By land, sea and air: Projects in all segments position the Kingdom for change

Spurred on by strong demand for services, the government is planning to bolster and upgrade infrastructure capacity across all segments of the industry – from aviation to ports. With this financial backing, the Kingdom’s land, sea and air transportation networks are experiencing a complete transformation and, consequently, opportunities for new operators in all segments are likely to increase in the years ahead.

Market Environment

The general trends in the country suggest that demand for transportation services and improved infrastructure will be substantial over the coming years. At the most basic level, the common emerging market combination of population and economic growth should ensure significant opportunities for market entry. Indeed, as the most populous country in the GCC, with a population of 29.2m, according to 2012 estimates from the Central Department of Statistics and Information (CDSI), the breadth of opportunities for investment in the transport sector should outstrip those in other regional markets. Furthermore, with a growth rate of 2.9% in 2011, according to the CDSI, there should be strong demand for passenger and freight services on rail, road and by air.

Trade Impetus

Movement of goods, in particular, will be bolstered by Saudi Arabia’s diversifying economy. The GDP growth rate stood at 6.77% in 2011 and, perhaps more importantly, the non-oil sector accounted for 73% of real GDP in 2011, according to the minister of economy and planning, Muhammad Al Jasser.

The Kingdom’s trade figures would appear to back this up. In 2011 exports of goods and services grew by 43.7%, while imports grew by 13.7%, according to the CDSI. Although hydrocarbons account for a substantial portion of this export growth, the non-oil economy has also pushed up exports. Indeed, according to the CDSI, non-oil exports grew by some 31% to SR176.6bn ($74.1bn) in 2011. The proportion of non-oil exports to imports reached 35.8%.

With such volumes, there is likely to be increasing pressure on transportation services and infrastructure. Indeed, the transport, storage and communications sector accounted for a 7.7% share of GDP at SR72.06bn ($19.2bn) in 2011, and experienced an annual growth rate of 10.63%. According to Transport Intelligence (Ti), a UK-based research and consultancy firm, the Kingdom’s logistics sector alone accounted for $630m in 2011, growing at a rate of 9.1%. This is unlikely to change anytime soon. Ti reported that the contract logistics services market is expected to maintain a 6.9% compound annual growth rate in the Middle East between 2011 and 2015, reaching $3.7bn in the latter year. As the largest logistics market in the region and the sixth biggest on Ti’s 2011 index of emerging logistics markets globally, Saudi Arabia is likely to represent an important driver of this growth.

Growth Driver

Research and consulting firm Frost & Sullivan has also singled out Saudi Arabia as a future logistics powerhouse. In its report, “A Strategic Analysis of the Logistics Market and Contract Logistics in Saudi Arabia”, the company predicts that revenues from logistics ventures will reach some $20.5bn in 2015, up from an estimated $13.8bn in 2011. According to the report, demand for logistics services is being pushed upwards by the “rise in the domestic uptake of major manufacturing and consumer-oriented industries such as retail, fast-moving consumer goods, engineering, chemicals, food and electronics”.

The growth of the logistics and transportation industry has also undoubtedly been helped by Saudi Arabia’s attractive trade environment. The country ranks 36th out of 185 economies for trading across borders on the World Bank’s 2013 Doing Business Index. Indeed, it does better than the MENA and the OECD averages when it comes to the cost of both exporting and importing goods. In Saudi Arabia, it costs some $935 to export a container, compared to a MENA average of $1083 per container and an OECD average of $1028. Similarly, the container import cost in the Kingdom is $1054, compared to a MENA average of $1275 and an OECD average of $1080. The country also scores relatively well on the time to trade across borders. It takes 13 days to export from Saudi Arabia (compared to 19 days on average in the MENA region and an average of 10 days in OECD countries) and 17 days to import (compared to 22 in MENA and 10 in the OECD).

Aviation & Airports

In May 2012 Arab News reported that the country plans to invest more than SR200bn ($53.32bn) in its aviation sector over the next five years in an attempt to meet demand from increasing air traffic. Indeed, according to the General Authority of Civil Aviation (GACA), passenger traffic at Saudi Arabian airports rose by 13.6% in 2011 to 54m passengers, while freight traffic increased by 13.1% to 641,896 tonnes. This is the highest passenger growth rate in more than a decade, signalling the growing importance of Saudi Arabia to the international aviation market. The majority of expansion came from international traffic, which rose by some 18.2% year-on-year. Domestic traffic increased by 9.8% to 24.8m passengers.

