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Mohamed El-Hout has transformed MEA into a thriving airline, despite the challenges it faces in Beirut.

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By  Neil Denslow Published  July 4, 2005

|~|el_hout_m.jpg|~|MEA's chairman & director general, Mohamed El-Hout|~|This has been a difficult, if historic year for Lebanon. The assassination of former Prime Minister, Rafik Hariri on 14th February rocked the country, leading to mass demonstrations and the eventual withdrawal of Syrian troops. Last month’s elections should hopefully draw a line under this turbulence, allowing the country to resume its strong economic growth, but the instability in the first half of the year has clearly had an impact on the country’s vital tourism market. Given these unique challenges, along with the rising fuel prices and hot competition at Beirut International Airport, the national carrier, Middle East Airlines (MEA) could be expected to be facing an equally difficult time. However, the carrier is in fact going strong, and the airline’s chairman & director general, Mohamed El-Hout, is confident of achieving a third straight year of profits. “We will not have the same result as last year’s [record US $50 million profit], but because we have restructured ourselves, we can absorb this shock,” he says. “I am confident that the future will bring another increase in the number of passengers to Beirut and we can make up for any decrease [in the first half] in the coming years.” Beirut suffered a drop in traffic immediately after the assassination with overall passenger numbers into the airport falling by around 25%. However, through a combination of the quick resolution in the political situation and special promotions from airlines and hotels, traffic figures have recovered. MEA’s traffic figures also fell, but this was from record highs last year and a strong beginning to 2005. “From January until the assassination of Prime Minister Rafik Hariri, we had growth of 11% over a period of a month and a half in both Beirut and Middle East Airlines,” says El-Hout. “Now, for the results from January until the end of May, we have about -4%. So, if you compare the decrease in the number of passengers to what has happened, it is still acceptable and can be absorbed by the company,” he adds. That MEA is able to weather these storms is testament to the turnaround at the carrier since El-Hout and a new board were brought in by the Central Bank, which owns the airline, in 1998. Back then, the airline was the sick man of the region’s aviation sector, having made an $87 million loss in the previous year. The new management team therefore set about restructuring the carrier with the aim of eventually privatising it. Loss-making long-haul routes were chopped from the network, a new fleet of three A330s and six A321s was introduced and better use was made of both equipment and the greatly reduced workforce — around 1500 staff left in 2001. “The restructuring plan that has been implemented was key in turning the airline round from continuous losses to profitability in 2002,” says El-Hout. The new plan for the airline saw it cease services to distant points, such as Sydney and Sao Paolo, to instead focus on O&D traffic to and from Beirut. These far-flung points have sizeable second or third-generation Lebanese markets, but they never generated the traffic necessary to be profitable. As such, the carrier now focuses its operations on the Gulf, Europe and Africa. “The stations that we are serving now are based on the real economic relations between Lebanon and these countries,” says El-Hout. The carrier’s strategy therefore contrasts sharply with the global ambitions of many Gulf-based airlines, for instance, and despite Beirut’s strong geographical position, MEA is not going to target this kind of traffic. “We do not have any plans to be a sixth freedom carrier due to many reasons. One of them is that you have a lot of carriers in the area that are expanding in this way,” says El-Hout. “Indeed, I think you will see not just competition between these carriers, but a price war. In a small area like the Middle East and the Gulf, you cannot have four major hubs none of which are based on real traffic to that point.”||**|||~||~||~|As a growing tourism destination, Beirut is certainly able to generate enough traffic to keep MEA flying. However, Lebanon also has one of the most liberal open skies policies in the region, which means that the flag carrier faces intense competition. It has been able to defend its market share, which is around 36% of the passengers travelling into Beirut, by offering an upmarket product. For instance, all of its aeroplanes have a high proportion of business class seats, around 20%, and they are equipped with audio/video on-demand inflight entertainment in both cabins. The airline has also improved its service on the ground including the on-going implementation of an Oracle CRM system, plans to implement self-service check-in kiosks, and the construction of a huge new business lounge at Beirut Airport. “We have chosen a certain niche in the market,” says El-Hout. “We have a luxurious product, and we still believe Middle East Airlines can compete and continue making money in this way.” This though, is becoming increasingly difficult for the airline because of both rising fuel costs and what El-Hout describes as unfair competition from airlines in the region and Europe. He particularly singles out the bankrupt Alitalia, accusing it of dumping capacity in the Lebanese market. “They have 11 flights a week to Beirut and they are selling below costs as they are looking