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A tough task in Tunisia

Tom Gill/TUNIS Despite low yields and profits, Tunisair's president Abdemalek Larif is upbeat about the year ahead for the airline. With an extensive fleet renewal programme already under way, he is making the company leaner and more profitable

For some in the business of travel and tourism, Tunisia was a pretty good market to be in last year. Hoteliers saw a flood of foreign investment, while tourism receipts were up by 75%. That was fuelled mainly by tourists seeking sun, sea and sand on the North African coast. German, French and Italian holiday-makers packed not only the beaches, but international flights to the country, taking traffic growth into double figures. Despite a steep fall in domestic traffic, air markets looked healthy.

But 1999 was not a good year for everyone. That included Abdelmalek Larif and his colleagues at Tunisair. Larif joined Tunisair as president in January 1999 after a high-flying career in government and a number of state industries. Like Hannibal, Tunisia's famous son who took his elephants over the Alps, he has faced an uphill battle.

In his first few months at the airline Larif has seen some signs of progress. Both scheduled and charter traffic increase modestly and load factors crept up by just over a point to 68%. But sales growth was not strong. Larif is nevertheless optimistic and believes that 2000 will be a "good year", certainly in terms of pushing through the changes he wants to see at Tunisia's flag carrier, if not in profits.

To some extent the tough times were in the pipeline. The company grew rapidly in the 1990s, expanding capacity by close to 50% since 1992 and registering a more than 40% increase in passenger numbers to 3.5 million. Its has increased its scheduled traffic market share from 54% to 59%.

This rapid growth, combined with increasingly tough competition, has left its mark. Yields have fallen by just 1% to ó6.3 per available seat kilometre (ó10 per mile) over the past five years, but unit costs have risen by 6%. Operating margins fell to 1.2% in the first half of 1999, while net profit margins were little over 1% on sales of $210 million.

Last year's half-yearly result was doubly bad because of the weakening of the national currency, the dinar, against the dollar, which amplified the negative impact that fuel price increases are having the industry worldwide. But the financial trend is clear.

Cost reduction and productivity improvements have now become high priorities for the management.

Restructuring

Backed by its government owner, Larif and his team are drawing up plans to outsource Tunisair's catering, maintenance and ground handling. Because the latter activity is spread across the country's five domestic airports, it is a real burden on the company's resources, says Moncef Ben Dhabi, director of corporate planning and development. The carrier has already laid the groundwork for this process, last year splitting the company into numerous cost centres.

Contracting out non-core services will remove 800-900 staff from the 5,000 on the payroll, says Larif, while early retirements of 550 employees will further slim down the organisation. But labour costs are not the biggest issue. Wages are relatively low in Tunisia and the company has in-built flexibility in the shape of a large seasonal workforce that it calls upon on.

Financial expenses and inefficiencies due to a lack of appropriate aircraft have been a real burden, however. A $500 million fleet renewal process currently under way will help tackle this. The delivery of the two Airbus A320s last year and a further aircraft of this type in March has ended the need to pay annual $26-30 million leasing fees, says Larif.

An additional A320 will be delivered in early 2002. Six Boeing 737s-600s will have been delivered over the 12 months to May, while in the first quarter of 2001, an additional A319 is set to join the fleet. Seven Boeing 727-200s have meanwhile been withdrawn since November 1998 and a further four will be brought out of service in 2001.

Revenue boost Investments in other areas will produce cost as well as revenue benefits. The company has just begun installing a new yield management system, which when fully operational will deliver gains equivalent to at least 3% on yields, Dhabi says.

In addition, routes launched last year to Beirut and Amman, should also start contributing quickly to the company's bottom line because they will be carrying a high proportion of business passengers. Tunisair is considering more new scheduled business services to Canada and Dubai, says Larif.

Much has already been done to woo business passengers, he adds. On-board product is being improved along with the new aircraft. A premium class lounge at the heart of a new terminal at Tunis airport has recently been opened.

