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ANALYSIS

How high will Nile Air fly punching above its weight?

Manama, May 15, 2014

By Martin Rivers

There is no denying that the past three years have been a torrid time for Egyptian tourism. Hopes of a quick recovery after the 2011 Arab Spring were dashed by last year’s military coup against the Muslim Brotherhood. The bombing of a tourist bus in Sinai this February further unnerved visitors, although militants have predominantly directed their wrath at security forces.

Tourism revenue fell 43 per cent year-on-year in the first quarter of 2014 to just $1.3 billion, accelerating the downturn triggered by last July’s overthrow of Islamist president Mohamed Mursi. Full-year revenue had already fallen 41 per cent in 2013, when just 9.5 million tourists visited the country compared with 14.7 million back in 2010.

With nine out of ten visitors to Egypt arriving by air, it is little wonder that the country’s aviation sector has taken a beating. Flag carrier EgyptAir is the largest airline in Africa, but its home market suffered a 30 per cent slump in passengers last year. Former civil aviation minister Abdel Aziz Fadel estimated that overall traffic was down 60 per cent against 2010, contributing to EgyptAir’s loss of 1.5 billion Egyptian pounds ($210 million) in 2012/13.

To the flag carrier’s credit, that figure marked a halving of the previous year’s losses, with management reacting swiftly by grounding aircraft and re-aligning the network in favour of connecting traffic.

Yet despite the turmoil, one little-known Egyptian airline is punching above its weight and steadily expanding operations. Cairo-based Nile Air has the unique advantage of being owned by Nasser al Tayyar, chairman of Saudi travel firm Al Tayyar Travel Group. That matters because Saudi Arabia and Egypt have significantly improved ties since last year’s coup - Riyadh is the region’s strongest critic of the Muslim Brotherhood - which leaves Nile Air in an ideal position to benefit from heightened traffic flows.

“Following the change that occurred last summer, there’s now been stronger political links between Saudi Arabia, Kuwait and Egypt,” notes Ahmed Aly, Nile Air’s newly appointed chief executive.

That triumvirate makes up the entirety of his carrier’s network, which comprises three points in Egypt (Cairo, Alexandria and Luxor), five in Saudi Arabia (Jeddah, Tabuk, Qassim, Ta’if and Yanbu) and Kuwait. Some 92 per cent of Nile Air’s seat capacity is deployed to Saudi Arabia, and the airline’s diverse range of customers shields it from the downturn facing European markets.

“We’ve got a very good spread of passengers,” Aly says. “Tourism from the Gulf has held up much better than from Europe. There’s also a large diaspora of Egyptians living in Saudi Arabia and Kuwait, so we’ve got strong VFR (visiting friends and relatives) traffic. And we see Umrah and Hajj religious traffic being extremely resilient.”

As well as focusing on wealthy Gulf-origin tourists and observant Egyptian pilgrims, the airline also benefits from two-way business traffic. Nile Air provides the only Business Class option on some of its routes, ensuring loyal custom among government, military and corporate travelers.

These flows will only be boosted by warming ties between the countries in its network. In January, the General Federation of Egyptian Chambers of Commerce and the Jeddah Chamber of Commerce (JCC) signed an agreement to strengthen bilateral co-operation. That coincided with the establishment of the Egyptian-Saudi Businessmen Association, which has a stated goal of enticing 200 Saudi companies to invest in Egypt.

A more telling sign of Riyadh’s relief at the overthrow of the Muslim Brotherhood came in the immediate aftermath of the military coup, when the kingdom pledged $5 billion in aid for its neighbour.

In Kuwait, Deputy Prime Minister Shaikh Sabah al Khalid al Sabah unveiled a raft of measures to boost the Egyptian economy in December, despite his emirate’s cautious tolerance of Muslim Brotherhood-affiliated groups. Three months later, the Kuwait-based Arab Fund for Economic and Social Development pledged to invest more than $400 million in Egypt’s faltering energy sector, including the Egyptian-Saudi electricity linkage project.

Almost by chance, Nile Air finds itself perfectly placed to facilitate co-operation at the grass roots level. Aly estimates that seat availability between Saudi Arabia and Egypt has risen by 96 per cent across all airlines in the past three years, and he believes other traffic types are fuelling this growth in equal measure.

“Egyptians are the second largest nationality that travels to Saudi Arabia for religious purposes, which will continue to grow,” he notes. “Al Tayyar Group is also one of the largest travel organisations in the Middle East … That gives us very strong clout, a very strong advantage in the region.”

