Every cloud has a Silver lining

The aviation industry continues to suffer, but are nations in the Middle East ready to open their skies for the benefit of the sector?

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By  John Irish Published  August 11, 2003

|~||~||~|Take a large-scale terrorist attack involving three planes, a couple of wars, a deadly global virus and most industries would find it difficult to recover. Add to that a regulatory body that has hardly changed since 1944 and you have an industry immeasurably suffering, looking for a way to escape the abyss.

That the aviation industry needs an escape route is nothing new, but as aviation bosses like IATA’s (International Air Transport Association) chief Giovanni Bisignani call for comprehensive wide scale changes, how is the Middle East aviation sector going to tackle the issues holding it back?

Undoubtedly, the regional market in the Arab world is maturing. The likes of Emirates Airline and airports such as Dubai and Beirut are leading the way in helping to modernise the region’s regulatory infrastructures.

Even Saudi Arabia’s recent announcement that the hegemony of Saudia, the national carrier in the domestic sector, is set to end, suggests that change is very much on the cards.

The statement that the first low-cost airline in the Middle East, menaJet, will take off in December 2003 is another sign that the industry is moving towards some degree of liberalisation. That a low cost operator will be able to travel from point to point illustrates regional governments are beginning to tear down regulations that have shielded national carriers.

However, countries in the Middle East are, on the whole, still keeping their skies closed. Dating back to the establishment of the 1944 Chicago Convention, closed skies refers to regulatory conditions that governments apply to prohibit and restrict international flights.

The intention of adopting a closed skies policy is to protect the national operator from foreign competition. The result for the Arab world has been high prices, reduced quality of service and ultimately a money losing aviation sector, factors that have forced regional governments to reconsider their approach to aviation.

“Open skies is a growing trend in aviation,” says Mazen Hajjar, general manager of menaJet. “In the old days, people used to think that you needed three things to form a country; you needed a flag, an anthem and a national carrier. [However], aviation has become different nowadays. People realise that a carrier is important to provide transport for the local economy, but it’s no longer a national symbol. That kind of thinking has moved the US and Europe into more and more open skies and they have benefited,” adds Hajjar.
In the Middle East, however, many countries still maintain their flag carrier is a national icon rather than just another commercial entity. Yet without exposure to market forces, a nationalised airline has no incentive to change.

“[In] countries where they restrict and control their own airline, you will find that airline is very bad because there is no competition, there is no legislation, there is no modernisation, there is no change and no challenge,” explains Ghanem Al Hajri, director general at Sharjah’s department of Civil Aviation.

“They are looking after that specific airline, but if they look at the airport as a part of the general economy of the country, the benefit to the country is much greater than just securing an airline. This is why you don’t see much development in these countries in comparison to the UAE.”

Lebanon is a good example of a country that has undergone this change in mindset. In 2000, the government realised to turn the air transport industry into a viable contributor to the economy that would bring in increased trade, investment, jobs as well as tourism, it had to opt for open skies without reciprocity. Additionally, the Civil Aviation Authority was restructured, Beirut airport was privatised and all safety and security bills redeveloped.

Middle East Airlines (MEA), the national carrier, was also turned around, enabling it to cut half of its manpower, pay off its debts and transfer all of its non-core activities to private companies. “The same story applies to Dubai.

For them, Emirates Airline is a contributor to the economy of the emirate,” explains Abdul Wahab Teffaha, secretary general of the Arab Air Carriers Organisation. “Look at its role in creating and operating a competitive environment. Even if it is owned by the government, it is working as a commercial entity,” adds Teffaha.

Emirates Airline and Dubai airport are shining examples for the region. Despite turbulent times for the airline industry, it announced record profits last quarter. Dubai Airport also welcomed over 16 million passengers in 2002. While still owned by the government, in all senses of the word it runs like a private company.

“The management of Emirates could have applied a policy to protect their own interests, but they had a broader way of thinking,” says Mohammed A. Ahli, operations director at Dubai’s Department of Civil Aviation. “In other countries, in my personal opinion, the national airlines dominate the policy and civil aviation cannot do anything about it.” Thus, the first step is to define the role of the national airline.
National airlines with huge government subsidies have become, more often than not, a financial burden. If governments were to withdraw from direct ownership of the airline by floating the airline as has happened with British Airways, for example, or through private equity sales, it would pave the way for a period of consolidation. At present, there are too many inefficient airlines.

