MEA confident of clearer skies ahead

The Financial Times

Source: Financial Times
By Robin Wigglesworth

Running an airline is often a bumpy business but few have to contend with headwinds as strong as those confronting Middle East Airlines, Lebanon’s national carrier.

After a buffeting from civil war, a central bank bailout, restructuring and an Israeli offensive, the carrier says it is now heading for a smoother ride.

The restructuring, coupled with its experience of tough times, has left the airline in good shape to withstand more turbulence, argues Mohamad El-Hout, the chairman and director-general of MEA.

“We have made money even during the most difficult times, such as when [former premier Rafiq] Hariri was assassinated [in 2005] and the Israeli bombing in 2006,” he says. “Our profitability was tested by these events but we have kept making money.”

Indeed, after first turning a modest net profit of $3m in 2002, its bottom line swelled to a peak of $107m in 2009, helped by the positive sentiment engendered by the Doha Accord of 2008, which brokered an end to a domestic political crisis, and lower fuel prices that year.

Nonetheless, the more recent turmoil in the Arab world – and particularly the civil war in neighbouring Syria – is taking its toll. Net profit dipped 24 per cent to $63m last year but actual operating profits more than halved to $40m in 2011, despite the total number of passengers rising to a record 2.1m.

Mr El-Hout hopes for similar results this year but concedes the Syrian conflict is weighing on business. The political turmoil in Syria has spilled over to Lebanon where real growth GDP will be about 2 per cent in 2012, compared with an average annual growth of 8.1 per cent between 2007 and 2010.

Established in 1945, when Beirut was known as the Paris of the Middle East, MEA was stricken with mounting losses during the Lebanese civil war that raged between 1975 and 1990. Peace brought little improvement. By the end of 1996 the central bank had to rescue and restructure the company, after losses of more than $500m between 1981 and 1997.

While the large Lebanese expatriate community “are used to tensions”, and have kept on visiting their homeland, the vital stream of wealthy tourists from the Gulf has contracted by more than a third, Mr El-Hout estimates.

“I don’t expect things to deteriorate further but I don’t think things will improve either,” he concedes. “It’s a huge amount of money lost but we are still making acceptable profits.”

The airline nonetheless hopes to keep its dividend policy of returning $1 a share this year. If profits do start to dip further, at least MEA will have a healthy balance sheet to fall back on. Mr El-Hout says that the airline always keeps $300m of cash – equal to about half its annual operating costs – on hand as a safety net. “We live in a troubled neighbourhood, so we know that cash is important,” he says.

MEA is also under pressure from a more familiar challenge for airlines: low-cost carrier rivals. Flydubai and Sharjah-based Air Arabia have added many cheap flights to Beirut and taken market share as a result.

Although MEA pitches itself as a more upmarket airline, competition has reduced the yield of economy class flights by 25 per cent over the past four years and eroded some of the Lebanese carrier’s profits.

MEA is now itself considering whether to set up a low-cost airline to compete with its cheaper rivals. Mr El-Hout, a former central bank official, expects a feasibility study to be examined and voted on by the board next year.

Regardless of what the final report concludes, the carrier is looking at expansion. MEA operates a fleet of 18 aircraft, but this summer signed a memorandum of understanding with Airbus for the acquisition of 10 new aircraft – five A320s and five A321s.

The national airline is also considering new destinations to its network to buttress its business. Iraq is particularly attractive. MEA already flies to Baghdad and Irbil but is considering adding routes to Basra and Najaf. It is also considering routes to Sudan and Russia but visa issues for Lebanese in the latter country is a problem, Mr El-Hout concedes.

Longer term, MEA hopes to become a public company by listing shares on the Beirut stock exchange and an international bourse – most probably London, which boasts more investors that look at emerging and frontier market equities.

The central bank has long been keen to reduce its stake in the airline – the Banque du Liban owns more than 99 per cent, with the balance in the hands of MEA employees – but an initial public offering has been continually delayed by the succession of crises confronting Lebanon.

More recently, the global financial crisis forced MEA in early 2009 to shelve plans to list 25 per cent of its shares. The Beirut Stock Exchange has continued to tread water since the crisis, and the $12bn market capitalisation is almost half the pre-crisis peak.

The turmoil emanating from Syria this year has hardly helped, contributing to the bourse’s 3 per cent loss in 2012, and trading volumes remain dismal; hardly the best environment in which to list.

Nonetheless, Mr El-Hout says that a stock market flotation is still on the cards – eventually.

“Our investment bankers have said this is not the right time,’’ he says. “[But] we are watching the market.”