TOM GILL CASABLANCA
Moroccan flag carrier Royal Air Maroc is preparing for privatisation and hopes to join Air France's global alliance. But it has not escaped the market turmoil hitting the rest of the industry.
"When you make a lot of profit it is a bit worrying. You say to yourself - when is that going to stop?" Mohamed Hassad, chairman of Royal Air Maroc has the luxury to fret about a problem that many of his counterparts in Africa can only envy.
From its heavy losses in the early 1990s, the Casablanca-based airline now boasts profit margins on a par with some of the more successful US and European carriers. Under the leadership of Hassad, a former minister of public works who was responsible for reorganising and unifying the country's substantial port industry, the state-owned carrier has transformed itself into a leaner, healthier operation.
Hassad says he has maximised the use of existing assets and resources. He has not hesitated to cut back unprofitable activities. Alliances have been struck where they have made business sense.
Since Hassad took the helm in February 1995, the Magreb's largest carrier has raised capacity by 50%. The company did not expand the fleet but increased aircraft utilisation by 40%. Frequencies to key destinations in Europe and the USA were boosted, and fares brought down. As a result, the carrier has raised market share, which now stands at 64% to France and 49% across the rest of western Europe.
Costs have been brought down substantially and are said to be close to the US low-cost giant, Southwest Airlines. The decentralisation of management responsibility, such as dividing it into separate profit centres, has created more transparency and helped keep a lid on expenses. So have a seven-year wage freeze, a cut-back on benefits and longer flying shifts of 60-70h a week for the company's 337 pilots, according to Morocco's cockpit personnel association.
The company's debt burden has also eased, with the asset to debt ratio cut from 3.9 to 2.4 over the last four years. Indebtedness now stands $350 million.
The next step, says Hassad, is privatisation. Royal Air Maroc will not be the first state company to be sold off in Morocco, which began the privatisation process in 1993. A recent change of the political guard appears to be good news for investors whose appetite was recently wetted by a billion dollar sale of the license for the national GSM mobile telephone.
The new King, 36-year-old Mohammed VI - who took the throne in June - appears to be determined to accelerate the reforms of the late King Hassan II, which have made Morocco one of the most liberal economies in the region.
In October, the socialist-led government of this constitutional monarchy was set to give the go-ahead for privatisation. This is to involve the state relinquishing up to 40% of the equity of the company through an initial public offering on the Casablanca stock exchange. The listing, say company officials privately, is set to be more than twice over-subscribed.
Strategic investor
"The process should be completed by the end of June 2000," says Hassad, but adds that it is not yet clear whether this will include an injection of capital or whether a strategic investor comes in from the start or at a later date.
"We have argued for a complete flotation on the stock exchange but it is possible that the state decides from the very start to introduce a strategic investor," says Hassad.
The local backer of Morocco's sole operating private carrier, Regional Air Lines, is a possible strategic investor, according to pilot groups. Through the management of the two-year old domestic carrier, which operates four 19-seat Beech 1900 aircraft, the Othman Bengelloun Group not only has experience of the industry, but as a major shareholder in BCME, a leading Moroccan bank, it has financial muscle. Hassad, however, is fairly clear about who he sees as a long-term partner.
While he claims it is "too early" to say whether French flag carrier Air France will raise its 4% stake (Iberia owns 2% and the balance is held by the Moroccan Government), Hassad clearly sees the airline's future tightly bound with the French carrier. "Air France is already a shareholder. Our most important market is France," he says.
Strong historical links and a large Moroccan population living in France have ensured that the country is Royal Air Maroc's largest, and among the fastest growing, markets. France accounts for a 30% share of passenger traffic while the rest of Europe accounts for another 30%. Both markets have been growing rapidly in recent years, expanding at over 15% in 1998 alone.
Royal Air Maroc expanded co-operation with Air France in 1997 with a broad co-operative agreement covering schedule co-operation and codeshares between France and Morocco. The airline has been multiplying alliances with other carriers, codesharing with Iberia since 1988 and last year sealing a major deal with US carrier, TWA. This includes joint operations between Casablanca and New York and onwards to eight locations in the USA. In March it signed a codeshare agreement with TAP Air Portugal. Despite this proliferation of bilateral arrangements, Royal Air Maroc's aim is to join the French flag carrier's global alliance.
"In the end we are going to integrate into an alliance. There are natural alliances. For us a natural alliance is with Air France and Delta. I think the others [in the alliance] are putting all sort of things together before opening up to other partners. But we will join them as soon as it is possible," says Hassad.
The carrier's new-found commercialism has pushed it to expand well beyond its relatively small home market, rejecting protectionism for free trade.
"We have noticed that in the last few years that with this strategy of capacity and the control of structural costs, we have substantially lowered the unit costs. That has permitted us to lower our prices and at the same time generated supplementary traffic. We believe that open skies will make the market more dynamic. We could be wrong. But I think today we have the ability [to survive in a competitive environment].
