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Keeping pace: IPOs and alliances among Arab carriers

Public offerings and alliances were two of the hot topics at the Arab Air Carriers Organisation annual general meeting in Damascus. Can they help the region's smaller carriers compete with the heavy hitters?

All the flag carriers in the Middle East and North Africa remain government-owned, but that is about to change in a big way. Royal Jordanian is on course to become the first publicly traded Arab flag carrier in mid-December and several others - including EgyptAir, Middle East Airlines (MEA), Kuwait Airways, Saudi Arabian Airlines and Tunisair - have drawn up similar privatisation plans.

Many of the region's small to medium-sized carriers are also looking to follow new oneworld member Royal Jordanian into alliances as part of an attempt to attract more traffic into their hubs and fend off intensifying competition from larger rivals.

Global alliances have traditionally been shunned by Arab carriers, and the region's largest carriers, Emirates and Qatar Airways, continue to pursue ambitious growth of their hubs without the help of others. But smaller Arab carriers are starting to come to the realisation that alliances can help make their hubs competitive with Dubai, Doha, Abu Dhabi and Bahrain. "This is the reason why we decided to join an alliance - to be able to compete with others," says EgyptAir chief executive and new AACO chairman Atef Abdel Hamid. "This is an international industry. You can't go alone."

Hamid is confident membership in the Star Alliance will help EgyptAir fend off aggressive competition from big Gulf carriers, which he claims are dumping low fares in several ­markets and are poaching its employees. "We're suffering from competition from the Gulf carriers on an unfair basis," he claims.

Kuwait Airways is also struggling to keep up with its larger Gulf rivals. "We're losing market share. We're losing resources," says Kuwait Airways' new chairman and general manager Barrak Abdulmohsen Al-Sabeeh. "Everyone is expanding and we are shrinking."

Yemenia chairman Abdulkalek Al-Kadi has an even stronger reaction when asked about larger Gulf carriers: "They're killing us. They are taking our pilots, our engineers."

Yemenia is fighting back with an ambitious plan to turn sleepy Sana'a into a regional hub. Al-Kadi says the plan will be supported by expansion of Sana'a airport, the acquisition of 10 new Airbus widebody aircraft and the launch of a new feeder operation next year with six Bombardier Dash 8 Q300 turboprops. "We are trying to create Sana'a as a hub and get some benefit from the booming economy in the region," Al-Kadi says, but he acknowledges: "When I say a hub, we won't compete with Dubai. We can't compete with [new Dubai airport] Jebel Ali, at least not yet."

Tiny Yemenia, which currently operates six widebody and four narrowbody aircraft, realises it cannot develop Sana'a alone. "We need partners. We need an alliance," says Al-Kadi. He says the new terminal will only expand capacity at Sana'a in 2009 from 2 million to 5 million passengers, but this will be enough to attract more connecting passengers, which only account for 25% of Yemenia's traffic today, with a focus on East Africa.

Hamid has a similar but much larger vision to turn Cairo into a regional hub. This is supported by expansion at Cairo airport, Egypt­Air's accession into Star and its partial privatisation, which will help pay for rapid expansion of its fleet from 49 to 75 aircraft over the next five years.

The Egyptian government is preparing to sell a 20% stake in the flag carrier next year. Hamid says mid-2008 is also the target for the carrier to formally join Star and for EgyptAir and its new Star partners to move into Cairo airport's new Terminal 3, which will double the airport's capacity from 11 million to 22 million. "We hope the completion of the membership process will coincide with the opening of Terminal 3," Hamid says. "We have a plan now to move together and be under one roof."

EgyptAir expects it will nearly double its passenger traffic over the next four years from 6.5 to 11 million annually, driven by expansion of its intercontinental and regional network. Hamid says the carrier in particular is looking to expand in the Americas, where it currently only serves New York. "We are thinking about Chicago and maybe South America," he says.

Hamid adds several Star members including Air China and All Nippon Airways are also considering launching services to Cairo and this will further help develop Cairo into a hub. To improve connections, EgyptAir plans to add significant capacity on its African and Middle Eastern routes. "We are the western gateway to the Middle East," Hamid says.

Turkish Airways (THY) is also joining Star next year and will give the alliance two hubs on two sides of the fast-growing Middle East region. "We look at it as more members and more hubs are beneficial for everyone," says THY chief executive Temel Kotil. "Each hub - Cairo and Istanbul - will develop. There won't be a single localised hub."

While THY is a European carrier, it was chosen by Star mainly for its connections to the Middle East and central Asia. "The big focus now is Europe but the others are growing faster," Kotil says.

He adds that THY's Middle East-North ­Africa network is growing at a 25% annual rate, while its European network is growing at 15%. Half of Turkish's network is now European, compared with only 20% Middle Eastern-North African, but Kotil says this gap will be steadily reduced over the next five years. To help THY further grow its Istanbul hub, Kotil says a new airport is planned for 2011 and as an interim measure a second runway will be built at the existing airport.

Newly privatised Amman airport is also bidding to become a regional hub, with plans for a new terminal capable of handling 9 million passengers annually. Royal Jordanian chief executive Samer Majali says the carrier has already "seen some improved passenger flows" since joining oneworld in April and the new terminal will support further expansion of its network. Royal Jordanian is looking to add capacity within the Middle East as it puts into place more codeshares with oneworld partners, which are keen to improve their connections to the region.

Majali says Royal Jordanian is not interested in expanding eastward to Asia because it does not want to compete directly with larger Gulf carriers such as Emirates. Instead it wants to further grow its European and North American networks, where competition is not as tough because Jordan is on the western edge of the Middle East. "This is why our network is lopsided to the left," Majali explains.

