Pulling together

Abdul Wahab Teffaha, secretary general of the Arab Air Carriers Organisation (AACO), explains how the 22 rivals in AACO benefit from cooperation.

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By  Neil Denslow Published  February 1, 2004

I|~|teffaha1_m.jpg|~||~|The aviation industry is highly competitive, with airlines seeking to better their rivals either through their level of service or the cost of the ticket. At the same time, however, airlines also share many common concerns and use many of the same facilities. As such, these competitive rivals can all benefit from working together as cooperative partners. Within in the Middle East, it is the role of the Arab Air Carriers Organisation (AACO) to make this happen.

“Airlines being in competition with each other does not mean that they have no common interests,” explains, AACO’s secretary general, Abdul Wahab Teffaha. “Their common interests range from the regulatory and political — where most worry about how they can influence the decision making processes both in the Arab world and abroad — [to economic aims,] cutting costs and improving revenue generation.”

AACO performs both of these roles. It acts as the voice of the industry in the region, lobbying governments in the region and around the world on behalf of Arab airlines. At the same time, it is also a co-operative, organising joint purchasing projects for its members that give them access to lower costs and higher service.

In this edited interview, Teffaha explains how AACO performs these two roles and where its main focuses lie at present. In particular, he highlights the need for liberalisation in the region, both in terms of access and ownership. He also explains how joint purchasing has helped AACO members and how it will be extended in the future.

Aviation Business: What do you think is the biggest challenge facing AACO members at present?

Abdul Wahab Teffaha: We need to look at how the regulatory regime is going to evolve in the Arab world, and what will happen in terms of market access. There are many voices advocating open skies and freer market access within the Arab world — not to mention outside the Arab world — and, in fact, there are governments in the region that have already decided to implement open skies policies across the board. These governments believe it [open skies] is going to add value to their economic development, especially in attracting tourism and furthering their economic diversification. However, there are also governments that believe in open skies as the right strategic direction, but who think it should be applied at a different pace.

I believe that aviation will thrive in a liberal environment, but that does not mean that a liberal environment should be an objective in itself. It should serve economic interests, and since we live in nation states, each national authority needs to set its own agenda, and see whether a liberal aviation policy would serve these [national] policies. Therefore, I am not calling for open skies without any restrictions, but for having that policy as part of a general plan for the whole economy, so that it contributes to the wider economic development.

AB: Would airline privatisation help in this economic development?

AT: Until now, there has only been one serious experiment with privatising an airline in the region, which was in Jordan. However, the instability in the region, the intifada starting in 2000, and the tensions in Iraq have all inhibited the effectiveness of the airline. So, although they were able to privatise some of the units that were attached to the airline, the airline itself has not been privatised yet.

Aside from this, there are not any real plans being implemented vis á vis privatisation. However, I think this is one of the issues the Arab airlines will have to face in the near future, because it is a general trend in the world that airlines are being privatised. I think all governments are looking for freer market economies and the application of certain principals that reduce the government’s role as an owner of economic activities and instead concentrates more on the role of facilitator and regulator. I think this [privatisation] would go hand-in-hand with the market access issue, but I think some of the privatisation events will take place before the liberal market access issue is resolved completely.||**||II|~||~||~|AB: Why do you think Arab airlines are going to have to face up to privatisation? Why can’t they continue being state-owned?

AT: One of the biggest challenges faced by the airline industry worldwide, not only in the Arab World, is the effects of the European Court of Justice ruling declaring bilaterals that included an [airline ownership] nationality clause to be illegal. This means these bilaterals need to be changed so that they will include a community ownership clause rather than a national ownership clause. The challenge is not about the legal aspects of this ruling though, but rather the economic effects.

I believe it [the ruling] will open the way for the European aviation industry to consolidate, and we have seen that already with Air France-KLM. British Airways and Iberia are also getting closer and closer. For us in AACO, Europe is the second biggest traffic market. It represents more than 30% of the total traffic carried by the Arab airlines, so it is really an important market. What happens in that market, and the type of consolidation there is going to change the whole competitive landscape. Where an Arab carrier is now competing with one [national] airline on the other side, it will instead be competing with a mega-airline with different economies of scale. It is going to be a big challenge.

The way we are trying to deal with this [change] is by trying to be proactive with the Arab governments and push them towards the creation of a single Arab aviation market. This is not only because of the European development though. In order to move in the direction of consolidation of the industry in the Arab world, there needs to be governmental decisions that will remove the barriers between the Arab countries on the movement of capital and cross-ownership of the airlines. Once those barriers are removed, the Arab airline industry will be able to consolidate, and work on a level playing field with the mega-airlines, or be part of mega-airlines, which is not the case at the moment.

AB: Why are governments in the Arab world so reluctant to give up control of their national airlines?

