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Saudi Airlines: Firm Overview and Assessment

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Saudi Airlines: Firm Overview and Assessment

Company information

  • Company name: Saudi Arabia Airlines
  • Airline IATA Code: SV
  • Airline OACI Code: SVA
  • All-Class rating: 6.4
  • Company website.
  • Main Operational Hub: Jeddah International Airport
  • Employees: 23,683

Firm Overview and Assessment

The company was begun in 1945 with only one plane which had been given to the king (Aziz Abdul) as a gift from the American president (Roosevelt Franklin). Only a couple of months later, two more airplanes were purchased and the company kept growing until it became one of the biggest carriers in the present world. The company boasts a fleet of at least 139 aircrafts today. The company is based in Jeddah and has branches all over the world. It is the national flag carrier of Saudi Arabia (Saudi airlines).

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Saudi Arabia airlines has used the Jeddah airport as its main hub from which it services the middle east, the African, North America, Asia and European markets. In total, the Saudi Arabia airlines reach at least ninety different destinations across the globe. The company usually experiences a peak season during the holy month of Ramadan. During this season, the Muslim faithful will want to engage in pilgrimage and the company offers chattered plane services to them. One of the biggest strengths for the company is that it is a multinational carrier a fact that gives it a competitive edge over other local carriers in the same locations.

According to the company’s official website, Saudi Arabia airlines handles a variety of ground services for other local an international carriers. Some of the ground services that the company provides include Cabin services, Ramp operation, Terminal Services, Shipment escorting, Aircraft marshalling, Fueling, Balance control, Catering, Baggage services and equipment operation. In total the company services up to one hundred and fifty thousand flights per annum (Saudi airlines).

Saudi Arabia airlines operate from three different hubs. While this could be seen as a plus in terms of efficiency of the logistics, it obviously results in some additional costs that competitors that have one hub don’t incur especially since the company will have to maintain system-wide load factors utilization. The challenge is that the prices of the services might be higher than some of the competitors.

Growth and Innovation

One of the most important concerns for both the business as well as the social traveler is his or her security especially in the wake of a new tide of global terrorism where terrorists are targeting the aviation industry more than ever before. In the light of this, the Saudi Government embarked on a biometric system in airport security across the Dubai region (Khosro 14). The system works by linking each client’s fingerprints to their respective luggage. This is bound to guarantee the security in terms of avoid lose of cargo as well as eliminating the transportation of harmful cargo like bombs and drugs.

The company has also embarked on an ambitious fleet expansion program. Recently, Saudi Arabia airlines purchased a total of thirty eight new airplanes to add to their fleet. It is forecasted that as more destinations keep opening up for the company, there will be even more acquisitions of new planes to service the commercial as well as the private carrier needs of its large and growing clientele (Ghafour 3).

Management has also made a decision to embrace new Information and Communications Technologies in the logistics of the company as a way of enhancing efficiency. The new Technologies will also be used to improve the infrastructure especially through the linking of the different activities as well as through the optimization of the e-commerce portal to increase the rates of online bookings (Ghafour 5).

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The management of Saudi Arabia airlines decided to adopt the SAP platform in the year 2006. The adoption of the SAP was in a bid to accelerate its privatization. The SAP approach bore fruits when Saudi Arabia airlines began a process of privatization in the same year of 2006. The company was subdivides into SBUs (Strategic Business Units) as a way of integration. The catering wing of the company becomes the first fully privatized wing in the year 2007. The full conversion of the SBUs into constituent companies of Saudi Arabia airlines was not possible without the necessary government legislation. The needed laws were however put in place by the council of minister of the Saudi Arabia government in 2007 which led to the conversation of the Units into companies (Airwise).

The Enterprise Resource planning approach of the SAP was implemented to establish a seamless relationship between the front end operations and services with the backend operations in a bid to minimize the cost of production, by eliminating recurring expenses so as to maximize the profits. As the director general said in a press release, The SAP Technology was needed so as to establish business processes that will enhance profitability in the different strategic business units since all of them had unique infrastructure (Pfahle).

In order to increase the passenger services, the Saudi Arabia airlines entered a codeshare agreement with Mahan Air, South African Airways, Gulf Air, Air France and Kuwait Airways in November of the year 2010. Under this arrangement, customers can purchase tickets of the other companies without necessarily knowing that the given seats are controlled by the Saudi Arabia Airlines.

Accidents and Weaknesses

Just like any other player in the aviation industry Saudi Arabia airlines has been exposed to accidents and other aviation incidents. The very first accident was recorded just a few years after beginning of operations when an aircraft crash-landed just a few minutes after takeoff from the Jeddah airport. A couple of years later in 1970, Saudi Arabia airlines registered the first ever hijack when Douglas DC-3 was hijacked and forced to change course from Saudi Arabia to Damascus.

