ExecutiveMagazine - 7/8/2019 1:57:56 PM - GMT (+2 )
Middle East Airlines (MEA) is one of Lebanon’s indisputable assets in the wide realm of mobility. The flag carrier throughout its 74-year history has reflected the varied economic fortunes, ambitions, and realities of Lebanon. To inquire about MEA’s positioning and strategic outlook today, Executive interviewed Walid Abillama, the airline’s head of commercial strategies and alliances.
E: MEA very recently declared that it was a launch customer of latest single-aisle Airbus version: the A321XLR. This aircraft has a longer range of up to 4,700 nautical miles and 30 percent lower fuel consumption than other planes in the A320/321 family. What is MEA’s strategy behind going for the XLR version? Do you primarily want the fuel efficiency or the larger range?
We want both. Our strategy is based on one clear fact that we have to always remember: MEA is a small airline that is competing at Beirut airport with the biggest airlines in the world. We compete with all these guys, and our natural market is Lebanon, which is a small country. Our strategy is to service most markets to and from Beirut airport that make sense and are sustainable. We either service [these markets] using our own fleet or by using our commercial agreements with carriers that operate into markets where we find common benefits.
The difficulty for us is that the market is decentralized and that we need to set priorities as to which point makes the most sense. We don’t fly to other markets—outside of destinations in Western Europe, the Eastern Mediterranean, the Arabian Gulf, and Western Africa—but we service them through code-sharing agreements, especially in North America (Canada and the USA) where we have commercial agreements either as special pricing agreements or as code shares. What makes it difficult for us to serve destinations other than the ones I listed for you is either a lack of economic feasibility for using our own aircraft or a lack of partner [airline], which usually means the unwillingness of a [potential] partner to cooperate with us.
We are a small airline and [we take] the perspective that it is always wise for the national airline to be dimensioned at the size of the national market, which is a lesson that we learned the hard way. When the civil war ended, the management of the airline came up with a strategy that they should go after the Lebanese diaspora. Between 1990 and 1997 there were many losses because we were concentrating on serving Lebanese outside of Lebanon. This is a high-risk strategy, because people residing in a country are interested in and loyal to the airline of that country. Thus the strategy of servicing the Lebanese diaspora outside of Lebanon was at a risk of the competition being in a better position for serving this community. So we lost money.
E: Didn’t MEA at that time also have a very large headcount in comparison to the number of planes in operation?
E: And it was widely perceived as a result of the conflict years when many employees were taken on for political reasons?
E: How much of the loss in the years 1990 to 1997 was based on the strategy of seeking to service the market of Lebanese diaspora customers, and how much was based on the very large headcount?
Approximately one third of the losses were attributed to the irrational network, one third to the irrational fleet, and one third to headcount.
E: You undertook a massive restructuring in the early 2000s, rationalizing networks, aircraft choices, and employee numbers. What is your approach today?
We take risks but we take very calculated risks because we are a small airline, plus we focus the risks that we take on the Lebanese market. Our strategy is to grow—we cannot escape growing—but the challenge is to do it rationally and at the right time.
E: Between renewal and expansion you are looking at quite a large investment in the next three years. Is that perception correct? One of the sales argument for the XLR seemed to be that you can reach destinations that are further afield, with this single-aisle twin-engine jet and don’t have to use the larger dual-aisle machines. Is MEA looking at using the greater range for expansion into destinations like Sao Paulo?
Let’s stick to some facts. The XLP range extends from Beirut to Dakar in West Africa or to Reykjavik and Dublin but it cannot go across the North Atlantic. It can do so from Europe but not from Beirut. It also cannot go to China. [In any case] it is not always good to be a leader. Sometimes it is better to be a follower, and we have learned a lot from low-cost airlines. You can learn from their mistakes and you can learn from their successes. We are very good at observing what other people do and taking the best practices of what they do.
“I don’t think there is a difference between us and a LLC in the way in which we think commercially.”– Walid Abillama, MEA’s head of commercial strategies and alliances
Opening new routes is about when you do it and how you do it. We have a top ten bucket list of what to do, of points where there is [the] most traffic that is not being serviced by direct flights. We monitor this every month and plan accordingly. Sao Paulo is very far [down] on our list and South America is very far on our list, and so is the Far East. North America is on the top of our list but has political obstacles. The next points in Africa that are hot on our lists are points like Abuja in Nigeria, Kinshasa [in Congo], and [other destinations] that come right after [the existing connections to] Abidjan, Lagos, and [Accra]. I would say the XLR could operate in flights to many new [destinations] in Africa and perhaps in Asia, where the challenge is to find the right partner to China. China is a big question.
