By Shane McGinley
Jazeera Airways chairman Marwan Boodai has implemented a profitable turnaround of the carrier’s fortunes. However, with setbacks affecting state-backed Kuwait Airways, he is calling on the government to intervene
The Kuwait aviation sector was given a jolt in 2004 when the market was liberalised and the 50-year dominance of flag-carrier Kuwait Airways officially came to an end. The fresh new entrant into the market was Jazeera Airways, which started operations in October 2005 with a fleet of Airbus A320 aircraft.
With government-owned Kuwait Airways this year suffering a series of setbacks — strike action by workers demanding better wages and conditions, its planes being grounded over safety concerns, and bitter discussions with Iraq over aircraft stolen during the Gulf War — many would think this would be the perfect time for Jazeera to capitalise on its rival’s misfortune.
However, this is not the case, says Marwan Boodai, chairman of Jazeera Airways, as we sit down for an interview at his office in Kuwait City. “A healthy Kuwait Airways is much better for Jazeera Airways than the situation it is in right now. They can cover long-haul and we can focus on the short-haul,” he says.
Instead of competing, the two Kuwaiti carriers operate different markets: Kuwait Airways handles the long-haul international traffic, while Jazeera Airways focuses on the short-haul, low-cost regional traffic. With Kuwait Airways’ various issues creating complications, larger international carriers, such as Abu Dhabi’s Etihad Airways, Doha’s Qatar Airways and Dubai’s Emirates, have moved to fill the void.
Boodai says this has resulted in local carriers increasing capacity in and out of Kuwait so they can direct traffic through their respective hubs and elsewhere around their route networks. The answer to Kuwait Airways’ problems, Boodai believes, is for the government to push ahead with the privatisation of the national airline and open up the market even further.
“Governments are meant to govern, not run airlines,” he says emphatically. “Once they get Kuwait Airways privatised, rest assured there is a huge weight of opportunities in Kuwait Airways that could be exploited but you need a private-sector mentality to make sure you get the best returns,” he adds.
When Jazeera Airways launched its own initial public offering (IPO) in 2004 it was heavily oversubscribed. Boodai says that while a Kuwait Airways IPO might not reach such high levels, he believes it would “definitely be oversubscribed”.
“To be frank, it is always easier to start with a greenfield project rather than having to deal with all the historical problems like Kuwait Airways. Times have changed, I don’t think they are going to get ten times oversubscribed but definitely it will be oversubscribed once the government pushes the button.
“We want to see the implementation… We want to see Kuwait, as a state, to be taking the leadership in our region in privatising their service sectors,” he says.
Kuwait-based analyst Rick Bhandari estimates that Kuwait Airways has accumulated losses of over $2.5bn and thinks that the main problem is that it is “being run as a government ministry rather than a commercially viable operation”. He says that the Kuwait government needs to absorb the losses before it can think about privatising it.
“Not only would this result in better financial management of the airline… [it] will be beneficial for all the stakeholders and the overall aviation sector in Kuwait,” Bhandari says.
If the privatisation does move forward with some sense of urgency, Boodai says he has not ruled out a merger between the two airlines. “Kuwait is a small market... It all depends on the economics and how things shape up in the future. If we can support each other and have a better, stronger business model [then] why not?” he says.
In contrast, Saj Ahmad, chief analyst at London-based StrategicAero Research says Jazeera would be better off remaining as a single entity and should instead consider competing with Kuwait Airways on its international routes.
“Unless Jazeera Airways’ management got to lead the combined entity, I can't fathom why they’d want to align themselves with Kuwait Airways. Jazeera are better off launching their own international and other regional routes. They have a very strong customer base that would flock to them,” Ahmad believes.
Regardless of the dynamics ahead, Jazeera has managed to turn its fortunes around, going from tough losses during the downturn to eight quarters of consecutive profit. However, Boodai points out that the carrier has not been immune to the global financial environment, despite the healthy aviation sector in Kuwait.
Earlier this year, revenue for the first half of 2012 rose 11.8 percent to KWD28.3m ($100.34m). Operating profit over the same period was up 39.9 percent year-on-year to KWD6.4m ($22.69m), while net profit rose 21.6 percent to KWD3.8m ($13.46m).
