Executive Magazine

Q&A – Karim Makhlouf

by Zak Brophy January 3, 2012

written by Zak Brophy

Gulf Air, Bahrain’s national carrier, was the Arabian peninsula’s original pioneer in aviation, boasting more than six decades of in-the-air experience. However, in recent years it has fallen from profit and the political tumult in Bahrain and across the region has accentuated the nosedive. Executive met with Gulf Air’s Chief Commercial Officer Karim Makhlouf to hear how the airline fell from favor and about its attempts to claw back market share.

Gulf Air has fallen from profit and lost significant market share in recent years. Why?

More and more competition entered the market so customer choice got divided between the airlines, and commercially we were not aggressive or innovative enough in order to introduce quickly to the market the things that the customers need. We have corrected that this year with many new initiatives, with a clear target of winning back the market share to Gulf Air.

What initiatives are being offered to win back your market share?

The new initiatives can be summarized in four areas where we are investing. The first is the Falcon Corporate Plus. Then we re-launched our frequent flyer program, called Falcon Flyer, and we have a new initiative for families called Family First. We are also now investing much more heavily in travel agent incentives.

What customer groups are you targeting with these initiatives?

When looking into the new commercial strategies we defined exactly the different customer segments and they are youth… business and corporate, religious traffic and we defined families as a new and important segment.

Can you expand on the corporate strategy?

It is called Falcon Corporate Plus whereby companies receive special prices and become gold and silver members; there are other features such as complementary upgrade, marketing support, incentive deals and so on. The target is to have 500 deals signed by 2012 and so far we have had 500 deals signed and we have had a good market response from Lebanon. The target here is clear; that we want to increase our market share with the corporate traveler. Companies, especially small and medium ones, can collect [frequent flyer] points with the Falcon Flyer program — that is new.

We have redesigned the Falcon Flyer program with three tiers. Every tier has different advantages besides upgrades, lounge access, baggage access, and obviously the redemption of tickets is the main thing. We are promising that we have the most attractive redemption scheme in the region.

And you said family travelers were a target group?

We really want to position ourselves as the family friendly airline. We are the only airline in the world to offer a sky nanny service and soon we will have this service also in the lounge areas. Also, we are designing kids’ menus and we have kid focused in-flight entertainment systems. We see this as a very attractive target group.

How is Gulf Air developing its routes to take on the regional competition?

We are completely restructuring our network. We aim to avoid the heavy competition of our fast growing neighbors to position ourselves stronger into under-served niche markets. This is why we opened routes to Isfahan in Iran, Addis Ababa, Milan, Geneva, Basra, Kabul, Copenhagen, Nairobi, Rome, Entebbe and we are going to open Juba in March 2012.

E: And how are you developing your regional network?

The target of double daily flights is not just to here in Lebanon but to all regional capitals. This is the difference from Emirates, Qatar Airways or Etihad; we try to make flying a commodity in the region. We think the Gulf and the Middle East will develop like Europe where it is normal for people to commute by flying, so we want to connect the regional capitals on a double daily basis. This is the differentiator, because we are not focusing on long haul to long haul — competing with the European carriers like our neighbors — but we really want to develop here an excellent choice for the people flying throughout the region.

What investments are being made in the fleet to accommodate your new strategy?

We undertook a major investment into the products, so we are refurbishing the whole of the business class compartment with new state of the art seats, which will be ready by the first quarter next year. With Panasonic we have invested in a new-state-of-the art in-flight entertainment system where we are the world’s first airline offering broadband internet, live television and phoning on board.

How about the actual planes in the fleet?

We are in the process of renegotiating our order book. In recent years there were a lot of orders placed with both Boeing and Airbus and we are fine-tuning that. Because we want to develop further the strategy of high frequency regional flying we are going to start flying with narrow bodies, 320s, with an extra tank and a full lie-flat business class to fly to Europe as of next year. We have six extra range A320s coming in next year.

How many jobs have been or are going to be lost as a consequence of the restructuring program?

Staff [numbers] have been reduced by 30 percent in 2010 and we also managed to reduce losses by 30 percent.

Due to political upheavals this year Gulf Air suspended its Beirut routes and is still not flying to Iraq or Iran. How serious an impact has this had on business?

We were hit very hard in March but in the meantime we managed to partly compensate for these losses with new routes, mainly to Europe and Africa. Of course we hope that the flights to Iraq and Iran will be back soon.

I think the Lebanese market is somehow used to the political ups and downs. I think it is also clear that [Gulf Air was not] behind the decisions to suspend flights. I think the customer can very well differentiate between politics and Gulf Air. Obviously we see now the customers are coming back and flying with Gulf Air and that is why we are intending to increase the frequency of our flights for the Lebanese market.

How significant a portion of business is cargo and how does this fit into the overall strategy?

Cargo is integrated into our carriers but we don’t have specific freighters. Cargo business contributes around 25 percent to the revenue of the airline. It is very good ancillary revenue for us which we are developing further. By going toward a narrow body fleet we are focusing on high value cargoes.

With the sector becoming increasingly fractured between traditional carriers and low cost airlines, how is Gulf Air positioning itself?

