Saudi Arabia plans second national airline
Flag carrier Saudia may shift focus to religious tourism
Saudi Crown Prince Mohammed bin Salman has announced plans to launch a second national airline as part of a broader push to turn the kingdom into a hub for transport and logistics to help diversify the economy and decrease dependence on oil revenues. The announcement came Tuesday shortly after the cabinet, chaired by his father the king, approved renaming the “Ministry of Transport” to “Ministry of Transport and Logistic Services”.
Under a new “National Transport and Logistics Strategy”, Saudi Arabia aims to make the kingdom the 5th global air transit passenger route, increase international destination reach to 250 destinations, and double air cargo capacity to more than 4.5m tonnes. Additionally, the strategy plans to develop ports, rail and road networks, and increase the transport sector’s contribution to GDP from 6% to 10% by 2030.
“The comprehensive strategy that aims to solidify the Kingdom’s position as a global logistics hub connecting the three continents, it will uplift and improve all forms of transport services and strengthen the integration of logistical services and future technologies, supporting and enabling the Kingdom’s national development plans,” the crown prince said in a statement, adding that the strategy would also enable adjacent sectors such as hajj and umrah and tourism to achieve targets.
A new Riyadh airport is expected to serve as a base for the new airline that the kingdom’s sovereign wealth fund and other investors are looking to launch, according to a report by local financial news site Maaal last February. The Public Investment Fund appeared to confirm that when it unveiled its 2021-2025 strategy earlier this year, saying it was “studying setting up a new company to support the aviation sector aspirations locally and regionally.”
One rationale given for introducing the new airport and airline, which will fly domestic and intentional routes, is to take advantage of an anticipated increase in travel as Saudi Arabia aggressively targets 100m visitors annually by 2030. Under this rationale, the PIF-owned airline would capture these new tourists and business travellers, while the exiting Jeddah-based flag carrier Saudia would focus on serving pilgrims coming to visit the holy cities of Mecca and Medina.
State-owned Saudia, which celebrated its 75th anniversary last year, has been struggling. The government provided the company with at least $7 billion in direct payments and other financial support in 2019 and 2020 as the coronavirus pandemic brought global aviation to a near standstill, according to Reuters. One source familiar with the matter told the news agency last November that the PIF was planning a takeover aimed at revamping the airline, but another source said there was “no reason to believe that such a move by PIF is imminent”.
Now it seems the PIF has come to the conclusion that the airline is broken beyond repair and would rather launch a competitor rather than fix Saudia.
One of the main factors behind Saudia’s struggles is that, as the oldest and largest carrier in the kingdom, they are expected to serve pretty much every city in the country. That means flying many unprofitable domestic routes simply because when people need to travel in a vast country like Saudi Arabia they are usually limited to two options: flying or driving.
Did the government consider restructuring Saudia and prepare it to take advantage of the expected increase of travel as a result of the tourism and foreign investment push to help it make up for losses on domestic routes by making profits on this new segment of customers? I don’t know, but the plan to introduce new stuff rather than fixing existing ones fits with a longtime pattern in government thinking that prefers to (not) deal with problems by seeking parallel solutions.
Ben Schlappig, the founder of aviation site One Mile at a Time, questioned what it called “bizarre” plans to build a new Saudi airport and airline. “I can’t really make sense of this strategy, but I’m curious to watch how it plays out,” he wrote. “It’s one thing if Saudia were to become the airline serving tourists and business travelers, which I could kind of make sense of, but that’s not what’s happening.”
The neighbouring emirate of Dubai remains the undisputed regional hub for travel and logistics, and it remains to be seen if Saudi Arabia can dislodge it by launching this strategy. Economists like Omar al-Shehabi have often warned that Gulf states should reconsider replicating Dubai’s blueprint as they attempt to diversify their economies because you can only have so many hubs in the same area.
“There is a case for greater investment into the Kingdom’s transport infrastructure – Saudi ranks 58th (out of 160 countries) in the World Bank’s Logistics Performance Index, leaving it behind the likes of the UAE, Qatar, and Oman,” James Swanston, Middle East and North Africa economist at Capital Economics, wrote to in a note to clients. “But rivalling Dubai as the region’s logistics hub will take time – UAE air freight and port container traffic volumes are fourteen and two times that of Saudi – and, in any case, we would argue that Dubai has first-mover advantage.”
Saudi officials reject the claim that they are trying to copy the Dubai model and insist that the kingdom is more than capable of unique trailblazing thanks to its size and influence. This would probably be a bit more convincing if the PIF were not considering the acquisition of Depa, a Dubai-listed interior design company that worked on Burj Khalifa and Atlantis resort, to fit out hotels and other projects under construction in the kingdom.
However, there has been virtually zero criticism of the PIF in local media since the crown prince picked the sovereign wealth fund as the main vehicle for the kingdom’s ambitious reform programme.
“Other funds and government institutions, and even the private sector, need to draw inspiration from the highly successful experience of the PIF, and repeat it through mergers, seizing opportunities, and abandoning the sterile conservative policy that has missed the major booms that the kingdom has witnessed since its inception until today,” columnist Mohammed al-Saaed wrote in Okaz.
“People in charge of these institutions and funds should pay a quick visit to the PIF and send their employees to learn in its offices the basics of successful investment planning, and how to get out of the bottle of guaranteed returns to confirmed returns, and shorten the time without asking others to pay bills for them.”