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NOVEMBER 2019

Executive Interview

Saudia’s long haul to profit includes attracting pilgrims from Asia

The sleeping giant of the Middle East is waking up. Saudi Arabia’s loss-making flag carrier, Saudia, is re-inventing itself after years in the commercial doldrums. And Asia’s religious pilgrims are planned to be part of its recovery. Associate editor and chief correspondent, Tom Ballantyne, talks to CEO Jaan Albrecht.

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November 1st 2019

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When Mexican-born Jaan Albrecht, former head of the Star Alliance, became chief executive of Saudia three years ago, his new employer told him the flag carrier “must grow, grow, grow”. Read More »

Rejuvenation of the airline was critical to Vision 2030, which aimed to reduce the country’s dependence on oil and attract more foreign investment to the Kingdom, his government bosses said.

There were formidable obstacles to overcome if the “grow, grow, grow” targets were to be reached. At the time, Saudia was drowning in losses, despite being heavily subsidized, and had a bloated and complacent workforce of 42,000.

Fresh from rescuing Lufthansa-owned Austrian Airlines in a remarkable six-month transformation, Albrecht believed he had the right formula to turn around the airline group.

“When I arrived in Saudi Arabia, to my surprise, the name of the game was a little different,” he explained to Orient Aviation. Slashing staff numbers and shrinking the carrier to cut costs were not options. As well, the airline had ordered 72 new aircraft.

Warning employees they would be fired if they did not perform could not be used as leverage to increase productivity. Saudia’s workers knew its government owners would never allow the carrier to be shut down.

“Typically, in my previous turnaround exercises, you downsize, you shrink, you clear out a lot of legacy issues. But here, that was not possible. Here it was a combination of growing and making the company profitable,” he said.

As the first foreign CEO of the carrier, Albrecht essentially reversed his engineered strategy. He supported the government by expanding the airline’s passenger and cargo businesses with a focus on the important pilgrim traffic to the Kingdom during the Hajj and Umrah.

Albrecht also discovered the airline only had a 24% market share of the millions of pilgrims who travel each year to Saudi Arabia. “If we did our homework well, we should have been aspiring to a 50% market share. Perhaps this lack of strategy and vision were reasons why Emirates (Airlines), Etihad (Airways) and Qatar (Airways) were given an opportunity to grow to where they are today, the big three Gulf carriers,” he said.

Albrecht said there are 1.8 billion Muslims worldwide who have to perform the Hajj and the Umrah pilgrimages at least once in their lives. Many were travelling to the holy sites via Istanbul, Cairo, Abu Dhabi or Dubai. “This is why I use the term sleeping giant for Saudia because we were missing out on this traffic. If you have subsidies and you have a comfortable life, there is a lack of aggressiveness or hunger to get this traffic back,” he said.

From day one, Albrecht’s primary goal was to win more pilgrim traffic. “From 24%, three years later we have a 38% market share. To gain one per cent market share from your competitors is not easy. We have generated 14% growth. It goes hand in hand with the vision of the government,” he said.

Several developments are helping to turn the tide in Saudia’s favour. Firstly, the government has ended subsidies to the carrier. Albrecht said: “After losing our fuel subsidies, we are standing on our own feet. Secondly, the government radically altered the visa application system. By the end of this year, citizens from 49 countries will receive their visas more speedily and cheaply online. In five years, the government wants to double the number of visas issued and triple that figure in ten years.”

A third impediment to growth was antiquated airport infrastructure, particularly Jeddah, a key destination for pilgrims. With a third world terminal it was incapable of handling the increasing volume of traffic demanded by the government’s growth targets.

“We cannot do more than eight flights per hour because there are only eight gates and all of them are remote gates where passengers have to be bussed. There is not a single jet contact gate. So, to try to build a hub where there is a maximum eight flight arrivals and departures an hour, you can’t do it,” he said.

This is about to change with the opening of a new airport complex in Jeddah. “It is a fantastic state of the art terminal with 48 contact gates and three parallel runways. It will be fully operational by the end of this year. We operate most of our domestic flights from there and the whole operation of Saudia will move too,” he said.