for cash,” he says. “I have to follow them [in cutting prices], and this makes my routes to Rome and Milan unprofitable… Open skies therefore have to have safeguards,” he argues. “When you have price dumping, you have to have controls.” The airline also loses out from the fact that while its rivals are easily able to find slots at Beirut, it struggles to find good slots at congested hubs in Europe, which impacts on both its service levels and utilisation rates. “We have two flights a week to London, for instance, but we have to park the plane for nine hours at Heathrow because they say there are no slots… Frankfurt is the same,” says El-Hout. “They [foreign carriers] can come as much as they want here [to Beirut], they are welcome and we are happy to compete with them. However, when we want to improve our frequencies, they say there are no slots available or that they can only give us slots at a very bad time.” “They [the authorities] should look at smaller carriers, and they should allow daily flights at equal times that are suitable for aircraft utilisation,” he argues. “I am not asking for three or four daily flights to Heathrow; I am asking for a daily flight at equal times, and I think they can do it.” Rising fuel costs are also an increasing challenge for MEA — as they are for airlines around the world — and one that it can do little about. The carrier has implemented a fuel surcharge, although this does not cover the total increase in the cost of fuel, and El-Hout instead argues that the industry as a whole needs to adapt its business model to higher oil prices. “It was not normal that fuel prices had not increased for 20 years… [so] I think airlines should now adjust their pricing policies to this new fact, which is going to remain in the market,” he says. “We cannot do it alone because we are a very small airline; however, big carriers should start to implement it and not impose a fuel surcharge, but rather change the structure of their pricing altogether,” El-Hout continues.||**|||~||~||~|Reflecting the difficult conditions in the market at present, the airline has put plans to add another A330 to its fleet on hold for the time being. “We are thinking about an additional aircraft, but we have to make that decision in line with the level of traffic that is expected in Beirut,” says El-Hout. “We expand with real market growth… We do not buy planes and then decide what we are going to do with them,” he jokes. However, while MEA is freezing its fleet, the carrier is aiming to increase its network through codeshares and other partnership deals. It has already built up an extensive array of such arrangements to serve destinations in Europe and the Americas, including ties with Virgin, Continental and others over London, as well as with TAM through Paris. The main partner for the carrier though is Air France, which has long lead to suggestions that MEA would become a regional member of the SkyTeam alliance. However, while talks are on-going, there seems little prospect of them reaching fruition in the near future. “We have to look carefully at this subject, because we have to look at the conditions of joining SkyTeam and we have to evaluate the benefits and the cost to the company,” says El-Hout. “We are very good friends with Air France, we have very good relations with them, and as such we are focusing on these conditions as friends.” The airline is also looking to increase its co-operation with other carriers in the Levant, including plans to set up a regional airline named Phoenicia Express in partnership with Syrian Arab Airlines. It is not clear when the airline will launch, and the type of aircraft it will operate is also undecided, as initial plans for a turboprop fleet are being rethought. “If you want to look at saving money, then a turboprop is very suitable for the network that we are thinking of for this company,” says El-Hout. “However, there is the wrong concept of turboprops in Lebanon... so we will have to spend either on educating the Lebanese that this a good plane and a safe plane that everyone will be happy to fly, or to invest in jets and save on this additional [marketing] expense,” he continues. On long-haul routes, MEA is one of the carriers involved in the AACO-led Arabesk alliance, which could help it build its network eastwards. The carrier already codeshares with Qatar Airways to Doha and it recently signed a deal with Gulf Air covering flights to Abu Dhabi, and El-Hout expects these relationships to develop further in the near future. “This is only the beginning,” he says. “We are going to improve these agreements in order to use their hubs to serve the Far East [and Australasia].” However, despite MEA’s strong financial position, the original goal of privatising the carrier has been put on hold because of the downturn in the aviation sector. As such, with the possible exception of getting a strategic partner for MASCO, the airline’s MRO division, the entire company will remain in the ownership of the Central Bank for the foreseeable future. “The company is ready to be privatised, the restructuring has been implemented, it is making money, it has a good image and it has the advantage of being in Beirut… but timing is very important,” says El-Hout. “I do not think that this year or next year will be the right time... [as] you have many companies in the area that want to be privatised, and the big airline companies are losing money, so it is the worst time to match demand with supply. Furthermore, we are not in a hurry,” he adds. “We are making money, so we can afford to wait until the right time.”||**||

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