Meeting the Increase of Air Travel in The Kingdom of Saudi Arabia - Term Paper Example

Meeting the Increase of Air Travel in The Kingdom of Saudi Arabia Student’s Name Institution TABLE OF CONTENTS Introduction……………………………………..………………..……3 Geographical Location of the Kingdom……………..…….….……….4 General Authority of Civil Aviation (GACA) ..………….…………...5 The Saudi Market ………………….………………….…..…………..6 Local Airlines……………………………………………....………….8 Factors Influencing Increased Demand…………………..…..……....10 Geographical Location and Religious Activities…………....………..10 Monopoly…………………………………………..………..………..11 Growing Population……………………………...…………...……...,12 Recommendations…………………………...……………………….13 Conclusion……………………………………………………………14 References…………………………………………………………....15 1. Introduction The history of civil aviation in the Kingdom of Saudi Arabia dates back to the year 1945 during the regime of King Abdul-Aziz, when he was given a DC-3 Dakota airplane as a gift by the then US President, President Franklin D. Roosevelt. The kingdom was thus able to acquire its first aircraft which was used to transport mail and passengers between the cities of Riyadh, Dhahran and Jeddah. The government was able to acquire four other DC-3 aircrafts expanding the overall fleet. Furthermore, the Kingdom of Saudi Arabia is an extremely significant destination for travelers because it is home to the two holy mosques located in Makkah and Medina; it has a vast geographical area and enjoys good relationships with members of the international community. Civil aviation in the Kingdom has gone through significant expansions and massive growth in the past years (Abed et al., 2008). The number of domestic and international airports has gone up to 25 airports. The rate of passengers using air travel has also been increasing at a rate of15% per year having increased to 30 million passengers in 1998 from 16 million passengers in 1970. Saudi Arabian Airlines was given the mandate to oversee air transportation in the kingdom. It began scheduled flights in 1947 with international flights to Beirut, Damascus and Cairo. The airline joined The Arab Air Carriers Organization (AACO) in 1965 and The International Air Transport Association in 1967 (Siddiqui, 2006). The airline has done a recommendable job since services and infrastructure in the air industry has been upgraded. The airline promoted a spirit of innovation and stressed on the need of excellent service delivery to all clients. Moreover, the airline, just like other prudent business entities relies on forecasting to foretell future trend in the air travel market. This paper focuses on analysis of the factors behind increased demand for air travel in Saudi Arabia, the weaknesses and gaps in the air transport sector, and the measures that can be put in place to remedy the situation. 2. Geographical Location of The kingdom Saudi Arabia has an area of roughly 865,000 square meters.It occupies most of The Arabian Peninsula and is equal in size to Western Europe. It’s also one-third the size of The United States. It lies at the intersection of three major continents; Africa, Asia and Europe. It’s bordered on the east by Qatar, Bahrain and The United Arab Emirates; Iraq, Kuwait and Jordan border it to the north while its Southern neighbors are Oman and Yemen. The terrain is harsh and dryand characterized by mountains, sand dunes and salt flats (Ghoborial, 2009). Islam is the main religion observed in the country. Followers of Islam (Muslims) believe in Allah whose prophet is Muhammad. SaudiArabia occupies a crucial place in Islam and it is considered to be the heart of Islam. Muslims face the Sacred revered Kaabah in Makkah where they devout five prayers daily. Furthermore the holy book, The Quran was revealed to Prophet Muhammad in makkah, which is located in Saudi Arabia today. Moreover, Muslims must also fast during the holy month of Ramadan; and must go on pilgrimage (hajj) in Makkah at least once during the lifetime. This fact alone contributes tremendously on the increase of air travel during these seasons (Bafail et al. 2011). Data from The Saudi central Department of Statistics and Information reveals that about 3 million pilgrims from all back grounds and nationalities visit the city of Makkah for Hajj annually. (Hajj Instructions Governing the Carriage of Pilgrims). The large numbers of people who come for only a brief period of time raise a lot of serious issues to the Kingdom. Saudi authorities have to deal with many issues among them: Management of huge groups of people that are walking during Hajj; health complications due to vaccinations; response to emergency fires; and managing both the air and ground transportation of such large numbers of pilgrims. Due to the fact that most of the pilgrims arrive in Saudi Arabia by air the leadership of the Kingdom of Saudi Arabia is keen on ensuring the convenience and safety of the pilgrims from the time they arrive until the time that they depart. Pursuant to Article 24 of The Fundamental Regulations of Governance, the government is under an obligation to provide security and quality services in the airports and constantly upgrade the facilities and infrastructure of the two holy mosques.