If we look across the world, big names such as Swiss Air, Sabena or TWA have long gone, while other renowned carriers are looking down the barrel of a gun. As Mazen Hajjar asserts, the benefits of protecting a national carrier are disappearing and local economies cannot afford to support money losing businesses.

Nevertheless, while the air industry across the world is coming to that conclusion, it is taking more time to convince regional governments that this is the way forward. Until the figures illustrate that liberalisation, deregulation and open skies work and that the time to set aside national pride has come, regional governments will not change their policies.

The Lebanese authorities were originally reluctant to grant rights on routes where MEA was operating, but once the Dubai-Beirut route opened up, Lebanon’s national carrier found that it could still hold its share while the market grew.

“The way Lebanon has approached it has been successful. Last year they opened up the Beirut-Dubai route where MEA and Emirates actually operate. It’s completely unlimited; anybody can operate on this route. There are now eleven [carriers] operating on these routes, but MEA still flies the same number of people,” says Hajjar. “All these carriers have expanded these markets. That’s what airports and these economies need; they need to bring in business and business travel,” he adds.

But if the Lebanese-Dubai example is working so well, why have other governments in the region not opted to go down the open skies road? According to Ahli, national carriers still have an enormous amount of influence over their governments, which is holding the industry back.

“We encourage other countries to adopt it [open skies]. We are affected a lot in our growth because we are the only ones that have open skies,” he says. “If we all had open skies, then it would encourage other [carriers] to come to the region. Their growth affects our growth. We lobby them [regional governments] in every meeting. We are trying our best.”

While open skies can stimulate competition between national carriers, to create a truly free market requires the deregulation of other parts of the airline sector as well. One example is the question of operating licences. Regional civil aviation authorities are granting slots to operators, but at the same time, a lot of countries remain hesitant to let private companies become operators.

Although established airlines are allowed to enter the country under open skies agreements, newcomers are finding it difficult to begin operations. Hajjar points to Menajet as the perfect example.

“Beirut will say yes, you can come in and go as you wish, but we will not give you an operator’s certificate,” Hajjar says. “So you need to find a country that will allow you to register an airline. If I was Cyprus Airways, I could get the route to Dubai from Beirut, but for menaJet to be able to come into existence, has only happened recently. What needs to happen is new and clear regulations that permit private competition to come on board.”

Even Dubai and Beirut, which are championing the cause of open skies, haven’t reaped all the rewards. A customary benefit of open skies due to the increase in competition has been a reduction in prices for passengers.

Yet, why, if liberal policies are prevailing, are passengers still seeing huge prices on all airlines travelling to and from Beirut and Dubai? Ahli claims that the high fares are part of government strategies to keep tourists within the country, i.e. to spend their money at home rather than abroad.
Despite this, the successes these two nations are having with open skies is slowly rubbing off on others. Saudi Arabia, which has opened its domestic sector to competition, has now made Dammam airport open sky.

“It is in the right direction and goes in line with how Saudi Arabia moves in the economic sector. They will do it in their own time, when they feel that it will be a contributor to the aviation sector and will not end up as a liability,” says Teffaha.

Likewise, Jordan is gradually opening up, as are other countries in the GCC. Oman has privatised its airline and airports, while Bahrain and Qatar are gradually adopting a semblance of air liberty. As countries adopt open skies, they will look at things in the framework of their national agenda.

Egypt, for example, has not felt the need to turn Cairo airport into an open skies hub, as airlines that come into the capital do not offer the same financial rewards as Egypt’s other airports. The charter flights to open sky Luxor, however, bring with them planeloads of dollar carrying tourists.

The end result is clear. The industry is moving towards open skies, but the pace will depend on how much nations believe it will contribute to national economic development. However, with the likes of menaJet starting up and the inevitable consolidation of national airlines, a comprehensive regional open skies policy could take off sooner rather than later.

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