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By Rania Oteify

The second strike action in as many months by air traffic controllers at the National Air Navigation Services Company briefly wreaked havoc with flights across Egypt’s skies in May, but did little to dampen a growing sense of optimism in the industry as at least five carriers started new operations in Egypt

Air Arabia, Hapagfly and Jet Only are now operating the first regularly scheduled discount flights to Egypt, while Emirates Airlines opened a new service to Alexandria and, in a surprise development, Orca Air announced it will take back to the air later this year after restructuring under a new parent company.

Is liberalization finally coming to one of the most tightly regulated sectors of the economy? Industry veterans caution that the spate of new operators servicing Egyptian destinations isn’t a sign of a massive shakeup at the Ministry of Civil Aviation, but are hopeful their sudden appearance is a sign that the Cabinet economic group’s reformist message is spreading to other ministries.

Eastern European charter flights to Sharm El-Sheikh remain the most attractive option for highly price-conscious tourists looking for package deals, but three discount airlines say they’re positioning themselves to serve Egyptians traveling to less tourist-oriented destinations as well as individual travelers looking for lower fares without resorting to a charter package.

The UAE-based carrier Air Arabia, launched in October 2003, was the first to schedule low-cost international flights from Sharjah International Airport (10 km from Dubai) to Alexandria and Assiut in early 2004. Now, only 18 months later, the airline announced last month that it will expand its operations to service Luxor and Sharm El-Sheikh.

At the same time, Belgium’s Jet Only announced it is now running regularly scheduled flights from Brussels to Cairo, while German carrier Hapag Lloyd will fly regularly from Munich to Cairo. Jet Only and Hapag are the first low-cost airlines to fly to Cairo.

Hapagfly, a division of Hapag Lloyd, began scheduled flights three times a week from Cairo to Munich in early May. The new flight route compliments its existing charter services to Sharm El-Sheikh, Hurghada, Marsa Alam and Luxor. Jet Only has been scheduling flights from Cairo to Brussels twice a week since early May as well.

Low-price carriers have been operating in Europe, the United States and Australia for several years. For the Egyptian market, the trend is expected to help travelers bound for Europe or the Gulf to cut their expense by almost 20-30%. “Our point is to make people travel more often,” says Mohamed Rashad, sales manager for Air Arabia’s branch in Cairo. “It is the first low-cost carrier to enter the Egyptian market; our target segment is very big, and there is a massive need for it in the market,” he says.

Rashad says Air Arabia is targeting both business leaders and Egyptians living and working in the Gulf.

“It provides businesspeople and employers with reasonably priced flights. Our flights to Alexandria serve those coming from the Delta, while Assiut serves the Upper Egypt region. Now we’re planning an opening of Luxor flights as of June 2nd, which will serve Luxor and Aswan,” he says.

Elhamy El-Zayat, head of the Egyptian Federation of Tourist Chambers, says an increasing number of cash-rich Arab tourists are helping discount and regular carriers to expand. “There is a huge demand coming from the Gulf. The Gulf area has so much money now as a result of the increase of oil prices, and they have to spend it somewhere. Now Emirates is starting five flights a week to Alexandria. It is unbelievable,” he says. (See box on Emirates)

Air Arabia has capitalized on this opportunity by planning flights to Sharm El-Sheikh for inbound Arab tourists, Rashad says.

But at the end of the day, European tourists are the new carriers’ primary market. Travia, which books both Jet Only and Hapag Lloyd, introduced the first ever low-cost flights between European cities and Cairo, complementing the services Air Arabia provides.

Travia General Manager Berge Andreassian says the two carriers are also targeting the business community.

“We target vacationers, businessmen and merchants. As we fly to Munich and Brussels, we provide them with the option of going to those two major destinations, doing their business, then returning the following day or after two days,” he says, pointing out that unlike other carriers, there is no minimum stay required on round trip tickets.

Jet Only and Hapagfly have been flying for some time to Luxor and Sharm El-Sheikh as charter operations for tour operators, which allowed them to measure both Egyptian and European demand for a Cairo connection.

“The scheduled operations to Cairo offer a totally different [product],” Andreassian adds. “It means you have fixed days and fixed times. There are no changes in the schedule all the time. Cairo is also not only a leisure destination compared to Sharm El-Sheikh or Hurghada; it is a business destination, too.”

