Oman Air, In The airline industy and growth opportunities - Dissertation Example

?OMAN AIR – GROWTH OPPORTUNITIES Economic recession, liberalization, globalization, rising fuel prices have fueled the demand for cheaper air travel. The legacy carriers have been struggling to make profits, which further escalates the demand for low-cost air travel. Oman Air, started in the early 1990s, grew slowly and ensured that it had a sound operational base. Oman Air has been successfully operating as a full service airline but not in competition with three major carriers in the region – Etihad, Emirates and Qatar Airways. Oman Air has earned its own reputation and assisted by the local government, it is now surging ahead with a low-cost airline. Oman Air can capitalize on its strengths such as excellent engineering and on-time operations, and on its existing network to build its new LCA. This report has conducted a market research on the demand for low cost travel, which is very promising. Thereafter, based on competitor analysis and operations analysis, the strategy which Oman Air should adopt for its low-cost airline, has been defined. With focus on point-to-point travel and profit-sharing with employees, Oman Air should strictly adhere to the low cost leadership strategy and not adopt differentiation strategy because deviations are known to result in failures. However, a customer-centric approach should be adopted. Strategies to generate ancillary revenues have been recommended. Because of low margins, the legacy carriers have also been adjusting their business model, which can pose a threat to low-cost carriers. Other threats include rising fuel prices, inflation and duplication of business model possible due to deregulation in the sector. Table of Contents 1.0 Introduction 1 2.0 Oman Air - Company Information 1 3.0 Low-Cost Airlines 3 4.0 Market Research 5 5.0 Competitor Analysis 7 5.1 SWOT Analysis 9 5.2 PEST ANALYSIS 11 6.0 Operations Analysis 14 7.0 Strategy 16 8.0 Financial Summary 19 9.0 Summary 19 References 21 1.0 Introduction Global economic recession, escalating fuel prices, competition in the sector resulting in consolidation and financial restructurings, have all been important factors leading to transformation of the airline industry in the past decade (Rosenstien, 2013). The legacy carriers or full-service network carriers (FSNC), struggling to make profits, were forced to alter their business model to minimize losses through lower operating costs. Other factors that could help minimize losses were by eliminating unprofitable routes, or introducing newer, fuel-efficient aircrafts while grounding older, inefficient aircrafts. As the legacy carriers struggled to survive, low-cost airlines (LCA)/ low-cost carriers (LCA) continued to generate profits and expand. The low-cost model in the airlines sector was pioneered by South West Airlines (SWA) in1971 with certain features that were typical of LCA during that period. However, over the decades, the model introduced by SWA has undergone a change as competition in the LCA grew. Nevertheless, different airlines introduced different features and made changes to the original SWA model depending on the macro-environment in which they operated. However, what became apparent was that demand for low-cost travel was high and airlines in this sector continued to generate profits while the legacy carriers struggled. Oman Air (OA), the national carrier of the Sultanate of Oman, is a dynamic, growing carrier. However, Oman Air faces major challenges due to ever-increasing competition and global recession. Across the world many airlines still face losses as travel and freight have declined. Most airlines have been cutting operating costs but Oman Air is pursuing its expansion strategy (Hill, 2010). The carrier has several plans it is working on – to get into the cargo business to facilitate development of cargo in and out of the country, to bring freighters in (Aerospace & Defence, 2013) and to start a low-cost carrier (LCC) in addition to the regional service that it offers. 2.0 Oman Air - Company Information Started in the early 1990s, Oman Air grew slowly and ensured that it had a sound operational base (Aerospace & Defence, 2013). OA has played a major role in making Muscat a major traffic hub in the Middle East. Currently the airline has a fleet of 19 aircrafts comprising of most modern and fuel-efficient aircrafts having aesthetic interiors. The airline serves over 50 destinations across the globe (Gale, 2010). By 2018 they would have another 14 aircrafts added to the fleet to build up long-haul routes to Europe and Asia. The airline also plans to capitalize on strong local demand for luxury air travel but the aircrafts will not be delivered until 2014. The airline has been announced the winner of the ‘Middle East’s Leading Airline Economy Class’ category at the World Travel Awards (WTA) held in Dubai in 2013 (Trade Arabia, 2013). All the different classes on their flights including the economy class offer world class comfort, space and in-flight entertainment, with audio and video-on-demand. For 15 years the airline operated on short routes within the GCC and the Indian subcontinent using small aircrafts. It had aligned with Gulf Air to serve as its long-haul airline. Gulf Air was jointly owned by Oman and other GCC governments but the Omani government sold its stake in 2007 after which the government is focusing on the nation’s primary vehicle to promote trade and tourism (Gale, 2010). Despite the forecast that Middle East airlines would incur losses, Oman Air pressed ahead with its expansion plans. As it entered the long-haul market, it started incurring losses even as it faced challenges from competitors. When the Government of Oman had stakes in both Gulf Air and Oman Air, the two airlines attempted to create