In 1998, Mohamed El Hout, director of real estate and financial assets department at the central bank, was appointed Chairman of Middle East Airlines (MEA). At the time, Lebanon’s national carrier was overstaffed and hemorrhaging money. His appointment was surrounded in controversy. He had no aviation background and an unproven track record. Critics accused him of being the central bank’s man, while his supporters claimed that it would need an outsider to turn the company around. Six years on, MEA has a new fleet of planes, a leaner workforce and is confident it will announce net profits of over $30 million for 2004. In an exclusive interview, El Hout talks to EXECUTIVE about the past, present and future of an airline that was brought back from the brink.
How would you describe the trajectory of MEA’s performance curve in the past six years?
When the new board took over in 1998, it inherited a net loss of $87 million and an $80 million operating loss from the previous year. The challenge was to make the company profitable within three years by restructuring the network, making new purchase agreements and creating a better purchasing policy. We also wanted to develop a hub and have alliances with international carriers to serve more points in North and South America, as well as increase staff productivity to boost the competitiveness of the company, control costs and lay off excess employees. Then we wanted to achieve better utilization of our aircraft, develop a better, and by that I mean safer and more reliable, product. With all of these taken together, it was clear that we could make MEA profitable, although not a lot of people believed it at the time because of the inherent political realities in the country.
Do you mean the traditional political influence exerted on MEA?
Exactly. If you want to lay off employees, is it easy? If you want to restructure and appoint a manager in this or that post, is it easy? If you want to change someone from one job to another, is it easy?
So there was political resistance to change?
At the beginning I faced a lot of hostility but eventually the politicians realized that we were serious and recognized the problems we were facing. They got used to us and our way of doing things.
It must have been a very sensitive issue?
It was at the very beginning, especially when we laid off employees. The whole restructuring was difficult. Was it possible? Yes. So we showed that we could do it if you have a policy and you believe in this policy. Timing was another factor.
How were you able to get the MEA staff on your side given that you did not have an aviation background?
Only by results, because they were not convinced at first. However, if you are a pilot you can fly a plane from point A to point B but it doesn’t mean you can run a company. If you a manager you can run any company irrespective of your lack of specialized knowledge in that field. Managers elsewhere in the world move from industry to industry. Maybe my financial background allowed me to identify problems that were not seen before or deal with problems that old management was prohibited from dealing with. Anyway the results are there for all to see. In 2002, we made $3 million net profit, in 2003, $22 million net profit and $32 million operating profit.
I understand that MEA is about to release some encouraging figures.
This year, 2004, we expect in excess of 30 million net profit but fuel prices are escalating faster than expected.
How are fuel costs impacting the results?
During the summer we have not responded [to the increases] because we believe our prices are high enough and we feel this is unfair on our customers to impose a surcharge on the fare. We are waiting for the low season, when we will reconsider our pricing policy, as will all airlines. Unfortunately, no one is looking at this seriously. A lot of carriers are expecting fuel prices to decrease. I think that $30 to $40/barrel is a fair price. It was the same in 1980. Prices have increased since then on aircraft and salaries, etc. It is fair that fuel should increase as well. They have to adjust to this new situation and they have to build a commercial policy, factoring in this cost.
What are MEA’s options if prices go up further?
We will have to increase our fares, but as we speak there is no plan to do that.
You say timing was a factor? How has MEA’s recovery been helped by Lebanon’s revival as a tourist destination, especially after 9/11?
I wish 9/11 hadn’t happened. It was a disaster for the Arab world. It hasn’t helped us in anyway. Four months after 9/11 we had a considerable decrease in the number of passengers as we did before, during and after the war in Iraq. But yes, I suppose in another way 9/11 made a lot of Gulf Arabs and Lebanese expatriates look at Lebanon. This has helped us achieve our targets earlier.
Are MEA and BIA post 9/11 compliant?
Before 9/11, our security was seen as overbearing but now it is normal and we are very satisfied that we have one of the most secure airports in the world.
What about onboard security?
We have no plans to appoint sky marshals and our pilots are not armed. You are not allowed to fly to the US. What is the latest on this situation?
This is a political decision. When this barrier comes down we will look at our options but it depends on the timing. I cannot predict the future.
What if the barrier came down now?
Now? Yes, but with an alliance with an American company. The American company would fly to Beirut and MEA would fly to the hub of this company in the US, where they would have access to connecting flights in the same way we would offer the flights from the US connections to the Gulf. This is the only way it would work. You can’t go to these competitive long-haul markets unless you have a partner. In any case, we are serving our customers in the US and Canada through our alliance with Air France and special agreements with Delta, Virgin and Continental.
Has MEA any plans to purchase more aircraft?
We would like one more, preferably a wide-bodied plane taking our fleet to ten aircraft.
How is MEA positioning itself in the regional/global market?
We have been receiving very positive feedback. We have luxurious planes, our safety record is second to none and we are constantly upgrading our service.
