Egypt's post-revolution economic nosedive has not spared the aviation industry: The Ministry of Civil Aviation reported LE 2 billion in losses during the first six months of this year alone. And while the government has intervened in an attempt to boost passenger volumes, some policies have inadvertently exacerbated the problems.
In March, then-aviation minister Ibrahim Manaa said 60 percent of the industry's losses were attributed to EgyptAir, which canceled three quarters of its flights at the peak of the revolution. The state airline's market share is about 50 percent for international flights and more than 90 percent domestically.
EgyptAir Holding Company Chairman and CEO Hussein Massoud said economic losses were mainly due to the collapse in passenger numbers in the immediate aftermath of the uprising that ousted President Hosni Mubarak. February revenue fell 80 percent month-on-month, he says. "In an industry where profit margins are 1.5 percent to 3 percent maximum, it gives you an idea of how bad the damage was," he says. EgyptAir estimates a loss of LE 1.75 billion for FY2010/11.
EgyptAir Holding Company is one of three arms under the Ministry of Civil Aviation, along with the Egyptian Civil Aviation Authority - the policy wing - and the Egyptian Holding Company for Airports and Air Navigation, which oversees the country's 22 airports. EgyptAir Holding Company has nine subsidiaries, three of which are airline-related - including EgyptAir - with six others covering tourism activities, ground services, maintenance and other functions.
Despite some improvement in recent months, EgyptAir remains in the red against the backdrop of political instability and labor actions by employees demanding higher wages and airing grievances such as unfair terminations. While September's half-day baggage handler strike did not have a big impact, October's three-day air traffic controller strike forced rerouting and cancellations, says Massoud.
He adds that any protests or other disturbances have an immediate impact on passenger volume, known as the load factor. A day after the October 9 Maspero tragedy, Massoud says, EgyptAir's load factor dropped to 58 percent from about 73 percent.
Lufthansa's passenger numbers also dropped significantly since the revolution, according to Rasha Shaker, head of marketing and business development for the German airline. With renewed unrest, international carriers canceled 64 flights in the week since November 18.
In February, EgyptAir's load factor fell to 40 percent and the airline responded by grounding 40 percent of its planes in the month immediately following the uprising, which saved an estimated LE 450 million, according to Massoud. Fuel accounts for 30 to 40 percent of airline costs, according to Mohamed Rahma, corporate communication director of EgyptAir Holding Company.
Scheduled route expansions - such as Washington and Toronto flights planned to start in May - were put on hold, according to Massoud. In an attempt to attract passengers, EgyptAir increased its economy class checked baggage allowance to two pieces each weighing 23 kilograms for all international flights. A decision to lease out aircraft attracted unacceptably low offers, and few of the holding company's 30,000 employees accepted an offer of unpaid leave.
EgyptAir also attempted to delay the delivery of aircraft, with limited success, Massoud says, since the airline will still receive four new aircraft this fiscal year - three Airbus A330-300s and a Boeing 737. By comparison, the carrier received 13 new planes in FY2010/11.
By September, Egyptian Airports Company reported that airports were operating at 80 percent capacity and prior to the most recent protests had expected to operate at full capacity through the winter season.
Despite a 70 percent drop in year-on-year passenger load in the first couple of months after the revolution, British Airways "did not cancel any flights and closely managed schedules to fly and land before the curfew," says Mervat Alfy, commercial manager for British Airways in Egypt. The airline has since seen a strong return of business, she says.
Semi-closed skies
Throughout the downturn, the ministries of civil aviation and tourism have been "willing, open and supportive," says Ulrich Link, Lufthansa's regional commercial director. In July, Lufthansa reached 100 percent capacity. And while the government has tried to lend a helping hand, there have been missteps.
In September, the government caused an uproar with a widely reported plan to stop issuing tourist visas on arrival. Barely two days later, the decision was reversed. While admitting it was discussed at a council of ministers meeting, Tourism Minister Mounir Fakhry Abdel Nour denied a decree was ever passed: "It never happened; it's as simple as that." Such flip-flopping "adds to the challenges that we have in the airline business," says Rahma.
In a more positive move, the Ministry of Civil Aviation cut in half landing and parking fees for Egyptian airlines immediately after the revolution, according to Massoud. When asked about foreign airlines, he says they were not experiencing the same problems as EgyptAir.
In March, the government announced fee reductions of $5 per passenger to entice airlines to keep flying to Egypt. And in October, the Ministry of Tourism unveiled a program to boost incoming charter flights, providing subsidies of $30 for each seat filled by flights reaching 65 percent capacity and $50 for each seat if the load reaches 70 percent. Flights operating to tourist destinations that take more than five hours of flight time would see an additional $15 per seat. In September, Abdel Nour said the Tourism Ministry would subsidize a charter operator in Italy because there were not enough Italians going to Sharm El Sheikh.
Not all airlines are benefiting from these policies, however. "We would love to fly from Milan to Sharm, for example, but we can't, because we're deemed to be a UK airline," says Paul Simmons, UK director for EasyJet. The problem arises because airlines tend to be based in one country, but EasyJet has no hub. Simmons would like the authorities to grant his airline an EU designation rather than a British one, but there is no precedent for that in Egypt.