synergy. Gulf Air focused on long-haul flights to Europe while Oman Air was focused on short-haul flights within the region and to the Indian subcontinent (Rajasekar & Moideenkutty, 2007). This has given Oman Air a stronghold over the region and it became a successful niche regional airline. Before withdrawing from Gulf Air, the government had consolidated its control over Oman Aviation Services. As competition increased Oman Air also faced challenges from both full-service and low-cost model operators. Oman Air had been impacted due to economic downturn in 2009 but in 2010 the airline saw passenger traffic increase from 442,000 to 717,000 demonstrating healthy capacity utilization (Hill, 2010). In 2009 they had added capacity and launched many new routes. Its capital has recently increased by 67 percent which suggests that the airline can cope with the negative operating and capital cash flows, which is highly likely when airlines invest in new aircrafts and routes. It expects to swing back to profits in 2014 when the new aircraft and routes are established and as the global economy recovers (Gale, 2014). The government has already approved of the launch of a LCC in principle and the new airline is likely to offer domestic and regional flights (Trenwith, 2013). As of now the company’s share of the local market is low and it is expected that the introduction of a LCC would increase the number of Omanis flying with the carrier. This would focus on domestic and regional flights (Air Finance Journal, 2013). Two international consultants – Seabury and Oxford Economics – have been appointed to conduct the feasibility study and prepare a ten-year network and fleet expansion plan (ETN, 2013). This report evaluates the business environment in starting this division for the domestic sector in particular. 3.0 Low-Cost Airlines Liberalization and deregulation in the airlines sector has revolutionized the medium-haul market and the airlines are now in a position to provide air travel at significantly low prices. A low-cost carrier operates on the principle of minimum costs and maximum revenues (Ahmad & Neal, 2006) without compromising on their safety (Ahmad, 2010). Cost minimization is the core business principle that drives this business model. However, low-cost is not associated with cheap quality or low-quality service. It only emphasizes the need to keep operating costs low. The low cost may be achieved through the use of high technology and costly equipments. This can be achieved through offering the basic core product with no frills and all additional services have to be paid for (Ahmad, 2010). The utilization of aircrafts has to be maximized. If the product functionality can be maintained and the customers receive value in exchange of the price, the low cost airlines have achieved success. Southwest Airlines, Ryanair, Air Asia and EasyJet are examples of low-cost airlines that have achieved success. The original low-cost model adopted by SWA was the cost-leadership strategy in which costs were minimized and no frills offered (Rosenstien, 2013). Airlines that followed this strategy reaped benefits of scale or absolute cost advantages from all sources. As business environment changed, companies started adopting the differentiation strategy as they sought to be unique along some dimension as they wanted to be valued by buyers. In turn, they could charge a premium for their uniqueness, although Alamdari and Fagan (2005) argue that despite unique offerings the LCAs could not charge a premium price (cited in Rosenstien, 2013). Different researchers, as cited by Rosenstien (2013) also believe that airlines that deviated from the original low-cost model initiated by SWA have a greater propensity to fail. Those who adhere to the original model can expect greater profit margins. The original low-cost model adopted by SWA includes specific product and operating features. The product features include as ticketless travel, no inter-lining, point-to-point travel, low, simple unrestricted fares, high frequency, single-class, high density seating, no meals, no seat assignments (Rosenstien, 2013). The operating features include use of secondary airports, use of single aircraft type, short-haul flights and competitive wage structure. SWA’s business strategy has evolved over the years while others still adhere to this model. Ryanair is an example of ‘low cost and no frill’ LCA and they also eliminate intermediaries as they sell their seats only through the internet. However, initially the LCAs could operate at 50% lower operating costs than the full network service airlines (FNSA) but this is no longer achievable due to escalating fuel costs, global economic crisis but more importantly because the FNSA have adjusted their business models to the existing business environment (Vidovic, Stimac & Vince, 2013). The LCAs have also had to adjust their business model where they implement segments of the traditional business model and have thus created a hybrid between traditional and low cost business models. The criteria to be considered as LCA include homogenous fleet, use of secondary airports, point-to-point flight network, one-way tariff per flight, no code sharing, one class in the cabin, no extra services on board. Further reduction in costs has become difficult but if the airline has the same type of aircraft and not different models, it would be possible to reduce the operating costs related to training and licensing of aircraft crew and aircraft maintenance personnel (Vidovic, Stimac & Vince, 2013). The use of secondary and regional or non-congested airports is another segment where cost savings is possible in the low-cost business model (Vidovic, Stimac & Vince, 2013). There is no consensus on the definition of secondary airports and hence it would suffice to say where traffic is low and