Flydubai pushes low-cost model amidst downturn (page 1 of 2)

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.