There have been other minor incidents that have registered no causalities over the years. In the history of the Saudi airlines, there has been only one fatal accident which was in the year 1996 when the Saudi airlines, SVA 763, collided head on in the air with the Kazakhstan airlines KZK 1907. There were no survivors among the three hundred and forty nine crew and passengers. Incidentally, this also happens to be the worst ever recorded accident in the aviation industry (Khosro 17).

A major weakness that is faced by the Saudi Arabia airlines is the absence of pork and alcoholic beverages in the in flight catering services. This is mainly due to the religious customs since Saudi Arabia is an Islamic kingdom and Islam forbids pork and alcohol consumption. This may not be understood by non-Muslim tourists who may make them not to use their services again something that would obviously impact negatively on the revenues generated (Khosro 17)..

Competitive Environment

Saudi Arabia airlines face competition from four main international carriers namely; virgin Atlantic, Royal Brunei, Biman airlines, Qatar airlines and Emirates flights. These international airlines mainly ply the Dubai- United Kingdom route although they also fly from Saudi Arabia to other African and American destinations. There are a host of other local carriers that operate mainly within Saudi Arabia. These include flydubai, Jat airways and many others. The advantage that Saudi Arabia airlines have over all these local as well as international carriers is that the company is the national carrier which puts the company on a higher pedestal than her competitors. In addition, the company has a proven track record of safety with only one major accident ever since the inception of the company in 1945 (Hoovers 17).

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One of the factors that have made the Saudi Airlines a very competitive company in the region is the subdivision of the company into Strategic Business Units (SBUs) and their subsequent privatization after authorization by the council of ministers. The resulting constituent companies like the Prince Sultan aviation academy and air cargo just to mention but a few have continued to be independent streams of revenue that continue contribute to the overall profitability of the mother company.

There are three main competitive sections of the company. The first is the commercial flight services. Saudi Arabia is one of the largest tourist destinations in the world and Saudi Arabia Airlines is benefitting from the flight survives it offers to the broad clientele. The open market approach of the kingdom has also continued to attract many business travelers to the region.

The second most competitive section is the ground services which Saudi airlines provides for other local an international carriers. Some of the ground services that the company provides include Cabin services, Ramp operation, Terminal Services, Shipment escorting, Aircraft marshalling, Fueling, Balance control, Catering, Baggage services and equipment operation. In total the company services up to one hundred and fifty thousand flights per annum (Saudi airlines). The Third and probably most important competitive section is the chartered flights section. This section especially draws in a lot of revenue during the holy month of Ramadan as pilgrims from different parts of the world engage on the annual pilgrimage to Mecca.

Risk Factors

The recent subdivision of the company into different strategic business units (SBUs) is the most important risk factor for the company. The overall goal is to increase profitability but there is the danger of creating a conflict of interest within the different constituent companies that result from the privatization. Since the different companies will largely be autonomous, it is possible that a managerial decision made in one company may override the management decision that was made by another company which might lead to conflicts and even potential deadlock situations.

Another challenge that the company faces is the recent surge of terrorism that is increasingly targeting the airline companies. The company has previously fallen victim to hijacking when one of their planes was hijacked and detoured to Damascus. Luckily, the Saudi government has introduced stringent measures in the leading airports to enforce security especially through the use of biometrics to authentic the travelers. The Saudi Airlines has also become a signatory of the IATA an organization that seeks to enforce safety standards in the aviation industry (Saudi airlines).

Competition is also a major risk factor for the Saudi airlines. The company faces competition form other international carriers like Virgin Atlantic, Qatar airways and British airways. On the local front, the company has a wide assortment of competitors that are plying the local domestic routes. The open market approach in the Saudi Arabia kingdom has also made it impossible for the company to put any barriers to block entrance of new competitors from other regions.

Religion may also be a risk factor for the Saudi Arabia airlines. The United Arab Emirates is a predominantly Muslim kingdom and Islam forbids the consumption of pork and alcohol. The implication of this is that pork products and alcoholic beverages can not be served in the planes something that non-Muslim tourists may find not very appealing causing them to opt for other international carriers like British airways.

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The other important risk factor is the incidents and accidents. There have been many incidents recorded by the Saudi airlines including the most fatal accident ever recorded in the aviation industry the world over when a Saudi airlines plane collided in the air with a Khazagstan plane that resulted in the loss of hundreds of lives. These accidents might make potential customers to shy away from using their services.