Low cost doesn’t really work as well in the Arab world as it does in the US or Europe because we don’t have this infrastructure of periphery airports. That is where low cost can benefit from lower costs. So in the Arab world it is very difficult to get those low costs. I think in the Arab world ‘low cost’ is hype, which has more marketing content than real economics behind it. Of course, low cost airlines are competition and we treat them as such, but by offering the right service at the right price, especially in the Arab world, it is easier to maintain the customer loyalty than in, say, Europe, where low cost is spreading very aggressively.

January 3, 2012 0 comments

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Ditching diplomacy in Iran

by Gareth Smith January 3, 2012

written by Gareth Smith

The historical parallels are dismal. Iran’s display of a captured United States Sentinel drone sparked painful memories, both of the shooting down of Gary Powers’ U2 spy plane over the Soviet Union in 1960 and of two American helicopters abandoned in an Iranian desert in 1980 while trying to free US hostages held in the Tehran embassy. Both examples speak of the failure — or abandonment — of diplomacy. At their best, diplomats are better than soldiers at defusing potentially dangerous situations. Hence the freezing of relations between Tehran and London should be seen as a new escalation in tension between Iran and the West.

When students stormed the British embassy in November in protest at new sanctions, their actions were vindictive. “They even slashed the paintings,” a British foreign office employee, formerly based in Iran, told me. “What’s the point of that?” There is one painting I remember from my own visits to the embassy. A British ambassador during the 19th-century refused to take off his boots in the Shah’s presence. “I take off my boots only for the Queen of England,” he insisted. Fortunately, a compromise was drawn up in which the ambassador wore outsize socks over his boots — a story told to me by a more recent ambassador who clearly enjoyed the diplomatic ingenuity.

In our own time, politicians seem set on denying diplomats the space for such initiative. The US Congress is even considering legislation to outlaw any contact with Iranian officials without specific presidential approval, while several leading deputies in Iran applauded the students’ actions in trashing the British embassy.

Back in November, as leaks abounded about the negative content of a looming report on Iran from the International Atomic Energy Association (IAEA), Ali Akbar Salehi, Iran’s foreign minister, used an old Farsi expression, ‘Marg yek bar, shivan yek bar’, meaning: ‘You die once, you are mourned once’. With a background in nuclear physics, the US-educated Salehi is more of a technocrat than a politician. Evidently frustrated, he may have meant that if the IAEA had incriminating evidence of Iran working on nuclear weapons, then it should publish it. I don’t think he meant that if the US and Israel planned to attack Iran’s nuclear facilities, then they should go ahead.

In practice, while the IAEA report led to new sanctions from the US, Britain, the European Union and Canada, it was not sufficient for Russia and China to abandon their calls for renewed diplomacy and instead support increased United Nations sanctions. And in Tehran it was seized on — especially after the pre-launch leaks and hype — as proof of the credibility gap between US claims over the nuclear program and the reality of Iran’s peaceful, civil intentions.

As for the new sanctions, the EU added 180 Iranian officials and entities to a list of those whose assets may be seized, but it remains in doubt whether Europe will ban Iranian oil imports. Canada’s new measures, prohibiting exports to Iran’s energy sector and blocking monetary transactions, are largely symbolic. The UK has banned its financial sector from involvement in Iran, significantly raising the costs for British companies trading there.

As ever, the real damage could come from Washington. New energy measures prohibiting any person, US or foreign, from providing support — defined as annual investment of $20 million or more — to Iran’s petrochemical industry, will have limited effect, as existing measures already prohibit American companies from dealing with the Iranian energy sector and give the administration power to bar from the US market any foreign companies that do. But the US Treasury finding that Iran, including its central bank, is a “jurisdiction of primary money laundering concern”, may encourage greater international wariness over dealings with the country.

Washington’s new sanctions, like many existing ones, are extra-territorial, and hence enforcement by the administration against third parties will involve calculation. The Obama administration is being driven by pressures from congressmen and lobbyists vexed over China’s role in Iran.

But how far to go? While the State Department may now identify more Chinese or other foreign companies as engaged in sanctionable conduct in Iran, it remains to be seen whether Washington will completely dump diplomacy in the dust and bar them from the US market.

GARETH SMYTH has reported from around the Middle East for nearly two decades and was formerly the Financial Times correspondent in Tehran

January 3, 2012 0 comments

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John Newland Redwine

by Executive Staff January 3, 2012

written by Executive Staff

John began working with Executive Magazine in 2007, first as a journalist and then later earning his way into the editor’s chair, before amicably departing his post to pursue further career interests in 2009. In his time here John was a standard bearer for professionalism, integrity and quality, imbuing the office with a sense of kinship through his intense loyalty to his colleagues and his dedication to his work.

Many were the nights when the blistering hours of production would stretch into the morning, and as we closed that next month’s issue and walked wearily out of the office John would inevitably find a smile to greet the morning sun. Rare are those who one can count on so thoroughly that they seem among the forces of nature, so devoid of excuses and frailties. Now, some two years since John left Executive, his indelible mark on the organization remains, as do the friendships that were forged.