(Hajj Instructions Governing the Carriage of Pilgrims).The provisions comply with the Civil Aviation Regulations, Pilgrims Carriage Regulations, and principles of the Chicago Convention on international civil aviation; and bilateral conventions between Saudi Arabia and other states. 3. GACA (General Authority of Civil Aviation) In 1952, the premier civil aviation system was established as a department of the Saudi Royal Air force. It comprised of the meteorology department and the Saudi Arabian airlines. Saudi Arabian airlines broke away from the civil aviation in 1959 and the meteorology department detached itself in 1966 leaving civil aviation as an independent body, which operated under its own budget. The Civil Aviation Department was renamed the Presidency of Civil Aviation which was transformed by the council of ministers into the General Authority of Civil Aviation(GACA) in 2004. GACA is responsible for the operation of Saudi Arabia’s 28 airports and also oversees the economic and Safety Regulation Air Navigation services (Abed et al., 2008). The vision of the General Authority of Civil Aviation is to keep developing the Saudi airspace according to the maximum standards of Excellency and safety at Saudi airports. The main objectives of the GACA include: Obtaining financial autonomy and resources for the authority; encouraging investors to invest in air transport; providing excellent travel services to passengers and pilgrims according to existing global standards; Management of construction and constant upgrading infrastructure for effective air transport in accordance with the modern and latest systems; Putting in place mechanisms to ensure security and safety of air transport; Developing a criteria for maintenance and operation of air transport in accordance with global standards; and to achieve standard performance by employees and contentment in the workplace. GACA has been tasked with the responsibility of coming up with a master plan for development of airports. To attract sufficient air traffic to the Saudi Arabia transport sector, GACA realized that it must attract passengers, vendors and airiness to the Saudi Arabian sector (Ghobrial, 2009). Through the help of the Cisco Internet Business Solutions Group it developed a strategy and vision for establishing and designing small airports. The initiative is designed to make the airports more effective and profitable even amidst unstable economic conditions and constantly fluctuating prices. Under the Small Airports program, the system will be constructed under a single IP Platform where the signals will be converged making it possible to transmit high-speed traffic to airlines, logistic operators, seaports, airports, airport cities and other stakeholders in the air transport ecosystem (Alperovich &Machnes, 2011). King Abdul Aziz International Airport was selected as the pilot airport for the initiative because it is proximate to the holy city of Makkah and attracts global travelers during The Hajj Season. When the three-phase expansion program is completed in 2035, the airport is expected to be handling over 80 million passengers annually (Abdulrahman, 2010). The tenets of the small airports initiative include: World class sharing of services in the facility across airlines, airports, airport cities and control centers; Personalized services offered through subscription on a mobile device; tracking of assets such as luggage and motor vehicles; Wireless facilities and other mobility services; enhanced security and safety through automatic and video-controlled tracking; and a wide range of commercial services in the airport such as shops, virtual medical clinics; and facilities for teleconferences.(Economic Research Department in Saudi Arabian Airlines, 2010). The GACA plan is expected to result in modernization of more than 26 airports. 