where larger aircrafts with more than 100 seats do not land. The third segment of cost savings is to eliminate intermediaries and offer only online services, as Ryanair does. Travel agents may offer sales through their websites but as far as the airline is concerned, they only offer direct sales. Airlines also offer differential pricing on the same flight where higher prices include extra baggage, choice of seats, change of date without charges, meals (Vidovic, Stimac & Vince, 2013). However, offering such services would not qualify the airline as a LCA. In addition to cost savings, Rosenstien (2013) suggests generating additional revenue which has begun to play a major role in airline profits. LCAs have been named “ancillary revenue champs” as they generate 20 percent of their revenues through ancillary fees. LCAs generated ancillary revenues through unbundling pricing and creating three types of fees – they offer commissioned based item through partnership, they offer frequent flyer program and “a la carte items”. Unbundling pricing had to be undertaken as internet increased the transparency of pricing and the face value of the ticket is what drives customer purchase. In addition, soaring fuel prices have impacted profitability and the airline projects it in a way that unbundling reflects advantages for the customers. This is because they would be charged only for services they desire and pay for. Most importantly, for the company, unbundling pricing generates high ancillary revenues with extraordinary margins. However, ancillary revenues can give rise to mixed feelings among passengers. While some appreciate the unbundling of fares as it allows them to pay only for the services they use, others feel they have been tricked into paying for services which were part of the ticket cost earlier. Thus, while starting a LCA, the company has to be prepared for such challenges. The LCAs have been able to aggressively pursue the low-cost business model as this has stimulated demand. LCAs have been able to build a brand reputation to the extent that passengers would not look at any other carrier while making a booking (Rosenstien, 2013). Moreover, to avail of low fares, they are willing to connect to secondary airports and accept no frills as well. All the above factors suggest that starting a low-cost carrier has high growth potential. However, based on market research in the region, and based on competitors and the external business environment, this report would recommend a strategy which Oman Air could consider. 4.0 Market Research The air travel market in the Middle East in general and Oman in particular comprises of four types of customers – expatriates travelling on leave, business travelers, tourists and leisure travelers (Rajasekar & Moideenkutty, 2007). Expatriate-segment is a seasonal business as they mostly travel during the school vacations. Expatriates usually look for cheap fares as they are price conscious and low-cost carriers such as Air Arabia and Jazeera Airways served their purpose. Before the entry of LCA in the region, the full-service carriers could hike up fares during the season but this became difficult with the entry of LCAs. Leisure travel is a good market particularly during the two Eid festivals and school vacations. Business travel is steady throughout the year. However, the demand is high for economy seats and luxury travel to and from Oman is limited. The Dubai route is an important segment for Oman Air and it has five daily flights mostly used by business and leisure travelers. As a full service airline the fares to Dubai were not cheap enough to attract the segment that drove the sector, to fly. However, with the low-cost fares, the LCA may be able to attract a portion of the segment that drives the Muscat-Dubai sector. Even in 2010, the Middle East remained one of the least penetrated markets by the LCAs with only UAE carriers Air Arabia and FlyDubai dominating the scene (Dunn, 2010). The overseas LCAs just touched the fringes of the market without making an impact or capturing mentionable market share. Overall, the LCAs in the region held just 7% of all traffic in the region. Air Arabia was pioneers in low-cost travel in the region. Today it has bases spread across the Arabian region. It not only touches the European market but also serves a string of Indian destinations from Sharjah. Air Arabia’s financial results demonstrate long-term sustainability and appeal for low-cost service at a time when the global aviation sector faced challenges (Haq, 2009). It also received the award for the best low-cost airline of the Middle East in 2009. In 2013 the airline has reported a 20 percent rise in the first quarter net profits and a 22 percent jump in revenue (Black, 2013). Air Arabia claims to be providing value for money and excellent service. FlyDubai, within a year of starting operations started flying to 22 destinations even as untapped potential beckoned operators in the region (Dunn, 2010). The airline launched its 57th new route within four years of its operations (Black, 2013) which demonstrates the high potential for low-cost airlines in this region. They expect to launch 14 new destinations during the year. Saudi Arabia’s Nasair is the third low-cost airline in the region which has posted double figure passenger growth rates in the first quarter of 2013 (Black, 2013). It is expected to go public soon and it expects to be the first passenger operator out of Dubai World Central, Dubai’s second airport and the world’s first purpose-built aerotropolis. The airline considers this to be the most exciting time for aviation in the Middle East. The three Middle Easter low-cost carriers are expected to attend the Paris Airshow and the Dubai Airshow to shop for aircrafts, which implies the growth potential the airlines see in the region. The