Accompanying his professional prowess was a rugged outdoorsman, a man of intellect, easy charm and empathy, a husband dedicated to his amazing wife Irina — whose passport-sized photo John would have always near his hand whenever he wrote — and an adoring father to their newborn baby boy, Winston.

It is with profound sadness that we received the tragic news that our dear friend, who had a contagious passion for climbing, had died in an accident in the mountains. Our thoughts, hearts and prayers are with his family and everyone that had the privilege of knowing this exceptional human being.

John, may you rest in peace.

January 3, 2012 0 comments

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Revolutionary roles for Yemen’s women

by Farea al-Muslimi January 3, 2012

written by Farea al-Muslimi

Yemenis, from the deposed dictator Ali Abdullah Saleh to the angry street protesters, can all agree on one thing: Their country’s women have amazed the world with their extraordinary work during the 2011 uprisings. That recognition reached its zenith when the Nobel committee acknowledged the well-known Yemeni activist Tawakul Karman by awarding her the Peace Prize, along with two Liberians.

Since Saleh signed the Gulf Cooperation Council deal in November, which declares that he will step down next February, Yemenis have debated whether the political revolution is complete and what new political freedoms will emerge. Yet while the outcome of the political revolution is still unclear, the cultural one has brighter prospects. Art has emerged on Yemeni streets, scribbled by angry youths, while poets, singers and rappers have had a newfound impact on society. Even in the middle of ‘Change Square’, where Islamists play Quranic and Islamic songs on stage, musicians and rappers are offered the chance to express themselves. This cultural revolution is definitely more promising than the political one, but is it complete yet?

The question is very difficult to answer as it is still too soon to evaluate such a sociological shift, but there can be little doubt that women’s participation has been more significant than ever before. Women’s role in the street protests and their participation in political discussions have raised hopes that they will finally be granted their political and social rights. The spectacle of tribal leaders praising Karman for her bravery when she was awarded the Nobel Prize was something profoundly new in this conservative society. More importantly, when Hooria Mashhoor, a well-known Yemeni woman, was named speaker of the National Transitional Council, before later becoming Minister of Human Rights, many considered it a real shift in Yemen’s culture. The council consists of some very conservative religious and military leaders, many of whom have consistently resisted women’s empowerment on the basis of religion and culture.

Back in April, President Saleh tried to provoke Yemenis into supporting his regime by condemning the mixing of women and men in ‘Change Square’, calling it an anti-Sharia act. Initially the speech caused controversy, with conservative elements wary of the president’s accusations. The television footage of women peacefully protesting changed some attitudes, but it still did not get rid of the old mindset. Later, groups of Yemeni women burned their veils in the streets as a symbolic action to condemn some of the tribes’ support of Saleh. This sent a strong and very symbolic message to the leaders, partly about their political allegiances but also about their continued support of a patriarchal system.

Saleh’s gamble backfired, with the majority of Yemenis realizing it was a political ploy and many claiming the statement insulted the honor of Yemeni women. That has proved a significant moment; in the future politicians will think twice before using the veil of culture as an excuse to prevent women’s emancipation.

However, these positive trends are possibly too good to be true and some hard questions remain unanswered regarding Yemeni women in politics. What percentage of Yemeni women actually live in cities and participated in the revolution? Are the women in the streets reflective of their rural counterparts, who continue to be deprived of their basic rights? Is engaging in politics really the ultimate aim for Yemeni women? While there has been significant improvements in the political empowerment of Yemeni women, is it comprehensive? Not yet and progress can be frustratingly slow. Three women have now been appointed in the transitional cabinet, only one more than the previous government.

The hope is that Yemen’s women, as in many other Arab countries, are entering a new phase, but there have been false dawns before. If you meet a Yemeni man protesting for more freedom, ask him this simple question, “While you say you are in favor of women protesting in the streets would you support your sister doing the same?” Some confirm that they would be, but too many still answer the question with an awkward smile and a red face.

FAREA AL-MUSLIMI is a Yemeni activist and writer for Almasdar

January 3, 2012 0 comments

Finance

Big bucks for small business

by Maya Sioufi January 3, 2012

written by Maya Sioufi

Riyada Enterprise Development (RED), a member of Abraaj Capital Group, in December launched a $50 million fund in a partnership with Cisco and European Investment Bank, to invest in Lebanese small and medium enterprises (SMEs). This is the largest fund dedicated to Lebanese SMEs and is the latest venture by Abraaj Capital Group — the largest emerging markets-based private equity— aimed at enhancing investment in Middle East and North Africa SMEs. SMEs account for 70 percent of MENA employment and 30 percent of MENA gross domestic product.

“It is a well-known feature of the Lebanese economy that it produces an amazing amount of high-quality and highly talented entrepreneurs, so much so that they end up emigrating and succeed all around the world,” said Tom Speechly, chief executive officer of RED. “The aim of this fund is to encourage Lebanese entrepreneurs to stay in the country.”

The Lebanese SME fund has an eight-year lifespan, with ticket sizes ranging from $1.5 million to $8 million. The aim of the fund is to invest in 10 to 15 growth companies across various sectors within three to four years, by acquiring between 25 and 40 percent of a company’s equity. So far in Lebanon, RED has invested in one company with two in advanced appraisal stages.

