ali says. "Ryanair had only 10% or 15% in the first few weeks of offering internet sales." Spreading user acceptance could be difficult, however: "People buy small items like books on the internet in the Gulf, but not airline tickets so much."

Air Arabia is the first low-cost carrier to fly in the region - Gulf Air is quick to distance its all-economy Gulf Traveller operation from the no-frills sector, describing it as a "value-based airline". But more are planned: Menajet and Transgulf Express will start low-cost, short-haul operations from Sharjah once they receive their operating certificates. Ali dismisses the competitive threat: "I have no evidence that any other low-cost airline will start imminently. Being first gives us a real advantage."

As with Etihad, Air Arabia's expansion will depend on negotiating more flying rights with destination countries. "The UAE has an open sky, but some other countries don't believe in reciprocating. There it will take longer - all our landing rights have to be negotiated by the [UAE] federal government," Ali says.

Air Arabia and Etihad depend on the individual emirates for further investment, and on the federal government for their expansion, if they are not to be restricted in favour of their larger rivals. This government, and its seven rulers, will decide whether these new contenders fly or fall.

Source: Flight International