Saudi Arabia takes first steps towards transport privatisation

Saudi Arabia’s aviation sector is undergoing a period of robust year-on-year growth, as well as expansions and potential airport privatisations that could significantly alter the aviation sector in the years to come. The Kingdom’s two largest international airports, King Abdulaziz International Airport (KAIA) in Jeddah and King Khalid International Airport (KKIA) in Riyadh, are both currently undergoing substantial expansion projects. Improvements at KAIA will raise its annual capacity from 17m to 30m passengers by 2017, and if the full plans for development are realised, two further phases of expansion will grow its capacity to 80m passengers per year by 2035. At KKIA a new privately run domestic terminal opened at the end of May 2016, becoming fully operational in late June, with capacity for 12m passengers annually.

Work is progressing on the modernisation of Saudi Arabia’s other 25 airports, according to local press reports, and is due to be completed in the next five years. Additional airlines are also due to begin operating domestic flights in the Kingdom, with one privately owned airline already approved and two waiting for final approval from Saudi Arabia’s General Authority of Civil Aviation (GACA), the government body for civil aviation. Despite the significance of these developments, the biggest news in the aviation segment at present is the Kingdom’s push to privatise many of its airports as well as related infrastructure, potentially before the end of 2016.

Current Size

Of the 27 operating civil airports, four are used for international flights: KAIA, KKIA, King Fahd International Airport (KFIA) in Dammam and Prince Mohammad bin Abdulaziz International Airport (PMIA) in Medina. Saudi Arabia’s airports recorded a 9.5% rise in the total number of passengers in 2015, from 74.8m in 2014 to 81.9m. KAIA experienced the highest volume of traffic, according to GACA, with some 30.1m passengers on 212,799 flights, while KKIA saw 22.5m passengers on 172,754 flights. KFIA accommodated 9.4m passengers on 84,803 flights, and PMIA saw 6.3m passengers on 48,296 flights. A further 23 regional and domestic airports recorded a combined 13.5m passengers and 128,041 flights in 2015. GACA expects annual passenger traffic passing through the Kingdom’s airports to reach 100m by 2020, up from 65m in 2012, with domestic traffic almost doubling to 28.5m.

New Aviation Players

Saudi authorities announced the proposed liberalisation of the domestic aviation sector in 2012. Only flag carrier Saudi Arabian Airlines (Saudia) and budget airline Nas, which was launched in 2007, were present on the domestic market until 2016. Saudi Gulf Airlines, owned by the Abdel Hadi Al Qahtani group, was the first of the three airlines waiting for final approval to receive a licence to operate domestic flights in June 2016. Meanwhile, Al Maha Airways, a subsidiary of Qatar Airways, and Nesma Airlines, an Egyptian airline with a Saudi joint venture, are still waiting for licences from GACA.

In April 2016 Abdullah Al Kharif, general manager of public relations and media spokesman of GACA, told media that both Nesma and Saudi Gulf Airlines should be ready to launch operations by mid-2016, while Al Maha Airways is reportedly conducting a re-evaluation process before entering the local market. Saudi Gulf Airlines has ordered 16 CS300 jets from the Canadian manufacturer Bombardier at a cost of $2bn, to add to the four Airbus A320 jets, worth some $375m, that it has already taken delivery of.

While approval of the operating licences for the airlines is taking longer than many had hoped, once they are granted it should be the first step towards greater liberalisation of the domestic aviation sector in Saudi Arabia. The increased competition should also help reduce ticket prices and allow the national airline, Saudia, to focus its resources on expanding international routes and services, aided by the expansion of its fleet to 126 aircraft in February 2016, when it took delivery of four Boeing Dreamliners. The airline eventually aims to expand its fleet to 200 planes, Saleh bin Nasser Al Jasser, director-general of Saudia, told local press in February 2016.

Airport Privatisation

In November 2015 GACA announced that the Kingdom would start to privatise its airports and related services beginning in early 2016. The decision came at a time when Saudi Arabia was dealing with the effects of low oil prices and related cuts to government spending.

“The privatisation programme comes in line with the Kingdom’s plan to improve the productive efficiency of airport systems and ease the financial burden on [the] state budget,” Sulaiman Al Hamdan, president of GACA and minister of transport, said in a statement. The privatisations are set to run through to 2020 and are expected to include international and domestic airports, air traffic control and IT units.

KKIA was set to be privatised first in early 2016, with the air traffic control and IT units to follow in the second and third quarters of the year. However, in January 2016 it was decided that KKIA would shift to a corporate structure initially, allowing it to operate like a private company while remaining state owned. KFIA is scheduled to be corporatised in the third quarter of 2017 before being privatised later on.

In line with these developments, in January 2016 it was announced that foreign companies would now be allowed to invest in Saudi Arabian airports without the need for a local partner, with local investment in some airports restricted to 25% to ensure that foreign operators hold a majority in the operating contracts. “All international companies, operators, who are qualified can participate… There is no requirement for a local partner, that is up to the companies,” Faisal Al Sugair, vice-chairman of GACA said, speaking at a news conference in early 2016.

Greater involvement of foreign investment in the airport segment has the potential to aid in the growth and expertise of the Kingdom’s aviation industry, as well as offer opportunities for foreign companies to be involved during a critical period of growth.

Public-Private Partnerships

It is not just the privatisation of existing airports that has signalled a shift in mindset in the Kingdom towards state assets and private sector involvement.

In 2012 PMIA became the first full public-private partnership (PPP) project in the Kingdom, with an international consortium led by Turkish airport operator TAV winning the contract for a 25-year concession to build and operate the airport.

In March 2016 tendering began for the next fully fledged PPP project: an international airport in Taif, 70 km from Makkah. Bids will be taken for the design, development, financing and operation of the airport, with substantial interest from international players to date. The project is expected to be awarded by the end of 2016 and could be followed by other PPPs in the transport sector in the years coming.

Regional Player

While it is working to improve and expand its domestic infrastructure, Saudi Arabia also aims to become a larger player in the aviation sector regionally, with flag carrier Saudia expanding its fleet and focusing its resources internationally to capitalise on the increasing passenger traffic being taken by regional carriers. Global passenger traffic rose by 6.5% in 2015, with Middle Eastern carriers seeing year-on-year growth of 10.5%, accounting for 14.2% of all international traffic – versus 13.4% for North American airlines – according to the International Air Transport Association.

Although players such as Dubai are likely to remain prominent, there is a hope among those involved that the Saudi aviation industry can expand its presence and become a significant regional player.

“One of our objectives is to capture a significant share of the region’s air traffic, making Saudi Arabia a major regional hub,” Al Hamdan told OBG in 2015.