Undeterred by regional problems, Lebanon's Middle East Airlines is putting the finishing touches to its pre-privatisation restructuring programme, reconfiguring its fleet, its staff and its conception of the role it should play

To understand why Mohamad El-Hout, the chairman of Middle East Airlines (MEA) is not entirely unhappy with last year's loss of $30 million, one must understand the company's history.

During the war in Lebanon, which ended 12 years ago, MEA's home base at Beirut International Airport was a central point in the armed conflict that turned the one-time "Paris of the Middle East" into a war zone. And now, much as Beirut continues to tear down and reconstruct its war-torn centre, so too is MEA undertaking the steps necessary to rebuild itself.

During the war years, the carrier lost half its fleet to mortar fire. Staff at MEA, which came to be dubbed "Mad and Eccentric Airlines", were forced to spend months at a time in their offices. Those who left the relative safety of the airport - which was closed for about 800 days over the 15-year period because of fighting - ran a heavy risk: 40 employees died and many others were kidnapped.

A new era

The end of the war obviously improved the situation, but Lebanon and MEA have struggled to return to business as usual. In 1997, the year the government decided to privatise its flag carrier, the airline lost $80 million.

Before joining the national airline, El-Hout served as head of the financial asset department at Lebanon's Central Bank, the body that owns and manages MEA. As part of its overall fiscal reform programme, the Bank initially charged El-Hout only with finding a chief executive who could restructure the carrier and then sell it to the private sector.

However, days before he was to make his recommendation, the head of the Central Bank informed El-Hout that he was a better candidate than any that had come up on the shortlist. And so El-Hout was given the job, largely on the strength of his management expertise and his experience overseeing the country's first successful privatisation transaction - the sale of retail bank Credit Libanais. His task was first to revitalise MEA and then get it off the government's books.

In common with an increasing number of airline chief executives, El-Hout had no previous air transport experience. Lack of industry background, however, did not mean that he could not tell a company that had lost its way. The airline, he determined, needed to reassess its raison d'être. Nowhere was this more clear than in its network.

"Before," El-Hout explains, "route selection was not market driven. The company's philosophy was that if there are Lebanese people there, we will fly there." This strategy required a considerable fleet of wide-body aircraft and saw MEA flying all over the world with disappointing financial results.

"It's very difficult for a small company to compete with the giants on a long-haul sector," he says. Accordingly, El-Hout's first step was to determine what MEA's natural market was and then shape its operations accordingly. This process led to the realisation that the carrier is best suited to offering short- to medium-haul service to the Beirut-based passenger.

Making this vision a reality has meant major changes, touching on areas such as fleet, staffing levels, schedules and destination selection. The first move was to slash unprofitable destinations from the schedule. Gone were S‹o Paolo, Sydney and Kuala Lumpur, as well as Brussels and Zurich and even local cities, such as Damascus and Doha in Qatar. MEA served 30 cities when El-Hout came aboard and now serves 20. He says MEA will look to restore this lost capacity through codeshare agreements.

Future alliances

Air France is MEA's closest partner and El-Hout plans to deepen the relationship, both bilaterally and through the French carrier's alliance. "We are working on joining SkyTeam, but security concerns - especially post-11 September - have caused us to suspend these steps," he says.

Because the carrier's new focus had it principally serving cities close to home, the fleet El-Hout inherited - a Boeing 707, five Airbus A310s, two A321s and two A320s - was no longer the right fit. Consequently, he elected to replace them with six A321s and three A330-200s. MEA will take its first new A321s at the end of this year and the last at the end of 2004, while the A330s will be delivered in a three-month period next summer.

Because the carrier has no plans for long-range flying, it does not need a fourth A330, such as daily service to long-haul destinations would require. Rather, the A330s will be placed on routes with heavy loads, such as Paris, London and seasonal routes within the region, such as Riyadh during the Muslim holidays.

MEA will configure the two types in practically identical fashion so that they can be interchanged as loads dictate.

Catering to Beirut-based business and ethnic traffic, MEA's schedule is slightly unconventional, with arrivals and departures scheduled almost exclusively for peak local hours. This precludes much transfer traffic at Beirut, often makes the schedule at out-stations less competitive than other carriers and contributes to daily aircraft utilisation being a less-than-stellar nine hours.