AT: This is not a symptom that exists just in the Arab world; it is everywhere. Even European governments were a little surprised by the European Court of Justice ruling. People are still clinging to symbols of identity, but I don’t think this is going to last too long. The whole trade spectrum is moving towards globalisation. The airline industry has yet to follow suit, but the economic forces are going to push towards that. We have seen a glimpse of it in Europe, we saw it [consolidation] in the USA, and the Arab world will have to do it as well. Otherwise, I don’t think we will be looking at a viable airline industry 10-20 years from now.

Governments will [also] be required not to subsidise their airlines in trade agreements and bilaterals. Foreign governments are going to insist that for all economic entities there should be a level playing field and there should not be a subsidy for one entity that affects its economic operations or gives it a competitive advantage. Some governments now think they can sustain an airline simply because it is government-owned or that their markets can be protected forever because they will be able to isolate themselves. But it is going to be more and more expensive to do that, and at the end of the day, a government owning an airline with 10 or 20 aircraft would be at a competitive disadvantage versus the alliances or the mega-airlines that are going to emerge. Governments will therefore have to decide what are they going to do with that airline. Do they privatise it and try to let that airline form part of a wider international network, or do they just dissolve it and give up, and allow whoever is interested in that market to operate in it?

AB: At the moment though, we are seeing airlines, such as Etihad and Air Arabia, being launched rather than any sign of consolidation.

AT: I don’t think the two things are contradictory. We are still living in a regulatory environment that is based on individual sovereign governments making decisions in their national interest, and until we reach a stage where we have unification of the regional marketplace — not only on the economic side but also on the capital and financial side — I don’t think you will see any change. Each government is going to decide on its own set of priorities, and they are in a better position to decide if they need a national airline to promote their national interests. And I believe this is the reason why they have established these airlines, as they are part of the wider national development.

The creation of airlines within certain economic frameworks can also definitely add value to a country. Were it not for Emirates and the added value it provides for Dubai, the emirate would not be at this level [of development] now. Establishing a national airline is a not a bad thing to do, when it is part of your national interest and wider strategic direction. I think it will also add value when the government decides that it has developed its infrastructure to the extent that it can move on its own feet. And that applies everywhere in the world, not just in the Arab world. British Airways had £1 billion (US $1.8 billion) injected in it to prepare for privatisation and that was in a regulated environment. I think this is the best way to handle it, rather than apply the principle of privatisation or open skies just because it is the fashion.

Furthermore, I don’t think it [the launches] will be a hindrance when we reach the stage where there is a free market economy in the aviation sector, because these new airlines are going to create their own niche markets that will add value to the consolidation process.||**||III|~||~||~|AB: In terms of AACO’s joint purchasing role, how is this going to be extended? Would you like to go all the way up to purchasing aircraft?

AT: What we are trying to do is move with sure steps, we don’t want AACO to go at the speed of light. Instead, we want to move like a turtle, but cover the ground we want to cover. To do this, we aim to introduce at least one new project every year. We have succeeded in doing this with fuel purchasing, ground handling, the establishment of the training centre, now the agreement [with Unitpool] about the management of ULDs, which is something new. This year we are focusing on the e-business side, and there are a few ideas we are discussing with some of the CEOs, which may be on the table soon.
As for aircraft, I wish we could do that today. But let’s not forget that most of the airlines are government owned and the processes for making [strategic] decisions, like aircraft purchases, are bigger than the airline itself. The airlines have a major role, but we know that aviation has a political dimension, and, definitely, when you are talking about strategic matters, the government, as the owner of the airline, has the right to decide what is best for the national interest. Until such a time that the airlines are privately owned, and do not need to look at the strategic considerations of their governments, then I know that it [joint aircraft purchasing] is not going to be a reality.

AB: What impact would an Arab airline joining a global alliance, like the Star Alliance or Oneworld, have on AACO?

AT: I think there are at least four or five Arab airlines that are very close to being part of one of the three major strategic alliances. However, there is not a contradiction up to now [between being in AACO and an alliance] because, very simply, the alliances are just working on the marketing side. The main activity we have had on the marketing side are the conclusion of the special pricing agreements (SPAs), and these will continue as they [an alliance member] will continue to have relations with other airlines rather than just alliance partners.

The other [AACO] marketing activity is the agreement to analyse marketing information data tapes (MIDTs). This is also something that an alliance cannot provide for its members. Instead, it is something that each airline is going to acquire on its own, so in those two areas there won’t be any problems.

Alliances are now looking at joint ground handling and other common purchasing projects, but we have no problem with that. At the end of the day, what is important is for the airline to get the best deal. If it is provided through the alliance, that’s great. If it’s provided through AACO that’s even better. If it’s provided by the airline that’s also fine. We are not searching for an identity; AACO will continue to have an added value in many areas, even if an airline joins an alliance, because alliances at the end of the day are not a complete merger and loss of one’s identity.||**||

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