Chief executives of Middle East airlines met in Jordan in October to debate how to help Iraqi Airways return to flying, and discussed two new initiatives that suggest market reform is finally on the agenda
Perhaps it was appropriate that this year's gathering of the Arab world airline chief executives was held in southern Jordan. Although the Dead Sea resort setting could hardly have been more tranquil, it was never far from the gathering's collective conscious that it found itself directly between considerably less peaceful Iraq and Palestine. The former is a mere 400km (250 miles) away and the latter just a short stretch away on the other bank of the Dead Sea.
The continuing instability of those states, combined with the still-rising price of fuel, are the two factors that most bedevil the Middle East's carriers. However, the gathered airline heads also celebrated the return to service of Iraqi Airways and for the first time seemed to commit to tackling the historically divisive issue of market reforms.
After a 14-year, UN-mandated hiatus, Iraqi is once more connecting its country with international destinations. Presently leasing a Boeing 737 to offer twice-daily services between Baghdad and Amman, the carrier has announced plans to add three weekly flights to first Damascus and then Dubai. Consistent with the ever-present theme of Arab brotherhood, host carrier Royal Jordanian Airlines was one of several discussing initiatives designed toward easing Iraqi's return to active flying. Meanwhile, the meeting's other key subject - reform - dealt with an issue that has recently threatened to create a division in that celebrated Arab unity.
For years, carriers in the region's less wealthy states, tasked with operating on a pure financial basis and without state financial support, have bitterly complained that their counterparts from the oil-producing Gulf receive subsidies that they use to undertake below-cost pricing. For their part, the Gulf carriers have responded that the effect of subsidies on competition is overstated, while defending a nation's right to use aviation as a tool to develop its economy.
Reform initiatives
Middle East observers who believed that the impasse was a permanent feature expressed some surprise when this year's meeting of the Arab Air Carriers Organisation (AACO) saw the unveiling of two new initiatives that suggest reform is finally on the agenda in earnest. The first is the initial step in the formation of a common Arab aviation market, which AACO is assisting the Arab Civil Aviation Commission to co-ordinate. The initiative will at first aim for market liberalisation through bilateral agreements offering unlimited third- and fourth-freedom rights in 2005, with fifth freedom to follow not long after.
The second part will be a multilateral liberalisation agreement, to go into effect upon ratification by five nations. According to AACO secretary general Abdul Wahab Taffaha, this "will form the nucleus of a single aviation market", something, he says, which will lead to block negotiations with other multinational groupings and with national authorities. Most importantly, it will include a mechanism to resolve disputes and prevent anticompetitive practices within the region. As Teffaha says: "This will ensure that the playing field is levelled. If it's not, the guilty parties will be excluded from markets."
Why has market reform suddenly gained favour? A consultant based in the region suggests that one reason comes from even the deep-pocketed governments in the Gulf tiring of writing cheques of a magnitude that only a failing national airline can require. Perhaps another motivation comes from the positive example shown by carriers that have already begun to reform, such as Royal Jordanian and Middle East Airlines (MEA).
For years hugely unprofitable and government-run, both were told to transform themselves and prepare to be sold. Although value-depressing regional instability has put privatisation plans on hold, both have been operating on commercial principles and making painful sacrifices towards repairing their balance sheets. Lebanon's MEA halted much intercontinental flying to focus on serving Beirut with a carefully selected catalogue of point-to-point destinations, reducing its fleet and staff accordingly. Now, despite spiralling fuel costs, MEA head Mohammad El-Hout says the airline is set to turn in its second consecutive annual profit.
Similarly, Royal Jordanian chief executive Samer Majali says that while the carrier "continues to struggle with the effects of external crises", including $15 million in extra fuel costs, his restructuring efforts are expected to yield a small operating profit for the year. Interestingly, one of Royal Jordanian's two biggest external shocks - Iraq - represents a double-edged sword. While security fears have caused the number of tourists visiting Jordan from Europe and North America to drop by about half, the traffic associated with the rebuilding effort has been a tonic. The carrier operates two daily frequencies to Baghdad with a 65-seat Fokker F-28, charging around $1,100 for the short, round-trip flight. Majali stresses that the "profitability on the flight is good, but it isn't unreasonable", owing to its onerous insurance requirements, which have kept other carriers out the market.
Reform has not been limited to the Levant region. Gulf Air chief executive James Hogan states that his carrier, owned by the governments of Abu Dhabi, Bahrain and Oman, but charged with operating commercially, has used deep cost-cutting measures to weather its augmented fuel bill and stay on track to break even this year and earn a profit in 2005.
If much of the impetus for reform has come from within the region, the impact of external factors, too, cannot be overlooked. Last year, the European Union announced it could impose financial penalties on carriers using government aid to distort competition into Europe. The regulation was a response to transatlantic price-cutting after the US government's post-9/11 airline bailout, but could equally apply elsewhere. Gulf Air's Hogan predicts the new rules could be used against Middle Eastern carriers that generate much of their traffic in Europe, both to their own region and beyond to Asia.
European concerns
Association of European Airlines (AEA) secretary general Ulrich Schulte-Strathaus says there is a sense of "growing concern" about the fleet growth in the Gulf and its effect on fair competition. "It comes as a surprise to see the levels of large, long-haul aircraft being purchased there. Studies do not forecast a surge in traffic to support them, so the presumption is that they will be used on existing routes. If it can be demonstrated that this capacity growth is state-funded and is being used to pursue market share gains, then community action can be taken," he says.
Schulte-Strathaus insists the AEA is less interested in battles than in a dialogue between its members and those of AACO toward a mutually desired solution, a sentiment seconded by Teffaha. However, even in the absence of an immediate threat, Majali says the threatened imposition of competition rules by the outside world has accelerated liberalisation within the Arab region.
The second reform-centred initiative introduced at the meeting was the formation of a "virtual alliance", a three-stage project that would culminate with Egypt Air, MEA, Royal Jordanian, Saudi Arabian and perhaps Gulf Air rationalising their networks so that long-haul flying is done from whichever hub makes best sense. For example, flights to Paris might go through Beirut, with natural ties to the French market, while flights to Africa could be routed through Cairo. The initiative, which Majali calls a "breakthrough for AACO in the commercial arena", has drawn interest from other carriers. Oman Air head Abdulrahman Al-Busaidy says his carrier will join the group when it opens up to newcomers.
Reform is gaining momentum in the region but a new addition to the gathering and the absence of a familiar face show that it is not yet guaranteed. Present for the first time was Etihad, a new airline started by the government of Abu Dhabi, already a one-third owner in intercontinental carrier Gulf Air and located an hour's drive from regional aviation hub Dubai. More than one consultant has questioned how the emirate's population of fewer than one million can support the recently ordered fleet of five Boeing 777-300ERs and 24 widebody aircraft from Airbus, including four A380s.
Etihad head Sheikh Ahmed bin Saif Al-Nayhan laughs at the naysayers, saying Abu Dhabi was underserved by Gulf Air's offerings and that his new carrier will capitalise on its service standards and the convenience it offers local passengers to achieve profitability within four years.
Also indicative of the resistance to change was the absence of Kuwait Airways chief executive Ahmed Al-Zabin, who resigned from the post in February. In a letter subsequently published in a Kuwait newspaper, Al-Zabin blamed the government owner's resistance to reducing staff levels and pay scales at the loss-making carrier.
The continuation of reform, and even whether it is a good thing, are hardly questions that meet with uniform answers. But when the Arab airline chiefs meet next year in Yemen, they will hope to no longer find themselves, as Majali famously says of Royal Jordanian, "stuck between Iraq and a hard place".
Source: Airline Business