While discount airlines in Europe and the US vary widely in quality, convenience and regularity of service, the new carriers say they’re underpricing their competitors without reducing services as much as some operators may in other markets.

Air Arabia’s Rashad rejects the idea that low-cost means low quality, claiming the company provides top service on its 2004 Airbus 320 models at prices that are 20-30% lower than competitors’.

The airline cuts costs several ways, he says. “Air Arabia works on reducing cost by operating only one type of aircraft, namely Airbus 320s. That cuts our maintenance costs. Tickets are also an A4 receipt with a confirmation number, and meals are optional. We fly for less than four hours, so not everyone likes to order food. Still, we make meals available at a very reasonable price and do not include them in the fare,” he says.

Travia’s Andreassian prefers to call Hapagfly and Jet Only’s services “low-priced,” not “low-cost.”

“It is not low-priced because customers buy the seat only — there is a meal, refreshments, and alcohol during meals — but we do not provide business class. It is all economy seating,” he says.

Travia is part of the Travco Group, which represents several other carriers in Egypt including Royal Brunei, Air Pakistan and Oman Air.

If better prices and more frequent flights will allow people to travel more often and on shorter notice, El-Zayat believes this will introduce a new segment of tourists he calls “mature tourists.”

“Tourists are becoming more and more independent. People coming from the US, France or Germany do not like to travel in groups anymore. They want to be on their own. There is a change and an elimination of the role of travel agents,” he says.

El-Zayat suggests hotels and other tourism vendors are slowly adapting to the do-it-yourself mentality of the mature tourist.

“People who travel on low-cost airlines booked on the internet also try to find a hotel on the internet because this is the cheaper way. So the number of internet bookings for hotels has grown from 4-6% of the total to near 20% in Europe,” says El-Zayat, who is also chairman of Emeco Travel.

El-Zayat believes tour operators should diversify if they plan to survive. “For example, work on specialized tours such as golf tours, desert safaris or bird watching. You can tailor trips to small groups of people in whom big tour operators are not interested,” he adds.

Low-cost flights could also shake up the spending profile of Egyptian tourists by attracting younger tourists and Egyptian travelers who may spend less per person than older European ‘package’ tourists.

But for critics who look at the revenues of tourism rather than the number of tourists, El-Zayat affirms that every tourist is needed.

“You should not underestimate any tourist. We have to understand that we have to cater to everybody as long as it is within the capacity of our infrastructure, as long as we do not have to import food and subsidize it to feed the tourists. They should pay the right price with a profit margin [for the operators],” he adds.

Then, of course, there’s Orca Air, a name that should be familiar to many. When it launched in the 1990s as the first air taxi service in the Middle East, Orca Air was a lonely pioneer with big dreams of carving out a profitable niche by challenging national flag carriers in a highly regulated industry.

Orca chieftains Diaa El-Gabbani and Osama Farid were the talk of the nation’s capital when they appeared on the cover of Business Today Egypt’s August 1996 issue as business leaders watched to see how much of the domestic tourist market they could snap up.

But four years into the experiment, things started to go incredibly wrong: First came El-Gabbani’s tragic death in an air crash in 2000, then a slump in the tourism industry after September 11th, 2001. Hampered by the foreign-currency regulations then in effect and what company insiders say was inadequate management, Orca suspended operations in early 2003.

Although it retained its license, Orca only started to taxi back onto the runway in mid-2004 when Oyoun Tourism Development Company (OTDC) entered the picture, taking an undisclosed stake in Orca and putting the air taxi service through a restructuring process that could see planes flying again by year’s end.

Oyoun is an Egyptian-British joint venture established in 1998 under Egypt’s Investment Incentives and Guarantees Act (Law no. 8 of 1997). OTDC Chairman Michael Cutler-Hodgson describes his company’s role as that of a “commercial facilitator.”

“There is no such thing as a problem that cannot be solved,” he says. “It depends on how much time and effort people put in.”

In Orca’s case, that solution involves a new fleet of five to six turboprop SAAB 340 aircraft due to start arriving in Egypt in early July. According to Hodgson, Orca will use Cairo, Sharm El-Sheikh and Aswan as hubs for services covering almost every airport in Egypt as well as a handful of international destinations including Beirut, Istanbul and Port Sudan.

Oyoun is also working to bring back another name from the past, Hodgson says: “Orca will be serving the domestic and regional market operating on an air-taxi basis, but its air-taxi licence does not allow more than 50 seats. Here comes the role of the international charter airline. We are currently negotiating a similar restructuring with Pharaohs to serve this purpose. Under the umbrella of the mother company, Oyoun, those two companies can cooperate instead of competing like before.”

Although air taxis face a 50-seat limit, “the advantage is that you can go to and from any destination in Egypt,” Hodgson says. “If you are a charter jet operator, you have no limitation on passenger numbers, but you must have landing rights to go from one airport to another, and you usually have limitations on Cairo Airport, for example.”

Badr Damie, a veteran Orca Air staffer now serving as general manager in the restructured company, says the air-taxi license’s restrictions should actually work in the company’s favor. “Smaller planes are safer and more cost effective,” he says. “Also, we won’t fly empty aircraft, which makes the operation profitable. A charter plane brings 160 passengers, and not all of them will look to go to one place. So we fly them in small numbers to different destinations.”

Damie says that flying larger aircraft such as Boeing 737-500s on domestic routes was the reason EgyptAir racked up losses servicing a number of centers. “But as the national carrier, EgyptAir, is obliged to provide those services,” he stresses.

Air taxis have never been a popular niche in Egypt’s aviation industry, where small players are few and almost none of them are profitable in the face of tight government regulation and overwhelming competition from EgyptAir. Moreover, many private players try to compete in a sexier —and far riskier — market segment.

“The classic [Egyptian] example of an air operator is that they believe having a large aircraft like a BD 83, Boeing or Airbus flying from Cairo to Paris is the better deal; its profit margin is higher and there’s the prestige of being an international carrier,” Hodgson says.

It’s also exactly what the market doesn’t need, he claims, saying, “With a vast number of [tourist] sites in Egypt, between different coasts and deserts, there are so many different stretches and attractions. A few years ago, we did not have the lodging, the infrastructure, the immediate recreational requirements [to attract larger volumes of tourists], let alone the ability to move people around.”

But as part of a strategy to develop new tourist destinations that kicked off roughly five years ago, the government has encouraged hotel and resort development on the Red Sea, Aqaba Bay, Ain Sokhna, Ras Sidr, Marsa Alam and Ras El-Hekma, among other destinations. Accommodation capacity grew an average of 7% between 2000 and 2003, outpacing demand in growth by 4%. While government expenditures to support the sector flagged in 2005, it is picking up this year.

Tourism has grown from 4.1 million visitors in 2000 to just over 8.1 million last year; Tourism Ministry officials project more than 9 million will visit this year. According to World Travel and Tourism Council figures released last month, Egypt’s tourism industry should be the second-fastest growing of 12 countries in the Middle East ranked by WTTC at 6.0% real growth this year, 0.6 percentage points behind Iran and well ahead of tenth-ranked United Arab Emirates at 2.9%.

As the industry has expanded, so too has the nation’s airport infrastructure, with new facilities opening in Marsa Alam and Al-Alamein, among others, as well as renovations and expansions at Cairo and Sharm El-Sheikh.

That’s where Orca comes in, Hodgson says: “Even if additional flights can come in, what happens next? People coming, for instance, from Spain to Hurghada need to go to other places too, such as Alexandria, Aswan, and Taba. The only way you can do it is with a domestic carrier operation.”

In other words: Let Hapagfly or Air Arabia or EgyptAir bring them in, then Orca shuttles them from coast to desert to coast in Egypt.

“The tourism sector is never going to grow or get the numbers that we should have targeted if you have not got an appropriate transportation infrastructure,” Hodgson says. “You can fly people all over the country in small airplanes, you just have to put some time and effort into identifying what type of carrying capacity, number of seats, etc, that can provide services that are comfortable, safe, and cost-effective,” he adds.

It’s a formula Orca and Raslan air have tried before, as did at least two other companies that secured air taxi licenses without ever operating a flight. So if Orca failed the first time around, what’s to say now is the right time to get back into the game — and how did the restructuring set the groundwork? Hodgson refuses to speak in specifics, saying there is nothing to gain from doing so.

Is there a moral to learn, then? No, he says, “you don’t fall into the same mistakes because you restructure the whole thing. Now we have a new staff, new planes and everything.”

The one thing Hodgson will say is that there is a positive side to working with a company that’s been flying Egypt’s skies since 1996: “As the years go by, Orca gets the benefit of longevity. It also has an international name. Unlike Luxor, Pharaohs, or Cleopatra [one-time competitors], Orca can be anywhere in the world. It transported up to 50,000 passengers during its previous operations, so people will remember Orca Air. There is no problem in salvaging the name, building on what is there and taking it forward.

“But you do that on the basis of what you understand as correct, not on the basis of what was done before. Orca is now on the verge of starting up again on a new operational status. There is no comparison between the structure it has now and how it was before,” he says.

As a sign of the seriousness of Oyoun’s commitment to the market, Hodgson points to the fact that Orca will own its aircraft instead of leasing them.

“When you have your own aircraft, you are not tied by liabilities to others. You have only the costs of operation and you can control those better. Our feet are on the ground; the point is to have an actual aviation management operation,” he says.

Damie agrees that owning the planes is a sign of a “serious operator.”

“When I knew that Orca was starting with a fleet of five to six aircraft, I thought it was a step in the right direction,” the general manager says. “Airlines that work with only one or two leased planes are following a hit-and-run approach. They look to come into the market for 10-12 months just to score some money,” he claims.

Since 2001, civil aviation regulations have required private operators to own at least one aircraft.

“There are a few private sector companies, such as AMC and Lotus, that have the knowledge and experience to provide a private-sector alternative [to EgyptAir],” says Hodgson. “Then you have a cluster of other companies with one or two planes, generally moving according to market demands. If someone offers a large contract, there is money involved, they can get another plane. If they lost the contract, they lose the plane,” he adds.

So does all of this mean liberalization is finally catching up with a sector still dominated by state-owned giant EgyptAir?

While private players are few, there is a general belief in the industry that the Ministry of Civil Aviation may be loosening the reigns a little. No formal regulatory changes have been handed down, but government officials have tried of late to make the bureaucracy run smoother — and be more tolerant toward private operators.

Why? Hodgson believes because the aviation market will have to be liberalized sooner or later under the Open Skies agreements with the United States and other trade partners.

“What the Ministry of Civil Aviation is trying to do is to foster existing operations to make sure we are not going to be allowing total international operators working under the Open Skies to provide what the country needs on the domestic market. You should have local operators providing for your local requirements,” he says. “What they are trying to have is three to four solid Egyptian operators.”

Travia’s Andreassian and Rashad of Air Arabia believe the growing demand for economy-class travel to and within Egypt will see more carriers try to enter the market as the government continues to liberalize.

As to their own experiences with the ministry? “There were no complications at all in obtaining our licenses,” says Rashad.

El-Zayat confirms that the ministry allowed the new players in with a minimum of fuss.

“There are always two agreements to be negotiated: one is between two countries, Egypt and UAE for instance, on how many carriers they will exchange. Then there are the commercial agreements between the carriers. For example, Emirates and EgyptAir [will agree] on how many seats, flights, etc., they operate,” explains El-Zayat.

“The current Ministry of Civil Aviation has established a very proactive structure. It is very helpful — they are going very much towards Open Skies, allowing a lot of carriers to start getting traffic licenses to and from Egypt and maybe beyond, in what is called third, fourth and fifth freedom in traffic rights. These mean allowing [a carrier] to transport people from a nationality other than the carrier’s to a country that is not the carrier’s. We are expecting to see a boom in all aspects in the aviation market,” says Andreassian.

The government hopes the increased traffic will have a positive impact on business and commerce in the region of the carriers’ new destinations.

“[Air Arabia] flies to Alexandria and Assiut, which is very clever. I sit on the General Assembly of Egyptian Airports, and they are looking into improving Assiut airport, where there was nothing going on a few years ago. Now we are building a terminal. This will create jobs, and make life easier for people from Upper Egypt, and we will reduce traffic and road accidents on these roads,” says El-Zayat.

Air Arabia’s Rashad agrees that in this atmosphere, the market is definitely about to expand.

“More airlines are going to look to capitalize on the potential of the Egyptian market. This will change the aviation market in Egypt so that no one carrier will be monopolizing the market. [Air travel] will become a commodity accessible to people at reasonable prices [set by forces of supply and demand], says Rashad. bt