With lower economic prospects predicted in Lebanon and uncertainty over the outcome of the uprising in neighboring Syria, the timing of this fund is questionable, but Elie Habib, Lebanon country manager for RED, believes that “it is the best time” to launch. As political transitions occur in the Arab world following the revolutions, there is an increasing interest from the diaspora in coming back. Yet structural issues in Lebanon — such as lack of access to know-how, distribution channels and financing — continue to hinder their return, according to Habib.

When asked if RED considered delaying the launch of the fund to wait for more visibility on the economic and political situation in Lebanon, Habib replied: “RED saw an opportunity in 2007 and decided to launch a fund to tap into the SME opportunity in Lebanon. We are long-term investors, we build cyclicality into our business models and we help companies survive in downturns.”

In Lebanon, SMEs represent a very substantial portion of economic activity. Bankdata and Sofres have recently released a market study on SMEs in Lebanon that estimates the total annual production of around 17,000 SMEs at $4.4 billion with an average annual turnover of $280,000 per company. The study, undertaken in the spring of 2011, reveals that approximately one fourth of the 300 SMEs interviewed have a turnover in excess of $500,000, and more than three quarters have been in business for more than five years. Two thirds of SMEs have seen their turnover grow year-on-year with more than 75 percent witnessing a double-digit growth over the past year.

The fund is committed to $50 million and has so far closed $30 million through investments of $7 million from Cisco, $7 million from the European Investment Bank and the rest from Abraaj Capital. RED aims to raise another $20 million by the end of 2012 from investors attracted by the growth opportunities for Lebanese SMEs. Habib adds that after tapping into the $50 million fund, the long-term strategy is to launch another fund. It is “certainly not the last fund” that will be dedicated to Lebanon, confirms Speechly.

When asked about their competition, Habib argues that it comes from the banking sector, which “can offer financing at attractive rates but does not offer the value added of a private equity.” In the Middle East, venture capital financing is focused on early stage investment, whereas RED is adopting a private equity model, investing in growth companies and undertaking extensive screening and financial modeling, according to Habib. “As far as I am concerned, Berytech, MEVP and a few others are complementary and they are our partners. We don’t compete for the same deals.”

RED is looking to invest in established and growing companies. “We like proven business models where the business has stabilized itself, they’ve found their customers, they’ve got their supply chain worked out and the larger part of their growth is ahead of them,” says Speechly. When asked about his concerns regarding the reluctance of Lebanese companies to cede control, he replies, “We really don’t want control. These are founder-led businesses where we want the founder to continue operating the business as his or her business.” RED wants to grow the business for three to four years and then exit alongside the entrepreneurs, who ideally would start a new business.

In the MENA region, SMEs face three main challenges, according to Speechly. One of these is access to capital, as only 8 percent of bank loans in the MENA region go to SMEs. Speechly does not blame the banks “because a lot of the SMEs are relatively informal and not ready for bank debt. What SMEs really need is equity, longer-term patient capital.” The other challenge is access to best practice: “Everything from sophisticated business practice to new networks, corporate governance and financial reporting,” Speechly adds, although he stresses that this is the least serious concern, due to the accessibility of information. The third issue is access to markets. The MENA region has 350 million consumers, a sizeable market but “the issue is that companies in individual markets don’t necessarily have access to the full market. It is more difficult than it should be to have access to that whole market,” he says.

For the Lebanese fund, the target is for a 30 percent annualized return over the lifetime of the investment. While this may seem ambitious in challenging economic times, it leaves hope that newer financing options are being attracted to Lebanon and companies can rely on more than just their family and friends and the banking sector to fuel their expansion.

CNN chose IXSIR’s winery as one of the greenest buildings in the world

CNN chose IXSIR’s winery in Basbina, Batroun, as one of the greenest buildings in 2011 “that have been recognized not only for their good looks but for their green credentials too.”

The Lebanese winery is the only building in the Middle East and North Africa that was featured on the list. Other cited buildings included the Casa Locarno and Swarovski Headquarters in Switzerland, the Sandal Magna School and Velodrome – one of the venues hosting the 2012 Olympic and Paralympic Games – in the United Kingdom, and the Livestrong Foundation in the United States.

“This is a design and architectural achievement that raises Lebanon’s profile on the international scene, confirming its high standing in this respect, and reinforcing the world-renowned reputation of Lebanese wine,” said IXSIR’s General Manager Hady Kahale.

An eco-friendly building with sustainability at its heart, IXSIR’s winery won the 2011 Green Good Design Award.

The article underlined the winery’s contemporary concept that restores the traditional Lebanese winemaking process. “Overlooking Basbina in northern Lebanon, this winery combines a restored 400-year-old feudal seigniorial house with a modern-built, green-skinned […] structure,” the authors wrote. “Designed by Raed Abillama Architects, its cellar spaces are buried within the ground as a thermal sponge, creating the needed equilibrium of temperature and humidity.”

Using innovative skylights, the winery maximizes the use of natural light to illuminate the premises. And with its natural reliance on gravity, it respects the integrity of wine making. In addition to rainwater harvesting for irrigation purposes, it recycles all its outputs such as wastewater, and vegetable residue, which is turned into compost.

