Key fact

Wataniya Airways ceased operations in mid-March, after posting losses of more than $50m in 2010

Source: MEED

Kuwait’s aviation sector had an inauspicious start this year, with luxury carrier Wataniya Airways ceasing operations in mid-March, after posting losses of more than $50m in 2010. 

Undaunted by the untimely demise of a relatively young carrier, Kuwaiti transport chiefs are pressing ahead with the expansion of the country’s international airport. And in what promises to be a busy year for the sector, the Kuwait-based budget airline Jazeera Airways is planning aggressive moves to win more customers from struggling state carriers. Meanwhile, state-owned Kuwait Airways is being primed for privatisation, although the March 2011 deadline has come and gone.

Wataniya’s flawed business model

Wataniya’s collapse was attributed to a flawed business model, which saw the airline deploy a fleet of Airbus A320s, but with only 122 seats. The economics simply did not stack up, despite a concerted effort to target Kuwait’s sizeable band of high net-worth individuals. Squeezed between Kuwait Airways and Jazeera Airways, the elite carrier floundered, its premium cabin service offering insufficient revenue streams given limited route availability. With the political situation across the region deteriorating sharply, the management had few options, but to pull the plug.

Jazeera financial results
(KDm) 2007 2008 2009 2010
Revenue 34.71 48.71 46.01 42.7
Net profit/loss 2.29 4.45 -8.20 -2.8
Source: Jazeera Airways

One airline’s downfall presents opportunities for others. Jazeera Airways is hopeful of winning over some customers, having spent much of last year rationalising its fleet and stemming losses.

In 2010, the airline lost its hub in Dubai. The loss of 400,000 passengers a year hit the budget carrier hard. The resulting dip in profits forced the company to launch a turnaround plan in the second quarter of 2010, focused on removing excess capacity, dropping loss-making routes, and reducing headcount.

“Jazeera Airways has rationalised its fleet to six planes and leased out five of the aircraft they own. They have also trimmed down their order with Airbus from 29 A320s to just four now,” says Samir Murad, an analyst at National Bank of Kuwait. 

Downsizing the fleet from 11 to six should ensure sustainable profitability in future, says Murad. The strategy appears to be working. In the third quarter of 2010, Jazeera Airways reported its best ever profits of KD4.4m ($16m). It then reported KD2m profit in the final quarter of the year. In 2010, the airline carried 1.3 million passengers, accounting for 15 per cent of traffic at Kuwait International airport.

Jazeera Airways is unlikely to repeat Wataniya’s mistakes. “What Jazeera Airways did was take a step backwards, realising that their strategy wasn’t working. They basically took the decision to change their business strategy and that is paying off now,” says Murad.

For now, there are no plans to expand the airline’s fleet. Instead, Jazeera Airways will attempt to grab market share by launching the most profitable routes and boosting load factors.

The aim is to attract more customers from Kuwait Airways. In a sign of its ambition, Jazeera Airways is planning a new terminal at Kuwait International airport, which it will build and finance itself. It is also planning to shore up its balance sheet by raising capital from KD22m to KD42m.

Competition will intensify between the two main carriers. Jazeera Airways has taken over virtually all the regional routes that Kuwait Airways operates or used to operate.

Gulf aviation competition

As one of the region’s major low-cost operators, Jazeera Airways is likely to expand further as it ventures into the Indian subcontinent, North Africa and Central Asia republics. “Their model is simple and effective and will remain this way as long as they can sustain current efficiencies in cost cutting and effective management of staff and assets,” says Usman Ahmed, an aviation analyst at the UK-based International Bureau of Aviation.

The challenge from Jazeera Airways is not one that Kuwait Airways is likely to shirk, as it seeks to re-establish its network of more than 46 countries.

“Kuwait Airways cannot compete with Jazeera Airways on fares, but can still attract a big share of the market by offering premium service at attractive rates,” says Ahmed. “Internationally, it can remodel itself as a low-cost premium carrier, as this is the only sector where it has the edge over Jazeera Airways. But to do this, the airline will have to follow a very rigorous regime of cost-cutting measures.”

For Kuwait Airways to transform from a sleepy state-run behemoth into an aggressive carrier able to compete with UAE-based airlines Emirates, Etihad Airways and Flydubai, it will need to radically revamp its business model.

Privatisation is top of the agenda. Political approval for a sale of Kuwait Airways was granted by the National Assembly (parliament) in January 2008. In August 2010, the government appointed the US’ Citigroup, the UK’s Ernst & Young and New York headquartered aviation services firm Seabury to handle the privatisation. A legal consortium comprising the local Abdulhameed al-Sarraf & Partners and the US’ Baker & MacKenzie are working on transferring assets and liabilities to a shareholding company.

The aim is to sell a 40 per stake in the airline via a public offering, another 35 per cent to a long-term strategic investor, with the remaining 25 per cent retained by the state through the Kuwait Investment Authority.

