Case Study of Saudi Arabian Airlines Type: Report

Saudi Arabian Airlines, the national carrier of the Kingdom of Saudi Arabia, is currently assessing the potential for operating flights on a weekly basis (once a week) between Riyadh (RUH) and Osaka in Japan (KIX).

Introduction of Saudi Arabian Airlines

Saudi Arabian Airlines or more famous as Saudia is known as the national carrier airline of Saudi Arabia with headquarter in Jeddah. The airline has been listed as the 3rd biggest airline in the Middle East according to its revenue. Saudi Arabian Airlines, at the moment, has a basic operation that provides the flight schedules for both local and international to more than 85 destinations across Riyadh, Jeddah, Medina, Dammam, Abha, Asia, Africa, North America, and also Europe (saudia.com, n.d.).

As we have acknowledged, almost all of airline companies in whole over the world are consistently seeking to add new destination routes to their route system and schedules. The reason is due to those airlines aim to increase long-term profits. This happens as well with the Saudi Arabian Airlines, which is recently assessing the potential for extending its flight routes by operating flights on a weekly basis between Riyadh and Osaka in Japan. In this case, there are some points that needed to be analyzed such as the demand on the route, the CAPEX investment needed, and also the breakeven point that the Saudi Arabian Airlines needs to consider before finally decides whether to go or no go.

The Demand on the Route of Saudi Arabian Airlines

Before establishing a new route, Saudi Arabian Airlines should able to figure out or forecast how many passengers that will travel on the new route which is from Riyadh to Osaka. Now the basic thing that needs to be acknowledged by the Saudi Arabian Airlines is that, the distance between Riyadh, Saudi Arabia and Osaka, Japan is 8.350 Kilo Meters. The fastest one-stop flight or direct flight for this new route would take around 15 hours and 25 minutes (prokerala.com, n.d.).

In addition to this, the Saudi Arabian Airlines also needs to know properly about some points which included in the demand on this new route such as; the utilization of aircraft, human resources productivity, high load factors, maximization of connections, and, of course, the customer satisfaction as well.

The Utilization of Aircraft of Saudi Arabian Airlines

In the context of the aircraft utilization, one fundamental thing to be considered is the fact that an aircraft would only able to give profit if they are operating or flying. On the other hand, the aircraft that stays on the ground would make no profit for Saudi Arabian Airlines. The best way to view this is to undertake that the indirect costs of the aircraft ownership (interest, depreciation, etc.) would be comparatively fixed. Accordingly, since there would be an increment in the aircraft utilization, the total hours along with the decrement of indirect costs. This might lead to a decrease in general cost, and would result in the improvement of the overall financial condition of the airline itself (Halpern & Graham, 2016).

Human Resources Productivity of Saudi Arabian Airlines

The Saudi Arabian Airlines has to make sure that the entire staff would be set at an optimal level for this new route. The airline needs to ensure that there would be enough staff available to maintain this new route and serve the passengers, without disturbing other route schedules (Halpern & Graham, 2016).

High Load Factors of Saudi Arabian Airlines

The new route might able to optimize the available traffic level along with the offered capacity level of the Saudi Arabian Airlines. There is a fact that an excessive frequency would cost plenty of money for the airline. In fact, if this new route would be miscalculated, then there is a possibility that some flights on this route would take-off with some empty seats, and thus, this will definitely create a loss for the airline. For this reason, it is important for the Saudi Arabian Airlines to measure the load factor and must not be set extremely low nor extremely high (Lordan, Sallan, Escorihuela, & Gonzalez-Prieto, 2016).

Maximization of Connections of Saudi Arabian Airlines

This new route should be planned properly in order to optimize the passenger’s connections. This can be completed by the Saudi Arabian Airlines with including new points for  to  and  long-haul flights. The Saudi Arabian Airlines could also shuffle the passenger through intermediary hubs in which the airline would able to  and  this new long-haul route. Some other development progress can be used in boosting up the traffic flows such as  or the , also might be considered by the Saudi Arabian Airlines (Gudmundsson, 2015).