low-cost model has proved to be a success in the Middle East as people have adopted the idea. However, the Middle East does not have secondary airports and hence they cannot operate through cheaper airports. Nevertheless, since the region works 24x7 the utilization of aircrafts is much better. Almost 40% of the business for LCAs comes through travel agents and hence another shift from the traditional low-cost model would be that it would be difficult to do away with intermediaries (Dunn, 2010). It is believed that increased competition in the sector may yield reduced profits but airlines would not run in loss. The Sultanate of Oman is actively looking at restructuring the aviation sector in Oman. The prospects of success of LCA are high and they could award two or three licenses to start low cost airlines. Only local companies would be awarded with licenses and hence Oman Air has very high chances of being awarded the license. The market share for budget airlines is expected to increase in Oman by 10-15 percent with the introduction of low-cost carriers (Al Bawaba, 2013). Currently the LCAs enjoy 7-10 percent of the Oman market. 5.0 Competitor Analysis Oman Air currently competes with three types of airlines in the long-haul sectors – the Gulf airlines, the European carriers and the LCAs like Air Arabia and Jazeera Airways. Within an hour of flight from Muscat three of the fastest developing carriers in the world operate – the Etihad, Qatar and Emirates. Competition is intense but OA is able to withstand competition (Aerospace & Defence, 2013). Emirates, is the fastest growing airlines in the world and it has been ranked as a four-star airline by Skytrax, an agency that tracks airline service quality. Emirates’ growth is directly linked to the growth and development of Dubai as an international trade and financial centre (Rajasekar & Moideenkutty, 2007). Dubai has an “open skies” policy and its international airport is a major hub for international long-haul travel. Air transport in the Middle Eastern region is generating 450,000 jobs and US$16 billion in economic output, according to the International Air Transport Association (IATA) (Rajasekar & Moideenkutty, 2007). The Middle Eastern region has been performing equally well in passenger traffic as well as in air cargo shipments. Ethihad, the national carrier of United Arab Emirates, flies to almost 70 destinations across the globe (Rajasekar & Moideenkutty, 2007). Their strategy is to focus on local transfer traffic, thereby posing sever competition for Oman Air. Qatar Airways, tanked as five-star airline by Skytrax, has one of the highest networks across nations. Its fleet comprises of fifty-two airbus aircrafts. It files to almost all destinations covered by Oman Air and offers very aggressive fares across all destinations. Air Arabia provides tough competition to Oman Air as it is a LCA and its mission is to offer the lowest fares without compromising on passenger safety and standards. In line with the low-cost strategy, Air Arabia maintains one type of aircraft and flies to 36 destinations in nineteen countries. Jazeera Airways is another LCA, based in Kuwait and has established Dubai as a second hub. It operates direct flights between Muscat, Dubai and Kuwait and provides convenient connections to other cities. However, OA has a unique selling advantage – the country itself. It has a 1700 km of coastline along with mountains and peaks that receive snowfall (Aerospace & Defence, 2013). The country is also endowed with cultural heritage and architecture. They have no plans to compete with the other carriers in the region, namely the Etihad, Qatar and Emirates. The airline would prefer to be a small player. Air Arabia and Jazeera Airways do pose a challenge but Oman Air as a brand is more renowned than the other LCCs in the region. 5.1 SWOT Analysis A SWOT analysis will further help in strategy decision Strengths Oman Air considers itself a boutique airline as its pillars of strength include distinctiveness and innovation (Hill, 2010). Oman airports are less congested and hence tend to attract transfer traffic. The airline has a solid business base and great potential in the coming years. They have the capability to challenge the airlines of the Middle East. They are a luxury airline offering services at regular rates. Domestic airports are being developed which is likely to increase domestic tourism. This will also promote local connections and shorten the distances for local communities. Oman Air has strong engineering and flight operations, great cabin service (Aerospace & Defence, 2013). It is expanding routes when most airlines are contracting (Gale, 2010). It is the first airline in the Gulf to introduce Boeing NG 737 aircraft series and its on-time-performance (OTP) exceeds 95 percent (Oman Air, 2012). It has excellent domestic network and its global destinations exceed 50. As the airline has its own full service network, it need not enter into code sharing or alliances for international sectors or for long-haul sectors. New international airport is under construction in Muscat which will be able to handle 12m passengers per year (Aerospace & Defence, 2013). OA will have considerable share of this passenger flow. Weakness The three giant competitors in the Middle East have been performing very well in the region and are among the world leaders. Qatar and Abu Dhabi are major oil producers and the growth of Qatar Airways and Etihad has been supported by oil subsidies (Rajasekar & Moideenkutty, 2007). Oman Air does not have enormous oil resources. Opportunities Development of low-cost segment as the Gulf is predicted to be the fastest growing region for international traffic (Ladki & Misk, 2009). Most of the business and traffic in the Gulf is on the 6th freedom (the right to carry passengers and cargo from