E: As you said, the experience of low cost carriers (LCCs) has many lessons to offer, in learning from failures of airlines like Germania or Wow earlier this year and from successes of LLCs in the Middle East market, where Air Arabia and flydubai were founded and became active in the past 10-15 years. This must have had implications for your strategy.
Yes, but I want to note and clarify something. I don’t think there is a difference between us and a LCC in the way in which we think commercially. At the end of the day, they, just as we, pay for fuel, maintenance, they pay their crew, taxes, and airport fees. So they have to make money and since they do not have business class to sell, they have to make their money in the economy segment. Their strength is that they are very flexible from very low to very high [economy class fares]. We are less flexible but we both want to make money. So it all boils down to who is monitoring the market better and gives the market what they want at the right time. We also have other tools like loyalty [schemes] and incentives to travel agents but the flexibility in the pricing we have learned to include.
E: Isn’t there a difference between the fact that the LCCs are at the mercy of the market and shareholder interests whereas MEA is the flag carrier-affiliated, albeit by ownership via Intra and its shareholder BDL, with the state? Is your mandate at MEA to make profit at all costs or is your mandate to serve the Lebanese market and look at your profit always in connection to this role?
No, the primary objective is to make money. But we understand that to make money, you have to [do it a way that fits your purpose]. Do you watch football? In football, everybody wants to win, the objective is to score goals and win. But to win and sustain a good team, you need to play well and play nice. And this is something that you have to believe in. Our objective is to make money, but we have to service the Lebanese market and the needs of Lebanon, in the sense of the needs in terms of tourism and people who reside in Lebanon. We need to do this correctly because this will sustain our money-making objective. But the objective is to make money.
E: But when comparing with purely private sector LCCs, are you not less vulnerable to shareholder decisions that might be driven purely by profit motives?
In 1998, the situation [of MEA finances] was very delicate and I don’t wish to be back in those shoes. Since then, we have built a robust airline with concentration on conservative growth. Our financial position is robust. Our current commercial position in the market is very robust. We have loyalty in the Lebanese market, and we enjoy strong market shares on our routes because of the services that we offer. We offer the right capacity at the right times and go out of our way to operate extra flights—and it is very expensive for us to do that [as it means] to react in the last moment to sudden surges in demand.
“We have built a robust airline with concentration on conservative growth. Our financial position is robust.”– Walid Abillama, MEA’s head of commercial strategies and alliances
One fact is essential to the airline industry and this fact is that the aircraft size is fixed. This [inflexibility of supply] has implications on the pricing level that very few people understand. If I don’t keep selling until the last minute, my competitor wins. If I am out of seats in the month of August and my competitors will have seats and would sell at the price that they wish to sell at; they will have an easy ride while I have to reject all this demand and will not be able to serve my customers, and I will lose them. The best thing for the consumer is to always have a choice and once the consumers cease to have choice, they lose. So to preserve the choice for the customer, I have to have seats available—and that is what I do.
E: And from the 20-year experience between 1998 and 2017, the trajectory of pricing of the average seat on MEA was downward, and this was better for the consumer, wasn’t it?
E: How are MEA experiences concerning increased connections to Europe through LCCs when flights to Western or Eastern Europe are concerned? Do you have any Eastern European destinations on your target list?
European traffic is now segmented into two types of traffic. It is either direct or through Istanbul. Turkish Airlines and Turkish low-cost airlines have cleaned up [the market for connecting to] all the European stops. Lufthansa is now selling either direct to Frankfurt or long-haul: USA and Canada. [It’s] the same thing with Air France. With Aigle Azure and Transavia (which launched Beirut services in 2017: Editor) there are low cost airlines to Paris, and we were not affected because we immediately adapted our pricing model and our commercial model. As long as the market is healthy and as long as growth is there, one has always room to adapt if you know how to apply the correct policies.
Right now, Eastern European destinations are far behind Western European destinations. But we are [present through code-shares]. We are code-sharing with Czech Airlines and are selling a lot of seats on their flights as they operate in this market. Czech Airlines and (Romania’s) Tarom are part of SkyTeam and Lot (Polish Airlines) has started operating (flights to Beirut as of June 2019: Ed), and we are cooperating with them commercially.
E: The impact of aviation on climate is an emotive topic; are protests or calls in Europe for climate change-related taxation of airline fuel a point of concern?
