The grand turnaround

Chairman Marwan Boodai reveals how a ground-breaking turnaround plan brought Jazeera Airways back into profitability
The grand turnaround
By Robeel Haq
Thu 02 Jun 2011 12:13 PM

A countless number of turnaround plans have been launched in the airline industry over the years, with dramatic measures enforced to reverse the fortunes of troubled carriers around the world.

Malaysia Airlines, for example, was plunged into a financial crisis around six years ago and based its survival on a three-year plan to reduce losses in 2006, cross breakeven in 2007 and increase profits in 2008. The strategy was a monumental success and not only received the Centre for Asia Pacific Aviation (CAPA) award for airline turnaround of the year, but also triggered a series of comparable initiatives by the likes of Garuda Indonesia, Japan Airlines (JAL) and Air Malta.

The common thread in each of these cases was a long-term vision, spanning anything from three to five years. Indeed, the suggestion that a successful turnaround could be completed in anything less would probably be greeted with mild amusement by industry naysayers. Until now.

Kuwait-based Jazeera Airways has proved that a triumphant return to profitability can be achieved within a 12-month period, after completing an aggressive turnaround plan that focused on network optimisation for short-haul flights, with loss-making routes being dropped and the workforce being slashed by around a third. One year later and chairman Marwan Boodai is toast of the town, celebrating a third consecutive quarter of profitability, including the best first quarter since Jazeera Airways was launched in 2005.

“Looking back, we were actually profitably every year from our inception until 2009, when a net loss was registered for the first time due to the overcapacity that was dumped into the market by a combination of new players and existing government airlines. By the end of the year, on each of the destinations that we serve, around 44% of seats offered by all airlines were empty,” he states, with a subtle reference to the likes of Kuwait Airlines, Middle Eastern Airlines, Saudi Arabian Airlines and Royal Jordanian.

“Such oversupply is destructive and as a private airline, we care about our shareholders as much as our passengers and employees, so that is the reason our turnaround plan was created. We needed to solve this external challenge and ultimately bring the group back into profitability.”

Following months of preparation, Boodai and his team commenced the turnaround plan in May 2001, with a three-stage approach. Under the initial phase, Sahaab Aircraft Leasing Company was acquired for a reported US$88.7 million and fully integrated into Jazeera Airways Group. This meant the airline could reduce its fleet to six aircraft and redeploy its five excess planes to other carriers through Sahaab, thereby introducing new revenue streams. Its workforce was also reduced by around 30%.

For the second phase, Jazeera’s commercial team was reshaped to cater for a network optimisation that favoured short-haul routes of around two hours. In addition, loss-making routes to destinations such as the Indian subcontinent were terminated. And finally, for the third phase, a previous order with Airbus was reduced from 40 to 15 aircraft, ensuring a match between fleet development and market demand.

“With a focus on profitability before growth, the results were immediate and even better than expected. Within the first three months, Jazeera Airways Group closed its best performing quarter in history, when we reported a net profit of $16 million for the third quarter of 2010,” states Boodai.

“One year later, and with the plan competed, we closed the fourth quarter of 2010 with a net profit of $7.3 million and the first quarter of 2011 with a net profit of $3.9 million, which was the first time we had three consecutive quarters with positive results at both an operating and net level. This was a clear sign to the market that we are well into sustaining profitability and that will remain our focus in each and every quarter ahead.”

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Although workforce redundancies and aircraft reductions may appear extreme, Boodai is adamant that such measures were necessary to ensure a long-term future for Jazeera Airways and were taken after much consideration. “We worked closely with Airbus in making the decision to resize our fleet. Our original order for 40 aircraft was reduced to 15 aircraft, 11 of which have already been received and then one more in 2012, two more in 2013 and the final one in 2014.

These will be introduced into the Jazeera Airways fleet to replace older models, which will then be leased through Sahaab,” Boodai explains. “And this decision caused no problems with Airbus. On the contrary, we have been supported by the best aircraft manufacturer in the world and when you look back to our inception, Airbus did not have a private airline partner in Kuwait. Today, it has a partner with $570 million worth of assets on its balance sheets, a figure that will significantly increase over the next couple of years. A future order with Airbus is therefore likely in the next 18 months.”

The ability to react quickly to market changes has been key to the success of Jazeera Airways, especially when competing with a government-owned airline in the form of Kuwait Airways. “It’s true that private airlines have flexibility to react much quicker to market conditions, although on the other hand, it’s still a huge challenge when the main competitor is your own government or the governments of the region.

After all, the agenda of a government owned airline is different, they are selling for the sake of selling, without much consideration for profit or loss,” claims Boodai. “At the same time, we have to admit that the Kuwait government has been a strong supporter of the private sector. They were the first within the region to allow the launch of private airlines in their country and the benefits of that decision are now evident. Today, we have carried more than 7.5 million passengers, facilitated the travel industry here in Kuwait, and created a job market with more than 430 people working at Jazeera Airways.”

