Kuwait Airways Seen Facing Last Chance

March 10, 2016

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Kuwait Airways' overhaul may be management's last chance to save it, as the drop in oil prices means the government cannot go on funding its losses at a time when it is struggling even to pay public sector salaries, industry experts say.

Once a prominent symbol of Kuwait's prosperity, the airline is now under real pressure to turn a profit, the 61-year old flag carrier having lost money in each year bar one since Iraq's invasion of Kuwait in 1990.

And to some the airline's plight is indicative of the wider challenges faced by one of the world's richest countries per head of population as it now struggles to live within its means as low oil prices cause the government to run a budget deficit.

And a habit of relying on the state for jobs and cradle-to-grave welfare means Kuwait faces an uphill task in convincing citizens that the state urgently needs to reduce spending, speed up asset sales and encourage the private sector.

"The government can't go on for very long continuing to fund the airline," said Kuwait economist Jassim Al Sadoun, head of the Al Shall consultancy.

"With low oil prices, it might take them a year or two to realise they don't have enough funds, especially because of their involvement in regional conflict," he said, referring to Kuwait's involvement in Saudi-led operations in Yemen.

Which means securing a lasting future for the airline is now a much more urgent challenge for the management, led by chairwoman and former chief executive Rasha al-Roumi.

Following Al-Roumi's appointment as chief executive in December 2013 the airline placed its first significant aircraft order since the invasion, after parliament agreed to convert the airline into an independent corporation, freeing it from having to first gain approvals for such deals from state auditors.

Al-Roumi has since sought to make the business more efficient with staff cuts and a rationalisation of routes. The airline will be rebranded with a new look by June.

Kuwait has also agreed to pay off the airline's losses, fund its fleet renewal costing nearly USD$8 billion and inject USD$4 billion of capital.

But economists say that could be the last lifeline thrown.

Kuwait's emir, Sheikh Sabah al-Ahmed al-Sabah, last month called for budget cuts and better management of spending in public entities.

The country expects revenues of KWD7.4 billion dinars in this fiscal year, which would cover only 71 percent of state salaries and associated costs.

As a result pressure is growing to push ahead with long-planned privatisations, including that of the airline.

"Kuwait's government will have to pay attention now to its bleeding points, and Kuwait Airways is one of them," Marwan Boodai, chairman of rival Jazeera Airways, said in an interview.

Kuwait Airways has been embroiled in political haggling over stalled privatisation plans since 2008, but the pride attached to a national carrier and its status as one of Kuwait's largest employers has so far frustrated any moves to sell it off.

"The government doesn't have a vision for the airline… Even if it does privatise it, it will continue its interference without a corporate plan for the airline," said Will Horton, an analyst at Australian aviation consultancy CAPA.

PRIVATISATION DELAYS

Kuwait's parliament first approved a plan to privatise Kuwait Airways in 2008 with a two-year deadline, but it has since gone through various proposals to change the structure, with no new timetable set.

The original plans called for a strategic investor to purchase 35 percent. Kuwaiti budget carrier Jazeera Airways and logistics firm Agility both expressed interest.

Opposition from some members of parliament prompted government approval last year of a new privatisation structure, where the government will retain 75 percent, leaving no room for a strategic investor.

Sadoun said the government has two routes to take with the airline; either privatise it or follow the example of the UAE and Qatar by establishing Kuwait as a travel hub between East and West.

But a hub plan could prove costly and take many years to achieve, due in part to many bureaucratic hurdles.

However, the airline's latest restructuring plan that dates back to 2013 when Al-Roumi took over as chief executive, still gives it a fighting chance as it leases its first new aircraft in 15 years, according to airline officials.

As part of the turnaround she has also shed 1,350 jobs and plans to cut another 1,000 from the remaining 5,800.

Al-Roumi declined to comment.

But with a gradual reduction in losses and a slowly renewing fleet, some in the industry say Kuwait Airways is at last heading towards becoming a commercially viable airline.

"(Kuwait Airways) has a changed model and I'm sure it will rapidly progress under the leadership," Qatar Airways chief executive Akbar Al Baker said in January.

Critics warn that may simply be a reprieve until a significant private partner is brought in.

"Governments should look at the privatisation option to stop the bleeding - if they stop annual losses, that's an achievement. And it's a good time for them to look at getting rid of such businesses," Boodai said.

(Reuters)