Much of this international traffic has been handled by foreign carriers looking for greater access to the Saudi market. Foreign carriers handled some 62% of international passenger traffic in the Kingdom in 2011, up from 58% in 2010 and 55% in 2009, according to the Centre for Aviation (CAPA), an independent provider of aviation market intelligence. One of the major factors in this growth was a government decision in 2011 to open smaller domestic airports, beyond Riyadh, Jeddah and Medina, to international traffic. According to GACA, passenger traffic at these domestic airports increased by 19%, with 7% more flights and cargo growing by 5% in 2011. This was the result of new routes from carriers such as Turkish Airlines, Ethiopian Airlines, FlyDubai and Air Arabia. According to CAPA, international traffic at 21 domestic Saudi airports was up 161% in 2011, with most of the growth at Taif, Al Gassim, Tabuk, Yanbu and Abha. Indeed, Taif was the standout performer that year, with passenger traffic up 52.4%.

Saudia & Liberalisation

In terms of domestic traffic, the flagship carrier Saudi Arabian Airlines (Saudia) dominates the market, accounting for 94% of passenger traffic. The remaining traffic is handled by NAS Air. CAPA forecasts that Saudia’s domestic traffic will grow by 20% in 2012. The situation is tough for NAS Air as it has to operate within the government-imposed ticket price caps, but without Saudia’s fuel subsidy. However, while the company reported a net loss in 2011, the situation began to turn around in 2012, with the carrier reporting three consecutive months of net profits to August 2012. In the three months to August, it had a combined net profit of SR72m ($19.2m). It carried a total of 24m passengers in 2012, up 13.3% from 2011, having added 58 new aircraft. NAS Air, on the other hand, carried nearly 2m passengers with an average load factor of 75% in the first eight months of 2012.

Competition Is In The Air

However, with the Saudi market experiencing greater levels of liberalisation, the aviation sector may become more competitive for NAS Air in the future. In December 2011 GACA announced plans to open domestic airports to both foreign and domestic carriers. In July, the authority said 14 consortia had applied for licences to operate domestic and international airlines, with Reuters reporting that seven had been pre-qualified. Qatar Airways, Bahrain Air, Gulf Air and a Chinese firm, the parent company of Hainan Airlines, were some of the players in the consortia, according to Reuters.

Licences were expected to be awarded in October 2012, but were delayed to the end of the year as GACA evaluates the bids. At the end of December, Bahrain's Gulf Air and Qatar Airways were the first foreign players to be awarded licences. It is unclear whether this will push back the launch of operations of new airlines, which are expected by the end of 2013. As new airlines will have to operate under the same terms as NAS Air, namely with a price ceiling on domestic economy flights and no fuel subsidy, the substantial interest in these licences illustrates the strength of the market. The ongoing process of privatising elements of Saudia’s operations should also bolster the competitive environment in the aviation sector.

Airport Expansions

All these factors should push up passenger volumes even further, and have led the government to address capacity issues. In January 2012, GACA offered a SR15bn ($4bn) Islamic bond, or to the market as part of plans to raise finance for a new SR27.1bn ($7.22bn) terminal at King Abdulaziz International Airport in Jeddah. The airport is already the busiest in the Kingdom, receiving 162,838 flights and handling 22.9m passengers. Indeed, the facility handled approximately 42% of all passengers coming in and out of the Kingdom in 2011. Under the master plan drawn up by GACA, the airport’s expansion will increase handling capacity to 30m passengers per year in the first phase, 45m in the second phase and up to 80m passengers per year in the final phase. The first phase is expected to be complete by 2014.

GACA is planning to raise another SR12bn ($3.2bn) in early 2013 to complete the funding for the project. It is also expected to sell more debt in 2013 to finance the expansion of King Khaled International Airport in Riyadh. Under this plan, GACA hopes to expand capacity from the current 12m passengers per year to 25m.

Media Landing

Perhaps the most important development for air transport is the Medina airport project. Rather than funding the project simply through debt, GACA has embarked on a public-private partnership, signing a build-transfer-operate agreement with Tibah Airport Development Company, a consortium led by Turkish airport operator TAV Airports, in July 2012. TAV and its consortium will invest as much as SR5.63bn ($1.5bn) to construct the new airport. The first phase, expected to be complete in three years, will have an annual passenger capacity of 8m, while the second phase should increase this to 12m by 2020. According to TAV, work will continue beyond this date to produce a final capacity of 14m. Tibah Airport Development Company will operate the airport for 25 years and TAV is likely to bring in subsidiaries, such as ATU Duty Free, BTA catering services and TAV Operation Services, to handle certain operations at the facility.

Ports

The formula adopted for the Medina airport project has already been put into practice in the seaports sector. In April 2012 the transport minister, Jabara Al Seraisry, officially opened the Red Sea Gateway Terminal (RSGT), the new container terminal at Jeddah Islamic Port. The SR2.03bn ($540m) terminal was developed on a build-operate-transfer model by RSGT Company, majority-owned by the Saudi Industrial Services Company (SISCO). The terminal has a capacity of almost 2m twenty-foot equivalent units (TEUs) per year and can handle vessels with a draught of up to 16.5 metres, including the next generation of mega-vessels with a TEU capacity of 18,000 or more.

