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Why another stall spells bad news for Kuwait Airways

Posted 12 November 2012 · Add Comment

Is time running out for Kuwait Airways' aspirations to be among the Gulf's big boys? Martin Rivers finds out.

 

Kuwait’s decision to suspend the privatisation process for its national carrier came as little surprise last year, with muted interest among bidders and more pressing concerns in the emirate’s fractured parliamentary system.

But the subsequent grounding of three Kuwait Airways Corporation (KAC) aircraft in July – following an emergency landing by one of its Airbus A300s in Medina – underscores how time could be running out for the airline’s ageing fleet.

Kuwait’s most recent attempt to resurrect the privatisation bill came unstuck in June, when draft legislation provisionally approved by the cabinet was swept aside with the rest of parliament.

The Constitutional Court’s move to invalidate February’s election – which had seen significant gains by opposition Islamist parties – forces the emirate to once again go through the motions for new legislation.

“[The interim] parliament will be dismissed but we don’t yet know when exactly,” airline PR director Adel Boresly said, in reference to the pro-government ministers drafted in following the dissolution.

“There are some important decrees with the government that will be issued in between parliaments,” he explained. “The Emir will decide on these issues during that period of time. The parties will have two months’ election time for campaigning, and during that period the important decrees to run the government issues will be announced.”

While the parliamentary machine prepares to reboot, KAC’s long-awaited and sorely-needed fleet renewal has once again been kicked into the long grass.

Boresly said the flag carrier drafted two ‘operational plans’ for short-term fleet renewal in the wake of the Medina incident, advocating the leasing of either five or ten new jets. Direct aircraft orders will only be placed after privatisation has come to fruition – a distant prospect that entails selling a 35% stake to new strategic investors, and pushing through controversial staff restructuring.

But privatisation and fleet renewal are not the only aviation issues winding their way slowly through Kuwait’s dysfunctional parliament. The airline’s long-running row with Iraqi Airways – which it accuses of stealing ten civilian jets during the Second Gulf War – is also back on the agenda.

Reports from Baghdad in March indicated that Iraq had agreed to pay $500 million in compensation to Kuwait to end the bitter dispute. That marked a significant discount to the $1.2 billion in damages awarded by Britain’s High Court, but sources say the payments have failed to materialise.

Questions persist not just over whether the two parliaments stand by the deal, but more fundamentally over “whether this was even a real settlement to start with”, one person close to the matter said.

The rancorous dispute dates back to August 1990, when Iraqi troops swept through Kuwait and seized ten KAC jets parked at Kuwait International Airport, purportedly acting under orders from Saddam Hussein. After being flown to Basra for “safe keeping”, four of the aircraft were destroyed in coalition bombing and six were moved to Iran. Millions of dollars worth of spare parts were also allegedly stolen.

Though the surviving aircraft were eventually repatriated to Kuwait, subsequent legal action unearthed evidence that Iraqi Airways had not merely followed Saddam’s instructions – as it claimed, initially successfully, in the English courts – but rather airline management had forged documents in an effort to mask their complicity.

Several years of asset seizure by Kuwait followed, culminating in the detention by British police of Iraqi Airways director general Kifah Hassan Jabbar after the airline’s first flight to London for two decades touched down in April 2010.

Amid deteriorating relations, an apparent breakthrough came in March of this year when a spokesperson for Iraqi prime minister Nouri al-Maliki announced that the two countries had brokered a settlement. The deal would see Iraq pay $300 million up-front in cash, the spokesman said, while providing another $200 million towards an unspecified joint venture – believed to be a pilgrimage charter service to Najaf.

However, cracks emerged in the deal over the summer, with KAC lawyer Christopher Gooding, who has represented the airline for the duration of the dispute, warning that the Iraqi government appeared to be backtracking.

“No payment has been made pursuant to the proposed ‘broad terms’ agreement,” he said in July. “The terms of the proposed settlement are not as set out by Iraq. The terms, which are far from clear, appear to provide for a payment of $300 million, plus the right to receive the first $200 million profits from an unspecified joint venture, in which Kuwait is expected to invest an unspecified amount.”

In other words, the Iraqis were insisting that the second tranche of compensation was contingent on the joint venture attaining profitability – a long, uncertain and costly endeavour for any start-up airline – without financial support from Baghdad.

A second agreement reached between the parties in late July reiterated that the Iraqi government is liable for both tranches in full but, to date, Baghdad has only voted on the initial $300 million payment. Moreover, the dissolution of Kuwait’s parliament has muddied the waters further by delaying the ability of its National Assembly to formally approve the second deal.

In October the general secretary of the Iraqi Cabinet, Ali al-Allaq said Iraq will not pay compensation to Kuwait Airways for the debt dispute before Kuwait drops legal claims against Iraqi Airways. Under an agreement reached in March, the two countries decided that Kuwait would abandon all lawsuits against Iraqi Airways in return for Iraq paying $500 million, but in an interview with Bloomberg al-Allaq said Kuwait has yet to drop the claims in court.

KAC’s Boresly declined to comment on the court case, insisting that it was “government to government, not airline to airline”. However, the source that spoke to Arabian Aerospace confirmed that the terms of the settlement had been murky from the get-go. He suggested that the ambiguous wording of the first agreement could have been interpreted as promising just one-fifth of the headline figure.

“What was originally agreed was always going to be a difficult pill for people to swallow,” he said. “On an apparent settlement of $500 million you actually got $100 million. Not a good deal, was the general view.”