If you are in Sweden and want to visit Lebanon, how can you do it if you don’t fly? It is their right to have clean air, and it is our duty to service the demand with technology that maintains clean air—but demand will always be the driver. If there are tourists in the Netherlands or Germany who want to visit Lebanon, they have to fly. These people can protest, but they will have to answer to the tourists who would like to visit Lebanon before we have to answer to them. We do not build airplanes, we try to find the cleanest ones, but we want to bring tourists to Lebanon.
E: You have been doing this well, and now Lebanon and all of us are in a situation where the airport has to increase its capacity. How is the projected expansion of Beirut airport in the near and longer terms impacting MEA?
It will be for the better. Our product is limited by the infrastructure of Beirut airport. The better the quality of service is at Beirut airport, the better it will reflect on MEA and we support the project.
E: Will you, additionally to scheduled aircraft renewals, expand your fleet and your network with a view to ongoing improvement and later expansion of Beirut Airport or will you say, in terms of target market and strategy, let’s do more of what we are good at and are doing already?
We are expanding our fleet. It looks like we are just replacing aircraft [in 2019 and the coming years], but that is not really true because the A321 will have 150 seats, while the A320 currently has 126 seats.
E: And in the number of aircraft, you are looking at what total fleet size in the next few years?
We currently are at 18, and we may have one or two more aircraft, but even with the equal number of aircraft [when comparing the fleet of the recent past to the future fleet], there is an immediate 20 percent increase in capacity. So [the overall capacity increase] may be in the order of 30 percent if we decide to add one or two additional aircraft.
E: Would the newly ordered XLR jets be on top of that, increasing the fleet by four more jets in years from 2023 that Airbus announced as the year when it would begin deliveries of this model?
The four jets will be part of the fleet increase by two more jets.
E: So the net increase of the fleet is looking to be two jets and the increase in capacity is to be 30 percent.
E: What can you say about your profit and performance data in 2018 and 2019 to date?
In 2018, we made less profit than in 2017, because all additional revenue that we made [last year] by carrying more passengers was eaten up by fuel costs. In 2018, we made $50 million more revenue, but fuel cost translated into $60 million increase in cost. In 2019, we are going to inverse this phenomenon, because the fuel cost has dropped and we will be able to enjoy the extra revenue that we are making in terms of profits for 2019 if everything goes as expected in the high season and in the rest of the year—2019 should be financially better than 2018. And this is needed at a time when we are investing in the fleet and taking the risk.
E: How much is the total investment into the fleet that MEA is undertaking today?
I do not have visibility on this, but we are receiving nine new aircraft in 2020 and another nine new aircraft in 2021.
E: A number quoted by Reuters reporting from the Paris Air Show was that the four XLR will cost something like $500 million in list prices—which are usually not the prices that airplane buyers end up paying—but is it correct to think that the total investment into replacement and expansion of the MEA fleet would amount to several billions of dollars?
E: In terms of looking forward into the next few years, we have the airport expansion, the fleet renewal and then, on another level, there are implications from the impending arrival of the new Electronic Trading Platform to Lebanon’s capital markets next year, where the message from the governor of the central bank not long ago was that privatization should be pursued on MEA. How do you view this prospect?
I am not in a position to comment on this. But we are a strong brand and the public trusts MEA. We are competing and we are surviving and offer a quality product at rational prices.
E: But when it comes to the financial side of privatization, much emphasis is being placed on corporate governance structures, due diligence, and all financial preparations for taking a company public. I surmise from what you just said that you cannot tell me if MEA has contracted any advisers or investment banks in this direction. Can you tell me, however, why you did not publish annual reports in 2018? I did not find them on your website where I saw the 2016 board of directors report as the most recent entry under financial statements.
(Asks “Aren’t they published?” on phone with staff members: Ed) 2018 is not published yet, but the results that I gave you are correct. There will be around $10 million less profit [for 2018] due to the increase in fuel cost. We had about $50 million increase in revenue but the additional fuel costs [ate away at this].
E: And results for the first five months in 2019?
The trend is opposite in terms of fuel. Now fuel cost has increased due to increased activity, but since the price [of fuel] has decreased, it has helped us to maintain our costs so the extra revenue we made we are seeing as moving to profits.
E: Can you say how much profit for the period is higher when compared to the same period in 2018?
Profit so far for the first five months in 2019 is $6 million, but this is an estimate.
E: Is this similar to how the profit was in the same period of 2017?
E: In an earlier interview with an aviation magazine this year, you said that passenger increase was around 6.5 percent?
This is now much higher. Traffic is at the level of 11 percent.
E: This is 11 percent up in the first five months of 2019 when compared to 2018?