Kuwait Airways' transition to a private entity marks the first privatisation of any flag carrier in the Gulf. But has the airline learned the lessons of its troubled past?
After 18 years of political wrangling, the Kuwaiti parliament passed a privatisation law in May 2010 which proponents said would reinvigorate the country's bureaucratic, public-sector dominated economy. Cabinet ministers forced the legislation through after 28 of the state's 50 parliamentarians opposed it, with some arguing that the changes were tantamount to "the robbery of the wealth of Kuwait and a plan to destroy the country".
Top of the agenda was the long-awaited move to privatise Kuwait Airways, which has itself done little to preserve the country's wealth in recent times. The flag carrier posted losses in 20 of the last 21 years, hemorrhaging more than $3 billion including $556 million last year alone - a time when most airlines were rebounding from the global recession.
Beyond the state bureaucracy and allegations of corruption, the airline is bogged down by maintenance costs for its fleet, which has an average aircraft age of 18 years. A $3 billion order for 19 replacement jets had been touted as a landmark solution, but the deal was axed in 2007 after ministers voiced growing unease about pouring yet more money into the failing carrier.
Only rubbing salt into the wound is the breakneck expansion of its three main regional rivals - Emirates, Etihad and Qatar Airways. And with Kuwait Airways' wage bill accounting for 30 per cent of revenues, restructuring by the private sector is now seen as essential to restoring competitiveness.
Of course Kuwait's flag carrier is far from the only state-owned airline struggling to turn over a profit. But its predicament is all the more frustrating given the obvious growth opportunities in the state's aviation sector, which was liberalised in 2005 with the granting of three private licences.
Demographics in Kuwait could hardly be more favourable, with almost half the population under 30 years of age and disposable income among the highest anywhere in the world (GDP per capita is around $38,000, according to the International Monetary Fund). While tourism is virtually non-existent, the country's large expatriate presence, coupled with its geographical location spells clear potential for establishing Kuwait City as an intercontinental hub.
Keen to turn over a new leaf, Kuwait Airways last month set in motion Phase One of its "holistic transformation" into a private entity - the first privatisation of any flag carrier in the Gulf.
The new operating company will have predetermined share capital of KD220 million ($810 million), with 35 per cent being auctioned off to strategic investors. Expressions of interest were filed in August and are currently being reviewed with the help of Citibank and specialist aviation consultancy Seabury. Selected parties will then be invited to submit binding bids, followed by a one-day auction.
Though domestic airlines cannot take part, the field is open to joint-stock companies listed on the Kuwaiti Stock Exchange as well as "specialised global companies". According to some analysts, interested parties could include international carriers whose route networks currently have limited reach in the Gulf.
"There has to be a demonstration of an ability to run an airline, both operationally and technically," one source close to the sale emphasised. "It's restricted by virtue of the expertise required, so it's open to Middle Eastern airlines as well as airlines outside the region. It could be a joint venture, but again one party would need the relevant expertise to run an airline."
A subsequent Initial Public Offering (IPO) will see 40 per cent of the company sold to Kuwaiti citizens, while five per cent will be allocated to airline employees. The remaining 20 per cent will be held by the Kuwait Investment Authority, the country's sovereign wealth fund, as a guarantee of continued government support.
With staffing costs weighing heavily on the airline's bottom line, its 2,600 employees were recently asked to choose between joining the new operating company, transferring to another government entity, or taking retirement if eligible.
Though the survey's results have yet to be published, it is believed that most staff opted to retire or switch to another public body. "It cannot be implemented until the privatisation has occurred, but in terms of the cost element you'll see a dramatic reduction from day one," the source predicted. "They've rationalised the staff."
A transitional interim management team will also be appointed to head up the new airline - with ministers wary of longstanding accusations of corruption - while a new board of directors will set to work implementing Seabury's turn-around business plan.
While progress has been made in human resourcing, Kuwait Airways still faces an uphill battle in attracting bids. Years of losses have caused immense damage to the brand, and political tensions risk further undermining regional interest.
Dubai's Emirates and Abu Dhabi's Etihad, both themselves state-owned airlines, are unlikely to see much benefit in propping up a smaller rival flag carrier. Qatar Airways is busy planning its own IPO. And further afield Kuwait won little sympathy over its bitter feud with Iraqi Airways, whom it still pursues in the courts for Saddam Hussein-era reparations.
There are also concerns that the airline's KD220 million valuation may be excessive. That was the figure put forward by investment banking firm Rothschild in June 2009, since which time one domestic rival (Wataniya Airways) has gone bust, and another (Jazeera Airways) has scaled back expansion plans by cancelling orders for 25 jets.
Perhaps the biggest worry for investors, though, is the sign that Kuwait Airways may not have learned the lessons of its troubled past. Buried in the teaser document for prospective bidders are several indications that the airline will continue to rely on state support, rather than free-market competitiveness.
On top of the ten per cent fuel discount afforded to all airlines at Kuwait International Airport, the flag carrier will benefit from an additional ten per cent markdown. It will also retain exclusive rights to transport government personnel, as well as enjoying subsidies on airport space rental and exemption from custom duty on aircraft parts used within the Gulf Cooperation Council. Critics say these privileges will do little to foster a culture of efficiency.
© The Gulf 2011