a second country to a third country stopping in home country). This facilitates transferring passengers from point-to-point via the hub. This also enables a high mix of passengers both on short- and long-haul flights. The three major carriers of the GULF have been focusing on wide-bodied aircrafts for full service network and since Oman Air has placed orders for Boeing 737, this could be utilized to gain competitive advantage in the low-cost business model. The traffic between Dubai and Muscat is huge and Oman Air currently operates five daily flights between these two cities. With reduced fares, it is highly likely that Oman Air would be able to capture a segment of the passengers that drive the sector. Oman Air has an extensive network within the region and to the Indian subcontinent. Both these sectors are expected to provide heavy traffic for low-cost carriers, as business travelers and expatriates are all price conscious amidst competition. Growth in aviation activity in the Gulf States is sustainable. Most Middle Eastern countries are diversifying their economies and they look towards tourism. As a result the region’s aviation sector is becoming segmented, as new startup airlines are challenging the traditional FSNA for market share (Ladki & Misk, 2009). Since Oman Air does not compete with the three main carriers of the region, its entry into the low-cost segment would help it capture part of the tourism market. LCAs have low market penetration in the Middle East and the region is till ripe for exploitation by LCAs (Black, 2013). Regional governments are recognizing that LCAs can enhance travel and tourism as liberalization is under way in hitherto highly protected economies such as Jordan, Saudi Arabia and Lebanon. LCAs have amply demonstrated that they can be profitably run and this demonstrates high growth potential in the sector. The new airport, scheduled to be completed by 2014, is expected to be dedicated to either domestic or LCA or perhaps a combination of both these segments in the aviation sector (Musalmy, 2013). Threats Rising fuel prices, inflation, duplication of business model, the FSNA entering into the low-cost segment pose threats to Oman Air. Deregulation in the sector has eased the way for competitors to start operations. Oman does not have enormous oil resources as other countries in the Middle East. According to a report of Royal Dutch Shell, oil resources in Oman would start dwindling by 2025 and this could adversely impact the Government’s financial support to Oman Air (Rajasekar & Moideenkutty, 2007). While the potential is enormous as the Middle East carriers can capture the GCC, the Middle East, the subcontinent, parts of Russia and some parts of Africa, regulatory framework such as visa restrictions have been the single biggest barrier to growth (Dunn, 2010). The cost and time to obtain a visa to the Middle East hit the spontaneous travel market. However, visa regulations have since been relaxed, thereby enhancing the growth potential for LCAs in the region. Other barriers to growth of LCA in the region include protectionism in favour of state-owned carriers, and unrest in the region (Black, 2013). Many full-service Gulf carriers have also moved into regional routes, which have made it difficult for LCAs to compete. Thus, Oman Air is comfortably positioned to launch a low-cost airline and compete in the region. It can capitalize on its strengths such as excellent engineering and on-time operations, and on its existing network to build its new LCA. Opportunities should be capitalized upon. Threats such as dwindling oil resources can be dealt with as the Oman government has diversified the economy. Visa regulations too, have been eased and despite the existence of LCAs in the region, growth potential is high; demand is expected to surge. 5.2 PEST ANALYSIS Political Middle East is one of the troubled regions of the world – the centre for international disputes, national conflicts, ethnic tensions and internal instabilities. However, reduction in the violence in the Middle East can have a significant positive impact in the air-transport industry (Adler & Hashai, 2005). In Oman there are no legal political parties and no active opposition movement. Directly under the Sultan the three governors have been appointed for each of the three districts Muscat, Musandam and Dhofar (Oman, 2007). The success of the FSNA in the Gulf region, including the Etihad, Qatar Airways and the Emirates, would suggest airline boom in the region. However, the civil war in Syria and the instability and the possibility of civil war in Iraq and Maghreb, unrest in Bahrain, confrontation in Iran, the unsustainable political system in Saudi Arabia, and political instability in Egypt can give rise to concerns of the success of any new initiatives in the air-transport industry in the region (Levine, 2013). The three main Gulf airlines have 386 aircrafts in service and 458 on orders as on December 2012, all of which are wide bodied aircrafts, suggesting full service network (Levine, 2013). This also implies a surge in demand for airline services in the Gulf but the demand projections are not very promising based on the newspapers and news magazines. Political instability in the Gulf region is imminent as loss of oil dominance reduces wealth in the region. The political instability has a direct impact on the demand for tourist trade in the region. Weakened financial base also impacts political stability. All these in turn impact commercial aviation in the sector. The major airlines are expected to experience overcapacity threat. Many airlines are already operating long-haul small bodied aircrafts to different points in Europe and this can reduce demand to and from the Gulf. Turkish Airlines is fast picking up and its hub is an alternative to access the Middle