With Rayani’s wings clipped what are the opportunities and risks in launching a low-cost ‘Shariah-compliant airline’?

Photo: Rayani Airlines, a so-called "Shariah-compliant airline" had its license revoked by the Malaysian authorities on Jun 13, 2016

Three so-called “Shariah-compliant” low-cost airlines were launched in the last two years, one of which had its license revoked today. What are the opportunities and risks in launching a low-cost “ Shariah-compliant airline” to address Muslim demand?

MODERATE GLOBAL INDUSTRY GROWTH

The global spend on air transport was estimated by the International Air Transport Association (IATA) to have reached $742 billion in 2015, accounting for 1 percent of global GDP. This is expected to grow moderately by 1 percent cumulative annual growth rate (CAGR) to $749 billion in 2016.

Underpinning this growth has been a steady climb in global passenger traffic, rising from 5.2 percent in 2013 to 7.4 percent in 2015, according to IATA data. The highest growth is for the Middle East—10.1 percent last year—followed by Asia-Pacific at 8.7 percent.

LOW-COST MARKET

Low-cost carriers (LCCs) represent a high-growth segment, accounting for 25 percent of the global aviation market in 2014, according to PwC, which would imply a $185 billion market in 2015. The largest low cost airlines by passenger numbers include Southwest Airlines, Ryanair, and easyJet.

Southwest Airlines is a U.S.-based LCC established in 1967. It operates over 3,800 flights per day, with revenues of $19.8 billion and carrying over 140 million passengers in 2015.

Ryanair is the largest European LCC, founded in 1984 and based in Ireland. It operates over 1,800 flights per day. The company generated revenues of $6.3 billion and carried over 100 million passengers in 2015.

EasyJet is a UK-based LCC, founded in 1995. It currently operates over 500 flights per day. EasyJet had revenues of $6.76 billion and carried just under 70 million passengers in 2015.

ROBUST MUSLIM DEMAND

Muslims represent a key segment of the global travel industry, accounting for an estimated $142 billion or 11 percent of global outbound spend on travel in 2014, according to the State of the Global Islamic Economy 2015/16 report.

To capture this large market segment, service providers across the travel industry are trying to better understand and address the needs of Muslim travelers.

At a basic level, most global airline service providers have accommodated Muslims with services including halal food options upon request, such as British Airways, Lufthansa, and United Airlines.

Carriers from Organisation of Islamic Cooperation (OIC) countries by default tend to offer halal food, but they largely focus marketing efforts towards the global marketplace. These airlines would include Emirates, Etihad, Qatar Airways, and Turkish Airlines.

Going a step further, Saudi Arabian Airlines, Iran Air, and Royal Brunei Airlines primarily carry Muslim passengers and all three provide a full suite of services focused on Muslim passengers.

“SHARIAH-COMPLIANT” LOW-COST AIRLINES

The last two years have seen the emergence of a new breed of dedicated, so-called low-cost “Shariah-compliant airlines” primarily addressing Muslim needs, notably Rayani Air, Firnas Airways and Waqf airlines.

Rayani Air was founded in 2015 in Malaysia. It operates two aircrafts. Initially pitching itself as a LCC, it was ultimately positioned as a full service airline offering lower cost flights to domestic destinations in Malaysia.

While there was much excitement following the airline’s launch, there were multiple operational problems, including pilots’ refusal to fly following delayed payments, which resulted in the airline’s license being officially revoked by Malaysia’s Department of Civil Aviation on Jun 13 after the authority conducted what it said in a press statement was a “full investigation into the administration and safety audit of the airline’s state of operation”.

Firnas Airways was founded in 2014, and has plans to launch from the UK in 2016. The company seeks to offer lower cost options for Muslims travelling to South Asia. Its application of Shariah compliance extends beyond halal food and the flight experience to also cover the use of Shariah-compliant funding and financing.  

Waqf Airlines, founded in 2016 from Malaysia, plans to offer pilgrims cheaper rates for hajj and umrah travel based on a waqf, or endowment, model. It plans to operate as a social enterprise or non-profit company.

The operator behind the airline, Air Riths Sdn Bhd, is working in partnership with state charitable management group Perbadanan Wakaf Selangor, which has given the company the rights to collect waqf funds from individuals, companies or cooperatives both locally and internationally to subsidize its operations, according to a Salaam Gateway report.  It has also sought to obtain Shariah-compliant funding and financing as part of its remit.

CHALLENGES AND CONSIDERATIONS

Determine whether it makes sense to focus on Muslims

Focusing on Muslim passengers makes sense if there is sufficient demand on the planned routes. For instance, both Firnas Airways and Waqf Airlines have focused on routes that would primarily carry Muslim passengers, and that have been underserved by existing operators.

Tariq Mahmoud of halal travel agency Andalucian Routes said, “It depends on the type of client you’re predominantly targeting and where you’re going. I think it would be useful in some destinations but in places like Europe and the U.S. it would be difficult.”

Determine the extent to which you are, or need to be, Shariah-compliant

The definition of Shariah-compliant has predominantly focused on in-flight experience of passengers, and ensuring Muslim requirements and lifestyle values are fully adhered to. However, the newer airlines are seeking to also secure Shariah-compliant funding and financing.

Waqf Airlines is seeking to be funded through Shariah-compliant financing as well as charitable donations.

Firnas Airways has undertaken a campaign to raise equity financing from Gulf investors.

There is also an increasing availability of Islamic financing options for airlines, including for aircraft leasing via the Aircraft Leasing Islamic Fund (ALIF Fund), a Shariah-compliant $5 billion fund launched in 2014 with Airbus and the Islamic Development Bank as investors and strategic partners. The Fund is managed by the International Airfinance Corporation (IAFC).   In June last year Saudi Arabia Airlines signed a deal with IAFC to acquire 30 Airbus aircrafts and lease 20. The deal consisted of debt and equity financing.

Ensure operational proficiency from the start by having a strong team

The experience of Rayani Airlines highlights the need to have the right industry experience when starting a new airline. In many instances, the company did not follow best practices, including deferring salary payments to pilots and rescheduling flights frequently.

To ensure it gets off to the right start Firnas Airways has hired an airline industry veteran with 30 years of experience as Managing Director to steer the company’s expansion plans.

© SalaamGateway.com 2016