Out of the hangar: Revitalising aviation to prepare for future opportunities

Breaking ground in 2013 on a new, 130,000-sq-metre terminal building, the Kuwait International Airport (KIA) is at the forefront of a major national overhaul of transport infrastructure. This is intended to renew the nation’s international transport credentials, improve its image, and encourage greater economic diversification in the hydrocarbons economy. The new terminal, alongside a 3m-sq-metre cargo city and third 4.6-km runway, is the basis of KIA’s KD900m ($3.2bn) complete redevelopment that is intended to launch Kuwait as a regional air travel hub. KIA’s pipeline facilities are impressive, but the true scale of demand is as yet uncertain.

FLIGHT TIME: Kuwait’s original 1986 airport structure is now operating dramatically over capacity. Designed for 2m passengers, it handled 8.9m in 2012 and has seen throughput increase 28.7% since 2007. Growth projections indicate further positive trends ahead for passenger traffic, and the strong performance of Kuwait-based low cost carrier (LCC) Jazeera Airlines (JA) has demonstrated that there is a viable sub-regional role that Kuwait can play in aviation; its growth can been seen in its recent announcement in July of 2013 that it will be adding 61 additional flights to its schedule during the summer.

Adopting an open skies policy in 2006, the country has continued to sign bilateral agreements with a number of international air carriers, resulting in exponentially greater air traffic and pressure on the limited facilities. There were 85,117 flights to Kuwait in 2011. In 2012 Nabil Al Zamel, deputy director of the Directorate General of Civil Aviation (DGCA), reported increased flights to Kuwait by Bahrain Air, Iran’s Zagros Air, Thailand’s Jet Asia, Qatar Airways, Flydubai, Gulf Air, Turkish Airlines, Egypt Air and Emirates. In 2013, Air Philippines Corporation (AirPhil Express), the LCC arm of the Philippines’ national carrier, also has Kuwait on its radar for three weekly flights as part of an expansion into the Middle East, serving in part the 3m Filipinos working in the region.

Significantly, 2013 also the saw the resumption of cross-border flights between Iraq and Kuwait since 1990 following a $500m payment by Iraq to settle compensation claims filed by Kuwait in international courts (see Economy chapter). This has now paved the way for greater bilateral links that will be crucial for Kuwait as it designs future transport and industry growth to serve Iraq’s recovery. However, Iraq could yet emerge as a potential rival to Kuwait as a sub-regional hub as it resumed global aviation operations in 2013 and opened the region’s largest pilot air training and development institute.

SANDSTORM: Privatisation plans for the national carrier, Kuwait Airways Corporation (KAC), were approved in January 2013 and the year may see progress in the reform of the airline, whose performance has been volatile over the past two decades. Reviving the airline’s fortunes, fleet and management remains the foremost priority for Kuwait to realise its coveted regional role. This was underlined in 2011, when previous privatisation plans were abandoned by the Privatisation Committee of Kuwait Airways, when no serious bids were made for the airline. This was despite concessions, including a 20% discount on fuel, exclusive government contracts for seven years, a ground operations concession at KIA, and an indefinite exemption on Customs taxes and charges for GCC-sourced aircraft spare parts.

Privatisation remains critical for KAC if it is to survive in the vicissitudes of the regional and global aviation markets and prosper. Yet KAC’s potential is assured given both its high-flying legacy of the 1980s and as the national carrier to one of the world’s largest oil producers. KAC’s fortunes may also prove more lucrative over the next two years following the announcement by its chairman, Sami Al Nasef, that the airline would be buying new aircraft – it is currently seeking local financing for 30-40% of a plan to purchase 25 Airbus places and lease an additional 13 at a cost of KD230m ($821.5m). Furthermore, following legislative reforms enacted in January 2013, which awarded a greater measure of control to investors and managerial independence to the airline, its foundations are looking stronger.