With the courts struggling to hold together the agreement, KAC’s legal team has dropped hints that asset seizure could resume shortly. Previous enforcement action saw Kuwait take ownership of Iraqi Airways’ offices in Jordan, as well as disrupting delivery of its Bombardier CRJ-900s from Canada. But while Iraqi Airways faces an uncertain future, KAC is hardly in a position of strength.

Kuwait’s flag carrier saw a slump in bookings in the aftermath of the A300 Medina incident, Boresly confirmed, though he stressed that the decision to ground three aircraft coupled with renewed fleet planning has restored confidence.

“The minister [Salem Al-Othainah] was convinced by our engineering experts that because of the age of the aircraft we need extra time for maintenance work on the ground. So he said, ‘Ok ground the three, complete the maintenance work, and [source] spare parts’. We have to request some spare parts from outside, and that takes time.”

KAC’s fleet consists of 17 aircraft with an average age of 18 years, comprising five A300s, three A310s, three A320s, four A340s and two Boeing 777s. One of each of the A300s, A310s and A320s has been grounded and will stay in hangars for “at least between six and nine months”.

Recalling the furore surrounding the Medina scare, Boresly said: “There was a drop [in bookings] for a couple of weeks but we called a media conference, we explained to them what happened, and then the bookings started to pick up after that. By the time of the Eid holidays most of our aircraft were full again.”

KAC is mitigating the fleet reduction by cutting frequencies on routes already encountering lower traffic numbers. Cairo, Beirut and some destinations in the Indian subcontinent were among the first to be scaled back.

The airline is also taking advantage of the Kuwaiti Emir’s private 747-400. Though the aircraft has a VIP configuration it still seats around 300 passengers, allowing KAC to temporarily boost capacity on reduced routes as well as accommodating spikes in demand for religious traffic. “At the beginning of Ramadan we leased it,” Boresly noted. “If it is on the ground and they don’t need it, they lease it to us.”

Moving forward, management have a good understanding of the fleet requirements, but they remain hamstrung by the difficult political climate.

The airline has submitted two ‘operational plans’ to the government outlining possible short-term fleet renewal, with the upcoming Emiri decrees expected to call for new leases irrespective of how far privatisation has progressed. “The government will decide whether it will be five or ten aircraft. If it were five, they would be for certain destinations only. But if it is ten, we can expand [the existing route network].”

The leased jets will include either A320 or 737 narrow-bodies and A330 or 777 wide-bodies. Any talk of direct purchases is strictly off-limits for now, Boresly said, adding: “That is for the strategic partner who’s going to buy the company to decide. They will decide whether to buy or not, and what kind of aircraft.”

With several lessors already having submitted proposals, KAC is keen to sign agreements and begin phasing out its older aircraft. But uncertainty persists over parliament’s willingness, or ability, to push through the privatisation necessary for a comprehensive overhaul of the carrier.

Privatisation efforts date back to 2008, when ministers drew up the legal framework for restructuring the airline and transferring ownership from the public sector.

Having been almost consistently lossmaking for the previous two decades, in 2011 KAC began the first phase of its “holistic transformation” into a private entity. Share capital of KD220 million ($785 million) was predetermined for the company, with 35% due to be auctioned off to strategic investors.

Another 20% would be retained by sovereign wealth fund the Kuwait Investment Authority (KIA), while 40% would be distributed among Kuwaiti citizens through an initial public offering (IPO) and the remaining 5% allocated to airline employees.

Joint-stock companies listed on the Kuwaiti Stock Exchange as well as “specialised global companies” were eligible to bid for the 35% stake. But by October of last year the plan had been suspended amid reports of underwhelming interest.

“The delay in privatising KAC gives us the opportunity to address a number of operational and structural issues ahead of a future privatisation programme,” the airline said at the time.

Hopes were resurrected in April when state-run news agency KUNA reported that the cabinet had approved draft legislation paving the way for privatisation in the more realistic timeframe of three years. Though details were sketchy, it was clear that the government planned to force through immediate restructuring while allowing extra time for a strategic investor to be found.

The KUNA report made no mention of price estimates, relieving those who had warned that the earlier KD220 million valuation – originally proposed by investment banking firm Rothschild in June 2009 – was excessively optimistic.

But this effort, too, was scuppered in June, when Kuwait’s parliament was dissolved and the National Assembly denied the chance to vote on the matter. With restructuring plans back in the hands of the government and KIA, there is little KAC can do to speed up progress.

“We are in a transition period,” Boresly explained. “We are waiting for the government to establish Kuwait Airways Company [as a part-privatised entity], and then we will start implementing all steps – reducing staff through retirement, leasing aircraft, restructuring the whole operation. The plan is there, but we are waiting for the resolution from the government to establish the company.”

As soon as leases are secured, KAC will benefit from immediate savings on fuel burn as well as reduced maintenance costs. Cutting staff expenditure poses a bigger challenge, with Kuwaitis long accustomed to a cradle-to-grave benefits system that encompasses well-paying public sector jobs.

Indeed, hostility towards restructuring at the flag carrier boiled over in March, when dozens of flights were cancelled after employees staged industrial action in pursuit of still higher wages.

Ultimately, though, the 58-year-old airline has no choice but to push through its transformation into a commercially viable private entity. Newcomer Jazeera Airways, which was founded in 2005 under the emirate’s aviation liberalisation scheme, posted its eighth consecutive quarterly profit this summer – compared to KAC’s reported full-year loss of KD80 million.

Losses at the flag carrier now exceed $3 billion over two decades. Even Kuwait’s fractured parliament must surely have run out of patience with the status quo.

 

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