East. Aviation infrastructure in India would slacken demand in the Gulf. All these factors would cumulatively reduce demand for air seats and overcapacity would result. Economic The Omani Government has ambitious plans for reforms and development as outlined in the Sultanate’s Vision 2020 (Euromonitor, 2012). This impacts different sectors of the economy but tourism is at the centre of these ambitions. The government envisages luring 20 million tourists by 2020 although in 2011 the number of tourist arrivals was 2 million. Two major airports – at Muscat and Salalah – are being developed, in addition to construction of new airports and improvements in transportation infrastructure in the country. The government is focusing on attracting high-end tourists to Oman which is part of the strategy to have sustainable tourism. The government plans to focus on the GCC and the BRIC markets and shift the focus away from Europe. The government’s 2020 program appears to be a fundamental transformation of the economy by that time (Oman, 2007). Oman is a middle-income economy heavily dependent on dwindling oil resources but tourism and gas-based industries are the sectors in which the government has diversified. Oman’s economic performance has improved significantly since 1999 largely due to the mid-year upturn in oil prices (OmanSultanate, n.d.). Liberalization and privatization mark growth and development in the region. In addition oil and revenue from petroleum products have fueled the economy, leading to dramatic development in the past three decades. Because of its liberalization initiatives, Oman has also gained access to World Trade Organization (WTO). The government is also taking several initiatives to modernize the economy and improve the standards of living of its people. The country has modern airports and seaports and is in the process of opening yet another mode airport. The national road network includes a $400 million highway linking the northern and southern regions. As part of diversification of the economy, the country also has copper mining and refining plants. It has been able to reduce dependence on oil and expatriate labor and further aims to reduce the oil sector’s contribution to GDP to 9% by 2020 (Theodora, 2013). Income diversification and job creation have increased the income parity and purchasing power of Omanis. “Omanization” of the labour force is emphasized upon in different sectors and government subsidies are forthcoming for the growth of the economy. Investment opportunities have also been liberalized to attract foreign capital. Population below poverty line is nil and unemployment stands at 15 percent. Social Tourism in the Gulf is not perceived of as a lucrative market because of the region’s political situation and confrontational history (Ladki & Misk, 2009). Saudi Arabia and the UAE do receive tourists and these account for 65% of the total market in the region. While the UAE has holiday makers, Saudi Arabia receives religious tourists. Number of migrants is high in Oman and there is frequent movement between Oman and neighboring states. Oman provides social security to the aged which is jointly funded by the self, the government and the employer (Oman, 2007). Women are discriminated against and are not allowed to leave the country without the permission of a male relative. However, education is the region is high and high level of literacy is found among both males and females. Oman is cautiously developing tourism and most large hotels offer recreational facilities. The government encourages foreign tourist arrivals. Technology The government encourages research in several fields such as agriculture, minerals, water resources and marine sciences (Oman, 2007). Internet use is high in Oman as more and more people have access to the worldwide network. As of 2012, 68% of the population has access to internet in Oman (Internet World Stats, 2012). Barriers to internet penetration include language, literacy and content. 6.0 Operations Analysis The airline has been experiencing losses but it is able to contain the losses to about the same levels. New routes and additional capacity will continue to strain financial results (Hill, 2010). It would take time to return to profits till the routes mature, awareness of Oman Air products increases and the group reaches a breakeven in 2014 after which it sees profits. Even in 2010 the company’s board of directors has approved of a five-year plan which details that several more years of losses would have to be incurred as the airline attempts to transform itself from a regional airline to a full-service flag carrier (Gale, 2010). Focus should be on new markets where proper connections are not available and on new markets that support tourism, trade and commerce with Oman. Penetration of the LCA is still low in the Middle East (Black, 2013) as LCCs account for only ten percent of all regional seating capacity and 11.8 percent of intra-middle east capacity. In Europe LCCs account for 36 percent of intra-regional seating capacity and in the Asia-Pacific, LCCs account for 25 percent of all intra-regional seats. The LCC demand particularly caters to the migrant workers and VFR passengers (visiting friends and relatives). Based on the above, the roadmap for starting a LCA is being presented. The resources required to launch a new LCA include financial capital and human resources capital. ‘People Power’ is Oman Air’s greatest asset as they consistently nurture talent and encourage employees to grow and develop (Annual Report, 2012). Oman Air is now the employer of choice and offers premium employment and career development opportunities. This suggests that attracting talent to its LCA will not be difficult. However, human resources for operating an LCA need training in specific areas. For instance, quick-turn-around