4. The Saudi Market Saudi Arabia airports: King Khalid International Airport, Riyadh; King Abdul-Aziz International Airport, Jeddah (JED); King Fahad international airport; and the Prince Mohammad Bin Abdul Aziz International Airport at Madina. The number of air transport passengers in the kingdom increased by 13.6% over 2011 amounting to more than 54 million passengers. On the other hand aircraft operations increased by 6% reaching a total aggregate of 477, 002 operations. International aircraft operations increased by 6% which can be attributed to increasing number of pilgrims visiting the two holy mosques and introduction of modern carriers in the major airports (Alperovich & Machnes, 2011). Traffic in the domestic airports also grew significantly witnessing a 19% rise in passengers, 7% increase in flights and 5% rise in cargo. This increase is captured by the diagrams indicated below: TABLES ON KINGDOM WIDE AIRPORT TRAFFIC (The tables show the no of flights, passengers and cargo) Saudi Arabia airports handle more than 40 million travelers per year. The government of the kingdom has identified civil aviation as a core pillar for ensuring economic development. The kingdom has embarked on an expansion program that targets returns of 5 billion US Dollars in the first phase that is spread over four years. (Economic Research Department in Saudi Arabian Airlines, 2010). The objective is to modernize the air transport sector and transform it into a hub attracting passengers on both the east and west routes creating 50,000 new jobs in the process. The long-term goal is to have the sector contributing 25 Billion US Dollars to the kingdom’s economy by the year 2020. Foreign carriers also want a share of the Saudi air market but are currently prohibited from doing so by barriers that ensure that they cannot operate on Saudi Arabia’s domestic routes (Abdulrahman, 2010). The Saudi population is growing at an annual rate of 3% without corresponding expansion of air travel facilities. The main foreign carriers interested in the Saudi Market are from the Orient and the Gulf region. Companies, which have expressed interest so far, are from Qatar, China, Bahrain, The United Arab Emirates and Egypt’s carriers Nesma Airlines and Almasria Universal Airlines. 5. Local Airlines There are only two local airlines in Saudi Arabia; Saudi Arabianairlines, which is the national carrier; and the National Air Services which is a private and low-budge carrier. This is a very small airline network considering the fact that the country is in the Arab world and geographically, it is the biggest country in the Gulf region. (Siddiqui, 2006)The two airlines are struggling to cope with the increased demand for air travel. In 2011, over 54 million passengers passed through Saudi Arabia, which was a 13.6 percent rise when compared with the passengers who passed through the country in 2010. (THE BAR GRAPH ON PAGE 6, Compares domestic and international flights) Due to limitations caused by its few airlines, Saudi Arabia is set to adopt an open skies policy that will allow other major carriers in the Gulf region to operate in the region (Bafail et al. 2011). Hopefully problems that have characterized air travel in the past such as overbooked flights will come to an end. Other carriers in the Arab world have been able to venture internationally with resounding success. For instance, Etihad Airways and Emirates Airlines from the United Arab Emirates have already stamped their marks as internationally recognized brands. The same case applies to Qatar’s national carrier whose objective is to be the leading Gulf air travel carrier. Currently foreign carriers can only fly in and out of the Saudi Arabia kingdom but cannot fly within the country or operate on domestic routes. The government however announced it would reverse this directive and authorize foreign carriers to operate in both the domestic and international markets (Bafail etal, 2011). GACA received application for licenses from 14 airline companies and deliberations are still going on. The bidders want to establish business in Saudi Arabia due to booming travel for business and religious tourism purposes. Saudi citizens are pleased with the initiative since they will have more options to choose from as they are currently limited by having only two options to choose from. They hope that the open skies policy will create more jobs, make air travel cheaper and enhance service delivery. 