Why should I fly MEA rather than any of the other regional carriers? How does MEA convince the regional passenger that it is best?
I don’t want to compare but try MEA, and then fly another and tell me what you think. We don’t ‘over-promise’ like other airlines.
Is there a recruitment strategy for cabin staff in this regard?
Yes, we are recruiting new cabin staff to match the caliber of our pilots, ground staff and engineers. Out of 320 we have 200 new staff that have joined us in the last five years, with 120 experienced staff that can share their experience. It’s good mixture. We assess them every year for two years on an annual contact basis and then and only then do they become permanent staff.
MEA management’s relationship with the pilots’ association has been quite turbulent in the past. What is it like today?
We are recruiting pilots and we have reached an agreement with the pilots concerning work conditions.
Is MEA expanding their route network elsewhere?
Next year we will open Qatar, but let me stress again that long-haul routes are killers for an airline of MEA’s size. Low margins and a notoriously sensitive market means that long-haul route survival is very difficult. We have no long-haul plans for the moment I must stress this. What we do have is a network that is concentrated in the Middle East, North Africa and the Gulf. I think this policy has been the best one for MEA for the time being, given the current regional situation. We have partnerships with Qatar and Gulf Air to the Far East and we have now this month entered into a partnership with the Brazilian TAM.
How has MEA been able to attract the low season traffic?
For our part, our prices drop, but this is not enough. We have to market Beirut conferences and attract the European traveler. We have to create more activities in Lebanon. When Lebanon is in good health, we are in good health. The government has a role to play, as does the private sector.
How is MEA coping with demand this summer? Have there been delays like previous years?
Really, compared to other airports, we do not have long queues at our counters. Look at other airports and you will see what I mean. In the high season, yes when all the planes are leaving early, it is more busy than normal but really we are very good compared to others.
Is the staff size down to the airline’s needs in numbers and are employees up to the market challenges?
We have 2,400 staff. We had 4,200
It’s a huge achievement to downsize like this, but do you feel that by international standards, MEA is still slightly bloated?
Still over-staffed? No. The level of employment is acceptable. This is because if we compare ourselves to other airlines we are doing the handling and the engineering. These are not normally counted as airline staff. We can benefit from economies of scale. With every new plane we would only have to increase staff by half. In fact, the Arab world should look to bigger entities and not a lot of one or two plane airlines. This is in total contrast to what is happening outside. I met with the CEO of Delta, which has over 1,100 planes. He said we have to look for more consolidation and bigger volume in order to benefit from economies of scale. Then there are the mergers, such as that which happened between Air France and KLM. This is what is happening in the international market. In the Arab world we are always opening new carriers with a few planes. How can they compete?
Is MEA management not at all interested in running TMA, and why not?
At this stage no. Let me be very clear: it is not attractive to us. It does not add anything to MEA. In the future, it might depend on TMA’s situation and the cargo volume at BIA. It depends on whether or not there will be a cargo village, which cargo carriers are coming to Beirut and the level of competition. Things change. Again, like I said, timing is everything.
How is the company responding to the arrival of charter airlines?
We are not a direct competitor in terms of prices but what is worrying is that our open skies policy is not regulated. By this I mean that some subsidized carriers in the region are selling fares that do not reflect the reality of their operating costs and a fare structure that is not based on commercial considerations. This means the competition is not worried about making a loss. This can be as high as $40 to $50 million per year. It is the duty of the government to ensure fair competition, an efficient market structure and a better end product for the customer. Otherwise these carriers could force you out of the market.
Would you care to name these carriers?
I don’t have to. Everybody knows them. Yesterday you received an MSN message telling you that they are selling the seat at $150 to any point in the Gulf. We all know that cost per seat when the plane is full is more than $300 during the high season. They buy the planes and then look at the market, whereas we look at the markets and we buy the planes. But it is not only the charter carriers. Cyprus Airways have come into this market with excess capacity and have reduced their fares. The result was a disaster to the market and to them. They made a loss of $40 million last year and they have had to restructure their operations. Then you have the problem with equal access to the markets, which we at MEA do not have. For example, if you want to fly daily to Frankfurt or London we get bad time slots, making the cost per flight very high, but when they come to Beirut they have more beneficial timings. The basic rules of perfect competition, which are part of the US anti-trust laws, are not adopted in Lebanon, so we are operating in an unfair market. We need to look at reciprocity equal access and subsidized carriers. We are pro-open skies and we are pro competition but we would like to compete equally.
It has been five years since you were appointed. What have been the high and low points?
When I received the first new planes, it was really the most important period for me. I felt at the time that this was the result of everything we had worked for. We had the youngest fleet in the world we were a profitable company. A page had been turned.
And the worst time?
Like I said earlier, it was when we laid off the employees. It is hard to tell people to leave their jobs and it was very difficult for me personally. One bad year was 1999. The board was attacked and condemned without knowing why and we were impotent. It was a bad year but that was all in the past. We are looking forward.