Majali is now preparing Royal Jordanian for a listing on the Amman Stock Exchange and will lead a series of roadshows throughout the Middle East and possibly Europe at the end November and beginning of December. He says the Jordanian government, which earlier sold off the carrier's duty-free, catering, flight-training and maintenance divisions, plans to sell up to 74% of Royal Jordanian in the first two weeks of December.

Kuwait Airways could follow with its own IPO in 2008. Al-Sabeeh expects Kuwait's parliament will issue a decree at the end of this year or beginning of next year approving the carrier's long-delayed privatisation. That will be followed by a due-diligence phase. "They will then have to make a decision," Al-Sabeeh says. "There are a lot of steps - financial, legal and marketing. It needs structure."

Al-Sabeeh says Kuwait Airways is "110% better off private" and privatisation is needed "to allow us to compete with neighbouring country airlines". But unlike EgyptAir and Royal Jordanian, Kuwait Airways will wait until after privatisation before joining an alliance or renewing its fleet. The Kuwaiti government in September rejected the fleet renewal plan of Al Sabeeh's predecessor, prompting the entire board to resign. Al-Sabeeh was hired in October specifically to prepare Kuwait Airways for privatisation. "I have a task," he says. "To me a happy ending is to sell it off."

Tunisair chief executive and new AACO president Nabil Chettaoui has a similar task. Chettaoui joined Tunisair early this year from Tunisia's civil aviation and airports office, where he oversaw the privatisation of two airports. "I [next] hope to privatise Tunisair," he says. "It's not a mandate. But it's one of the ideas I want to present to the government."

Saudi Arabian Airlines director general Khalid Al Molhem also has experience with privatisation, having led an IPO at Saudi Tele-com before moving to the flag carrier in mid- 2006. Molhem is slowly preparing Saudi Arabian, which faces intensifying competition from two new privately owned low-cost carriers, for a public offering. The Saudi government recently sold a 49% stake in the flag carrier's catering operation and approved the spinning off of some of its core businesses, which will remain wholly owned subsidiaries until the privatisation process is completed.

Yemenia, which is 49% controlled by the Saudi government with the majority 51% stake owned by the Yemeni government, has a similar strategy. Al-Kadi says Yemenia is preparing to spin off its non-core activities including "maintenance and catering and other services". After they become wholly owned subsidiaries, the next step will be to sell them off. The third step could be privatisation of the carrier itself although Al-Kadi stresses this is "a government decision".

An IPO is also on the agenda of MEA chairman and outgoing AACO chairman Mohamad El-Hout. The Lebanese government unveiled plans in early 2006 to float 25% of the flag carrier on Beirut's stock exchange, but the offering has since been delayed by political instability in Lebanon. El-Hout says MEA is now reassessing with a financial adviser when the offering should go forward because the carrier is now stable again. "We were prepared to sell 25% on the exchange market in the first place. But timing is very important," El-Hout says.

MEA, meanwhile, is moving forward with plans to expand its fleet from nine to 16 aircraft over the next three years and is considering resuming services to North America. SkyTeam, which will soon be the only global alliance without an Arab member, has identified MEA as a prospective associate member.

MEA is already a member of Arabesk, a loose grouping of Arab carriers established under the AACO umbrella in early 2006. While AACO secretary general Abdu Teffaha says Arabesk does not qualify as an alliance because there is no branding or public promotion, he says it gives members a mechanism to co-ordinate schedules and co-operate in an increasing number of other areas. AACO announced at its annual general meeting expansion of Arabesk from seven to nine members with the accession of Syrian Arab Airlines and Etihad Airways. For Syrian and other small carriers, Arabesk provides a tool to improve efficiencies, expand network coverage and compete with Emirates and Qatar Airways, which have elected not to join.

"It's a kind of an alliance," says Syrian chief executive and outgoing AACO president Nahant Namur. "It means we can extend our network by using other airlines' routes."

Syrian has seen its share of the Damascus market drop in recent years to 40% as larger carriers such as Emirates, Qatar Airways and Air Arabia have expanded their operations at Syrian's hub. Namur says joining Arabesk will help Syrian increase its frequencies within the region and attract more transit traffic.

Expanding its network through Arabesk is especially important because Syrian has been unable to expand its own network or renew its ageing fleet in recent years due to sanctions imposed on Syria by the US State Department. "Syrian is unable to expand its own fleet," Teffaha says. "Arabesk enables Syrian through codeshares to extend its flights by using other Arab airlines."

But Namur says Syrian still hopes it can secure approval soon for the long-planned purchase of seven new Airbus aircraft, which has been delayed by the sanctions for over two years, and for the lease of four additional A320s. He says the carrier is also seeking to acquire four Bombardier CRJs for a new feeder operation, Syrian Pearl, scheduled to launch in mid-2008. While Syrian has no plans for privatisation or global alliances, Namur says Syrian Pearl will be 75% owned by two private firms, Syria's Cham Holdings and Kuwaiti financial firm Al-Aqeelah.

While appealing, IPOs and alliances cannot be seen as universal solutions for all Arab carriers. Chettaoui acknowledges Tunisair is not ready yet to join a global alliance and says the carrier "first needs to undergo a major restructuring and become more efficient".

SH&E senior vice-president Emre Serpen warns Arab carriers must also be careful not to rush into public offerings, especially if the airline still has restructuring work still to do. He adds only one Arab airline has ever had a successful IPO - budget carrier Air Arabia, which began trading in Dubai in July. IATA chief economist Brian Pearce warned AACO members: "Privatisation on its own won't deliver what you are looking for."




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