Amid this atypically optimistic outlook for an Egyptian airline, Nile Air is understandably looking to expand. It presently operates a modest fleet of just two Airbus A320s, each of which had its capacity lifted to 164 last year when the Business Class cabins were halved in size to eight seats. But two more A320s will arrive this year, with the first unit expected in time for the summer season.

The new aircraft will be taken on operating leases for “a minimum of five years”, he adds, emphasising the need for “immediate lift” to capture near-term growth opportunities. As for Nile Air’s longstanding order for nine A321s - a larger variant of the A320-family jet - Aly says the deal is “subject to ongoing contractual negotiations” with Airbus.

Fleet expansion inevitably puts network growth on the agenda, and Nile Air has already committed to launching flights from Luxor to Kuwait. In March, following months of intensive lobbying, it secured the right to operate Cairo-Jeddah flights. But Aly also has his sights set further afield, spying new destinations across the Middle East, Africa and even Europe.

“When you look at the largest markets out of Egypt, the big three in the Middle East are Saudi Arabia, Kuwait and the UAE,” he says, raising the spectre of new links with Dubai or Abu Dhabi. “When we look at North Africa, we also see Libya and Sudan as being strong areas for growth.

“In Europe, the largest market in terms of traffic would probably be the UK, Italy and Turkey … The UK is a strong market for Egypt given the large Egyptian population there. Likewise with Italy. And Turkey has a liberal visa process for Egyptians, so it’s seen as a good tourist destination for Egyptians. These markets are relatively under-served given their attractiveness.”

Paving the way for such expansion, Nile Air is evaluating potential ties with other carriers. In 2013, the airline formally joined the International Air Transport Association (IATA), the main industry group. Then this year it became a member of the Arab Air Carriers Organization (AACO), the main regional body. “These are both important steps for Nile Air,” Aly says. “We are planning to explore all opportunities to maximise our revenue.”

There are lingering questions about the stability and prosperity of the airline’s home market. However, while Aly admits that Egypt is going through a challenging period, he insists its status as a major tourism destination and economic powerhouse is not in question.

“The Egyptian market is highly dynamic. It’s a market which has the potential for significant growth,” he says, singling out the country’s historic attractions, its 80 million-strong population with a growing middle class, and its geographical advantage at the intersection of three continents. “I believe now, as stability returns to the country, we’ll see a strong rebound and growth.”

Any push into Europe will only be made after careful analysis, but with an Egyptian diaspora estimated at up to eight million there is huge VFR demand with or without tourism. And although countries such as Germany have issued stern travel advisories about the Sinai peninsula, that did not stop Air Cairo, the low-cost subsidiary of EgyptAir, announcing seven combined weekly flights from Hurghada to Dusseldorf, Stuttgart and Hanover in April.

Nile Air will be mindful of losing market share to Air Cairo given the parallels between the carriers. It, too, plans to double its fleet this year, taking four more A320s. It is also increasingly throwing its weight behind scheduled traffic at the expense of charter operations (albeit targeting the low-cost end of the spectrum, unlike Nile Air).

“Last year, more airlines started to go into scheduled areas,” Aly admits. “But we’re not concerned in terms of additional competition, because we believe that the market has significant pent up demand.”

His optimism echoes that of former civil aviation minister Fadel, who was succeeded by EgyptAir’s outgoing chief executive Hossam Kamal in March, during the latest cabinet reshuffle. Speaking shortly before he stepped down, Fadel said EgyptAir remains committed to growing its fleet from 81 to 127 aircraft by 2025. The government is also proceeding with plans to build the Cairo Airport City aerotropolis, as well as investing in the West African market by establishing a joint venture with Ghana’s CTK Citylink.

All told, Egypt’s public and private aviation companies are standing by their long-term projections, placing huge bets on the future of this economically and politically formidable nation.

Although Nile Air is a minnow compared to the flag carrier, its future contribution has already been enshrined by Egypt’s interim government. The airline grew its traffic by 21 per cent last year to serve nearly 350,000 passengers. Its success in gaining access to the Cairo-Jeddah route - the Middle East’s largest for origin-and-destination traffic - is described by Aly as “genuinely a very big step” towards liberalisation. The route had previously been duopolised by EgyptAir and Saudia.

“The pace [of reform] has been slower than in other countries in the region, but we’ve seen positive developments,” he concludes. “We hope it continues. I think it will be to the benefit of the economy of Egypt.” – TradeArabia News Service

This feature appeared in the May 2014 issue of The Gulf.




Tags: EgyptAir | Egypt tourism | Al Tayyar | Nile Air |

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