Cheap Gulf flights flying on wafer thin profit margins

Posted on 06 June 2010 with 1 comment from readers

Short haul airfares in the Persian Gulf used to be immensely profitable for the airlines. But cut-throat competiton from low-cost carriers over the past few years has changed all that.

Last week ArabianMoney investigated low-cost fares from Dubai to Bahrain. The best deal proved to be Gulf Air with a guarantee to beat any competitor.

Bahrain flights

But this Arabian generosity comes at a cost to the airline. The return fare of AED505 comprises AED400 in airport taxes and left just AED100 for cost of the return flight.

Actually the taxi fares either end of the flight cost more than the actual flight itself. AED50 is nothing to pay for a flight up the Persian Gulf to Bahrain from Dubai, and the airline offering that fare just has to be making a loss.

Why does it do it? Safeguarding market share is one answer. But this comes at the cost of attracting the lowest end of passenger who will just as likely not fly if prices go up.

This is surely commercial suicide. You are at the point of paying customers to use your service. Sure they will fly for free but how can you ever make a profit out of that?

Gulf Air would surely argue that this has worked for Ryanair in Europe. Ryanair offers similar amazing bargains to last minute travelers, and has achieved commercial success through increased volume, and is indeed the largest passenger airline in Europe now.

The question is whether Gulf Air or its rivals like FlyDubai and Air Arabia can achieve the same sort of critical mass to support low-cost flying as a business model. The present growth path of Air Arabia and FlyDubai suggests that they are confident of success with a business model borrowed from Ryanair among others.

Legacy costs

But will a legacy carrier like Gulf Air be able to keep up with its larger staffing costs and general overheads? Always in a competitive market place – even one stuffed full of government subsidies like the Gulf States – there will eventually be winners and losers.

Other carriers also suffer from the contagion effect. Emirates Airline charges AED3,600 for a business class return from Dubai to Bahrain. That already looked pricey before low-cost flying. It looks outrageous and hard to justify on business expense accounts now.

The weakest link in the chain will break. Will that eventually be loss-making Gulf Air? Who can say but in the meantime enjoy those very low airfares.