“Once that happens, we are not only growing traffic but shifting traffic with our own hub structure. It is the first time Saudia will have a hub and spoke system in Jeddah in its 75-year history.”

Saudia has a fleet of 61 A320 and A321 types, 38 A330s, seven 747s, 40 777s and 21 787s. It has ordered 30 A320neo, five A321neo, 15 A321LR (long range) and 15 A321XLR (ultra-long range). Albrecht said: “With these (ultra-long range) aircraft we will be able to reach any destination in Europe, even the Scandinavian countries non-stop from Jeddah and Riyadh. So, yes, there are growing market opportunities and we will start developing them from the end of next year. The aircraft will be introducing a totally different game for Saudia, not only by flying to those countries but also being able to fill our empty seats with sixth freedom traffic.”

The Saudia group operates a budget subsidiary, Flyadeal, headed by Australian Con Korfiatis, a former CEO of defunct Viva Macau. The LCC began flying in 2017 and has 11 A320s operating 80 flights a day on 14 routes to eight domestic cities. Last December, it ordered 50 737 MAXs that were meant to start arriving at the LCC from this year.

After the MAX grounding, Flyadeal replaced its 737 order with 30 A320neo and 20 options. Deliveries will begin in 2021. Albrecht said Flyadeal operates at arm’s length from Saudia. “Their headquarters are two miles from Saudia’s HQ. They are basically running their own life. It is a good concept. The only way we co-ordinate is between Con and me,” he said.

“We sit together. We define the strategy. We understand very well what he needs and he understands very well what we need. We don’t mix cultures or the business models. We were very conscious we were going to be cannibalized.

“We agreed for them to go onto those routes that were the most profitable for us in the domestic market and not fly into airports and routes where we were having trouble. We promoted this cannibalization because, at the end of the day, it is stimulating the market.

Magnet of Mecca for Asian pilgrims
With a fully operational new hub in Jeddah, Saudia will begin targeting destinations with large Muslim populations, particularly in the Asia-Pacific, including Indonesia, Malaysia and the Philippines, Albrecht said.
“We are very much present there today, but we know we can increase our market share and increase our flights into these countries. Yes, we are restricted with the slots at some airports. And yes we are restricted with the traffic rights. But the opening of the new Jeddah hub, the focus of the government on generating more pilgrim traffic and the faster visa approval process are giving us leverage,” he said.
“The government is supporting us by applying for new traffic rights, new destinations and more frequency. We are engaged in this exercise with the authorities. You can expect Saudia to show up, perhaps next year in Hong Kong, as a continuation of our flights to Manila. We will extend it to Hong Kong. There is a lot of cargo traffic. We operate 12 dedicated freighters – B747s – which fly to Hong Kong, but now we will start generating the combination of cargo with passengers.”

“This formula has been agreed for the time being, but when they start receiving new aircraft a more intermodal model will evolve. They will start feeding our hub for our long-haul and medium-haul international flights.”

Saudia has 11 business units, including MRO, catering, cargo, ground handling, crew training and the operation of the Royal fleet. For instance, does it have to give its MRO business to the group’s MRO division? “We were required, but not now. Most of the heavy checks, after receiving 72 aircraft in the last two years, are in to the cycle for the first heavy check, the C1 check. We are doing a lot of this in Abu Dhabi and with Lufthansa Technik,” he said.

“It’s an open market and competitive. It is a wake-up call for MRO, for catering and the ground handling units,” Albrecht said.

Although not a primary objective, increasing tourist traffic is on Albrecht’s radar. Huge investments are being made in hotels and tourism infrastructure across the country. In 2017, Saudi Crown Prince Mohammed bin Salman announced a US$500 billion investment in a greenfield mega-city, Neom, now being built in the northwestern province of Tabuk bordering the Red Sea.

The smart city, which its planners said would be 33 times the size of New York City and be fully functioning by 2025, is intended to revolutionise Saudi society and turn the country into a technology hub.

“Look at all the investment in tourism to capture all of these nice tourists on this side of the Red Sea. Already, they are on the Egyptian side, the western side. But the east side of the Red Sea is perhaps an even better tourism attraction than the western side. That is part of government’s grow, grow, grow plan,” Albrecht said.

