Airline presidents in the Arab world may have reason for their cautious optimism. As they gathered in Cairo at the end of April for the annual general meeting of the Arab Air Carriers Association (AACO), they did so after a year of robust traffic growth. This, coupled with predictions of a 5% expansion for 2000, was welcome news. Last time they met, the carriers had just been through the bruising experience of a year of zero growth in the wake of the Asian crisis.
A better-than-expected 3.5% expansion of the regional economy in 1999 has helped the industry recover lost ground. Higher oil prices, while adding to the fuel bill, created an improved economic environment for business and intra-Arab tourism. Political stability is said to have boosted investor confidence in the region and lured tourists back.
With a 7.8% rise in demand marginally outstripping supply, load factors edged up one percentage point to 65.5%. As always, the picture was mixed. Some carriers expanded in double digits, with others barely growing; seat occupancy rates ranged from respectable 70% load factors down to no more than a third.
Because many Arab airlines have yet to file their annual results and others keep performance data as a closely guarded commercial secret, it is difficult to assess whether the region is indeed back in the black, but early reports are positive enough.
Royal Air Maroc (RAM) was perhaps typical of the new optimism, which in turn is fuelling another push for privatisation within the Arab world. The Moroccan flag carrier achieved double-digit traffic growth last. And although profits dipped, Hamid Benbrahim El-Andaloussi, the company's strategy chief, estimates that it will nevertheless show net earnings of over $150 million. The usual suspects of high fuel costs, a weak euro and a stronger US dollar played their part, he says.
The airline's traditionally weak yields are set to improve this year as capacity is tightened to further improve on last year's four point gain on load factors adds El-Andaloussi. This is timely, because the state-owned carrier, aided by advisers Banque Indosuez, local bank Wafa Trust and consultants McKinsey, is to relinquish a minority stake in an initial public offering on the Casablanca stock exchange in September. The valuation is due to be completed this summer.
As an aside, RAM highlights another major theme at the conference - e-commerce. Most AACO members have as yet to form Internet strategies but RAM is "a pioneer", says distribution manager Miriem El Bourey. The carrier launched e-booking for US and European customers in January and now takes in excess of eight bookings daily. Within two years, it expects 5% of total bookings to be made on the web. The carrier was due to start e-ticketing in June.
Restructuring appears to be taking hold elsewhere within the region too. Royal Jordanian also registered a net profit last year - its first since 1992, according to president and chief executive Nadar Dahabi. "The first four months of 2000 have been encouraging," he says. "We will have another profitable year if fuel prices go down."
Greater stability in the country and the surrounding region has played in the airline's favour. Tourism, particularly from Europe, boosted passenger numbers, which grew by more than 10% last year. He hopes the long-struggling airline which recorded a $36 million net profit on a turnover of around $350 million last year, is "out of the red for good".
Dahabi's hopes for Royal Jordanian rest largely on a wide-ranging restructuring and privatisation plan, launched three years ago (see Airline Business, June 1999). The recent replacement of an ageing, fuel-guzzling TriStar with an Airbus A310 on temporary lease was the last piece of route and fleet rationalisation before the sale to a strategic partner. Under the World Bank-sponsored plan, the airline has been spun off from the duty free, training, catering, engineering and maintenance businesses, which are being sold piecemeal this year. Proceeds will cover a large proportion of the carrier's debts of some $850 million.
In December, the airline side of Royal Jordanian completed a road show spanning the USA, Europe and the Gulf States. Dahabi now awaits legal changes this month which will reconstitute Royal Jordanian as a pure airline business. He says two European airlines (not Air France) have expressed an interest in taking up to 49%, which will also include $150 million in debts linked to the leases costs of the A310s and three Airbus A320s.
A US airline, which he also refuses to name, is interested, but it needs to get over some strategic issues in South America. "Once the government has found a strategic partner, it will sell the remainder," he adds. "In the year 2001 you will see a privatised Royal Jordanian."
Other carriers too are seeking to streamline and cast off state ownership. At one end of the scale, Arthur Andersen and Forbes Consulting are advising Sudan Airways, with its eight aircraft, over privatisation, which director general El Fatih Mohamed Ali says will be completed within two years. At the other end of the scale, are some major of the Arab world's largest carriers.
EgyptAir, the host of the AACO general assembly, is to be privatised, according to the local press. Egyptian transport minister Ibrahim El Dimieri has been quoted as saying that it would be broken up into 16 subsidiaries, including air transport, freight, airport services, maintenance, storage, duty-free, travel and tourism as a precursor to a sale, although chairman Mohammed Fahim Rayan denies that this is on the agenda.