6. Factors Influencing Increased Demand: 6.1. Geographical Location and Religious Activities The geographical location of Saudi Arabia is one of the prime factors contributing to increased demand for air travel. Besides hosting the two holy mosques, it contains many historic site that appeal to many visitors worldwide. Moreover, the Kingdom of has also developed rapidly in the economic, political and social spheres of life. Unlike many of the Arab counties, it enjoys friendly relations with both is neighbors and Western Nations. The kingdom is also among the top ten importing and exporting nations in the world (Abdulrahman, 2010). Each of the factors affecting increased demand for air travel contains elements that can either constrain or stimulate growth of air travel. The factors can be grouped into two broad categories: external factors outside the air transport industry; and internal factors within the air transport industry. The factors are political, demographic, social and economic trends for instance the income distribution and age of the population, and socio-cultural ties to neighboring states and other nations in the world (Ghobrial, 2009). Short-term factors include interest rates, currency exchange rates and inflation and growth of airlines in particular and the industry in general. The economic factors include: Oil Gross Domestic Product; Consumer Price Index; Per Capita Income; Imports of goods and services: Exchange rates; Yield; Total Expenditure; Private Consumption Expenditure; Government Consumption Expenditures; and Total Consumption Expenditures (Economic Research Department in Saudi Arabian Airlines, 2010). 6.2. Monopoly Saudi Arabia Airlines (Saudia) monopolizes the domestic air market of the kingdom. Saudia has been able to cope with the growing demand for air travel providing a solid source of revenue for the kingdom and in turn contributing to development of other economic sectors of the kingdom. This can be attributed to ultra-modern facilities, huge base of operations, classic flight and ground equipment and efficient highly trained personnel. (Siddiqui, 2006). By 1994, the airline had a fleet of approximately 52 aircrafts. The airline has contributed in development of the kingdom in that it has been able to connect people living in widely separated places in the kingdom whose size corresponds to that of Western Europe. Since the airline has enabled effective transport, economic and social cooperation between various regions in the kingdom is possible. Fast transportation of domestic and foreign workers has accelerated industrialization since the airline covers both domestic and international routes. The Saudia network comprises of over 63 stations of which 38 are international and 25 are domestic (Abed et al., 2008). The average number of daily flights is 265, 232 departures being from domestic stations and 33 departures being from domestic stations. The national airline is on its way to be privatized, to increase its efficiency and enhance service delivery. Use of e-tickets in the countries’ 28 domestic airports proved to be a phenomenal success. Introduction of e-tickets in international routes also resulted in resounding success. The airline also has a website that is updated constantly which is highly customized, has interesting content and has a simplified online flight booking mechanism. The website account for 30% of the total transactions conducted by the airline. The airline keeps establishing new routes, which ensure that the business keeps flourishing even in rough economic conditions (Bafail et al., 2011). The airline launched new routes to Manchester, Athens, Munich and Athens which generated substantial revenue for the kingdom. It keeps on offering promotions on air travel fare to the United States since most of the customers who use the route are students. This has created brand loyalty and ensures that the airline’s traffic remains substantial all year round. A report released by GACA in 2006 indicated that domestic air traffic had increased by 42% over the past 10 years, which was quite a significant increase since in China, a bigger country with a higher population and a more vibrant economy, domestic air travel had only increased by 16.7% (Siddiqui, 2006). (BAR GRAPH SHOWING TOTAL FLIGHTS AT DOMESTIC AIRPORTS pg 9) The tourism market has also led to increase in air travel demand in Saudi Arabia. Saudi Arabia Airline’s main focus is customer care, which gives it an edge over other carriers in the international market. The airline has ensured that customers remain loyal because the airline has created a conducive environment which makes them feel safe, secure and absolutely at home. 6.3. Growing population The population size has a positive effect on increased demand for air travel. This happens if all the other factors are held constant. Increase in the population by 1% leads to demand for increase in air travel by 0.021 million passengers. When the total expenditure spent by the population increases by 1%, the demand for air travel increases by 0.395 million passengers. Passengers tend to be sensitive to changes in air fare (Abdulrahman, 2010). If the airfare is increased, the demand for air travel reduces and the traffic reduces. Saudi Arabian airlines carrier has realized this and they try to keep the fare as constant as possible especially during Hajj. Leisure travelers are more sensitive to fare changes than business travelers and if fare has to be increased, it is advisable to increase it for the business class. (THE GRAPH SHOWING MARKET SHARE FOR INTERNATIONAL & DOMESTIC AIRPORTS pg 12). 