Abdulkalek Saleh Al-Kadi, chairman of Yemen Airways and current president of the Arab Air Carriers Organisation (AACO), is blunt about the prospects for greater market freedom for the region’s carriers. “We cannot have open skies – it would kill unsubsidised airlines. We have to have an environment where all airlines operate on a level playing field, as in Europe.”
The recent AACO annual general meeting of the group’s 23 member airlines in Yemen may have focused on achievements in joint purchasing, safety, security, e-ticketing, and network co-ordination through the proposed Arabesk partnership, but beneath the surface, major difficulties remain. The two key issues holding back growth and hampering real progress in the region were briefly alluded to, but not fully debated, at AACO’s meeting. Liberalisation and privatisation, or the lack of both, are the controversial conjoined twins stalking governments that are fearful of losing control. One cannot happen without the other.
Perhaps the need to comply with the IATA Operational Safety Audit, the looming mandatory imposition of e-ticketing by the end of 2007 and the challenges posed by new low-fare carriers have diverted attention from the most fundamental problems afflicting the region. Perhaps, with many of the airlines being of small and medium size, there is a feeling that they would be less able to compete against larger, heavily subsidised state airlines if trade barriers were removed.
Governments from the Middle East and North Africa at least pay lip-service to the concept of pan-Arab liberalisation. A draft to liberalise the aviation sector and increase pan-Arab co-operation, signed by air transport officials of the 16 members of the Arab Civil Aviation Conference in Jordan in February 2004, was hailed as “a first step towards the great Arab free-trade zone”, and “Arabia’s answer to international aviation blocs”. But small steps, even if going in the right direction, will not be sufficient. What is required is a giant leap of faith. However, with new bilaterals still being forged among countries, this vision of one aviation area appears more distant.
“Even within the Gulf Co-operation Council countries [Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE], I cannot see free movement of people and goods,” says Sheikh Talal Mubarak, chairman and managing director of Kuwait Airways and next president of AACO. “With bilateral agreements continuing to be negotiated, we are going in the wrong direction.”
AACO secretary general Abdul Wahab Teffaha says achieving a level playing field will require three specific conditions: the freedom of movement of people and goods to grow intra-Arab trade, currently comprising only 7% of the total Arab commercial exchange; unrestricted market access, with fair competition and protection against price “dumping”; and opening the way for Arab finance to play a significant role in the partial or complete privatisation of airlines.
Single Arab market
It is clear that the region is far from reaching such ambitious goals, but Teffaha insists the picture is not as bleak as it first appears. “There are now 11 countries wholly or partially open,” he says. “Five years ago there was only one [Dubai].” However, most of these are on a bilateral basis, which does not advance the stated aim of a single Arab air transport market.
While most, if not all, AACO members are in favour of liberalising the market within the region, says Teffaha, member airlines cannot exert pressure on their governments to bring about deregulation. “It is a purely political decision,” he says. “Each country has its own national agenda. There is no single Arab view. No one opposes liberalisation, but account has to be taken of the individual local market and agenda.”
Talal cautions that liberalisation in Europe did not happen overnight and faced many regulatory and operational hurdles. “When we have a roadmap in place, only then can we consider ourselves as one Arab state,” he says.
But Talal and other airline chiefs warn that unless the Arab nations take a proactive stance, pressure for liberalisation will come from the outside, from the stronger European carriers, and the danger is that Arab airlines will be relegated to a minor supporting role in the battle for market share.
Capt Sabri Saad Abdullah, chairman of Afriqiyah Airways, agrees, lamenting the lack of political will in Arab countries and insisting that liberalisation has to come from the inside, and not be imposed by others outside. “We need to be prepared to achieve a better result,” he says. Such preparation will inevitably initially involve putting airlines on a commercial footing to create an efficient structure not overburdened by forced overstaffing. Partial or full privatisation could follow.
Discussions go back years on the partial privatisation of Saudi Arabia Airlines and what form this was to take. Prince Sultan bin Abdulaziz al-Saud, Saudi minister for defence and aviation, signed a contract in October 2000 for the preparation of a privatisation study, but only now is the government reaching a decision. Airline director general Khaled Ben-Bakr says the detailed study has been completed and has been put before the Saudi economic council for consideration. Khaled believes there is no doubt the carrier will be opened to private investors, including a possible strategic partner, but he is less certain about the timeframe and the percentage that would be released.
