Middle East Airlines (MEA) chairman Mohamad el-Hout likes to quote a regional proverb: 'Buy on the sound of the cannon, sell on the sound of violins.' When confidence evaporates, as at the prospect of war, it is a good time to find bargains. When peace prevails, economies boom, prices rise and that is the time to dispose of assets.
El-Hout recognises that the current recession has depressed demand for aircraft. Accordingly, he has chosen now to buy and lease new Airbuses to renew and rationalise his fleet - but the downturn has delayed plans to privatise the airline.
Lebanon-based MEA's opportunism is not unique in the region. Late last year the Dubai Air Show became an oasis in an otherwise arid sales desert, as Emirates extended to 22 its order for giant Airbus A380s and unveiled plans to acquire 36 other aircraft and up to 10 further A380s in deals worth $15,000 million. Other active buyers included Qatar Airways, which has embarked on an Emirates-style expansion, and Algeria's Khalifa Airways.
El-Hout is one of several Arab airline executives preparing for privatisation as the region plays catch-up. With market share too small to attract global alliances, regional airlines are acknowledging the need to be more competitive to survive. Indeed, El-Hout talks of a post-privatisation merger with neighbours Syrianair and Royal Jordanian (RJ) as the route to efficiency.
Until very recently, such talk has been anathema as states jealously protected their flag carriers. Even so, the idea has been floated just as troubled Gulf Air has lost one of its four sub-regional government owners and tries to fly its way back into the black against increasing competition. And any move among Arab states towards an open skies policy remains inhibited by continuing restrictions on movement of people and goods.
Abdul-Wahab Teffaha, secretary-general of the Arab Air Carriers Organisation (AACO), says that traffic at Middle East airports has been growing faster than actual Arab airline passenger numbers, as outsiders contribute to the local market. Increasingly, AACO members - comprising 22 Arab League flag carriers and other airlines throughout North Africa, the Middle East and the Gulf - are recognising the value of collective efforts to reduce costs. These include forging joint agreements covering activities such as ground handling at 'away' airports, purchase of fuel and insurance.
Teffaha announced in November that MEA, Gulf Air, Kuwait Airways, RJ, Saudi Arabian Airlines and Yemen Airways had contracted Sabre Airline Solutions to provide joint processing and analysis services, which enable operators to obtain market intelligence 'origin and destination' traffic data. The service helps carriers to optimise routes and timetables and adds 'a significant competitive advantage' to participants, says AACO.
The efficiency drive is needed. AACO member airlines had expected a 6 per cent traffic increase last year, but the post-September 11 recession resulted in a 5 per cent decline in the fourth quarter, reducing growth to less than 3 per cent. Load factors fell by half a percentage point to 66.7 per cent over the same period.
The greater traffic drop on international routes betrays travellers' insecurity and may deteriorate further as the US maintains its aggressive stance towards Iraq. Even without a new Gulf conflict, regional airlines might still suffer.
The effects of last year's terrorist attacks on New York and Washington constitute only a blip in long-term air traffic growth, according to European manufacturer Airbus Industrie (see box), but have led to cuts in Arab networks, fleets and revenues.
As El-Hout prepares MEA for privatisation, his situation illustrates characteristics shared with other AACO carriers harbouring similar aspirations: he is a technocrat with no airline experience and his route network is not market-driven. An immediate measure has been to cut 10 - mainly long-haul - MEA routes to Asia, Europe and South America in favour of 'code-share' agreements, whereby passengers fly on other airlines under MEA flight numbers. The airline plans a long-term arrangement with the Air France/SkyTeam alliance. El-Hout has also cut the workforce by almost 40 per cent and adjusted schedules to save MEA some $55 million a year and pave the way for a predicted small profit next year.
Another operator moving towards privatisation is Saudi Arabian Airlines, whose board is reported to have approved the sale of its cargo and technical services activities. A restructuring is planned and the government has welcomed domestic competition. Privatisation has been mooted for 2004/05, although it is not clear how much is for sale or whether overseas investment will be allowed.
Other regional carriers tipped for eventual privatisation include Gulf Air, Kuwait Airways, Oman Air, Palestinian Airlines, Qatar Airways, RJ and Royal Air Maroc. Last year Air Algerie appointed consultants to advise on a 49 per cent sale. Jordan has shelved plans for a partial sale, with RJ protected from competition until 2006 - allowing time for reorganisation. Some non-core businesses have been sold, instead. The restructuring is beginning to pay off. In the first nine months of 2002, RJ managed to post a small profit after years of losses.
Ironically, El-Hout's savings have been offset by increased competition, which has cost MEA $25 million a year since the Lebanese firm declared open skies. The region's leader is Dubai, where Emirates' strong growth has been achieved in the face of competition. This year Egypt's international airports, with the exception of Cairo, have been opened to competition from Arab airlines after long opposition from EgyptAir's recently-ousted former chief executive. Kuwait has also agreed to permit competition against its flag carrier.
Emirates continues to outshine other regional carriers. Passenger numbers increased by 18 per cent last year, while profits in the first half of 2002 doubled to $110 million on the back of Dubai's ambitious tourism drive.
Qatar Airways is following a similar path, with long-term plans for fleet and route growth to reach 30 aircraft and 50 destinations before 2005. Gulf Air's future is more uncertain. A major restructuring plan awaits approval by the airline's three remaining shareholders - Abu Dhabi, Bahrain and Oman. In the meantime, new managers have been recruited in an attempt to regain its 1980s' reputation for service quality.
The region provides a competitive playing field for manufacturers Airbus and Boeing. For example, Saudi Arabian last year completed a significant re-equipment, with more than 60 Boeings brokered in the late 1990s by then US President Clinton. Other recent Boeing customers include Yemen Airways, Air Algerie, Oman Air and Royal Air Maroc.
In contrast, El-Hout's plan to acquire Airbus A321s and A330s over the next two years confirms a switch of loyalty for MEA, once a confirmed Boeing operator. EgyptAir has been preparing to receive the 100-seat Airbus A318s, for which it was a launch customer four years ago.
Recent Airbus customers include Emirates, Qatar Airways and RJ. Emirates is pressing Airbus for a heavier A340 that would guarantee performance on its planned services to New York. Airbus claims a growing share of the regional market: 67 per cent in 2000, 78 per cent last year and 100 per cent in the first six months of this year.
As it prepares to triple in size over the decade, Emirates' growth might suggest a successful formula others could adopt. But with a significant rise in costs the airline faces a dilemma. 'There is a certain size at which economies of scale [reverse] as unit costs increase exponentially,' says group managing director Maurice Flanagan.
Nevertheless, the possibility of enhanced competition and talk of regional consolidation driving efficiency - and therefore profits - bring the prospect of governments selling on the sound of violins rather than cannons.
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