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French Version

Despite open-sky jitters MEA profits keep soaring

Lebanon's state-owned airline still fears losing market amid increasing competition

Almost eight years ago, in an effort to boost the competitiveness of air-travel in Lebanon, late former Prime Minister Rafik Hariri's government introduced an "open sky" policy.

The move was part of a global open sky campaign to deregulate the market and give any airline the chance to fly into and out of Rafik Hariri International Airport, increasing choice and lowering costs of air tickets.

This addition of low-cost and high-end competition to the market didn't have the devastating effect on the Middle East Airlines (MEA) - solely owned by the central bank - many assumed it would when the law was passed in 2001. In fact, MEA grew rapidly in the years since the law's passage, with an expansion of its fleet and annual profit increases.

Since the introduction of the open sky policy, more than 45 foreign and Arab airlines are currently flying to Beirut airport.

Air-travel is a vital part of the Lebanese economy, where tourism-related services constitute a hefty percentage of GDP. The idea behind the policy was to improve the industry by opening it to competition - although MEA retains rights to exclusivity until 2011. Seven years ago MEA feared this would sink the already struggling national airliner with cheap competition from abroad, and the company offered stiff competition to the policy.

The Daily Star reported earlier that companies seeking licenses to charter flights from abroad were directed by the Lebanese Civil Aviation Authority (LCAA) to seek permission from MEA, which first asked for a $2 million royalty and then denied the application. The general manager of that local charter firm accused the LCAA of not implementing the policy for fear of being accused of hurting MEA's business.

MEA officials feared the open sky would affect the profitability of the company because some of the foreign airlines, and especially the Gulf airways, could afford to slash prices of tickets to lure more passengers.

The airline suffered terribly during the Civil War and took a long time to turn around - something critics of the policy believed would only be made more difficult by opening the market. From 1992 to 2000 the company's market share plummeted from about 66 percent to 36 percent. In 1996 after being controlled by Lebanon's central bank after recording huge losses, the company laid off one thousand staff and reduced the destinations it served.

"It is difficult to talk about the tangible effects of the open sky here in Lebanon, because of all the political and security problems which constantly come up and distort the market," said Yousef Lahoud, the former general manager of Middle Eastern Airlines. "But the consensus is that it is a good policy that increases competition and efficiency in passenger and cargo air transport."

But, the policy achieved near-consensus support and was promoted vigorously by the LCAA.

In a 2003 speech to the International Civil Aviation Organization, director general of the LCAA Hamdi Chaouk, assured the audience that the policy would indeed move forward, adding that "no country can shield itself from the effects of liberalization that are transforming the air transport industry."

MEA not only avoided losses after the law's implementation, but even prospered. Between the years 2000 and 2002, MEA's profits increased steadily due to the austerity measures unrolled during chairman Mohammad Hout's tenure. According to the Center for Asia Pacific Aviation MEA's profits have grown each year since breaking even in 2002. Hout announced $60 million in profits in 2007, and is expecting to see $70 million by 2008. MEA also expanded its fleet in 2007 to include eight more planes - all indicators of a healthy airline.

"The open sky policy has not really affected our market share in Lebanon," said an official at MEA, who wished to remain anonymous because of the airline's policy on discussing the issue. "We have been hovering at around a 35 percent market share since this policy was adopted."

While MEA hasn't seen much damage to its market share, choice has increased significantly. Using the mid-July rates for a one-way ticket from Beirut to Dubai for July 31, the price differences and quality available are significant. Jazeera Airways, a low cost travel carrier, can get you there with no frills for $109, MEA for $293, while flying in the lap of luxury aboard an Emirates jet on that route can set the traveler back $476.

On Thursday, the Saudi airline Kayala Airline landed its first plane in Beirut, bringing yet another competitor to the market. Kayala offers thrice-weekly service between Jeddah and Beirut on an extremely luxurious Airbus 319 fitted with only forty seats, compared to the industry standard 120 seats. "This kind of luxury was not available to somebody flying into or out of Beirut 10 years ago," said Hamid Lakkis, Kayala's top representative in Lebanon. "Without open sky there would be no Kayala here."

Some of MEA's biggest competitors have been the state-owned airlines from oil-rich Gulf countries. With huge fuel subsidies from their governments and ambitious plans for expansion, these companies are willing and able to charge extremely low prices and offer exceptional service in order to make huge gains in new markets. Fly-Dubai and Etihad Airways - both based in the United Arab Emirates - ordered well over $10 billion worth of aircraft from Boeing in the past week.

In a 2005 statement, Hout said that "state subsidies offered to our biggest competitors have made our job much more difficult ... It is very difficult to contend with an airline that does not always pay attention to the bottom line."

But while he praises the demands on costs and efficiency that the new competition brings to bear on MEA, he calls for a more cautious approach to dealing with this "dumping" by foreign airlines.

Despite these overtures to more competition from MEA, resistance continues to local competition. Earlier this year Prime Minister Fouad Siniora's government scrapped plans for allowing the creation of more domestic Lebanese airlines, after pressure from MEA staff.

Yet, with barriers to entry being removed in air transportation markets all over the world, it looks to be a losing fight. When asked about the competition facing MEA from an open sky policy, Lahoud told The Daily Star that airlines from the Gulf receiving unfair subsidies and local competition may be inconvenient, but they are indeed unavoidable.

"MEA today seems to think the policy is a negative one," said Lahoud. "They are afraid of international competition, as well as local Lebanese companies being founded that can eat into their market share. But in the long run it is a good policy for everyone, because it simply lowers fares and increases choice."

Beirut 21-07-2008
The Daily Star

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