is important to LCAs and this requires training and motivation. Thus, apart from the basic salary, the staff engaged in operations of the flight should be provided with incentives for every flight which would ensure achieving the minimum flight operations on a daily basis. In addition, staff recognition and appreciation should be done at frequent intervals and not annually. The success of the service depends on employee cooperation and they need to be incentivized. One of the elements in LCA success is maintaining a homogenous fleet which reduces staff training and aircraft maintenance costs. Oman Air however, has a mix of different types of aircrafts which include Air Bus, Boeings, Embraer and ATR Turbo propelled aircrafts (Oman Air, 2013). This suggests that their operating costs could be high as the fleet is not homogenous – their fleet does not comprise of 75% of the same family aircraft. In order to derive full benefit of the low cost model, Oman Air should adhere to one type of aircraft which would help it to contain costs. LCAs usually make use of secondary airports to reduce airport charges but in the entire Middle East there are no secondary airports. However, airports in the region operate throughout the day and night and hence efforts should be to avail of the off peak hours and work on lower budgets. It is expected that as the new airport commences operations, the current airport would be dedicated to LCAs or only domestic sectors. Thus, charges would be much lower than the new airports. LCAs generally eliminate intermediaries but in the Middle East and in Oman, the travel agents contribute 40 percent of the business. This may be because of low internet penetration. As a result, it may be difficult to eliminate them but efforts should be to encourage customers to book online. If low incentives are provide to travel agents, they would be discouraged automatically. Another way that thus could be handled is by offering extra incentives to customers making direct bookings through website. This could be in the form of preferential seating which would not be granted to those booking through travel agents. Over time, they would be able to obtain maximum bookings directly. While fare pricing should be simple and low, differential pricing can be floated. For bookings made more than 90 days in advance the fare could be the minimum; and as the date of journey draws close the fare could increase. This would encourage customers to book well ahead and this increases cash liquidity of the company. Again, fare during tourist season could be higher than fares during the lean season. Group discounts can be offered as well. To keep costs low and to maintain its brand image, Oman Air should not interline with any other carrier. In addition, they should strictly operate on point-to-point basis on its low fare structure as this is the need of the region. They should only start with short-haul flights where LCAs are more successful. Long-haul flights require attending to passenger comfort in seating, food services and other amenities, which defeats the purpose of a low-cost model. In the initial stages the focus should be on Dubai-Muscat flights, which has heavy traffic movement and then untouched sectors or tier II cities should be taken up. Oman Air should start this carrier in another brand name and dedicate four Boeing aircrafts for this segment. Adherence to one type of aircraft would reap economies of scale. The airline has been making losses but that is because it has been investing heavily in new aircrafts. Investing in setting up the infra structure and training of staff for the new carrier would also require investments. Oman Air has a strong financial base and is equipped to handle this. However, finance cost is likely to impact the venture due to frequent changes in the foreign exchange rates. 7.0 Strategy Based on the market research, competitor analysis and operations analysis, the following strategy is being recommended for Oman Air in its initiative to launch a low-cost carrier. Demand for air travel in the Middle East is poised for growth. This includes both business and leisure travel segments. Competition is strong in full-service sectors but there is immense scope in the low-cost segment. The Middle East has low penetration by the LCAs and both these factors justify the launch of a low-cost airline by Oman Air. Even though airlines such as Air Arabia and FlyDubai do operate in the region, there is enough scope for low-cost carriers to serve the market. Besides, people have accepted the idea of flying LCAs without the frills. Moreover, Oman Air has a strong brand reputation and would be recognized even in the low-cost segment. Its other strengths include on-time-performance, excellent domestic network and extremely good employee relations. Oman is endowed with natural beauty and resources and hence can be an attractive tourist destination. The government encourages and promotes the country as a holiday destination. Oman Air itself has been focusing on promoting tourism extensively. Besides, Oman airports being less congested tend to attract transfer traffic. Liberalization has paved the way to enhance trade and tourism in the region which would help in the growth of the low-cost carrier being planned by Oman Air. It is likely that the business model adopted by Oman Air could be duplicated but there is scope for more penetration in the low-cost segment. The political and economic environments in Oman are stable and conducive to growth. However, the entire Gulf region is known for political instability and loss of oil wealth. In the foreseeable future these would not impact demand for low-cost travel. In fact the legacy airlines may experience overcapacity threat, which implies that demand for LCAs would increase. It is evident that demand for low fares is expected to rise as mobility is deemed to increase. Along with low fares people also want convenience of connectivity and hence the network of low fares sector should be attractive. Oman Air should adhere strictly to a low-cost model as it launches the flights for the new segment. It has already established itself in the region and earned brand reputation. Based on the principles of LCA and the success of airlines such as Southwest Airlines (Rosenstein, 2013), Oman Air can consider entering the low-cost segment with the following strategy based on cost leadership strategy. It would be pointless trying to adopt a differentiation strategy as differentiation requires innovation and investments. The purpose of being a low-cost carrier is defeated. 