IXSIR’s winery will be open for the public to enjoy tours and tastings in the spring of 2012.

To learn more about IXSIR, visit IXSIR’s official website www.ixsir.com.lb, or Facebook Page www.facebook.com/ixsir.wine.

January 3, 2012 0 comments

Finance

Merrill Lynch’s 2012 forecasts

by Maya Sioufi January 3, 2012

written by Maya Sioufi

The view for 2012 is cautious rather than catastrophic, according to Bill O’Neill, chief investment officer for Europe, Middle East and Africa (EMEA) at Merrill Lynch Wealth Management. “One of the potentially good news stories in the coming year is a stronger domestic United States economy. The worst-case scenario would be a run on European sovereigns leading to a run on the banking system.” He forecasts 3.7 percent global GDP growth in 2012, down from 3.9 percent in 2011, led by emerging markets.

O’Neill believes that decisions by policymakers will lead the markets in 2012 and he expects central banks to be more aggressive in terms of monetary easing, particularly in the Eurozone, and quantitative easing will become a global phenomenon. He stresses that “Europe needs to see itself increasingly as a single political entity and proper union.”

O’Neill is less compelled to buy into emerging markets than he was in previous years, as he believes that one needs to “dig beneath the surface to some of the sectorial stories”. He expects China to have a “soft landing” in 2012 and grow 8.6 percent down from 9.2 percent in 2011, but O’Neill won’t be buying Chinese equities as he finds more interesting emerging markets ideas elsewhere. He would keep an eye on China’s monetary policy and if it were aggressively eased, he would look to play that by buying into Russia, “despite politics issues and setbacks linked to presidential elections”, or Brazil, “which has been substantially de-rated”.

Regarding the Middle East and North Africa region, O’Neill believes that although it will be affected by the weaker global growth in 2012, the region will be more resilient as it enjoys high oil prices and big investment programs, such as those initiated in Saudi Arabia and Qatar. The Arab revolutions have “sensitized governments to the need to enhance social and communication infrastructure and get money out to the population. I think Qatar, Saudi Arabia and to a lesser degree Kuwait are the areas to focus on.”

Looking at Lebanon

On Lebanon, O’Neill is predominantly concerned with the high leverage. He is forecasting 3.8 percent GDP growth in 2012, up from 2.5 percent in 2011 but he warns that there are downside risks to the 2012 figure. O’Neill is concerned about the impact that the turmoil in Syria will have on Lebanon and whether it will also be slapped with sanctions. “What would affect my view on Lebanon in the coming year is… the knock on impact in Syria and the withdrawal of support from European banks and the effect it would have on the real estate sector,” he says.

When asked about investor sentiment, O’Neill’s view of global investor confidence differs from what Tamer Rashad, Head of Middle East wealth management at Merrill Lynch, says is the prevailing sense among MENA investors. O’Neill says global confidence has severely deteriorated. “Investors are worried about the outlook as they are not convinced with the incredible actions taken by policymakers. There is a lot of emphasis on capital preservation. The loss in faith in equity markets is very significant, and will take time to rebuild.” Rashad, on the other hand, tells Executive that, “Interestingly enough, confidence is very high relative to what is happening in Europe and the US. It is very high in the [Gulf Cooperation Council] and we have not seen a lack of confidence or decrease in confidence as a result of what is happening on political scenes across the region. Obviously for investors in Egypt or Tunisia it’s a different thing, but overall in the GCC confidence is very stable.”

As for his top areas of investments, O’Neill stresses on the potential surprise from the US domestic market. For exposure to this potential upside, he recommends the US dollar and large cap quality stocks that enjoy strong cash flows and that are exposed to secular themes such as emerging markets consumers. He favors the technology, consumer staples and consumer discretionary sectors. For a more risk-averse investor, he would recommend US investment-grade credit.

He sees limited upside to gold price in the first half of 2012, as he forecasts a price of $1,750 per ounce by June 2012, rising to $2,000 by December 2012. As for the oil price, he forecasts limited change in the first half of 2012 with Brent oil at $112 per barrel by June 2012 and then rising to $126 by December 2012.

For a more long-term investment, he would look to Africa although he acknowledges it is not for the faint-hearted. He likes their improvement in governance from a low base, the young demography with an increasing life expectancy and their access to natural resources.

January 3, 2012 0 comments

Finance

Q&A – Maroun Mourad

by Maya Sioufi January 3, 2012

written by Maya Sioufi

Zurich Financial Services Group (ZFSG), an insurance conglomerate with global reach, has been increasing its activities in the Middle East as part of an expansion strategy focused on emerging markets. Now one-year after the Swiss-based multinational acquired Compagnie Libanaise d’Assurances (CLA), a Beirut-based insurer with licenses in several countries in the Gulf region, Executive sat down with Maroun Mourad, chief executive of ZFSG’s insurance arm in the Middle East.

What is your approach to the Lebanese market? Do you see potential for Zurich here? How much was the local market a consideration in buying CLA, as opposed to acquiring the licenses held by this company regionally?