Privatisation hurdles for Kuwait Airways

That, at least, is the plan. However, things have gone ominously quiet on the privatisation front. There are several obstacles blocking the speedy privatisation of Kuwait Airways.

Some of the bitter medicine that privately-operated Jazeera Airways has been able to undertake would be more tricky at Kuwait Airways. The state carrier has a staff of 6,000 servicing just 17 aircraft .

“The better-performing Jazeera Airways has only been able to turnaround things as a result of staff reductions, rigorous cost management, asset redeployment and aircraft order cancellations,” says Ahmed. “These things are almost impossible in state-run Kuwait Airways.”

There is also strong opposition to privatisation in the country. Politicians worry privatisation could precipitate a spike in unemployment, even though there is a stipulation that 42 per cent of the new company’s employees must be Kuwaiti nationals, with minimum salaries set by the government.

Attracting a strategic investor is unlikely to prove any easier than overcoming political opposition to privatisation. In the current climate, Kuwait Airways will find it extremely difficult to attract a buyer. “Any investor would require a guarantee from the government that there will be no interventions to restructuring plans, which is inevitable after privatisation and as a result a lot of jobs will go,” says Ahmed. “There may be more interest from one of the Middle Eastern carriers, as they would look to merge the operations under one entity to maximise the benefits of investment.”

The region cannot support another international hub on the same scale as Dubai, Doha and Abu Dhabi

Usman Ahmed, International Bureau of Aviation

Kuwait Airways’ finances are not in good enough shape to be able to sweeten the deal. The company has budgeted for a $180m deficit for the 2010-11 financial year, with expenditure of $1.03bn outstripping revenues of $853m. Last year, it was reported that the airline had to borrow money from local banks to pay salaries.

The management is also still fighting a rearguard effort to obtain financial compensation from Iraq’s government for the alleged theft of equipment and aircraft during in the 1990-91 Gulf war, worth a reported $1.2bn.

Yet if it continues to carry excess staff and operate too many loss-making routes, Kuwait Airways could struggle to compete in a crowded marketplace with leaner and fitter competitors.

Turnaround plan

Privatisation will be the key to putting the airline back on track, provided that the new owners are left alone to restructure the carrier.

Kuwait Airways’ revival is not simply a case of laying off staff and slashing capacity. The whole business model needs to be reworked.

“The reality is that they cannot become an Emirates, Qatar Airways or Etihad, and the sooner they realise this the better,” says Ahmed. “[Bahrain’s] Gulf Air has realised this and positioned itself differently in the market as a regional legacy carrier that also has international connections.

“The region cannot support another international hub on the same scale as Dubai, Doha and Abu Dhabi. It requires not just a modernised airport, but a lot of infrastructure built around this, as Kuwait Airways cannot only depend and survive on transiting traffic.”

A larger airport with better facilities will certainly help to improve the performance of Kuwait’s local airlines.

However, there are other important elements that will be needed if Kuwait’s aviation sector is to meet its full potential. First and foremost, the work ethic needs to change and privatisation hopefully will address this issue.

Kuwait International: A hub in the making?

Kuwait International airport is preparing for a major overhaul that aims to dramatically expand capacity and create a proto-hub at the northern tip of the Gulf. Designs are in preparation for a new terminal that would raise capacity to 25 million passengers a year from the airport’s existing 7 million a year capacity.

Germany’s Deutsche Bank has won the transaction advisory contract from the Partnership Technical Bureau for five public-private partnership (PPP) projects at Kuwait International airport.  The projects under way or approved include the extension of two runways. One is to be increased to 4,780 metres, from 3,400m, and the other to 4,000m, from 3,500m. The extensions will allow the runways to handle fully laden Airbus A380 freight airliners. A third runway with a length of 4,580m will be created to serve the proposed new cargo city.

Kuwait’s Directorate General of Civil Aviation aims to have the award letter for the construction of the new runway ready before the start of Ramadan in August. In April, the Central Tenders Committee prequalified 14 companies for the runway package.   

Other contracts include establishing a company to provide aircraft maintenance, repair and overhaul for local, regional and international airlines. There are also packages to establish cargo handling services and facilities within Kuwait Cargo City, which involve the construction, management and operation of one cargo airside or landside warehouse, one cargo forwarders area warehouse and an office building.

A third package covers the construction of a catering facility and services for the airlines and airline operators at the airport. The fourth package involves establishing gas and maintenance stations and the fifth package covers the construction of a five-star hotel.

Dividing the work up into separate PPP packages may be a calculated move to speed up the projects, since one of the trickier aspects of Kuwait’s PPP programme is that if a project is above a certain threshold value, it must then be put to an initial public offering (IPO). If the different packages fall below that value, then the backers will not have to worry about conducting an IPO.