KUWAIT. Kuwait Airways celebrated its Golden Jubilee at the end of 2004, proudly boosting of having flown 50 million passengers in its 50 years of operation. However, the party atmosphere was clouded by questions hanging over the airline’s future. The carrier faces new competition in its home market, and it is unable to respond because of the on-going delays in privatisation plans. The organisation is also saddled with huge debts because of the Parliament’s refusal to approve its final accounts for the last six years. Despite these challenges though, the airline is slowly transforming itself, cutting its costs and aiming to maximize revenues by rationalizing its network.
Many of the problems faced by the airline date back to 1990 and the Iraqi occupation of Kuwait. On the one hand, the political instability caused by the invasion and subsequent events in the region greatly impacted on the carrier, as traffic into and through the country fell away. At the same time the airline had to take on huge debts, which peaked at US$ 1.4 billion, to rebuild and modernize its fleet following the occupation, when many of its assets were destroyed. Combined, the falling revenues and rising costs have created constant cash flow problems for the carrier, as well as 14 loss-making years in the last decade and a half.
"We are in a very bad situation now with the repeated deficit since the liberation of Kuwait," admits Sheikh Talal Al-Ahmed, Chairman and Managing Director, Kuwait Airways. "These deficits are mainly due to the situation of Kuwait, which was caused by the previous Iraqi regime. This has affected movements into Kuwait and through Kuwait, as a transit point."
Secondly, high expenditure [has added to the problems] because of the commitments Kuwait Airways entered into in order to modernise the fleet after liberalisation due to the destruction of almost 86% of the assets [during the occupation], he added.
The debts have now been reduced to around US$700 million. The Kuwaiti government is unable to clear them though, because infighting in the parliament has prevented the airline's financial results from being approved for the last six years.
"According to the constitution of Kuwait Airways, all of its losses have to be compensated by the government, as we are a 100% government owned airline," says Sheikh Talal. "However, this cannot be implemented unless the Parliament approves the budget and the final statements…. so all of its outstanding dues have been held because of the lack of a decision to clear them, which has subsequently kept a burden on Kuwait Airways' balance sheet," he adds.
Because of this burden, the airline is unable to invest in upgrading its fleet or overhauling other aspects of its product offering. The carrier is therefore pushing the parliament to approve the results, which would then allow it to compete more effectively. "The first and most urgent step we are hammering the government to take is to convince the Parliament to clear these outstanding dues in order to help Kuwait Airways reshape itself," says Sheikh Talal.
The carrier has been pushing this position for a number of years, but Sheikh Talal believes that it may soon be successful in persuading the Parliament to act. "We now sense that many members understand the situation and the importance of clearing these outstanding dues, and the sooner the better," he says.
The long road to privatisation
Alongside the campaign to get its debts cleared, the carrier is also seeking eventual privatisation. This would begin with the airline being converted from a corporation into a 100% government-owned company. Shares in the company could then be sold at a later date.
A draft law to turn the airline into a company was submitted to the parliament in 1990, and the relevant committee has accepted the amended it. However, the parliament has so far refused to move on the law, although Sheikh Talal is again optimistic that action will be taken in the near future.
"My hope is that the Parliament will look into the law this year," he says. "The government has listed it as one of the priority laws, and let us hope that the members of the parliament will agree will agree with these priorities and discuss the law."
The need for the airline to make this transformation, which would then enable it to operate on a commercial footing, has increased of late, because of the imminent threat of domestic competition. The Kuwaiti government is set to approve the formation of three new airlines, starting with low cost carrier, Al-Jazeera Airways, which will launch operation in the near future. Al-Jazeera will later be joined by eventually, an all-cargo operator and then eventually, by a full-service airline with a similar product of the flag carrier's.
The licensing of the private airlines in Kuwait necessitates that this [commercialization] law be passed," says Sheikh Talal. "Commercialising Kuwait Airways will put the airline on an equal footing with the new licensed airlines … as it will not be fair to tie us with all of this government bureaucracy while the others can function freely in the market."
New Kuwaiti carriers on a level playing field
The new airlines clearly present a threat to Kuwait Airways, even though aviation in the country is one of the upswings, largely due to reconstruction efforts in Iraq. The airport, for instance, has announced plans for a second terminal after breaking the five million passenger barrier for the first time last year.