Lebanon is an important market in its own right. If you look at the Gulf and Levant territory, Lebanon is effectively the third largest market after the United Arab Emirates and Saudi Arabia. It closed last year at $1.1 billion and Lebanon also has probably the most progressive and open attitude vis-à-vis insurance, given that penetration stands at over 2.5 percent, versus an overall Arab regional penetration of, grosso modo, one [percent], if not lower. Lebanon is part of the Middle East expansion plan and it so happened that there was a company that is based here and which owns the licenses in the Gulf. But we would have come here anyway. Our entry into the market is part of a much bigger plan for the region and globally.

As you said, the Lebanese insurance market reported $1.1 billion in gross premiums in 2010 but is very fragmented, with more than 50 operational insurance companies. What are your aspirations in terms of local market share and product mix?

We have none in terms of market share, that is predetermined. We don’t come in and say we will grab 5, 10 or 1 percent of the market. In the segments that we like, in the products that we can service and in the areas where we can actually be transparent, fast, easy to deal with, and honest — if we can dominate in that segment [then] we will. We recognize the fact that we are just starting here and we have to approach the opportunity with a bit of humility. There are household names in this market, good companies that have been operating here for some time. But this doesn’t mean that a new entrant with new ideas and top-notch local teams cannot succeed and cannot become one of the leading players. In the markets where we play we want to be as good as, if not better, than the leading local insurer.

Could you specify which segments of the Lebanese market are most interesting to you?

We are still in the process of finalizing our deep market studies, in order to not have one specific segment and miss out on the others that could potentially be areas where we could add value. [We will address a] few areas such as the higher-end affluent personal segment, where definitely the high net-worth area is neglected, not only in Lebanon but in the region. The corporate segment is a very interesting one, because companies have complex risks, they have high-value assets, and they have potentially big liabilities. They need very strong financial security, which is what Zurich can offer here in the market.

Is the high-end segment the most under-served area in the market?

From a claims servicing and proposition point of view, yes. Not just the highest end but in the affluent side of the market as well, there are a lot more things that this market deserves that are not being offered. I will not delve into the details [of what we plan to offer] now.

Insurance is still largely considered a luxury in Middle Eastern markets. Some people have, perhaps wishfully so, predicted that insurance is moving from a luxury consideration toward wider acceptance. Are you seeing evidence that this is happening?

We certainly see the year-on-year growth in the industry. According to the IMF [International Monetary Fund], the Gulf Cooperation Council’s economic growth projections, on a compounded annual growth rate between now and 2016, will be 4.5 percent. The insurance industry is estimated to grow at nearly double that — at 9.5 percent. Does that really mean that penetration will effectively go from 1 to 3 percent so that we are at par with Southeast Asia and Latin America over the next five years? Probably not. A big push should come from compulsory insurance but compulsory insurance is directed at the areas that are most competitive: medical and motor.

…and least profitable?

Yes. Most competitively priced and least profitable. So what we would love to see more of is a combination of compulsory insurance and more awareness through cooperation between non-profit organizations and industry representatives like ACAL [the Lebanese insurance association], the media, publishing houses as well as the industry, be it the distribution side of the industry or the risk-taking side of the industry. The awareness is not there. People probably still look at insurance as an unnecessary expenditure but I am not entirely aware that people do a proper assessment of pros and cons of buying insurance.

Is insurance awareness better in the high-end market versus the general consumer segment?

Awareness is [better] but it is not where it should be. You come across discussions where folks, taking a high-net worth [individual] for example, have a couple of pieces of art, a jewelry collection, and perhaps a few high-end rugs in their house and a lot of these properties are not insured. They should be insured as a financial protection mechanism… This is where insurance, besides being a financial management tool, can be a lifestyle support — if you have a piece of art you probably need to continue to be appraised of its market value. Through our network you can have access to events that talk about these things.

How are you investing yourself into awareness building on the high-end or the general level?

In a lot of ways. We work closely with the regulators in every jurisdiction that we work in, to see which areas we can support. We participate in market studies whenever we are invited; we submit ideas, try to contribute to the publishing houses in terms of [specialized] pieces on insurance or general discussion of insurance.

How strong is awareness in the corporate segment and where do you see a need to enhance awareness in the corporate market?

In the middle market and corporate segment the awareness is there. It could grow faster but it is there for basic products. But even with property insurance, you don’t find that companies always buy [coverage of] business interruption, which is a real risk subsequent to a [catastrophe]. I think a bit more education there would help. Then professional liability; a doctor or lawyer or accountant or auditor may buy life insurance and maybe workers’ compensation for the employees and car insurance for the drivers. But the areas that are crucial, which are professional liability and also general liability, are neglected. Overall, in certain products we see a higher take-up in penetration in the commercial segment where the policy holder is a company rather than an individual. What we don’t find enough of is the higher density per customer.

Meaning companies do not buy different types of insurance beyond what they absolutely have to have?

Exactly. I think if there is increased awareness — even without acquiring new customers, although you have to do this — if there is more density, this would spur growth.

How much financial power is Zurich allocating to the Middle East? Any numbers that you can give our readers?

A lot [of power]. Just take a look: [Zurich has been positioned] in four countries through opening either a [Joint Venture], a greenfield or an acquisition. This is strategically important for us. The acquisition or expansion monies are not the only investments. When you come in, you have to integrate and expand and enhance. We are here for the long-term in multiple countries at the same time. We are pretty invested in the Middle East.

