Stormy weather ahead for BMed as potential investors circle

Leader in Beirut-London flights faces tough decisions over future

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The skies between the Levant and London got a little cloudier at the start of the year, as airline BMed admitted it had suffered such substantial losses in 2005 and 2006 that its main stakeholders refused to pump more cash into the operation.

According to the Times of London, BMed reported profits of $10 million in the financial year ending on March 31, 2005. Indeed, the carrier (formerly British Mediterranean Airlines) boasted impressive annual growth rates through 2004, before taking an initial blow from increased fuel costs. But profits were hit hardest last year by Israel’s war.

Jokes in Beirut suggested that the airline should appoint certain anti-government Lebanese politicians as marketing agents, because every inflammatory statement and call for protests led to a spike in bookings on BMed flights from Beirut to the calmer shores of the Thames. Nonetheless, UK media projected 12-month losses of BMed by to reach or even exceed $40 million by end of March 2007. With Beirut as BMed’s signatory destination, it appears that instability in Lebanon over 2005 and 2006 and, above all, Israel’s 2-month blockade of civilian flights to Rafik Hariri International dealt a severe blow to the airline.

BMed flew its maiden flight to Beirut in 1994 and celebrated its tenth anniversary in the Lebanese capital. While the carrier has developed routes to central Asia— Baku, Tehran, Bishkek, and Yerevan are among its destinations—and recently Africa, its Middle Eastern routes have always been its bread-and-butter.

Conversely, BMed has been an economic lifeline for Near Eastern travelers who have business in the City. The carrier offered the highest frequency of daily flights between Heathrow and Beirut (eight flights per week before last summer), Damascus and Amman. BMed was the one carrier that gave Levantine travelers an alternative to the respectable national carriers MEA and Royal Jordanian, the not-to-everyone’s-taste Syrian Air, or cumbersome indirect flights.

Partnership approach

BMed adopted an approach of complete partnership with the United Kingdom’s big carrier, British Air as its business model. Using the same livery, uniforms, and booking system as BA, the BMed identity was downplayed until it was indistinguishable from BA’s to many passengers; the carrier’s destinations were limited to those ceded by its larger cousin—in Egypt, for instance, Alexandria became a BMed destination, but BA-serviced Cairo was no-fly zone for the airline.

BMed’s chairman and a major shareholder was Lord Hesketh, former Conservative Whip in the House of Lords. Privately-held and run with the tight-lipped approach of a firm that had no stock market obligations—and adhering to the Arab habit of keeping private ownership out of the public eye—BMed managers refused to discuss shareholding structure with the media. The standard line only stated that BMed was owned by British citizens of Middle Eastern origin.

When a UK newspaper revealed in early January that BMed was facing troubles, it also reported that the airline’s main shareholder was an investment trust for the family of Syrian-born financier and philanthropist Wafic Said, whose name is associated with the Said Business School at Oxford University and the Karim Ridda Said Foundation, which sponsors the education of young Middle Easterners.

As news of the investment negotiations became public, BMed management issued a statement confirming that the Mikati family of Lebanon—which appears to be in an excellent financial state after its sale of telecoms holding Investcom—was riding into town as the primary contender.

A subsidiary of Mikati-owned M1 Group was in talks to become the new main shareholder in BMed, confirmed the airline’s CEO, David Richardson, in a statement.

If the investment deal were completed, M1, founded by brothers Najib and Taha Mikati, would infuse close to $60 million in new capital into BMed. As an intermediary step during the negotiations, the Mikatis provided the airline with bridge financing of up to $7.5 million to cover immediate needs.

According to a statement on the talks, the M1 Group has business interests that include “property, telecoms, oil and gas, and aviation.” The aviation interest currently stands for a recent shareholding participation in a four-year-old Geneva-based airline called FlyBaboo that offers short-hop service in Europe.

The M1 subsidiary for aviation is M1 Travel Ltd, run by a younger-generation Mikati, Maher. In a previous executive role, he tried managing several of the Mikatis’ information technology ventures in Beirut, including software company IdealSoft and an embryonic cable television company that fell victim to the failure of Lebanese lawmakers to regulate the piracy-dominated cable services market.

Talks continuing

However, as the talks for restructuring BMed progressed through January, M1 Travel lost the exclusivity of the negotiations and may no longer be the frontrunner for buying into BMed. In late January, BMed, true to its secretive style and without naming the new contenders, said it was now negotiating with three interested parties, including M1.

Media reports in London alleged one of two new aspirants is bmi (formerly British Midland) the second largest full-service airline in the UK and a member of the Star Alliance. Bmi, which has also reported a decline in passenger numbers in recent years, serves European and long-haul destinations but has no overlap with BMed’s route network; like BMed, bmi may need new concepts to stay in the air.

A partnership with another airline might make better sense for BMed than working with investors, who cannot provide the same operational synergies as a carrier with potential to develop network relations.

However, a partnership with a BA competitor would raise questions over the future of BMed and BA’s tight relationship. In any case, BMed will need to decide if the franchisee business approach—with its inherently limited freedom—is the best way to continue its development, which includes plans for fleet expansion.

Should BMed opt for the M1 partnership after all, it will be required to prove to the UK’s Civil Aviation Authority that the company is still majority-owned and controlled by British citizens, in order to maintain its international traffic rights as a British airline. Fortunately, several members of the Mikati family hold British passports, so this is unlikely to become a major issue.

The good news for the Near Eastern business community is that those convenient seats to London will hopefully still be available in the future. It remains to be seen whether under different ownership, BMed would put as much emphasis on the Lebanese market as in its first decade.

However, that question will largely hinge on the ability of the Lebanese to settle their internal affairs: the main issue pending is whether Beirut can pull back from the brink and reassert itself as a business and tourism center, or whether it will revert to an image of senseless chaos. The path the country chooses will play a much larger role in determining the appeal of ‘destination Lebanon’ to airlines and passengers than the identity of the next owner of BMed.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail