One to One with Adel Ali, CEO Air Arabia

Yeah, well, it's a short flight at least.

As I mentioned—I don't know, let's discuss that afterwards. I've got an interesting birthday coming up this year.

Thank you, John. Let me tell a story as well. My older brother told me, he says your life has been always about downgrades. For some of you who don't know, I joined Windsor House to work on the fleet of Concorde, which was the best thing available in the industry. Then because Concorde was taken to operate on North Atlantic, I was handling first and business class people—giving John a hard time in London. So that was a downgrade from Concorde to the premium cabin. Then I moved to Gulf Air, then from Gulf Air to low-cost. So my life has been always downgrading in the industry. Yet I must admit, this is the one I enjoyed the most. The career has been very interesting. If you work for a big organization like British Airways, you think you've mastered the industry. So I thought I knew everything about the airline industry, until I decided to put an airline together. I realized I knew very little. We were successful in putting it together in about six months, which normally takes a good two years. A good group of people working alongside me, and we managed to do it quickly. One of the best things I've done in my life is putting an LCC together in this region. Of course, when you put an airline together, you copy. We copied the LCCs of Europe, America, and Australia. Copying is always easy, but you need to know how to paste. We managed to paste it correctly, and that's why it worked for us.

Very much so. One has to be realistic in life. We looked at everything surrounding the low-cost industry, but we also had to look at the full demography and the reality of where we live in the MENA region. I recognized at the time that the success of Ryanair or Southwest—they were operating in a continent, not in countries. Europe had 530 million people; Ryanair could operate the whole of Europe. Southwest had another 300 million people, and all they needed was aeroplanes and airports. Whereas we, 15 years back, had airports across the Middle East, Indian subcontinent, and Africa that were very restrictive. Almost every airline was owned by the government of those countries—which is natural; when you own something, you want to protect it. We said, if we get five aircraft, which was our original business plan for five years, it should be good enough. The encouragement came when we looked at which was the best airport for a low-cost carrier. Most key airports in the region had a national airline. We found Sharjah had fantastic infrastructure—aerodrome, runways, everything—and a good catchment area: a 15 to 20-minute drive to Dubai, and the Northern Emirates customers had to pass through Sharjah anyway. The other motive was the very high expatriate population. If you're in a foreign country, you want to travel back home or bring someone from home to visit. We brought affordability into the business, and from year one—which is not known for the airline industry—we broke even and made a profit. People wanted to travel. There was a big need for affordable, simple travelling within the MENA region.

The industry has changed, and we probably started the change back on 28 October 2003. There was no confidence in something called a low-cost airline. People didn't understand it. Airports were very restrictive. To me, airports are no different from bus stops—you can't have a bus stop until the buses come. It's a building with a long road for aircraft to land on, and the more airplanes that land, the better for the country's economy. When we started at Sharjah Airport in 2003, the airport had a few charter operators. Occupancy was around 15%, moving about 200 to 300 thousand passengers a year. It was dull—when business is dull, you don't invest. As we grew, the whole area changed. The Sharjah Airport area employed fewer than 500 people; today there are 10,000. We had four broken taxis; today there's a fleet of 300 branded taxis with bus service across the UAE. We've got a hotel, catering infrastructure, offices. We contribute just under 7% to Sharjah's GDP. Most governments around the region now realize aviation is a good economy. This morning at a conference on youth unemployment in the Arab world—the percentage keeps increasing. Aviation and the service industry together are one of the biggest employment sectors. What is pleasing, 15 years later, is that a lot of countries have changed their philosophies about other airlines coming in. Those that opened up have invested in new airports, recruited more people, and the whole economic demography has changed. Dubai is a very good example—you've seen what it was pre-1985 before Emirates, and what it is today. We've seen similar changes in Beirut, Kuwait, and Saudi. One would like to see the whole region open up and let aeroplanes flow freely—that will help the traveling public and drive pricing down. We're all for open sky policy. When we started, we had to struggle for years. Our original business model had no India, no Pakistan, no Saudi Arabia. Today we fly to 13 cities in India, and more than 8 airports in Saudi and Pakistan. There's now a recognition in almost every civil aviation authority that the best way to grow the industry and benefit the country is to allow more airplanes to land.

People were used to air travel being for the rich. Go back before my days and John's days, people traveled in a three-piece suit with a bow tie. Now they travel in their pyjamas. That's a huge shift, and we went through so many experiences. When we said low-cost, a lot of people thought we'd have no seats and people would stand like on a bus, or pay for a toilet. People assumed we had no insurance—you name it. Strangely enough, people objected to not getting something free, but still wanted the cheap fare.

This is where the aviation industry has been bad. It needs to be a business industry, not a civil service. We got people used to the idea that if you travel one hour and don't get a full meal, you're a bad airline. Nothing to do with the fact that I took you safely from one point to another in a good aeroplane—you're bad because you didn't give me curry and rice. In this region it goes even further. People want a 25 or 30-inch screen with the latest movie for a one-hour flight. Because of that, we've just introduced our SkyTime. But I flew two and a half hours in Europe two days ago on a distinguished airline, supposed to be business class—no in-flight entertainment, economy seats. It was fine, we got there. We do spoil people in this region, and sometimes you can't afford it because everybody wants the same price regardless. We created an expectation that may not be reality. Hence the movement towards fourth-class concepts—super economy and non-super economy—because of economic pressure. I think we were lucky 15 years back because the media played a big role. It's very important to educate the general public. Advertising doesn't necessarily make people believe, but when journalists write about what this means, people understand. They did a big educational role and people bought in quickly. The most interesting thing: in the first week or month of operations, the bus company that ran between the UAE and the Levant took us to court for damaging their business. But we recognized that people who spent 30 to 40 hours on a bus crossing borders—if for the same price they could jump on an aeroplane and arrive in three hours, they'd come back to us every time. Reflecting back, it was a success. Even premium five-star airlines used to advertise cabin crew and good food. Nowadays they all put a price tag at the end, because price matters. That was the change in philosophy—people realized they can travel inexpensively, so why pay so much? The local GCC market has changed. I call ourselves low-cost because not a lot of true low-cost exists in the region. We see women traveling alone for weddings, small businesses flying in the morning and back in the evening. Local travel has grown. It helped the whole community and connected people with their families. The fact that we started, some copied, and the conventional carriers woke up and became competitive—that meant the whole community travels more. We stimulated that.

Thanks to two things. First, customer segmentation. In my old company, we used to engage big consultant firms who would tell us who flies with us—wealthy people, businesspeople, labor, visiting friends and relatives—20 different types. In the end, it was everybody. No airline will say no to anybody who wants to pay. You get on a plane next to someone in flip-flops, someone in pajamas, someone in a suit. We see the same profile: very wealthy, high-net-worth individuals traveling with their entire families, the middle class, and the less fortunate. They all travel. Sometimes I'm surprised—wealthy families fly with us even though they can afford conventional airlines. They tell me: 'We're husband and wife with six children, plus another family—we're twelve or thirteen people. On a conventional airline, we'd need first class, business, and economy. With Air Arabia, we buy three or four rows, sit together, have a picnic, and life is good.' As Mohammed Alabbar said, 'If you want to be rich, you have to be mean and not spend money.' Those people get the benefits and say it's also cheap. Second: how do we keep it profitable? KFC will never tell you their spices. It's a tough, expensive industry—once you lose, it's hard to gain back. Credit to the company both of us worked at: one thing we were taught is that in aviation, you should take 5% cost out every year, because you're never in control of what you charge. The market dictates price, and public loyalty to airlines lasts only as long as prices are good. The moment they're not, loyalty vanishes. People say, 'Why not give something and charge ten dirhams more?' It's about multiples of numbers. It's not the bottle of water or the peanut—once you add those up, it becomes millions. There's an old story—Pan Am or TWA—took one olive off salads and saved a million dollars a year. That's how this industry works. For us, it's focus on the business as a business.

We're a financial company. We've got shareholders, 30,000 people have shares in the company. They have trusted us with their money and we've got to make sure that — they have an expectation that we give them back something every year, otherwise they'd put the money in the bank and get it back.

Simplifies things, but there isn't a one-size-fits-all. I think if we were in Europe, Ryanair in Europe, every 200 miles you have an airport and the train infrastructure is good, roads are good, and you don't have borders. And therefore whichever airport you land in, it makes it easy. The agony in the MENA region, you've got other challenges. It's the only region in the world, by the way, that the main country airport is cheaper than the secondary airports. So if I fly to the main city, which is very busy and all the airlines fly into, I pay lower fees than serving a city that has nobody flying, an empty airport. And the fuel is also more expensive at that airport. Now in Europe, secondary airports want to build those cities, so they recruit people, they give you an incentive to fly, they give you a lower fuel price, which is great for the LCC business model.

The reason being is, in Europe most of the airports are private businesses. Here, almost 99.9 percent of the airports are owned by the country. And about 90 percent of them, the responsible person for the national airline, the airport, the ground handling and everything is the same government person. And that's why the competition is not good for those countries who have multiple airports. It does not develop the industry fast enough, or it develops it and you'll have massive congestion in one airport while the other airports are empty. And where you want to recruit people are all those small cities, because in the big cities the job opportunities are bigger. In I think 2008 or 2009, when we started flying to India, at the time India had four or five international airports. We went in there and had a lot of discussion with the civil aviation authorities to say, listen, your four airports are so congested and people have to come in, clear immigration, then go and buy a ticket on a domestic flight or take a 50-hour train. All the cities have good airports, so if we convert some of them — and they experimented, and they gave us slots. We as Air Arabia and I think quite a lot of other airlines now operate at a lot of airports within India and other places. And those five airports' business has not shrunk, it's grown. So the more you generate and the more people get into the air, the business grows. I have not seen in my career time a country that says air travel has reduced as a result. It's only grown.

I think we've had in the 15 years we've been there, 15 good profitable years, including 2018. 2018, somebody last night asked me, tell me what happened with the Abraaj capital investment. And my answer was, do you remember 2008, Lehman Brothers? I said it's version 2 of Lehman Brothers. So basically, we lost an investment that we made in a private equity fund. The legal side is taking care of it and it will happen, and a lot of companies have invested in that company. It was MENA's biggest private equity fund. But we decided as a company to take everything, impair the whole amount into one year. The reason we did that, we said let's take a one-year loss and move on with our life. Because our business is not about managing the legal side. That is something I will look after with the lawyers and the experts in the industry. But we need to grow our business. The potential and the opportunities are there. So I decided to convince our board and our shareholders at the AGM that look, let's take a full amount impairment and let's concentrate on our business. The Abraaj investment had absolutely no impact on the company's strategy, growth, or financial issues. So we're moving on and hopefully we will have a good year 2019 and life will be back to normal. So that was unfortunately 2018. What happened, hopefully, is history behind us.

Let me start with Saudi, as geographically it's closer. Saudi, over the years, has changed a lot in a positive way. We used to fly to three airports, now we fly to 14 airports in Saudi. I think the civil aviation and the government understood that the more you bring in airlines, the more people will visit. There is a natural market there, and the Saudis, from a population point of view, is large, therefore it's a big market for any airline. They have also established proper systems for the secondary airports. Although they are still more expensive than the main airports, it's outstanding. The fuel is more expensive at secondary airports. But they've also developed their own Saudi carriers — there are six airlines now based in Saudi. They've developed their own airlines, because this business is a two-way system. You go into somebody's country, they come into your country, so both sides benefit. Those Saudi carriers now come to UAE and UAE carriers go there. I think there was a slowdown about two years ago, a minor drop, but we see the economy bouncing back. Our flights are back to normal on the Saudi market. We're quite optimistic about Saudi and the way they are approaching the whole commercial side. India, we have not grown in India since 2010 simply because no more seats have been given to Air Arabia. There's a big Indian population here, a big local non-Indian population who fly into India for various reasons including medical tourists. India has a huge population, big market, so there's always going to be congestion on the route. For us, it's reciprocal — the Indian carriers use the same number of seats coming into UAE as UAE uses to go into India, and the market carries probably 49-51, 51-49 depending on the month. We carry year-round about over 90 percent seat factor. As you know from your previous profession, once you exceed an 80 percent seat factor, it calls for increasing the capacity. And to have year-round over 90 and 95 percent seat factor means you're turning business away. We hope that the Federal Civil Aviation Authority, which I know is continuing to try to have discussion with the Indian Authority, will soon be able to — obviously they've got the election in India past — hopefully conclude to increase the capacity. And if they do, we will benefit from that.

Yeah, it's quite simple. We call them JVs, joint ventures. We own 49% and the local commercial business people in those countries own 51%. From a product point of view, from the management point of view, it's exactly the same, so it's seamless. It's no different than easyJet or Ryanair in Europe. The only difference is because in Europe the law of the land allows you to have one certificate for all the carriers you have. In this part of the world, each country has its own certification, hence we have different legal entities and certification. Otherwise, there's no difference. We are very pleased with all of them. Ras Al Khaimah — we're very happy with it. We started there four years ago, it's very steady and it's working well. Morocco has been a star, and we moved up to ten aeroplanes and more to go. We will fly over 72 routes between six airports in Morocco to all over Europe, wherever there is an airport, and it's doing financially very well. Egypt, because of what happened from 2011 onward, it was unstable, we slowed down. We see everything is back now, tourists coming back. We kept Egypt at the time with just one aeroplane to keep the license, but now we've sent two more and our intention is to grow. We're doing flights from the Red Sea into Europe, Upper Egypt into the Gulf, and from Alexandria. So Egypt for us now is the time to grow that base. Jordan, I've said this story before, it hasn't worked for us, so we closed it down. Interesting to see Ryanair — Michael O'Leary quoted yesterday he's going into Jordan in quite a big way now. So you might come back, maybe. I wish him luck, I hope he gets a better treatment than us.

Thank you. The A320 has been a good aeroplane. It's done fantastic for us. Every profitability and success of Air Arabia has been associated with the A320. We always wanted to do a little more, and we always wanted a slightly bigger airplane, because some of our routes, we tend to have multiple frequencies but you could do with a bigger airplane, especially if you have a 90 and 95 percent seat factor. So the A321 gives us 50 more seats on an aeroplane, which is good. Also, it gives us a longer range. So we do at the moment places like Prague, we want to do a bit more in North Africa, we have some traffic rights into China, Kuala Lumpur as you mentioned. For some unknown reason, a lot of guys tell me, when do you fly to Bangkok? And I said, we're not yet. So all those route opportunities that come up, perhaps a few places in Europe that we think could be a niche market, not necessarily where there are massive operations already, but how could we complement those. The A321 is a very new airplane, we need to test it. We just got it two weeks ago, put it into service two days ago, and I think we will be testing that aircraft. We should have had the third aircraft delivered but there is a bit of a slowdown at Airbus, some challenges as well. So as soon as we get the six of them and we know enough of them, we'll need to move on and put an order. That order, Air Arabia needs to put an order for probably a hundred, hundred-plus aeroplanes, some to replace our existing fleet and some for organic growth. And we're going out to both Boeing and Airbus — it's a commercial deal, so whoever comes up with a better option we will go for. And probably the question will be, will we be able to have a mix of fleet? I think we've got a fleet that is sizeable now that if the commercial deal is good, the business can afford switching fleets.

But you know, we are not a mega-sized airline to order every year. We've got a team of experts within the organization looking at all our future growth, because we started operating domestic in Egypt as well as in Morocco and those will only grow. So maybe an A320 or A321 may not be the best aircraft, and some of those regional aircraft could be suitable. So we're going into this with a very open mind. And the analysis has been going on for a while.

It's a complicated one because we don't quite know where this is going. I guess if you have orders and waiting for delivery, your decision making is different. For us, by the time we make those decisions, Boeing will have sorted it out, because there are only two companies, so if one doesn't produce, it's quite challenging for the other to fulfill the market. People keep saying why can't Airbus take advantage of it, but they both got very full order books. It ain't easy.

I thought you'd ask this. Time goes very fast, but the guys are meeting as we speak with both companies this week and the meetings will go on. This negotiation will take time, so the sooner the better. But obviously Boeing has got some challenges to handle as a priority. If I was Boeing, my focus would be somewhere else. But one would respect all those circumstances, and as soon as we're ready, I suspect it will be another three to four months before we actually put an order.

We fly to the west of China, Urumqi. But you still need to go more into Central Asia and other places.

We normally hedge about 90% of our fuel. So this year we hedged that 90-plus percent at $62, which is good for us. It is a double-edged sword in terms of, you need the right fuel price in the region for the economy to keep going. Now, obviously putting it into the tank, the cheaper it is, the better.

Exactly. After this, it's again about being low-cost, also being flexible and dynamic. You described Egypt, we went down to one aircraft but now we're back up. If this shows the dynamics, how it changes quickly — that country built up a great tourism following and suddenly... those things are inevitable. The geopolitical side has been something we've been living with for years in this part of the world. Being optimistic, I think things are on the right track. The Sri Lanka bombing, unfortunately, and so on. But the public seem to forget things like this very quickly and the market regains itself very fast. We've seen this experience in Egypt, we've seen it elsewhere, in India and Mumbai in a hotel a few years back. I think the public are very intelligent nowadays — they realize, okay, we're not going to write off something just because of one incident. It will slow down for a few weeks and then things will be under control.

At the moment, we have in-flight entertainment on all our aircraft using your own gadgets, just been launched, called SkyTime, using digital technology. Our in-flight food is excellent. I'm probably biased, but I think we've got the best economy product at the best price that exists in the industry. I'm not after a business class cabin yet. That's a contrast with Norwegian. I guess they have a different mission in life and working closely with investors. But for us, it's not broken so don't fix it.

It would have been very expensive if we used the traditional systems, and this is why we didn't do it in the past. But now technology allows you to put a small box on the top or side of an aeroplane and it streams hundreds of channels. People can enjoy it. The wait is the worst thing on an aeroplane. So we put the new seats which have the trays with a gadget holder for you to enjoy it and charge your gadget. It does cost a little, but it's small in comparison.

We haven't examined that yet. I know AirAsia is significant and large in KL. As we start the operation after summer, we'll see how things go. If there was an opportunity that both parties benefit, we may look at it, but at the moment there's nothing happening there.

We will be, once we get enough airplanes. We start the first medium-range in June or July after Ramadan, and the first one is Kuala Lumpur. And as more aeroplanes come, other routes will be added.

The major costs in airlines are aeroplanes, fuel, and people. Aircraft come with maintenance and all that, so the more you utilize it, it's no different than a taxi — the more you're on the road driving, carrying customers, the better your bottom line is. That's one element. Efficiency in the staff — you need to have good staff, we pay them so they work hard, and that brings in efficiency, not just numbers. And the third bit is about the overall efficiency of the business. For example fuel is a good one — there are lots of technology fuel management systems nowadays that tend to save you fuel, flying at optimal altitude and so on. The more of those things you invest in and bring to the business, the better it is for you.