Fidélys, the carrier's frequent flyer programme, is also getting a facelift. Launched five years ago, it has just 3,500 members out of a total 2 million scheduled passengers last year. Tunisair wants to increase this number to 10,000 members and among other improvements, plans to double mileage points for premium passengers as well as increase baggage allowance.

Quality is being systematically measured, adds Larif. The company is working towards securing ISO9000 quality certification by June this year and has recently appointed a "director of quality" to oversee the process.

Yet the margin for improving revenues should not be overstated. With half of the airline's traffic from charter, and 40% of its scheduled capacity block-booked by European tour operators, Tunisair can never hope to attract significant numbers of high yielding business passengers.

On the charter side of the business, the carrier says it has considerable success on new routes to eastern Europe, including Hungary, as the demand increases in that region for affordable holidays in the sun. Of more strategic importance, Tunisair is trying to lock-in future revenues by tying up multi-year contracts - typically five years - with tour operators, says Larif.

Deals with Club Meditérranée of France and Neckermann of Germany are already in the bag, while negotiations are ongoing with major French tour operators Nouvelles Frontières and Fram.

International expansion

Getting the carrier's own internal house in order is critical if Tunisair is to face the impending boost to competition and the challenge of global alliance-building.

Along with the other Magreb countries, Tunisia is moving towards a common market with the European Union. Association agreements are at varying stages of development, with Tunisia, Morroco and Palestine the only countries to have ratified. Air traffic deregulation is following a separate path, however. Morroco is the sole country in the Middle East to have made a formal application to join the European Aviation Area. Larif favours a "phased in" approach to air traffic liberalisation, but says Tunisair is not afraid of free markets. The carrier is not new to deregulation, he says: "Eighty per cent of our traffic is tourist and that's totally liberalised."

Alliance strategy

Larif is also piecing together the company's alliance strategy. Air France is at the centre of it. There are good reasons for the two companies coming together, says Latif. They share common "culture" due to historic links. In 1949, when Tunisar was established, the French flag carrier took a 5.6% equity stake which it has held ever since. France is an important market for Tunisia, with a big chunk of its scheduled and charter traffic originating there.

So it surprised few observers when in August last year Air France and Tunisair signed a memorandum of understanding (MoU) to expand co-operation. The aim was to extend existing codeshare arrangements to all the carrier's flights between Tunisia and France, including between Tunis, Lyon and Marseilles.

The MoU also includes the exploration of other forms of co-operation that would "achieve substantial economies scale", according to a communiqué circulated at the time.

A key project in the agreement which will indeed deliver economies of scale is the establishment of an "international maintenance centre" involving Airbus, says Larif. This proposal, says Larif, illustrates the degree of integration, of "closeness", that the two carriers are seeking. "It is not just about seat sales and revenue optimisation," he adds.

One issue Larif and his team have not been able to tackle is the lack of management control and the baggage that comes with state ownership. Public service commitments prevent a totally free pursuit of commercial objectives and these constitute "a loss of earnings" of "tens of millions of dollars", says Larif. The airline is expected to support the national tourist industry, he says, by adding new services or additional frequencies to destinations the government wishes to promote.

As soon as these new leisure destinations, bolstered by linked by direct Tunisair flights from Europe, begin to thrive, rival foreign airlines get in on the act. While passenger traffic is boosted overall, Tunisair is often unable secure a sufficient chunk of it to recoup its original investments, Larif complains.

This apparent lack of commercialism is surprising since Tunisair is, although majority state-owned, a publicly listed company - a real rarity in the region. And since it floated a 20% stake in 1995 on the Tunis stock exchange, Tunisair has returned to the country's bourse three times, raising a total of 44.8 million dinars ($34 million).

In early March, the company's market capitalisation was standing at 282 million dinars. For the moment the carrier will not be making any more demands on its national bourse nor will the state dilute its majority stake, says Larif. But with the internal restructuring programme and international alliance building to carry through there is plenty for Larif to be getting on with.

Tunisair

Base: Tunis Operations started: 1949 Ownership: Tunisian Government, Air France (15.6%), Private (20%) Employees: 6,500 Fleet: 28 Aircraft Main types: Boeing 737, 727, Airbus A319, A320

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