"Before it was Royal Air Maroc that blocked capacity with Europe. It was Royal Air Maroc which didn't want to increase frequencies. It was Royal Air Maroc which resisted. Today it's the contrary. For most markets it is us that demands," says Hassad. "We are very demanding. It is Europe that doesn't want to discuss the matter."
The company is "in discussions with the European Commission", which has "sympathy" for the desire of Royal Air Maroc to open its skies to Europe, but this appears far away. According to Hassad, the main problem is that "Europe has not come up with a global doctrine to negotiate with non-European Union countries", he says. But pushing his case he adds: "We are very small. If a European company decided to liquidate us, it could do so very rapidly."
Open skies policy
The airline does not, however, believe all the frontiers of protectionism should be rolled back. In September, United Airlines called on the US Department of Trade to push for open skies with Morocco, following Royal Air Maroc's request to replace one of its four weekly Casablanca-New York-Montreal services with an onward service to Toronto.
Hassad's enthusiasm for open skies does not extend to the USA, which accounts for 10%of the company's traffic. By virtue of its TWA codeshare, it dominates 100% of the direct traffic to the USA, but it argues that European carriers already provide tough competition out of their own hubs.
Despite its focus on Europe and the USA, the carrier is not neglecting the African market. There are plans to form close ties with two African carriers - Air Senegal and Air Afrique. The idea would be create mini-hubs further south and draw traffic to Casablanca, although Hassan is cautious about dipping into company coffers to buy equity stakes before the privatisation process has begun.
"We would love to have a platform at Dakar and take the traffic to Casablanca. We would love to expand together," he says. But "even if strategically it seems seductive, we lack experience. I don't know what the outcome would be. It could be a disappointment for us and for the others." Hassad says he does not know the intentions of multinational Air Afrique's owner states, which are restructuring the airline to make it profitable.
Royal Air Maroc is sober about limited benefits of expanding in Africa and of its Casablanca hub. The airline not only suffers from a relatively small market - the population of the country is 29 million - but the economy is largely based on agriculture and low-value adding industries, which mean yields are weak. Even if some economies of scale can be achieved, attracting more transfer traffic, especially from the African market, will not reverse this trend.
In addition, the low-yield domestic market was liberalised in 1997 and the company is beginning to face competition from private operators - fledgling Regional Air Lines may soon be joined by Morrocan Airways, a yet-to-be launched Tanger-based airline owned by French travel agents Safar Tours.
"The problem is that our market is very weak in terms of premium traffic," says Hassad. "Our traffic is generated by a mass market. It's not like British Airways with all the flights full of businessmen going to Paris or New York. We have very few businessmen who go to New York," says Hassad.
A continued drive to decrease costs and raise efficiency is therefore crucial. A $1.5 billion fleet overhaul for 2002-12, will help. The company, which operates two Boeing 747s, 27 737s and two ATR turboprops with an average age of nine years, will receive five 737s between February 2000 and March 2001 as part of an existing Boeing order.
Reducing costs in other areas will be "difficult", without prejudicing the service, says Hassad. "Today we have low costs - around 6ó per available seat kilometre. Compared with other airlines we are among the lowest cost. That does not mean that we can't improve. We reduce them each year - this year they fell 8% - after a fall of 25-30% in four years. But we cannot reduce costs to zero. There are limits. I think we are beginning to reach them."
Unit costs have also advanced because of the airline's rapid expansion. But like its competitors, Royal Air Maroc has been hit by falling yields and is having to cut capacity growth to limit the damage.
Hassad says the company had been benefiting from relative calm until this year, but the tough price competition experienced in the early 1990s has returned. "Over the last three to four months the competition has been intensifying. Signs of panic have re-emerged."
The carrier was planning a 40% increase in capacity for the 1999-2003 period, with the biggest expansion - 58%- on routes within Magreb and to the USA. But last year alone, capacity increases considerably outstretched traffic in market segments representing around half of its business. The carrier's relatively weak load factors on the all-important US and French markets - 61% and 64%respectively - were not raised.
"Today we have an average load factor of around 60-62%. They are low compared with what is practical. This year we - indeed, everybody - put on a lot of capacity at the same time. Everybody is ambitious to expand market share, taking risks because they are making profits. That's dangerous," says Hassad.
He projects a fall in Royal Air Maroc's 1999 operating profits by 50% to $20 million. However, he says that largely "by acting on capacity" and "improving load factors" the company will bring profitability back up to the same kind of levels of 1998. Hassad does not rule out a continuing tough market in the months to come but, whatever the circumstances, he is confident that Royal Air Maroc "will adapt".
Hassad has shown an impressive ability to adapt to circumstances. In the nine months before the privatisation deadline, his skills will no doubt be put to the test.
ROYAL AIR MAROC
Base: Casablanca Operations started: 1957 Ownership: Air France, Iberia, Morroccan State Employees: 5,400 Fleet: 31 Aircraft Main types: Boeing 737, 747, 757, ATR 42
Source: Airline Business