Premium class capacity

The unique dictates of the local market have also led the carrier to dedicate 20% of its seating to business-class - high by any standards. El-Hout, who proudly describes the planned amenities for MEA's new business class cabin, anticipates a 75% premium-class load factor.

While El-Hout did not bring airline experience to his new post, the ex-banker certainly knows his finances. As such, he knew that his plan to bring the carrier back to profitability could be best effected with a uniform fleet that brings both lower operating costs and a platform to offer the passenger amenities and young aircraft age that attracts higher-yielding traffic.

He also took stock of trading conditions and realised that the shape of the post-11 September market for aircraft made it a good time to effect his fleet plans. So, although the effects of last September's terrorist attacks hurt MEA disproportionately - traffic from Europe to the Middle East fell off more than to any other region - the industry crisis which followed afforded him an opportunity to undertake his fleet renewal plan at discount prices.

El-Hout explains that lease rates had dropped significantly for widebodies, but not nearly so much for single-aisle aircraft. Therefore, he decided to lease the A330s from ILFC and purchase the A321s outright from Airbus. "A Middle Eastern proverb says: 'Buy on the sound of the cannon and sell on the sound of violins.' This was definitely a good time to buy," he says.

His financial training also told him that his payroll costs were incompatible with the size of his network. However, while trimming MEA's workforce was the obvious solution, it would not be nearly so straight forward a decision to implement as the fleet renewal.

The move to reduce the workforce from 4,100 employees to 2,500 was necessary, but politically difficult to effect, especially for a state-owned enterprise. In the end, the cuts were made and much-needed work rule changes implemented, but only after numerous strikes, a pilot slow-down campaign and several unions demanded the resignation of the airline's chief executive.

El-Hout says the fact that MEA is owned by the Central Bank - which is more resistant to political pressure than most government branches - made the trimming programme possible. He adds, however, that the political environment makes such moves frustratingly slow. "What a US airline can get done in months," he complains, "we need three years to do."

Still, he says with satisfaction, progress has been made on the costs side, explaining that the closure of unprofitable stations and fine-tuning of the schedule has yielded annual cost savings of $30 million, while the 40% reduction in staff size and increased productivity accruing from work-rule changes has cut a further $25 million.

All these structural improvements are good for MEA's bottom line and the carrier believes continued improvement is likely. However, company forecasts - which call for a loss of about $10 million in 2002 and a small profit in 2003 - rely on such uncertainties as a strengthening of the Lebanese economy and enhanced regional stability.

For his part, El-Hout appears undaunted. When asked about the carrier's load factors, down in the mid-50% range, he laughs and says he would be more concerned if it were in the 70s, since the current situation affords him ample room for improvement. Indeed, he says that, save for an open skies policy unilaterally declared by Lebanese prime minister Rafiq Hariri - and exploited to great effect by MEA's competition - the airline would already be profitable.

Even though he believes the open skies policy costs his airline more than $25 million annually, El-Hout is philosophical about its effects: "It does negatively affect our worth, but there is more value added to the Lebanese economy as a whole than is taken away from MEA."

Even with open skies, recent gains would seem to put the carrier on course for its planned sale, but he says that external factors have rendered this prospect unlikely for the near future. "The company is ready for privatisation," he says, "but the timing is not."

Bad timing

Indeed, continuing problems in the region make him think that the sale will not occur for a few years. This delay is rendered more likely by his insistence that the right offer and purchaser be found. El-Hout hopes that the winning team includes a strategic airline partner, so as to facilitate the transfer of expertise and make possible more long-haul service, such as Beirut to New York. Indeed, he thinks a US carrier would represent in many ways the best fit for MEA.

However, he will study all candidates more closely than ever, pointing out that if Swissair had wanted to buy the airline before 11 September then he would have happily accepted. He also will make sure that the buyer will not be someone likely to reduce air service from Beirut, which would seem to preclude an airline from the same region. Whoever the buyer, he says, the Lebanese Government will not accept a price below MEA's value. "We want to sell MEA, but not at any price. Although we will entertain offers now, we have absolutely no burden with operating the company in the future."

So, prepared to wait for the sound of violins before selling, El-Hout and MEA are readying themselves to tackle the challenges of alliance membership, attracting premium passengers, maintaining labour productivity and the other vital components of the carrier's on-going rebuilding effort.


Source: Airline Business