Customer Satisfaction of Saudi Arabian Airlines

This point is extremely important for the Saudi Arabian Airlines to plan out. For this reason, the airline needs to take information from the airline’s marketing, sales and reservation department, and also the productivity management in knowing how the customers’ behavior and also know how to satisfy the customers with this new route (Koklic, Kukar-Kinney, & Vegelj, 2017).

Cost and Prices of Flights of Saudi Arabian Airlines

Average cost of operations for an airline in a fiscal year is around 88,000 AED (m). Cost of operations includes all expenses and cost associated with flight operation, employees’ salaries and airport maintenance. The presented below table show operating cost based on average cost and expenditures recorded by different airlines in Saudi Arabia.

Operating Cost	AED m
Jet fuel	25,000
Employee	13,000
Aircraft operating leases	11500
Depreciation and amortization	10000
Sales and marketing	6000
Handling	5400
In-flight catering and related costs	3300
Overflying	3000
Facilities and IT related costs	2400
Aircraft maintenance	2400
Landing and parking	2200
Cost of goods sold	1500
Crew layover	1200
Corporate overheads	2000
Total operating costs	88,900

The following graph shows minimum prices set out by airlines for Saudi Arabian travellers travelling from Dubai to Osaka, Japan.     

Prices vary for connected and non-stop flights. The above mentioned bar graph present prices for non-stop flights and connected flights from Dubai to Osaka, Japan. 

The CAPEX investment required of Saudi Arabian Airlines

The next thing that the Saudi Arabian Airlines needs to figure out is the CAPEX or Capital Expenditures investment required for this new route. The formula to calculate CapEx is as below (Hansen, Huhn, Legrand, Steiners, & Vahlenkamp, 2011):

in which:

CapEx defines as Capital Expenditures, and ∆PP&E defines a change in Property, Plant, and Equipment.

For calculation, if the total assets of Property, Plant, and Equipment of the Saudi Arabian Airlines in the recent year around 10,000,000 SAR, and the current depreciation is estimated for 10% per year, then:

So, we can estimate that the Saudi Arabian Airlines needs to prepare the CAPEX investment for this new route around 11,000,000 SAR.

Breakeven Point of Saudi Arabian Airlines

Calculating the breakeven point for this new route is considered as the main financial analysis for the Saudi Arabian Airlines to figure out how much the number of flight tickets sold for this new route that would able to cover the expenses. Thus, in order to calculate the breakeven point of this new route, the Saudi Arabian Airlines will have to include the values of three different variables such as (Shim & Siegel, 2008):

·         Fixed costs, which are the costs that are independent of sales volume, for examples, the essential fixed things such as tax, insurance, or aircraft financing

·         Variable costs, which are the costs that are dependent on sales volume, for examples, essential things such as the fuel, catering service, maintenance

·         The selling price of the flight tickets

The formula to calculate the breakeven point in units of the new route made by the Saudi Arabian Airlines is:

So, if we estimate that the fixed costs would be 3,000 SAR, the variable costs would be 2,000 SAR, and the price of tickets would be 5,000 SAR, then the breakeven point in units would be:

A final recommendation for a Go or No Go for this decision

After we observe the measurements of demand on route, estimate the requirement of CAPEX investment, and also calculate the breakeven point, then it is recommended for the Saudi Arabian Airlines to realize this new route. The reasons are due to the realization of this new route would able the Saudi Arabian Airlines to serve the already loyal customers of the airline, attract new customers who might have been seeking for traveling on this new route, and finally, this new route would able to increase the profit of the Saudi Arabian Airlines as well.

So, the Saudi Arabian Airlines should go for this new route since it would also strengthen the reputation of the airline besides than extending its international business capacity. As a result, there will be more new customers will be attracted to use the service provided, not only for this new route, but also for other routes provided as well, and this would surely lead to reduce the marketing costs for the airline itself.  Thus, this new route should be realized so that the Saudi Arabia Airlines would get all the benefits from it.