View points: Arab Air Carriers Organization

Liberalisation and ownership are among the greatest challenges that face members of the Arab Air Carriers Organization (AACO), and airlines need to move faster with e-ticketing

Arab air transport is under pressure. "The crisis headers are still unchanged," AACO secretary general Abdul Wahab Teffaha told his airline members attending its annual meeting in Kuwait City in late November. "The Israeli occupation of Palestine, the Arab-Israeli conflict that witnessed in 2006 a wide-scale attack on Lebanon, the situation in Iraq, terrorism, and other flash points in surrounding areas, have all prevented [the industry] from taking advantage of the potential in the Arab travel market."

The industry also faces several other key issues, of which liberalisation and ownership and control are among the greatest challenges to be overcome. "Airspace liberalisation and the liberalisation of market access is a must," says Teffaha. "The concept of government protection of airlines through limiting capacity, setting prices and frequencies is coming to an end," he says, "and the Arab world is heading in that direction."

He insists, however, that liberalisation and market access regardless of the interests of the national airlines, whether government owned or private, is a strange business concept, adding that laws need to be enacted that "guarantee equal opportunities, consumer protection, and prevention of capacity dumping, predatory pricing and government subsidies".

Slow pace of liberalisation

But the twin approach is making slow progress and so far is manifest only in bilateral agreements between individual countries, such as Lebanon-Kuwait and Saudi Arabia-Egypt, together with decisions by Egypt, Lebanon, Jordan and Saudi Arabia to divest control of their national carriers, or at least open up a stake in them to the private sector.

An interesting development has been the open skies pact negotiated by Morocco with the European Union (EU), known as a "horizontal agreement". The Arab States, under the direction of the Arab Civil Aviation Commission (ACAC) and supported by AACO, are negotiating with the EU a similar agreement, although some within the EU are calling for limits on the expansion of some Arab airlines in the European market because they are being subsidised by their governments. This may prove a sticking point, but the weaker Arab airlines also fear a potential domination of their markets by European airlines, as has been the case in Africa.

Allowing airlines access to the capital markets, rather than locking them into debt, is seen as a prerequisite to the development of the air transport sector and Teffaha says the capital is available as "Arab institutions seek new markets outside real estate and banking".

AACO is also calling for the adoption of a uniform visa between all, or some of the Arab countries as essential steps towards a single Arab aviation market and the development of tourism and travel within the region. In Europe, AACO points out, there is a common policy on temporary entry and the harmonisation of external border controls.

Alliance membership

The small size of many Arab carriers, together with the constriction of government control, has also hampered accession to major global alliances. Only Royal Jordanian Airlines has been elected to membership of the oneworld alliance, while EgyptAir says it is negotiating with another alliance, thought to be Star. Middle East Airlines is set to become an associate member of SkyTeam and Kuwait Airways chairman Sheikh Talal al-Sabah also confirms that his carrier has made overtures to join a global alliance.

AACO believes that privatisation could open the door for mergers and consolidation between Arab airlines to achieve the critical mass necessary to ensure "a competitive global standing".

The move towards market forces, however slowly, as well as the development of a small number of regional airports with direct flights, has also seen the emergence of the low-cost business model. While now limited to Air Arabia of Sharjah, Kuwait's Jazeera Airways and Atlas Blue of Morocco, the competitive pressure on legacy carriers in this part of the world, as seen elsewhere, will continue to grow.

Other countries, such as Saudi Arabia, are preparing to let low-cost players enter the market. It has given the first license to National Air Services. Competition, therefore, will have to be faced not only from the outside, but increasingly from within.

IATA director general Giovanni Bisignani acknowledges the success at various levels achieved by airlines and airports in the Middle East and North Africa (MENA) region, but cautions against "losing the plot on cost-efficiency and the differentiation between growth and profitability".

Singling out electronic ticketing by the end of 2007 as IATA's top priority in simplifying the business to reduce operating costs, Bisignani says the MENA region is last in e-ticket penetration in the world, at just 13% of sales, in spite of good advances made by Emirates, Oman Air and Royal Air Maroc. "As a region, this is more than disappointing," Bisignani observes.

"For a fast growing region, it is an embarrassment. Electronic freight is another missed opportunity," he adds. "Although Arab carriers ship 2 million tonnes of international cargo a year and understand the importance of cargo, not one country is a candidate for e-freight pilots scheduled for next year. I am raising the alarm bell - I am not raising the white flag," Bisignani says.

The freedom to do business is, as ever, Bisignani's hobby-horse, and he calls on politicians to move swiftly towards a liberalised environment. "You [in the MENA region] have enormous airport and aircraft investments and the numbers don't add up," he says.

"Clearly, to fill the airports of the future, you will need maximum flexibility to develop new markets," says Bisignani. "Liberalisation must be part of that equation. It stimulates traffic and is a catalyst for economic growth. Double-digit growth and booming economies are providing incredible opportunity. To maximise this airlines must press governments for much needed change on liberalisation, move forward on IOSA (IATA's Operational Safety Audit) and speed up the implementation of e-ticketing." Teffaha concurs. "Arab air transport cannot continue as an island isolated from what is happening in the global industry," he insists.

Fuel costs for Arab airlines increased by 60.9% over the previous year and other principal contributors were high distribution costs, because of the region's continued reliance on traditional sales channels and local charges and taxes, which, according to AACO, are among the highest in the world.

"Despite the fact that the problem is global in nature," says Teffaha, "it is crucial in the Arab world that governments revisit these taxes and charges - especially on short sectors, where the value of taxes and duties is almost equivalent to the price of the ticket. In total almost 50% of the costs [of Arab airlines] are totally beyond their control."

Kuwait's minister of communications, Dr Ma'asouma Saleh al Mubarak, says her government is committed not to impose taxes on passengers to "cover the cost increase of other activities in the country", and is now considering preferential pricing schemes for the purchase of fuel at Kuwait International airport. But hers may be a lone voice, with Teffahah complaining that taxes on tickets have increased in the Arab world this year.

Fuel purchasing scheme

For most Arab airlines, growth does not necessarily ensure profitability, but progress is being made on several fronts. Fuel costs would have been worse but for savings achieved through AACO's joint fuel purchasing scheme, and savings have been achieved through its regional training centres and other joint projects like ground handling and distribution.

Benefits are also accruing from the Transarabia multilateral fares agreement among six Arab airlines and the Arabesk network co-operation, formally established in January 2006. In November, Tunis Air became the seventh member to sign this agreement. The others are Gulf Air, Middle East Airlines, EgyptAir, Royal Jordanian, Saudi Arabian Airlines and Yemenia. The delivery of 82 new aircraft and the phasing out of 54 in 2005 has further reduced AACO's fleet age to 9.71 years.

Safety has again been impeccable, with no fatal accidents suffered by member airlines in 2005. By 2007, all AACO members will be accredited to IOSA, and compliance will be a prerequisite to joining the organisation. "We see IOSA as a facilitator for co-operation with other airlines," says Teffaha.

However, there are still 10 IATA carriers in the region that are not yet in the IOSA process, including four AACO members, says Bisignani, and these will need extra help.

AACO is also working towards its members achieving the March 2008 deadline for compliance with ICAO's English language proficiency requirements through recognised assessment and training centres.

Source: Airline Business