Jazeera’s chief operating officer, Donald Hubbard, says net profit for the period would have been significantly higher if it had not been for losses sustained as a result of foreign exchange fluctuations during the period.
“If we compare net profit, excluding foreign exchange movements, net profit would have been up 107 percent,” Hubbard says. “Exchange gains in first-half 2011 were slightly less than KWD1.4m ($4.96m), compared with an exchange loss of over KWD210,000 ($744,450) for the half year 2012.”
“The impact is a huge swing,” adds Boodai. “If it wasn’t for Europe, the dollar wouldn’t have gained that much… That is what is really impacting and it is what we call non-realised profit.”
The Kuwaiti dinar has been pegged to a basket of currencies since June 2007 but the eurozone crisis has strengthened the US dollar, and this has had an adverse affect on many Kuwaiti firms like Jazeera Airways.
The carrier’s results are part of its ongoing strategy to revive its balance sheet, known as the Group’s Strategic Master Plan (STAMP), which was introduced this year and will be in effect until 2014.
“Our strong financial performance clearly demonstrates the agility of the company’s business model, which continues to perform despite ongoing political turmoil in our region,” Boodai says proudly.
“Our outlook for the second half continues to be positive, in line with Kuwait’s economy… We think we have a good opportunity to achieve the target of double-digit growth [for the full year],” he adds.
Jazeera’s main competitor in the regional low-cost market is flydubai, but Boodai says the fast-growing carrier has had little impact on its market share. Somewhat dismissively, he suggests that it has only managed to keep going because of its lucrative government backers.
“[flydubai] are government-backed and without that they can’t survive,” he says. “The impact on our market here is not a major impact.
“Yes, you need government support, but what you need more is a local economy that can support you, that is much more valuable than government support... Kuwait has the demand, the population and the people who are going to travel,” he adds.
Jazeera Airways previously operated a second hub in Dubai before it pulled out in 2009, just prior to the Dubai government’s launch of flydubai. Boodai says it was unlikely Jazeera would move to establish another hub in the Gulf as the lack of a common aviation policy in the region has made such a move impractical.
“You have six nations in the GCC and there is nothing called open skies… What we need is a common skies [policy] like Europe to be able to have hubs in the region. Right now, with the regulatory situation we have in the region, it is virtually impossible to set up hubs and operate freely, you simply can’t have the added value in terms of economies of scale,” he says.
Despite Boodai’s assessment of flydubai, some analysts argue that the Dubai-based carrier’s success is also down to the product it offers proving attractive to passengers.
“flydubai has excellent load factors across its system-wide network and the growth they’ve had over the last three years has come about because their pricing, product and low cost of operation gives the airline a huge advantage against its rivals,” says Ahmad.
flydubai has seen rapid growth since it was launched in 2009. This year it plans to add up to five destinations and is on track to earn its first profit in 2012, its CEO said in May. The Dubai-owned airline with a fleet of 23 Boeing aircraft currently flies to over 45 destinations. Just down the road, in Sharjah, the Gulf region’s first listed airline, Air Arabia, is also expanding quickly.
“We have learned our lesson the hard way… unless you have open skies within the GCC it is virtually impossible that a model like Ryanair or easyJet would work in this part of the world,” Boodai says.
In fact, Boodai believes plans by the Lebanese government to persuade Dublin-based Ryanair to operate routes to the region would not work in the Middle East.
In July, authorities in Lebanon said they were in talks with low-cost carriers, including easyJet and Ryanair, about starting operations to the country in a bid to boost a tourism industry that has been rocked by political turmoil in the Arab world. “It won’t work… They will only do it when they have huge capacities,” Boodai says.
Despite the potential introduction of Ryanair and easyJet and ongoing issues with Kuwait Airways causing rival carriers to tap into its local market, Boodai is still confident Jazeera will continue to remain in the black and will maintain its current profit run.
“We have a very strong local economy… Kuwait is not a tourist country but has one of the highest incomes in the world and that is the market we want to serve… As long as the consumers have more disposable income they will travel.”