1. Expansion of the KSA’s Madinah Airport – A Positive Move Towards Airport Privatisation and Economic Diversification, notes Frost & Sullivan

Expansion of the KSA’s Madinah Airport – A Positive Move Towards Airport Privatisation and Economic Diversification, notes Frost & Sullivan

The Kingdom of Saudi Arabia’s aviation sector is a dynamic industry due to the country’s expanding population and increasing religious tourism.

By: | Published: July 16, 2015 4:50 AM

The Kingdom of Saudi Arabia’s aviation sector is a dynamic industry due to the country’s expanding population and increasing religious tourism. The Government is working to sophisticate and streamline the industry through infrastructure development, privatisation initiatives, and market liberalisation.

Keeping up with the growing need, the KSA has just opened the first phase of its airport expansion project. The USD 1.2 billion expansion plan consists of a three-level terminal covering over 156,940 square meters with 16 aircraft stands and boarding bridges. For Haj and Umrah pilgrims who are looking to sanctify their travel with a visit to Madinah, the airport expansion plan comes as a boon without disguise. However, the Madinah airport is also likely to be the harbinger of heightened economic activity and the precursor to other privatisation initiatives.

Frost & Sullivan estimates that the KSA has close to 11 million tourists annually of which 5.7 million are aviation passengers. Aviation traffic is likely to grow at a Compound Annual Growth Rate (CAGR) of 27.2 per cent over the next decade or so. In view of this, the airport expansion project assumes special significance.

The new airport is expected to significantly boost Madinah’s economy. Besides improving commercial trade to more than USD 107 million, almost 20,000 new job opportunities will be created and housing accommodation for an excess of 100,000 residents will require new constructions. This will also directly boost infrastructure and connectivity of the city.

The Madinah airport project was constructed and will now be operated as a private enterprise. The KSA has been steadily moving towards aviation privatisation and the sale of Saudia Airlines was the first of multiple such steps. The new airport is another such move in the same direction as the KSA looks to enhance competitiveness and efficiency in the aviation sector.

“Privatisation is seen as a welcome move as it provides a more competitive environment for airports to function. Besides improving efficiency, privatisation ensures that the airport management will have a more focused business outlook that could contribute to the economy of the KSA,” says Vinod Cartic, Senior Consultant, Business and Financial Services, Frost & Sullivan. “Growth is also more likely in the privatisation set up with airports looking to non-aeronautical revenue sources as well.”

With the need to support an entire business environment, airports have a more varied source of revenue, leading to diversification. “Given that airport revenue is tied to economic cycles and uncertainties, diversified sources of revenue can help stabilise the airport’s cash flow. Studies indicate that as airports mature in terms of traffic, non-aeronautical revenue increases correspondingly,” Mr. Cartic added.

Mr. Cartic also suggested that the Madinah airport could also pave the way for a Madinah Aerotropolis – an urban planning concept where all economic and business activity revolves around the airport. Apart from the geographical size and the economic impact, an aerotropolis serves to boost significantly the airport’s non-aeronautical revenue. The non-aeronautical revenue associated with an aerotropolis like Madinah will also boost the economy of the city.

The KSA took giant strides in developing the aviation sector with the liberalisation policy initiated in 2007. However, with the expansion of the airport, safety standards in a privatised airport will attract significant attention. Prevention of monopoly and illegal tie ups between the airport, airlines, and aerotropolis management will be a big challenge. Simultaneously, with the expansion of the airport, the requirement of an increasing number of trained line staff is on the increase.

With the KSA economy given a boost by high oil prices, a burgeoning young population with higher disposable income, enhanced aviation infrastructure, and an open capital market attracting greater foreign investment, the overall outlook for the KSA’s aviation sector is very positive.

For more information on this study, please email Ravinder Kaur / Anita Chandhoke, Corporate Communications, at ravinder.kaur@frost.com / achandhoke@frost.com.

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