EasyJet also struggles with the lack of "open skies," an international policy that advocates competition and reduced regulation of international carriers. In a September press conference, Abdel Nour admitted EgyptAir is given preferential treatment: "Egypt is applying open skies with one exception, which is Cairo; this is to protect the national airline."
EasyJet is the largest UK airline by volume, with 55 million passengers per year and a fleet of 200 aircraft. It has flown to Egypt since 1998 and operates 29 flights a week to Sharm El Sheikh, Hurghada and Luxor, but has been denied access to Cairo despite having been granted the rights under a UK-Egypt aviation agreement. "We are not here to threaten EgyptAir," Simmons says.
Massoud argues that Cairo is not appropriate for operating models such as EasyJet's. "If a low-cost carrier asks to come to Cairo it destroys its main principle, because low-cost carriers should work from subsidiary airports to reduce fuel costs and fees," he says. EgyptAir's problem is with airlines that undercut airfares and create unfair competition and price wars, according to Massoud.
For his part, Rahma is puzzled by the open skies debate. "When Emirates asked for more flights to Paris, France said no. When Qatar Airways asked for more flights to Toronto, Canada said no," he says. "The US, Canada and Europe are the areas that invented open skies. People think of open skies as a good thing, but it has to agree with their own interest."
Since the Ministry of Civil Aviation was created in 2002, EgyptAir has received favorable treatment, most recently rights to Cairo airport's Terminal 3 together with its Star Alliance partners. Star Alliance, which EgyptAir joined in 2008, is the world's largest airline alliance with 27 members, including Lufthansa.
"We are on an equal level with the national carrier when it comes to terminal use," says Link. "This is a high value asset which we really appreciate. Terminal 3 is up to European standards and that is what our clientele expects and appreciates."
On the topic of fair playing fields, the balance was not always tilted in favor of EgyptAir. "EgyptAir had lower priority in the old days; the best facilities and the best treatment were given to foreign airlines," according to an industry insider speaking on condition of anonymity. When Terminal 2 was opened in 1986, all the foreign carriers moved while "EgyptAir remained in the very old and very out of date Terminal 1," he says.
Flight path to profit
Egypt might learn a few tricks from the American airline industry, which has turned to extra fees since the September 11, 2001, attacks sent 41 carriers into bankruptcy. US airlines have lost $55 billion since 2001, but the industry is enjoying its second consecutive profitable year in 2011. Many American airlines charge for such things as pillows, blankets, meals, checked luggage and entertainment. Bag fees alone brought in $784 million in the first quarter of this year, according to The New York Times.
Massoud says EgyptAir has no plans to introduce such measures. "We have to attract customers at this time," he says. "In the second half of October we reduced prices by 20 percent."
Other avenues to greater profits include shifting from carrying passengers to cargo. Freight is a key sector of the Egyptian economy, and not just because of the Suez Canal. Cairo's airport handles 400,000 tons of cargo annually and is expected to reach 900,000 tons by 2025, Trade Minister Mahmoud Eissa told the International Federation of Freight Forwarders Associations 20th World Congress in October. Recognizing Egypt's status as a freight hub, the federation chose Cairo to host the event despite pressure to pick another venue following the revolution.
On the ground, Egypt has been branding itself as a maintenance hub. EgyptAir Holding Company has maintenance certifications from the European Aviation Safety Agency and US Federal Aviation Administration; a state-of-the-art facility at Cairo airport is audited every six months by European and American authorities.
About 110 airlines conduct their maintenance at EgyptAir, according to Rahma. Maintenance ranges from servicing Rolls-Royce engines to painting aircraft livery, each requiring specialized technologies. "Painting an aircraft is not like painting a car," Rahma says. After the Dubai Air Show last month, Boeing predicted the Middle East would need 53,000 new maintenance personnel over the next 20 years.
Ripple effects
Developing aviation infrastructure would carry many spillover benefits to all airlines. "In the past 10 years, Egypt made great improvements in airport facilities," says Yehia Zaki, Egypt operations director at Dar Al-Handasah, an international design and consulting firm. His team acted as designer and project manager for Cairo's third runway and new air traffic control tower, as well as the Sharm El Sheikh and Hurghada terminals.
"The Ministry of Civil Aviation has a very aggressive program for development," says Zaki. When asked about new projects such as the 6th of October airport plan, he says that while it makes sense in the long term, it would be prudent to first complete improvements at Cairo airport, including an inter-terminal passenger rail, hotel and renovation of Terminal 2.
Cairo's airport still has some room to increase capacity beyond the current 20 million passengers annually, according to Zaki, because of the "finger" design of Terminal 3, referring to the U-shape of the gate areas. Any further expansion, however, would put pressure on several factors ranging from air traffic to parking; thus, the 6th of October airport is the best long-term plan for increasing passenger flow.
Airlines, too, are planning for the long term. EgyptAir is working on its 2015-2020 fleet plan, says Rahma, and that has not changed since the revolution.
© Business Monthly 2012