1. Fleet of similar aircrafts, mostly Boeing 737 which would control costs of maintenance, spare parts and training of crew 2. Encourage passengers to book online as it reduces the cost of intermediaries, establishes direct passenger contact with the airline 3. Encourage web check in as this reduces the cost of kiosk at airports 4. Focus on high-quality customer service 5. Outsource aircraft maintenance services and ground support services in other countries that it plans to operate as LCA 6. Negotiate terms with other airports 7. Offer corporate deals for a certain number of seats on point-to-point fares 8. Charge extra for checked baggage and for airport check-ins 9. Step up revenues by advertising on seat-backs 10. Meals at extra charges 11. Since Oman Air is using state-of-art-technology aircrafts, these should be advertised and the customers made aware. Customers would be easy to attract with latest technology at use. 12. Flight density should be high; they should be easily available and become a recognizable brand which will help achieve economies of scale. 13. Single class high-density seating as this would eliminate work and reduce time 14. Point-to-point travel and no interlining 15. Only short-haul flights 16. Use of airport during lean hours 17. Profit sharing or giving incentives to staff for every flight that achieves the turnaround schedule 18. No in-flight entertainment 19. Charge extra for checked baggage However, while reducing costs, customer service, comfort and safety should not be compromised with. These are the primary requirements and if these are provided, the customer would be willing to compromise with the frills of the full-service airlines. Therefore, in addition to cost-leadership strategy, a customer-centric approach also has to be adopted. Customer service can be enhanced through unbundling of pricing structure. Thus, customers who are willing to pay should be provided with services such as meals-on-board. In addition, through the website other services can be offered such as car rentals, hotel reservation facility, and travel insurance. Apart from providing service to the customers, these would help generate ancillary revenue. In addition, ancillary revenue generation also helps drive low cost behavior (Rosenstein, 2013). Risks do persist because of higher maintenance costs, rising fuel charges, increased competition and the ability to contain costs would be critical to the success of the venture. With the parameters defined as above and strict adherence to cost leadership, Oman Air would be able to register profits within the first three years of operations. 8.0 Financial Summary The airline has been incurring heavy losses as it has been investing in the growth of the airline (Gale, 2010). It also posted a loss of US$253m in 2012 which was an 11 percent improvement over 2011 (Trenwith, 2013). Revenues had risen by 21 percent in 2012 but the losses continued. Passenger demand increased by 17 percent in 2012 to 4.43m passengers in Oman compared to 6 percent rise globally and 15.4 percent rise in the Middle East. However, it is difficult to ascertain the financial projections for the LCA to be launched. The first few years may not see profits but allotting a homogenous fleet, minimum staff, no frills, high-seating density, minimum involvement of intermediaries, point-to-point travel and profit sharing with staff, could ensure that the airline would reap the benefits in three years. 9.0 Summary Economic recession, liberalization, globalization, rising fuel prices have all fueled the demand for cheaper air travel. Low cost carriers such as Southwest Airlines had started as early as the 1970s in the West but its demand is being recognized extensively now amidst global financial crisis. This is particularly because the legacy carriers have been struggling to make profits, which can eventually impact survival. Oman Air has been successfully operating as a full service airline but not in competition with three major carriers in the region – Etihad, Emirates and Qatar Airways. Oman Air has earned its own reputation and assisted by the local government, it is now surging ahead with a low-cost airline. This report has conducted a market research on the demand for low cost travel, which is very promising. Thereafter, based on competitor analysis and operations analysis, the strategy which Oman Air should adopt for its low-cost airline, has been defined. Oman Air should strictly adhere to the low cost model as started by Southwest Airlines and any deviation is not recommended. References Adler, N., & Hashai, N. (2005). Effect of open skies in the Middle East region. Transportation Research Part A, 39, 878–894 Aerospace & Defence. (Februray 5, 2013). Oman Air CEO Wayne Pearce on the carrier’s network and fleet expansion. The Prospect Group. Retrieved June 24, 2013 from http://www.theprospectgroup.com/executivefocus/profile/oman-air-ceo-wayne-pearce-on-the-carriers-network-and-fleet-expansion/81186/ Ahmad, R. (2010). AirAsia : Indeed the Sky's the Limit! 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