Around half of these passengers flew on the flag carrier, but whether it will be able to maintain its grip on its home market remains to be seen. Sheikh Talal is confident though, that Al-Jazeera will not impact greatly on Kuwait Airways. "We do not expect that we will be very heavily affected [by Al-Jazeera]," says Sheikh Talal.
"Low cost flights might affect other regional transportation services, like the buses, but the effect on the legacy airlines will be very minimal… However, the other airline that eventually be established – namely the legacy airline – might hurt Kuwait Airways, unless Kuwait Airways is converted into company, and then we would have a free hand," he adds.
The airline also faces increasing competition from other carriers in the Middle East, especially the likes of Emirates and Etihad, which are rapidly growing their fleets. "Particularly with the extra capacity that will come with the A380, we do anticipate that there will be a regional price war," says Sheikh Talal.
"When these airlines take this capacity, they will want to fill aircraft and they will not be able to unless they reduce their prices. They will also have the capability to do this because the cost per seat will be less for them," he adds.
To prepare for facing this competition and also to make the company more attractive for its eventual sale, Kuwait Airways is aggressively tackling its cost base. For instance, the airline has begun to reduce its excessive headcount, which has long been a problem. A 1997 study, for instance, found that the airline had 800 employees too many. Since then, however, staff numbers have fallen by 570 through a combination of early retirement schemes and a hiring freeze for non technical positions. "We have to reduce our costs," says Sheikh Talal.
"We have managed it for the last three years and we have managed to reduce the deficit for the last three years as well. If we continue to succeed in doing this, it will certainly give us the possibility of reducing our fares."
However, there are certain cost elements that you cannot control, like the problems we faced last year and this year with the fuel prices," he notes. "The fuel hike doubled the rate we had planned our budgets on and the cost increased tremendously."
"Airport users charges is another area that IATA is working on getting reduced, and also over-flying charges, which is another charge that we cannot control … Too many governments do opt to increase these charges without realizing the impact that it has on airlines," he comments.
Smaller but profitable
Working with Lufthansa Consulting, the airline is also cutting its costs and improving its revenues by rationalizing its network. The airline has already cut out seven loss-making routes - including Karachi, Larnaca and Singapore - and it may also cancel its twice- weekly services to Chicago, which would then allow it to increase its New York flights five a week to seven.
A move to concentrate the US operation in New York would reflect the carrier's wider network strategy, as it has already increased its frequencies to other key destinations, such as Cairo, Dubai, Beirut and Colombo. "We have moved all of the cancelled hours from the non-profitable routes," says Sheikh Talal.
To more cost effectively extend its network; the airline is also looking to cooperate more widely with other carriers, particularly on long-haul routes. It started code sharing on Air China's flights to Australia and its flights to Beijing at the beginning of the year, for instance, and it is now talking to Gulf Air about cooperation on GF's routes to Australia and its flights to the US. "Such cooperation would be viable and a win-win situation for both airlines," says Sheikh Talal.
More long-term, the carrier is also hoping to join one of the global alliances, although it will need to make a number of changes to its schedule in order to have the necessary connections with its partners. "We are on the verge of the final step with all three major alliance," says Sheikh Talal. "We know that they need and we know the shortfalls that we need to improve on, and (once we have done this) we will see which one would suit Kuwait Airways best."
The airline also has a plan for overhauling its fleet, which would let it improve its service levels while reducing costs. Presently, the carrier has 17 aircraft, comprised of three A320s, three A310s, five A300s, four A340s and two B777s. These aircraft are starting to age, however, and the airline wants a standardized fleet of 23 or 24 planes instead. "Our fleet is not too old, but it is about time that we had a plan for modernising it," says Sheikh Talal. "We also want to have just one manufacturer from long range to medium to short."
"Both [Airbus and Boeing] have submitted their views on where they see Kuwait Airways with this concept, while we have not yet made a final decision; we can see the direction we want to go in."
However, the carrier is unable to move that way at present, because of the ongoing cash problems. Clearing up these is therefore critical for the airline's future, as it will otherwise be unable to make the improvements needed to define its market share and regain its historic position as leading regional carrier in the Middle East. "Being small and profitable is better than being big and losing money," concludes Sheikh Talal.