MEA is expected to achieve $45-50 million profit for 2007, compared to $46 million and $40 million for 2005 and 2006, respectively. In June, MEA will receive the first of 10 Airbuses that it has contracted through 2009 (6 aircraft) and 2010 (3 aircraft).
This fixed and steady profitability and the determination to expand by purchasing new aircraft will certainly lead to an increase in the number of flights and destinations. MEA is recording these achievements at a time of rough and unsuitable conditions – this means bigger marks should be awarded for this success than that achieved by other companies experiencing conditions that are suitable, facilitating and encouraging for growth and expansion.
Thus, the story of MEA’s continuing success since 2002 takes on special importance and gives us indications about the effectiveness of MEA’s management, led by its Chairman- Director General, Mohamad El-Hout. It also speaks volumes about the policy that has been adopted when it comes to operations, controlling expenditures, or improving services, as MEA has captured a fixed and constant niche market in recent years.
However, we should note that this success has been achieved under various unsuitable conditions, as detailed below.
Zero Growth
MEA operates in an unstable climate, in terms of both politics and security. The nature of this climate is hostile to all economic activities, especially travel, due to its connection to tourism, business and the movement of investors and businesspeople.
This unstable climate is reflected in the figures for the movement of passengers at Rafic Hariri International Airport. The number of passengers in 2007 equaled that of 2005, which registered the same number as 1974. In practical terms, this means that MEA has been functioning in a situation of zero growth for 35 years.
This is also reflected in the load factor at Rafic Hariri Int’l Airport - Beirut, which recorded a mean average over the year of 60%, while the world average for airports in 2007 stood at 74-75%.
Sharply Seasonal Activity
The load factor of 60% is relatively low compared to the world standard; it is not distributed evenly throughout the year, but exhibits sharp disparities throughout the year, between peak and dead seasons. This increases the administrative difficulties faced by MEA, which must resort to unpopular policies. The consumer (passenger) does not enjoy seeing price fluctuations, so it is not a good idea to raise prices during peak periods, just as the company must lower prices during dead seasons.
In addition, even peak seasons witnesses full bookings in only one direction, as planes heading for the Gulf prior to holidays are empty but return full, and vice versa following the holiday periods.
Open Skies
MEA operates under the Open Skies policy and there have been observations raised about this subject, but not about Open Skies itself, which is a sound policy for the economy, the sector and the consumer (passenger), with noble objectives. However, there have been remarks about the lack of control on this policy, in contrast to other countries applying the same policy. The head of the Civil Aviation Authority supports the position of achieving the desired goals through Open Skies, with the following control that should be observed:
1-We should combat price dumping policies that sometimes reach the point of seeing free flights, as well as government subsidies that hinder equal competition, when work standards and practices based on commercial foundations are lacking.
2-The Open Skies policy will work soundly when the principle of treatment in kind is applied; this means our entry into foreign markets is handled equivalently to the entry of others into our domestic market. MEA suffers from this situation with regard to several European and Arab countries.
3-The Open Skies policy does not do away with the principle of nationality of the carrier, which requires a plane to depart from its homeland country - for example, Kuwait Airlines departs from Kuwait and Egypt Air from Egypt, etc. When this is respected, we can employ international aviation’s Fifth Freedom of connecting flights between two points, via a third point, which should be roughly mid-way between the take-off point and the destination in question. This should be the condition; however, there are situations where some companies violate the rules by travelling to Lebanon originating from airports other than their country of origin. This leads to the use of the so-called Seventh Freedom, which is not permitted under the Open Skies policy.
Oil Prices
Meanwhile, MEA is facing a huge challenge from the ongoing rise in petroleum prices to unprecedented levels, with no government subsidy on this front. This price rise could be confronted if accompanied by an increase in the load factor, as achieving a certain percentage leads to an additional profit, without an accompanying rise in expenses. MEA is facing a rise in the fuel price, while its number of passengers remains stable. In light of current information, we should not expect any increase in the load factor, at least in the short term, with the present political and security conditions.
While it is true that airline companies have previously handed down the extra burdens of rising fuel costs to the passenger, this cannot continue since the policy has limits that are difficult to breach.
Flexibility and Effectiveness
Despite all these unsuitable conditions, and as we have noted above, MEA is still maintaining profitability during years that have witnessed hugely important events.
Under the unstable political and security conditions, MEA is facing competition at home from 41 airline companies, 3 charter companies, 4 cargo and 3 low fare companies. Despite the small size of MEA’s fleet (9 aircraft), the national carrier has managed to preserve a market share close to 35%, which is considerably lower than that of a number of companies, especially in Arab countries.
Certainly, there are several factors behind this ability to confront these conditions and continue to earn profits, most importantly:
1- The advantages of MEA’s having a small fleet in a country like Lebanon and under the circumstances the country is undergoing. Experience has shown that under the present conditions, Lebanon cannot be a hub, although it is more qualified than other cities for such a role should the country achieve stability.
This size, which MEA has adopted for the present, gives the management flexibility and ability to adjust, which MEA resorted to during the July War by leasing some of its aircraft, with their crews, and thus turning profit instead of incurring losses due to the closure of the airport. MEA also managed, although without making a profit, to operate some flights via Damascus, Amman and Larnaca.
2- MEA has adopted a policy of cost control. Due to the cost-effective operations, MEA succeeded in channeling towards expenditure quality, services and maintenance, among other value-added items.
3- Thanks to its services, MEA has been able to carve out a niche market, which provides it with fixed revenue. This refers to services such as Business Class, which offers passengers a competitive level of services compared to other companies on similar routes.
The New Fleet
Amid all of these considerations, MEA is waiting for 10 new Airbuses, the first of which is scheduled to arrive in June. When the contract is completed by 2010, MEA will have a 16-plane fleet, after returning 3 leased aircraft from the current fleet. Will this pose a new challenge? Is there a fear about this upgrade becoming a burden, rather than a source of profit?
The answers to these questions are provided by MEA’s Chairman, Mohamad El-Hout, who notes with confidence, that the decision to purchase the planes was taken during difficult political situations. The reassurance about this move, as we can deduce from the MEA Chairman’s remarks, is based on the ability to finance and the suitable financing conditions, not to mention the urgent need to boost some lucrative itineraries. None of this does away with the need to consider the available capacity for renting planes to meet the company’s surplus needs, with the growing international aviation market and revenues that exceed the cost of the aircraft.
Certainly, the increase in the number of aircraft will be accompanied by a new operational policy. Here, MEA is following a policy of prioritization in increasing the number of stopovers, based on considerations of financial feasibility. Thus, the primary goal of the deal was the increase the number of “repeated” flights on some high-activity, profitable routes, such as Cairo, Amman, Jeddah, Riyadh, Dubai, Abu Dhabi and Paris.
Moreover, MEA will soon resume (in June or July) its flights to Doha, Qatar. There are also plans in principle to open up new routes toward Moscow and Sudan and some African countries.
Thus, MEA and profitability are continuing their steady flight in rough winds for economic growth. We can continue to say that evaluating MEA’s profitability should be seen as an achievement that requires official support, within the available capabilities.
Source: http://www.mea.com.lb/MEA/English/Corporate/PressReleases/20080410.htm
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