The General Authority for Civil Aviation said in a statement carried by the state news agency it will let both local and foreign companies apply for licences to run domestic flights by the end of the Islamic month of Safar, roughly late January.
The decision comes six weeks after King Abdullah split the responsibility for the aviation sector from the Defence Ministry, appointing Prince Fahd bin Abdullah bin Mohammed al-Saud, a former deputy aviation minister, as head of the newly independent General Authority for Civil Aviation.
The new authority comes directly under the aegis of King Abdullah, which some analysts interpreted as meaning it will have more power to institute reforms.
In April, the advisory Shoura Council recommended that the kingdom study allowing Gulf airline carriers to operate in the Middle East’s largest economy.
Saudia and National Air Services, a lower-cost private carrier, now serve a domestic market of around 27 million people, but with a price cap on domestic flights private airlines have struggled with their profit margins.
Last year a third carrier, Sama Airlines, was forced to suspend its operations. By contrast Saudia receives fuel at subsidised prices, allowing it to continue to serve the domestic market despite the ceiling on ticket costs.
Saudia is also moving through a slow process of privatisation, which was started in 2006 by splitting the carrier into six units with a view to selling each separately.
Saudi Airlines Cargo has already been partly privatised while the ground handling services unit was merged last year with National Handling Services and Attar Travel Company.
Earlier this year the airline said it hopes to hold a much-delayed initial public offering of its catering service, which is estimated to be worth up to $540m.