Of course, other private airlines in Kuwait have not been so fortunate. The suspension of Wataniya Airways made headline news this year, blamed on the company’s financial situation, in addition to political unrest in the region and a “lack of fair trade requirements in the local market”, according to a statement issued at the time.

Boodai has his own take on the development. “Its all about the business model and that applies to any industry in the world. First you have to determine the viability of the business model and the business model that Wataniya Airways adopted was unsuccessful in Europe and the United States, which are more developed and wealthy markets, so succeeding in our part of the world would have been extremely difficult.”

However, rather than focus on the downfall of others, Boodai is facing a number of immediate challenges for his own airline, starting with the issue of constraints in Middle East airspace regulations. The entrepreneur has been a vocal advocate of introducing the ‘one sky’ system for a number of years, similar to the European approach.

“There has been a lot of talk about open skies in recent years, but open skies will soon be a part of history, we need a one sky approach in the region,” he states passionately. “This would allow GCC carriers to operate freely between cities and without any commercial restrictions on routes, the number of flights and the setting of fares. Such an approach would essential remove the necessity of outdated bilateral agreements between GCC countries and establishing a single, more progressive sky.”

Numerous attempts have been made to lobby the governments for a one sky approach and while it’s a long-term goal, Boodai is adamant that it’s a realistic one. “Nothing is impossible. When we launched Jazeera Airways, the concept of a private airline was taboo in this region, but with persistence in lobbying the government, our efforts paid off. Hopefully the likes of Emirates, Etihad, Qatar Airways and Saudi Arabian Airlines will also be privatised one day, and when we reach that stage, I am more confident that a one sky approach will become a reality.”

In the meantime, there is also the issue of congestion at Kuwait International Airport, which has been struggling to cope with growth in passenger volumes for some time now. In order to tackle the problem, Boodai has decided to take the bull by its horns, with plans to construct a dedicated terminal for Jazeera Airways at a cost of $50 million.

 “We have to remove this bottleneck at Kuwait airport. Our terminal will be completed in around six to eight years and must be a profit centre by itself,” he explains. “It will be designed specifically for the regional market. For example, passengers do not appreciate having to arrive at the airport a couple of hours in advance for a short-haul flight. They might accept this for a long-haul flight to New York, but not to destinations such as Dubai, Bahrain, Cairo or Beirut. So we are exploring ways to shorten that time, because a passenger’s journey does not start at aircraft boarding, it starts at the airport counter.”

Having such a base for Jazeera Airways is a dream come true for Boodai and while there are rumours that the entrepreneur is keen to introduce supporting hubs around the region, he’s denies this approach, especially given the unsuccessful experience of opening a secondary hub in Dubai during the early years, only for traffic rights beyond the UAE to be revoked for carriers such as Jazeera Airways by the authorities.

“Dubai was both a sweet and sour experience, but we have to accept the realities of life. Jazeera Airways is now focused on developing the business vertically, such as our Sahaab acquisition and building our terminal, which is very different from our earlier focus on establishing hubs in different locations, starting with Dubai,” he explains.

“We respected the decision of UAE authorities; it’s an internal issue that meant our assets could not be increased in the Dubai market, which is one of the reasons we redeployed them. Before that, we wanted to open additional hubs in locations such as Cairo, but these were shelved for the same reasons and looking back, we did the right thing. We would only reconsider that model if the system in our region changes to the one sky policy that I mentioned earlier.”

While there is evidently scope for Jazeera Airways to break a few industry boundaries with its forthcoming airport terminal in Kuwait, surely the carrier will be handicapped until the ambitious project is completed, especially in terms of route launches? Boodai agrees, although he’s keen to focus on the development of existing routes for the time being, rather than expand into a large number of additional markets.

“It’s a fact that today we have a stressful situation on our hands with airport congestion, but we are very cautious in launching new destinations at the moment, at least until we have the infrastructure in place to ensure that a route expansion will not impact the overall service quality that we offer to passengers,” he states. “After all, we have full control on the level of quality that is received on board our flights, and we strive to ensure that level is very high. But once the passengers leaves our aircraft and enters an overcrowded airport environment, their overall experience is negatively impacted, which is not acceptable.”

Even with a selective approach for route launches, some destinations are too attractive to ignore, with Cairo being a prime example. Jazeera Airways commenced 10 flights per week to the Egyptian capital last month – a frequency that will increase to a staggering 21 flights per week from the middle of June 2011.

“This has been a goal for everyone working in Jazeera Airways since the beginning. We wanted Cairo to be amongst our very first destinations and although it took five years to happen, the wait has been worthwhile. Egypt is new and full of optimism today; the spirit of change is sweeping the country,” says Boodai.

“And that’s a perfect match for Jazeera Airways, as we are bringing change to the aviation industry too. Today, our value proposition is hard to beat by any competitor operating on our network, whether its year-round competitive fares, free meals and up to 40 kilograms of free checked-in baggage allowance for economy class passengers, or exclusive fast-track check-in, business lounge access, a-la-carte food selection on board, and of course competitive fares for business class passengers. Our approach has worked and will continue to work in the future.”

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