A mainly positive reporting season has seen several Middle Eastern airlines talk of privatisation and initial public offerings as they seek to raise capital and in some cases at least, continue to expand.
Key Middle Eastern carriers are looking to access the capital markets after reporting relatively robust results for 2004. Gulf Air and Royal Jordanian returned to the black and Emirates turned in a record profit.
Speaking at the Emirates annual general meeting in Dubai in May, the group's chairman Sheikh Ahmed bin Saeed Al-Maktoum said that the carrier was undertaking a study into a possible initial public offering. "It is always up to the government of Dubai, but we are in the middle of looking into that, looking at how much the airline is worth," says Sheikh Ahmed.
Gulf Air, meanwhile, is talking with investment banks about a possible privatisation. "The financial community is certainly interested and we're in discussion with a number of banks," says chief executive James Hogan.
Emirates made a net profit of Dh2.6 billion ($708 million) on revenues of Dh19.1 billion. Gulf Air exceeded its stated target of reaching breakeven with a profit of $4 million as a result of changes implemented during its three-year turnaround programme Project Falcon. "We now have a business built on sustainable foundations which can compete with the very best in the world," says Hogan.
Royal Jordanian was also in positive mood – and also looking towards possible privatisation.
The carrier recorded its first net profits after years of losses, with a surplus of $22 million which was ahead of company forecasts. Revenues, meanwhile, were up a by a third.
"These gains prove that Royal Jordanian is an economically-successful company that performed very well in semi-normal conditions," says the carrier's chief executive Samer Majali, adding that potential investors would be encouraged by the results.
"The Government is currently considering accelerating the privatisation process of the company in 2006 by selling shares to a regional investor or floating shares on the local market," Majali says.
Elsewhere, Saudi Arabian Airlines says it has started preparing for privatisation through restructuring the financial, operational and administrative departments. The carrier plans to turn departments including cargo, ground handling, catering, maintenance, human resources and the Prince Sultan Academy for Aviation Sciences into "commercial, strategic and profitable centres". The airline has set up an executive board to prepare the catering department for privatisation, with similar steps due to be taken in other departments.
Many carriers in the region do not produce regular financial information, but the available results and the mooted share offerings suggest that in the Gulf region at least, the industry is looking pretty healthy at the moment, partly as a result of strong economic growth. Dubai saw a 16% increase in GDP last year, for instance.
The region has, ironically enough, undoubtedly benefited from the strong oil price. However, Emirates for one fervently denies that it has benefited from cheap oil. "I wish I could get cheap fuel," jokes Sheikh Ahmed.
Emirates managers make plain their annoyance at this idea that they get fuel on the cheap. Gary Chapman, president of Emirates subsidiary Dnata (which buys kerosene on behalf of Emirates) says, "We have to purchase our fuel from the likes of Shell and BP just like everyone else. These are major international players." Chapman also points to a successful hedging programme that reduced its fuel burden by $126 million in 2004-5. Even so, fuel costs rose from 14% to 21% of total operating expenditure.
Both Emirates and Gulf made clear that the financial outlook for 2005-6 was clouded by the risk of sustained high fuel prices. Gulf Air anticipates a 2005 fuel bill that will be at least $100 million over budget. "Record fuel prices, if unaddressed, have the potential to erode the progress we have made to date," says Hogan.
At Emirates, vice-chairman Maurice Flanagan puts the record result down to the breakneck speed of growth of Dubai itself, as well as internal improvements within the airline. "We are getting more efficient as time goes by. Dare I say it, we are getting quite good at running an airline business."
Widebody deliveries
The fast growing carrier had a fleet of 75 aircraft as of May this year, and has another 97 widebodies on order (including 45 A380s) which will be delivered at the rate of one per month for the next eight years. Emirates is busy establishing Dubai as the region's megahub, taking advantage of its position on the crossroads of many east-west routes. Last year the carrier expanded its network to include Vienna, Seychelles, Christchurch, Glasgow and Shanghai.
It is even looking at the likes of Newcastle in the UK as it widens its network and builds the critical mass necessary to feed its Dubai hub and its A380s.
Gulf Air's management board has approved a new strategic business plan to cover areas such as recapitalisation through privatisation or possibly a strategic partnership, fleet renewal and network expansion.
The carrier says it has received propositions from Airbus and Boeing, and in the first instance is considering replacing the existing fleet rather than expansion. Additional capacity in the region is putting pressure on yields, says Gulf Air's Hogan. He believes that a strong Gulf Air will be in a position to partner with other airlines in the region. Using the Air France/KLM merger as a model, he foresees similar propositions eventually appearing in the Middle East.
Low-cost penetration of the region is low so far, although Air Arabia, the regions' first low-cost carrier, reported a break-even result for its first year – something the carrier had only expected to achieve in 2005.
Gulf Traveller, the all-economy subsidiary of Gulf Air, recorded an average load factor of 75.8% last year, flying to 17 leisure destinations in areas such as India, Indonesia and the Philippines.
COLIN BAKER DUBAI AND JACKIE THOMPSON LONDON
Source: Airline Business