How large is your regional team today?

On the general insurance side we have over 250, including life we have over 350 people.

January 3, 2012 0 comments

Economics & Policy

Q&A – Fadi Abboud

by Executive Staff January 1, 2012

written by Executive Staff

As minister of tourism, Fadi Abboud has seen Lebanon through the heyday of visitor arrivals in 2010 to the more barren roads of 2011, as well as the change in government from last year to this. At the helm of one of the most underfunded ministries in the government while overseeing an industry accounting for nearly a quarter of the country’s gross domestic product, Abboud pulled no punches when laying out the challenges for tourism in Lebanon as he sat down for an exclusive one-on-one with Executive.

E Following a fantastic 2010, how bad was 2011 for tourism?
We broke all records in 2010. Some 2.2 million tourists visited Lebanon, with total tourist spending up to an estimated $8 billion. In 2011, I think we will be down by some 300,000 tourists, most of whom come by road. Because of what happened in Syria, we lost roughly some 100,000 Jordanians, 100,000 Iranians and 100,000 Gulf Arabs. However, total spending in 2011 seems up, though I should add that buying residential property is included in tourism spending. What may also play a role is the fact that we are a dollar-based economy, and the euro went down.

E What has been done or what could have been done to counter the negative consequences of the Syrian crisis?
In all honesty, we should have taken some measures much earlier, but we did not do anything to compensate what we lost by road. For example, we could have had planes to Jordan for $50 a flight. Most Iranians only come for 24 to 48 hours, as part of a trip to Syria, and they do not spend much. But I think we could work harder in attracting the some 1.5 million Iranians who visit Turkey. In other words, we should attract more Iranians flying to Lebanon. Generally speaking, we are not taking advantage of what is happening around us. We should grasp the opportunity to, for example, build a civil airport in the Bekaa Valley, or use the existing airport to create a regional hub for so-called low-cost carriers. I just came back from the World Travel Market in London, where I had a word with Monarch, which is one of the smallest low-cost carriers in the world. Still, with 34 jets and a turnover of some $1.3 billion, it is twice the size of MEA (Middle East Airlines). On average, they offer a return ticket from London to Cyprus for some $450. Compare that to flights to Lebanon. Also, open the travel section of the Sunday Times and you can fly anywhere in the world on a package deal. But not to Lebanon. As long as we have a monopoly in Lebanon, or a duopoly between MEA and BMI (British Midland International), which is technically bankrupt, prices will not come down.

E External factors aside, what do you think is the main internal problem facing the Lebanese tourism industry?
I’d say a lack of professionalism. Lebanon is like a mezze. You eat a bit of everything but you never get full. For example, we have a casino, but we are not a gambling destination. Our casino is more like a hospital to treat the locals. We have ski slopes, but are not a skiing destination. Do you know any skiing destination in the world that does not have snow cannons? With all due respect, these days we can no longer rely on God alone. Another problem is that the owners of the separate ski stations do not want to cooperate. Yet to create a true ski destination we need lifts from Faqra all the way to the Cedars and snow cannons. Then, and only then, can we become a ski destination.
Likewise, we are not a Mediterranean destination. We need a coastal resort, where you have all the facilities in one place not to get bored for a few weeks. We are not a serious religious destination, even though we have all the sites in the world and no less than four saints. We are not even a serious destination in terms of nightlife. I’ll be frank, a lot of people come here for prostitution, yet the Emirates have much more to offer. In terms of diving we have the Victoria, the only ship in the world in a vertical position, and underwater archeology at Tyre, yet we are not a diving destination. Even when it comes to hiking, we do not take things seriously. There are a lot of jacks-of-all-trades anywhere in the world, yet people want professionalism. We do not take anything seriously. And that is what I’m trying to change. In Arabic we have a saying ‘you do not drink from a well and throw a stone.’ I am embarrassed to say what we throw in this well. It is not just stones. It is rubbish. Tourism represents 22 percent of our GDP. We should invest in it. You cannot create an industry if you do not promote it.

E Talking about promotion, what happened to the LL5,000 ($3.33) airport tax you suggested in 2010?
It did not happen. It was refused as usual. It was meant to be an extra LL5,000 departure tax, which would have enabled us to promote Lebanon. But the whole 2010 budget was refused, including the extra tax. It was not even debated properly. The Ministry of Finance always emphasizes the unity of the budget, but, personally, I don’t see what a LL5,000 promotion tax has to do with the budget of, say, the CDR (Council for Development and Reconstruction).

E What is the budget of the ministry?
It’s ridiculous. It’s less than $20 million, which includes all wages. It is by far not enough to promote the country. But suppose they give me $30 million, even then I cannot spend them. If I tell the World Travel Market I want to participate and ask if I can pay six months later, they will ask me politely to f*** off. For a stand at a fair you pay up front, regardless of what is the official way of doing things in Lebanon.