7. Recommendations The open skies policy needs to be embraced so that foreign carriers can operate within Saudi Arabia to reduce monopoly and enhance air travel services for the increased domestic air travel passengers who complain that their options are severely limited by existence of only two airline carriers in the market. This will generate more revenue for the Saudi Arabia kingdom and result in better international relations between Saudi Arabia and the neighboring countries (Alperovich and Machnes, 2011). The stock market in Riyadh is currently closed t direct foreign investors including in the air transport sector. This policy should be done away with and the stock market should be opened to foreigners so that Saudi-based companies including airlines can be subjected to competition in order to improve their services and be more disciplined in their customer care policies. The government should hasten to privatize Saudi Arabia Airlines. Though the privatization process has started the airline is still under control of the state. The government subsidizes fuel for the national carrier, which marginalizes the returns and revenue made by the smaller low-budget National Air Services. The government should also stop controlling domestic airfares and leave them to be determined by the forces of demand and supply in the open market (Bafail et al., 2011). The regulation of domestic airfare has caused private airlines such as the nation’s third carrier Sama Airlines to go out of buisness as they are unable to cope with competition from the national carrier, which has an upper hand. Fair and equitable treatment of all carriers will improve air travel in Saudi Arabia since the local market will be competitive. As the Kingdom’s economy improves, the number of domestic air travelers is bound to increase. Due to favorable global economic conditions and improved life expectancy, the number of Hajj pilgrims to the holy city of Makkah will also increase tremendously. The Kingdom of Saudi Arabia therefore has to ensure that the programs put in place for expansion of airports, crafts; infrastructure and other facilities sail smoothly. The government needs to dedicate more funds to the expansion and development of infrastructure. 8. Conclusion The air transportation sector in Saudi Arabia has undergone considerable expansion over the years. The increase in air traffic was particularly high between 1971 and 1992, which was reflected, in the overall economic growth of the kingdom. The exponential increase in demand for air travel services in the kingdom has handicapped the capacity of the existing airports and airlines. The kingdom should therefore embrace the open skies policy and allow foreign carriers to operate within the county for improved services. This would generate more revenue for the government in the long run and lead to satisfaction of air travel passengers. Privatization of the national carrier will also reduce monopoly and encourage competition which will result in higher economic yields for all stakeholders. With the right mechanisms and policies, the air transport sector will become one of the leading revenue earners for the government. References Abdulrahman, K. (2010). Money demand & money supply in Saudi Arabia; an empirical study, Unpublished PhD. dissertation, UK. Economic Research Department in Saudi Arabian Airlines, (2010). Passenger Pro"les Surveys. Saudi Arabian Airlines Publication,Riyadh. Hajj Instructions Governing the Carriage of Pilgrims (2012/Year 1433H). Ghobrial, A., (2009). Aggregate demand model for domestic airlines.Journal of Advanced Transportation, Alberta 26 (2), 3}14. Kingdom of Saudi Arabia Bureau of Experts at the Council of Ministries Official Translation Department (2010).Civil Aviation Law.Royal Decree No.M144, 18 Rajab 1426H. Saudi Arabia Statistical Year Book (2011). From 26 Muharram 1432 A.H to 6 Safar 1433 A.H. Retrieved From: www.gaca.gov.sa. Saudi Arabian Bechtel Company, (2010). Update forecast and planning assumptions. New Riyadh International Airport. Siddiqui, A., (2006).Operating levels and airline economics. Saudia World. Saudi Arabian AirlinesPublication,Jeddah Read More