January 28, 2016

Diplomatic tensions are causing airlines in Saudi Arabia, Iran and Bahrain to lose millions of dollars in revenue at a time when all three countries are grappling with the economic impact of lower oil prices.

Flights that carry pilgrims to Islam’s holiest sites in Saudi Arabia are among the routes halted by a diplomatic spat between Iran and the two Gulf states.

The significant loss of revenue is pressuring airlines that are already looking for alternative sources to fund fleet expansions as their governments face holes in finances hit by the oil slump.

As airlines contend with higher costs from flying longer routes to avoid regional war zones, the additional squeeze on revenue could push them to tap debt markets or seek foreign investment.

Saudi Arabia’s state-funded carrier Saudia is in the midst of a renewal and expansion plan to boost its fleet to 200 aircraft from 157 in the next four years. Last week it announced plans for an Islamic bond worth SAR5 billion riyals (USD$1.33 billion) to fund expansion.

Kuwait, meanwhile, could be forced to revive plans for the delayed sale of loss-making Kuwait Airways.

The additional pressure on the Gulf carriers’ earnings has come after Saudi Arabia cut diplomatic ties with Iran after the kingdom’s January 2 execution of a Shi’ite Muslim cleric triggered an attack by Iranian protesters on its Tehran embassy. Bahrain quickly followed suit.

FLIGHTS SCRAPPED

Bahrain’s Gulf Air has cancelled 16 flights a week to Iran since then, chief executive Maher al-Musallam said at the Bahrain air show last week.

“Iran is an important market for us and I hope that we can compensate from somewhere else,” he said.

At the Bahrain show Gulf Air placed an order for 19 new Airbus aircraft and upgraded a 16-plane Boeing order, but the numbers were short of the proposed purchase of 50 aircraft flagged in October.

Some direct flights between Iran and Saudi Arabia, carrying thousands of pilgrims, were also halted as diplomatic relations were cut.

Official Saudi air traffic figures show that Saudia flew 350,000 Iranian pilgrims in 2015.

Saudia did not reveal revenue from pilgrim flights, which are mostly on chartered aircraft, however one charter operator said the price of a return ticket on the Tehran to Jeddah route is about USD$550. At that level 350,000 passengers would generate revenue of USD$192.5 million.

Budget Saudi operator Flynas had also obtained approval to fly about 100,000 pilgrim passengers from Iran for 2016, but the plans have been scrapped, chief executive Paul Byrne told Reuters news agency.

This translates to lost revenue potential of roughly USD$62 million, based on Byrne’s estimate for average fares.

“It’s a massive market. Tehran and Mashhad would be lucrative routes,” he said.