Flydubai pushes low-cost model amidst downturn

Flydubai was formed by the government of Dubai and received initial 'support' from government-owned Emirates Airlines, but the new carrier has made clear that it is not part of Emirates Group.

However, Flydubai and Emirates share a similar trait in that they both have ambitious plans for the future.

The low-cost carrier ordered a whopping 50 Boeing 737-800 aircraft last July in a deal worth $4bn, and has also announced plans to expand to dozens of destinations following an initial roll out of service to Beirut, Damascus, Alexandria and Amman.

Flydubai's route network will extend to four and half hours flying time from Dubai, where it seeks to tap a market whose population exceeds 2.5 billion people.

With one-way fares starting at a promotional price of Dhs350 ($95), the airline is hoping to attract customers with low fares and a straightforward business model: Travellers pay for the services they want, with ticket prices inclusive of all taxes and a hand baggage allowance of 10kg. Customers may select other optional services at an additional charge.

Sufficient demand

Although Flydubai is starting up amidst the worst economic situation since the Great Depression, it is confident that there is sufficient demand for another low-cost carrier in the Middle East market.

Kareem Murad, an analyst for Shuaa Capital, says his research shows there is ample room for another low-cost carrier in the region. The penetration rate for low-cost carriers in the Middle East is less than 2%, he noted, compared to about 25% in the US and 19% in Europe.

Flydubai will also benefit from the fact that it is launching during the downturn because the economic slowdown is causing a shift to low-cost carriers. 'The price elasticity of demand for the airline sector is one of the highest in any industry. That means the majority of the people choose their airline based on the price on the ticket,' he said.

John Strickland, an analyst at SNL Consulting in London, agrees that the slowdown will work to Flydubai's advantage. 'Particularly at the moment with the economic conditions being tougher - maybe not as much in the Middle East as other parts of the world - but nevertheless, the impact is there and if people want to trade down for a more economical journey it will benefit Flydubai,' he said.

Arab travellers are not likely to be a huge market for Flydubai as they tend to be less budget conscious, but there are many other key markets that the carrier can draw support from including expats from Europe and North America, as well as people from places such as India and Pakistan who want to travel home on an affordable basis and maybe more often, Strickland said.

Impact of fuel prices

One challenge that the new airline faces is the potential for rising fuel prices when the world economy improves.

'Let's not forget that the highest contributor to cost in the airline business is fuel, and it is even more the case for low-cost airlines than conventional ones. But I think that in the current range of $60 it is not really a concern. But anything above $70 or $80, that means their costs are higher, and they will be forced to charge higher prices,' which will hurt their competitiveness, Murad said.

If Flydubai encounters problems it is unlikely they would ever be merged with Emirates, he noted. 'These are two different business models. One caters to people who look mainly at the price of the fare, while the other is looking to attract travellers with luxury and comfort.'

Because the airlines are so different, Murad believe there is little chance that they will be combined into one company. 'Any time in history that the companies with two different business models have been combined in a company it has been a total failure,' he said.

Strickland agrees that Flydubai will be operated as a separate company from Emirates, noting that there will be 'some cannibalisation and some new traffic generation as well', the extent of which will be a function of what prices they put in the market place.

'The more price competitive that Flydubai is the more it will generate new traffic as opposed to stealing from Emirates,' he said.

Competitive field

Although Flydubai is setting up shop just down the road from Sharjah-based Air Arabia, the largest low-cost carrier in the Middle East, the competition is not likely to hurt the new carrier. 'There is no doubt that they will compete, but it will not be a fierce competition,' Murad said.

'From the statistics we have, not a large percentage of customers who fly Air Arabia come from Dubai, instead most are from Sharjah or the cities next to it. So I believe Flydubai will be competing more with legacy carriers as opposed to Air Arabia.'

With regard to the large number of planes that Flydubai has ordered, Strickland said 'it's a big order and certainly looked more viable a year ago when it was announced. It's going to take a while to see whether they end up slowing that order down.'

'However, putting into context the very small market share of low cost carriers and its potential upside, along with the fact that the Middle East does not have the level of privatization that exists in Europe, the US or Asia, and the lack of a widespread open skies regime across the Gulf, if the lid comes off these things they will provide a lot more room for Flydubai to grow and justify the large order of its fleet.'