Profits and Funding

The company’s main source of funding is the revenues gained from operations as well as government grants. The importance of grants can not be ignored especially since the first airplane that the company ever owned was a gift from the American president, Roosevelt Franklin to the then Saudi king, Aziz Abdul. Saudi airlines have continued to benefit from government funding since it is the main flag carrier of the Saudi Arabia kingdom (Ghafour 9).

Even though Saudi Arabia airlines had been in operation since 1945, the company didn’t obtain operational profits until 2002. This was a new dawn for the company and it has continued to become even more profitable. In fact, the operational profits of the company doubled within a single year between 2002 and 2003.The main reason for this impressive performance was the injection of capital form the government in terms of seventy aircrafts that were given to the company by the government.

In addition, the Saudi Arabia airlines amortized at least a billion riyals per annum in the balance sheet. This was majorly in the form of deferred income which was one of the contributors to the impressive performance in 2002. The company continued to grow in terms of passenger load and it handled its first fifteen million customers in the year 2004. This was an increase from the previous year by about fifteen percent something that necessitated an increase in the fleet. The need was covered by the purchase of fifteen Embraer aircrafts to the tune of four hundred million American dollars (Ghafour 17).

Corporate Governance

The two main core values of the company are safety and quality in air travel. IN the light of this, the company is a signatory to the International Air Transport Association (IATA) which is a regulatory body that seeks uniformity in the rules and regulations in the air space to facilitate safety of passengers and their cargo (Saudi airlines). The company has put in place measures to ensure that the integrity is maintained at all times. For instance, the company makes sure that the financial statements that it releases are a direct representation of the company’s operations. The Generally Accepted Accounting Principles (GAAP) is applied at all times.

To make sure that management functions optimally, the company has only employed three executives for its ground service. Mr. Moallem Khalid serves as the chairman, Mr. Hilali Abdul serves as the Managing Director and Banasag Salem is the procurement manager. The company has employed at least five thousand employees directly with many others benefiting indirectly as support staff in the various hubs and different destinations of Saudi airlines across the globe (Hoovers 23).

The internal audit segment of the corporation is used to ensure that all the other offices comply with the financial policy of the company. The auditors use tools at their disposal to put in place internal controls and perform financial accounting. As a principle of operation, the auditors regularly seat with the audit committee in the absence of management to review their reports. The code of ethics is not only followed at management level but also at employee level. As a prerequisite, the employees commit themselves in writing as part of the recruitment exercise that they will uphold the code of ethics of the company. The culture of the company is therefore maintained right from top-level management up to the tactical level (Hoovers 34).

Summary

The analysis of the company reveals that it is on the right financial track. As early as 1989, the company received three awards from IFSA (Chicago), Medal of Honor (Riyadh) and Oscar (Cannes, France) due to its impressive in-flight support services (Saudi airlines). The company has continued to be a world leader in flight services as well as flight support services.

The management of the company should be commended since they have taken a management by objective rather than a management by crisis approach. The company has embarked on a minimization and a maximization objective. As stated in a press release, Saudi Arabia airlines have been undertaking minimization of operational costs since the year 2006 through the adoption of the SAP architecture (Pfahle).

Following this, the company was subdivided into different Strategic Business Units (SBUs) which were later on converted into independent constituent companies of the Saudi Arabia airlines. The SAP model also helped in the streamlining of the operations and logistics management of the company a fact that helped to scale down the operational and managerial costs to a great extent (Pfahle).

There are stringent management practices that have been put in place and this is important as a company’s long-term profit is determined by management. One of the examples of such practices is the fact that the company has adopted a very lean management approach choosing to employ only three top level managers comprising of the chairman, the managing director and the procurement manager. This eliminates the possibility of bias and ambiguity in decision making.

The company also has a good financial base as can be seen from their balance sheet. It is worth noting that the company has largely maintained profitability even in the face of the global financial crisis. While many companies were crumbling down and some entirely closing down the world over, Saudi Arabia Airlines continued to register impressive growth and performance with the company achieving its first operational profits in the year 2002. Ever since this time, the company has continued to register a steady increase in profits. It is projected that the company will continue to perform better in the coming years especially with the recent adoption of the SAP architecture that saw the subdivision of the giant company into various SBUs that were later privatized.

Works Cited

Airwise. Saudi Air launches Privatization.2006. Web.

Ghafour, Abdul. 38 New Aircraft to Boost Saudi Service, Arab News. 2010. Web.

Hoovers, Thomas. Saudi Arabia Airlines Ground Services. 2010. Web.

Khosro, Mohamed. Airport Cities: From Airports to Airport Cities. Dubai: Global Technologies, 2010.

Pfahle, Angelika. Largest Airline in Middle East Builds Its Business Process Platform on SAP ERP. 2007. Web.

Saudi Airlines. Saudi Arabian Airlines. 2010. Web.

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