On the international front, Albrecht is making a major change. Saudia is a SkyTeam Alliance member, but he was surprised to learn the airline did not fly into any hubs of its alliance partners.

“We were part of this fitness club. We were paying our monthly and annual fees, but we were not going to the fitness club. After paying the fees and not going to the club you ask yourself: why are you not fitter? Well, you have to go there to get fit,” he said. He appointed a vice president alliances to negotiate code-shares and set up relationships not only with SkyTeam members but with non-aligned carriers.

“I would say participation with SkyTeam is 100% bigger than three years ago. In March next year we will start operating to Amsterdam with the full support of partner KLM. Today, Saudia is a very active member of this fitness club. We are participating in meetings, strategy meetings and working groups, so it’s a different story,” he said.

Saudi Kingdom’s “huge domestic market” advantage over Gulf competitors
As for the big three Gulf carriers, Emirates, Etihad and Qatar, Albrecht said he has an advantage they do not have - a huge domestic market. “Saudia is an airline which will continue transporting about half of the 34.1 million passengers in the domestic market. It is something competitors don’t have. We will continue focusing, to a high degree, on our pilgrim traffic,” he said.
“It is a key advantage on a non-stop flight against our competitors. We will continue being focused on the labor market from India, Pakistan, Bangladesh and Africa to and from Saudi Arabia.
“Then we will do a little bit of sixth freedom traffic, which has been the formula for success and growth for Emirates, Etihad and Qatar. We will take away a little bit of their share, but it is not a priority. We will not be the fourth Gulf carrier.
“We will be different, a big, efficient growing carrier based on these traffic flows. We do not pretend here to overtake Emirates or the other carriers. The sleeping giant was a term I used because Saudi Arabia is a country with 34.1 million people and 28 airports, with huge domestic traffic transported in sub-optimal ground transportation and infrastructure.
“Air transportation is critical to development and communications in the country. These are totally different environments. Yes, there is wealth there (in the other Gulf countries) but they have a zero domestic market versus the huge domestic opportunity in Saudi Arabia.”

Employee numbers have dropped marginally to 41,000 through natural attrition. But the expansion of the fleet has allowed the carrier to absorb talent and raise levels of productivity. Albrecht has introduced a performance management system and insists on KPI (Key Performance Indicators) reporting.

“In the first year, everybody was rated as outstanding because they did not manage performance management. Now, after two or three years, they are rating people that are underperforming. It’s a more natural way to make sure people start to perform. It’s a process that certainly did not happen overnight,” he said.

Changing the culture of the airline has been his biggest challenge and is not yet done. “It’s a combination of factors: trying to communicate with staff and convincing them the game is changing. Then have measures to pressure and make people aware this is a serious transformation,” he said.

“The challenge is to make our staff aware the government expects us to play a significant role in the country. For a company that has been protected in a subsidized environment, it is a challenge to make people aware they need to be part of the change.”

As for local competition - Saudi Arabia approved the launch of more airlines five years ago - Albrecht said Saudia was handling the competition well. “Until that time, Saudia was a monopoly. Now there are three additional domestic airlines flying in the country and they have started to fly internationally,” he said.

“It is starting to be competitive for Saudia. We lost about 15% market share, going down from 100% to 85%, but that is still a prominent position. Today, these other carriers are the meat in the sandwich between full-service Saudia and ultra-budget Flyadeal. They are starting to feel the pinch.”

One rule will remain unchanged. “I don’t think Saudia will serve alcohol, probably never. I don’t believe the loosening of this alcohol issue will happen any time soon in the country,” Albrecht said.

A more pressing issue is regional tension, most recently inflamed by Iran’s alleged missile strike on Saudi’s critical oil production plant. “It is unfortunate, but there are always external factors. Oil prices go up and down, the ecosystem, the global trade situation we are entering. We are used to this. In this industry, you learn to cope with volatility,” Albrecht said.

“I think we are doing a reasonable job in adapting to capacity and putting capacity where there is opportunity. Hopefully, there will be no escalation in political tension, but we will be ready to adapt to this.”

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