While the budget has not yet been revealed for the new fleet that will relieve the airline of heavy fuel and maintenance burdens, this is expected to be a timely resurrection for an airline that was described by the minister of communications, Salem Al Othaina, earlier in 2013 as “clinically dead”. The government has also agreed to clear KAC’s estimated KD450m ($1.6bn) in debt, but the airline faces a much changed market environment.

COST CONCERNS: JA is undoubtedly the great success story of Kuwait’s aviation sector. Focusing on its homeport in 2009 after plans to establish a secondary hub in Dubai failed, JA has engineered a spectacular turnaround. Reacting to private sector realities in the past three years, JA reduced its capacity and its labour force by 30%, leased aircraft out to Virgin America and Sri Lankan Airlines and has focused exclusively on short-haul flights. JA saw 25% increases in operating profits and a 32% operating profit margin 2012, reporting its best year-on-year record. Confidence in the airline was reaffirmed in January 2013 when the airline increased its nominal capital 74% through a share issuance that was over two times over-subscribed.

The airline’s “Turnaround Plan” has since given way to its Strategic Master Plan (STAMP), unveiled in January 2012. Running to 2014 it is focused on maintaining its existing network, increasing load factors, enhancing yields and growing its market share. Three more aircraft will also be delivered by 2014 complementing its current fleet of seven A320s. “Jazeera’s business model is focused on providing point-to-point services for which we have achieved market shares of up to 45% on some routes,” JA’s vice-president of operations, Falah Al Shammari, told OBG. “We shall continue to expand our products and services slowly and surely in line with our corporate master plan, but it is fair to say that we are enjoying a good rate of expansion relative to our size.”

Despite its popularity JA is not in direct competition with KAC, as they cater to distinct demographics. “Privatisation of Kuwait Airways would be advantageous to the sector by providing both a level playing field and transparent operating environment. JA would welcome such a move and would willingly pursue a partnership with the airline as its short-haul partner,” Shammari explained. While any such collaboration would be mutually advantageous, Kuwait’s market positioning is still unclear. Domestic market fundamentals provide a solid foundation given expected passenger traffic of 13m by 2020, high national income averages (gross national income in purchasing power parity was $53,720 in 2010, according to the World Bank) and a strong desire to travel – three to four times per year – but the scale of Kuwait’s aviation industry remains limited relative to neighbouring and established market players.

OPEN OPPORTUNITIES: Meanwhile, Qatar has signed off on a new $15.5bn airport with an annual capacity of 24m passengers. Dubai International Airport also already serves 51m passengers per year – more than New York’s JFK International Airport. Despite this indication of growing demand, competition is also likely to increase. The Middle East is expected to acquire 2370 planes by 2031, according to Boeing Commercial Airplanes, 69% of which will be driven by growth, not current asset replacement. LCCs already hold more than 10% market share and JA faces strong competition from four other regional LCCs.

There are few indications that Kuwait reasonably expects to compete against established global players. Yet there is every opportunity that it can leverage its facilities (see overview) and a rehabilitated national airline in partnership with private carriers to take a share of the market. Also to Kuwait’s advantage is its open skies policy. While Saudi Arabia has opened its markets to competitors, which should have cascading implications for the sector regionally, open sky policies remain a relative anomaly. Both JA and KAC’s already banked experience will undoubtedly serve them well in an inevitable open skies market, which doubled the rate of growth and cut fares by a third when implemented in Europe.

For Kuwait today, there are numerous opportunities to pursuing the aggressive rehabilitation of its aviation sector that the government has embraced. An anticipated return to stable parliamentary procedures in 2013 is expected to facilitate this. While the KAC faces a difficult period of rehabilitation, with the government’s help it has the potential to re-emerge as a viable regional player. With an established LCC partnership on the cards, it would also be able to target both high-end and “cost-controlling” segments of the regional and national markets, while leveraging its new facilities for the international stage. Kuwait’s determination to embrace an expansive approach is undoubtedly a very positive sign.

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The Report: Kuwait 2013

Transport & Logistics chapter from The Report: Kuwait 2013

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