Saudi Arabian’s improving financial performance should provide sufficient encouragement to private investors. Khaled says the airline made a profit of about $120 million in 2004 and expects to improve on this figure in 2005. Another positive step was the deregulation of the domestic market. “The domestic market has been a burden to us,” says Khaled. “Prices have been regulated by the government and were the lowest in the world – lower than those of low-fare carriers. It was impossible to make money.”
In preparation for privatisation, the airline is restructuring non-core activities such as catering, ground handling, maintenance and the Prince Sultan Flight Academy in Jeddah into commercial units and profit centres.
While Khaled appears philosophical about the slow progress towards privatisation, Talal’s dignified external demeanour barely conceals the frustration he feels about his government’s tardiness in reforming loss-making Kuwait Airways. While government policy seeks to convert the public sector into more independent commercial undertakings to get away from choking bureaucracy, Talal insists: “Reforming Kuwait Airways should be a priority.”
The airline is struggling with overstaffing – which afflicts many government-owned carriers in the region – but matching personnel to the size of the airline more appropriately would involve cutting the workforce by about 30% – a move that is near impossible under government ownership. A small operational profit of about $10 million will be made in the current financial year, says Talal, but high fuel and labour costs are keeping Kuwait Airways in the red, with a net loss close to $100 million expected.
Privatisation roadmap
Unfortunately, adds Talal, privatisation is still several years away and the process of commercialisation as a first step towards profitability has yet to begin. Proposed legislation was put before the Kuwaiti parliament in June 2005, but has been rejected in its present form and will be resubmitted in the first quarter of 2006. A five-year strategic roadmap has been developed based on guidelines formulated by Lufthansa Consulting.
The new corporate strategy accepts that Kuwait Airways must become financially independent and operationally efficient without losing its core values. Lufthansa Consulting also believes Kuwait Airways has to become “more market-oriented” and move quickly to focus on core operations by shedding various units.
After a number of false starts, Royal Jordanian Airlines appears to be the closest to achieving a loosening of state control. A proposal for offering an undisclosed minority stake in the airline to private investors is now with the government’s executive privatisations committee, which is expected to approve the sell-off some time in 2006.
Elsewhere, Abu Dhabi’s decision to pull out of Gulf Air may have brought an initial public offering to boost the airline’s capital closer, and Emirates has also mentioned such a possibility. Adel Ali, chief executive officer of low-fare carrier Air Arabia, owned by Sharjah’s airport authority and civil aviation department, also supports privatisation. “We would like to privatise to create healthy business practice,” he says, “but let us first prove that there is a market [in the region] for low-cost carriers.” Air Arabia, which started operating in October 2003, will make a small profit in 2005, he adds.
Another of the smaller carriers, Libya’s Afriqiyah Airways, has enshrined eventual privatisation into its constitution, which states that the airline can be fully privatised, with 49% open to foreign investors. “The sooner, the better,” says chairman Sabri Abdullah. “It will help us to create a profitable airline.” Afriqiyah, which started operating in December 2001, has yet to make a profit. Sabri cited high fuel prices in sub-Saharan Africa and expensive services provisions for keeping the airline in the red, but he projected a first net profit in 2007.
Looking further ahead, Sabri believes an eventual merger is likely between Afriqiyah and flag carrier Libyan Arab Airlines, provided both are privatised.
However, the private route is definitely not on the agenda at Syrian Arab Airlines, or for fast-growing Qatar Airways. This issue clearly shows the widely differing attitudes of the region’s governments and the slow progress being made.
It could take five years for some of the current privatisations to be completed successfully, and possibly longer for several others. Liberalisation, so long a topic of discussion at AACO gatherings, will take much longer to achieve. IATA director general Giovanni Bisignani succinctly summarised the current situation by saying: “Change is critical, but it is slow in coming.” ■
GUNTER ENDRES/SANA'A YEMEN
Source: Airline Business