The terminal has been operating since the end of 2009, and such is the pace of development in the sector that it is fast becoming old news. Indeed, the government has an ambitious plan to expand seaport capacity. Perhaps the most important project is the King Abdullah Economic City (KAEC) seaport, the showpiece infrastructure development being built approximately 100 km north of Jeddah. The port, which will have a capacity of 4m TEUs upon completion of the first phase in 2015, is expected to generate SR10bn ($2.67bn) annually, according to Arabian Business. The 13.8-sq-km port will be the centrepiece of the Industrial Valley in the new KAEC and is expected to generate increased traffic from the Red Sea. “KAEC's port aims to be one of the largest ports in the world, with an eventual capacity of around 20m TEUs per year,” said Ahmed Linjawi, the president of the city services and industrial division at Emaar, the developer of KAEC.

Expansion Plans

The Saudi Ports Authority has also embarked on a plan to upgrade and develop lesser ports. In September 2012, the authority signed agreements with W.S. Atkins & Partners Overseas and the German Agency for International Cooperation (GIZ) for the master plan development of five commercial ports in the country. W.S. Atkins was awarded a SR9.38m ($2.5m) contract for the master plan of King Abdulaziz Port in Dammam and Jubail Commercial Port, while GIZ won a SR8.63m ($2.3m) contract for the master plans of Jizan Port, Dhiba Port and Yanbu Commercial Port. Both contracts are expected to last eight months and the total investment required for the redevelopment of these five ports is expected to reach SR18bn ($4.8bn). These projects will support the existing expansion programme, which saw the combined capacity at ports rise by 40m tonnes to 413m tonnes in 2011, according to the Saudi Ports Authority.

Such developments are timely given the rapid increase in traffic at the Kingdom’s ports. Container volumes entering Saudi ports rose by 7.5% to 5.7m in 2011, a trend that contributed to an increase in port revenues from SR2.97bn ($791.9m) to SR3.3bn ($879.78m) in the same period, according to the Saudi Ports Authority. Indeed, total cargo handled at Saudi ports grew by 7.13% to 165m tonnes (excluding crude oil), according to the authority. This is above the target of 162.62m tonnes outlined in the ninth five-year development plan from the Ministry of Economy and Planning.

Rail

With the volume of goods entering and exiting the country increasing rapidly, the government has also been focusing attention on the land transportation network. However, the government’s policy towards roads and rails is not simply a reaction to rising volumes of passengers and freight at the air and seaports, but is rather a strategy to develop the Kingdom as a logistics centre for the region. This is clear from the development of the nascent rail network (see analysis).

The most strategically important project in this regard is the Saudi Landbridge, a cross-country line running from Jeddah on the Red Sea to Dammam on the Gulf. The project is estimated to cost up to SR26.26bn ($7bn), according to the Railway Gazette, and will require a new 945-km track between Jeddah and Riyadh, as well as upgrades on the existing 450-km track between Riyadh and Dammam. A 115-km link at Dammam will connect the line with the North-South line at Jubail.

Michael Wuebbens, the managing director of Huta Marine, told OBG that, “The arrival of the Landbridge will radically change the flow of goods around the GCC, especially when we consider that more than 50% of goods consumed in Saudi Arabia are imported through Gulf ports. However, logistics streams are governed by a number of other factors. The existence of a railway will not make much difference if freight handling and intermodal services are not properly developed as well.”

Roads

Nonetheless, the developing rail network will be of huge economic and strategic importance to Saudi Arabia, not least because it will plug into the proposed 1940-km GCC rail network. Similarly, plans for the country’s road network should improve regional connectivity and place the Kingdom at the centre of passenger and freight transit routes (see analysis). According to an August 2012 report in the London-based Al Hayat, an Arabic-language daily, the Kingdom is going ahead with plans to build a causeway to Egypt. The project is estimated to cost SR11.25bn ($3bn) and would link the city of Tabuk on the Red Sea coast with the resort town of Sharm El Sheikh in Egypt, passing through Tiran Island in the mouth of the Gulf of Aqaba.

Outlook

Such projects illustrate the importance the government is placing on the transportation sector to expedite economic growth and diversification. Current and planned projects could well take Saudi Arabia’s transport network to the next level and provide significant opportunities for investment in transportation services. As the tie-ups for the Medina airport and the RSGT demonstrate, the government is keen not only to bring in private capital for the construction of the required infrastructure, but also to outsource the operation and services to the private sector. Moreover, with continued growth in the population and economy, the prospects for logistics companies and freight forwarders look bright. The transport map is changing and as such the sector is only going to grow in importance.