What is clear, is that US information technology (IT)and consulting company Sabre was contracted in February to carry out a three year "re-engineering" project to "improve the competitiveness" of EgyptAir. Emre Serpen, Sabre's vice-president for airline consulting, says the former AMR subsidiary will address strategy, business processes, organisation and IT management at the 67-year old airline. By the end of August, a master plan for the re-engineering process will have been completed, by which time the carrier should start seeing short-term benefits, adds Serpen.
The region's largest carrier, Saudi Arabian Airlines, is also said to have given a push recently by its government owners to streamline with a view to privatise. In a bid to cut costs, director general Khaled A Ben-Bakr has curtailed some of the more generous staff perks, say sources close to the airline, such as discount air travel for the extended families of staff. Under Ben-Bakr, regarded by many as the most forward thinking leader the airline has seen, Saudi Arabian is now said to be working on the creation of autonomous cost or profit centres of group companies.
Some observers remain sceptical over the likely success of this renewed attempt at restructuring. Previous efforts, they point out, have foundered on a mix of political meddling, vested interests and employment issues.
But optimists hope this year's president of the 19-airline AACO, the young chief executive of Qatar Airways, Akbar Al Baker, will help galvanise these disparate and often halting efforts in the Arab world. He is careful to express concern about too much competition, although his own airline was born as a challenge to the status quo within the Gulf, where multinational carrier Gulf Air until recently had a monopoly. With a partnership with Lufthansa under his belt, Al Baker argues that "those who are not part of any alliance will have to capitulate" in a world in which, over the next five years, "a few major alliances will dominate".
His view is clearly shared by the more Western-facing carriers. Royal Jordanian sees its role as "fitting into a major airline's strategy". Chief executive Dahabi says he is prepared to drop North American routes to feed into its prospective European partner's hub because, in this way, his airlines will "serve more destinations, bringing more passengers to our partner and our own network".
Yet Al Baker has to balance this attitude with that of majors, such as EgyptAir, which remain dismissive of alliances. Chairman Rayan was clearly annoyed by further warnings to AACO delegates that service standards must improve if links are to be forged with western alliance leaders. Rayan implies that, as far as EgyptAir is concerned, there is no quality issue to address.
Response to globalisation clearly differs according to the Arabian capital from which they emanate, even if the wind appears to be blowing in the direction of the reformers. But speaking for the collective, AACO's secretary general Abdul Wahab Teffaha argued that unlike the European and US-led global alliances, which are only beginning to talk about cost savings, AACO members have begun to deliver them.
A joint ground handling initiative, launched last year at London Heathrow, is yielding $10 million annually and this arrangement is to be extended to Athens, Frankfurt, Vienna and beyond. It is less than a year since joint AACO fuel purchasing was introduced, yet Teffaha reports a $10 million saving.
In the latest initiative, announced in mid-April, 15 carriers signed a deal with computer reservation system providers Galileo and Amadeus, which will produce cost and revenue benefits of $100 million annually, says Teffaha. As El-Daimiri, the Egyptian transport minister, who opened this year's assembly, says: "The biggest achievement in our consolidated teamwork is strengthening the team through having a bigger negotiating weight that that of any individual team members."
Yet the caution of the Arab area's liberalisation measures weighs heavily against its carriers, competing in a world where much larger, better-capitalised Western competitors operate under open-skies agreements and expanded regional aviation markets.
Domestic deregulation, from Algeria to Egypt, is starting, but has brought a host of, often unwelcome, new entrants. Arab transport ministers have yet to give the green light to an Arab aviation free market. Teffaha is confident that a gradual bilateral liberalisation of air transport markets will be pursued up to a deadline of 2003, at which point talks will begin on a multilateral agreement between Arab states. But he admits that deregulation of Arab skies depends on a slow-moving broader agreement on the free movement of capital and labour in regional markets.
The Arab region has reasons to be optimistic. The $35 billion travel and tourism industry will grow at twice the global average over the next 10 years, according to the International Air Transport Association (IATA). While the current $6 billion capital investments in travel and tourism, at 6% of the Arab gross domestic product, represent only half the world average, IATA projects that they will outstrip the global trend over the next decade. This includes a host of Western-financed airport development projects.
But for this to happen - and the guarded optimism of Cairo to carry over to the next AACO annual meeting in Qatar in a year's time - airline executives will have to get down to some bold decision-making.
Source: Airline Business