E Will attracting more Western tourists be difficult considering travel warnings issued by many Western embassies?
Usually, we are not in the market of mass tourism. We cannot compete really. That does not mean we only want jet setters staying in 5-star hotels in Solidere. I love them, don’t get me wrong, but we cannot only rely on them. Fortunately, most educated people in the West know that these travel warnings are political. For example, why did England not issue a travel ban when earlier this year two young Britons were massacred in [Florida]? Is Beirut more dangerous than Bogota? I feel safer in Beirut with an expensive watch than in London, Paris or any city in the United States. Now, I don’t think these bans and warnings are working, but is it making our life any easier? No, not at all.

E In a few words, how would you describe 2011?
2011 was not as good as 2010, yet it could have been much worse. Overall, certainly seeing what is happening in countries around us, I’m happy.

E What to expect for 2012?
Of course, security is very important, but all things being equal, 2012 could be a good year. But, unfortunately, we are experts in losing opportunities. We have an excellent opportunity to build our position. We are currently one of the safest countries in the region. We should grasp this opportunity.

E What are the main challenges?
Well, regional politics of course. Look, if I were responsible for Israeli security I would have only one thing on my mind: a Shiite-Sunni war. Israel is usually very good at studying our weak points, and that is one of our weak points. Today, with the rise of Sunni fundamentalism everywhere, it is very feasible to instigate such a conflict. And the US would be happy with that, as they need a market to sell their weapons. If this scenario becomes reality, all hell will break loose. Closer to home, we really need to redefine tourism in Lebanon. We really need to become a serious destination for the hiker, the religious tourist, the diver, etc. We really need world-class facilities. In addition, I strongly believe that monopolies, and the sisters and brothers of monopolies, are still controlling the Lebanese economy. This has to stop. I don’t believe that Lebanon should have just one casino, one airport and one port. We have to free the travel market, especially when it comes to flights. If you talk to tourism professionals in Jordan and Egypt, they will tell you that they could only break their records once they broke the travel monopoly. If we don’t free the market, we will never substantially expand.

January 1, 2012 0 comments

Tourism

Fadi Abboud

by Executive Editors December 25, 2011

written by Executive Editors

A s minister of tourism, Fadi Abboud has seen Lebanon through the heyday of visitor arrivals in 2010 to the more barren roads of 2011, as well as the change in government from last year to this. At the helm of one of the most underfunded ministries in the government while overseeing an industry accounting for nearly a quarter of the country’s gross domestic product, Abboud pulled no punches when laying out the challenges for tourism in Lebanon as he sat down for an exclusive one-on-one with Executive.

Following a fantastic 2010, how bad was 2011 for tourism?

We broke all records in 2010. Some 2.2 million tourists visited Lebanon, with total tourist spending up to an estimated $8 billion. In 2011, I think we will be down by some 300,000 tourists, most of whom come by road. Because of what happened in Syria, we lost roughly some 100,000 Jordanians, 100,000 Iranians and 100,000 Gulf Arabs. However, total spending in 2011 seems up, though I should add that buying residential property is included in tourism spending. What may also play a role is the fact that we are a dollar-based economy, and the euro went down.

What has been done or what could have been done to counter the negative consequences of the Syrian crisis?

In all honesty, we should have taken some measures much earlier, but we did not do anything to compensate what we lost by road. For example, we could have had planes to Jordan for $50 a flight. Most Iranians only come for 24 to 48 hours, as part of a trip to Syria, and they do not spend much. But I think we could work harder in attracting the some 1.5 million Iranians who visit Turkey. In other words, we should attract more Iranians flying to Lebanon. Generally speaking, we are not taking advantage of what is happening around us. We should grasp the opportunity to, for example, build a civil airport in the Bekaa Valley, or use the existing airport to create a regional hub for so-called low-cost carriers. I just came back from the World Travel Market in London, where I had a word with Monarch, which is one of the smallest low-cost carriers in the world. Still, with 34 jets and a turnover of some $1.3 billion, it is twice the size of MEA (Middle East Airlines). On average, they offer a return ticket from London to Cyprus for some $450. Compare that to flights to Lebanon. Also, open the travel section of the Sunday Times and you can fly anywhere in the world on a package deal. But not to Lebanon. As long as we have a monopoly in Lebanon, or a duopoly between MEA and BMI (British Midland International), which is technically bankrupt, prices will not come down.

External factors aside, what do you think is the main internal problem facing the Lebanese tourism industry?

I’d say a lack of professionalism. Lebanon is like a mezze. You eat a bit of everything but you never get full. For example, we have a casino, but we are not a gambling destination. Our casino is more like a hospital to treat the locals. We have ski slopes, but are not a skiing destination. Do you know any skiing destination in the world that does not have snow cannons? With all due respect, these days we can no longer rely on God alone. Another problem is that the owners of the separate ski stations do not want to cooperate. Yet to create a true ski destination we need lifts from Faqra all the way to the Cedars and snow cannons. Then, and only then, can we become a ski destination.

Likewise, we are not a Mediterranean destination. We need a coastal resort, where you have all the facilities in one place not to get bored for a few weeks. We are not a serious religious destination, even though we have all the sites in the world and no less than four saints. We are not even a serious destination in terms of nightlife. I’ll be frank, a lot of people come here for prostitution, yet the Emirates have much more to offer. In terms of diving we have the Victoria, the only ship in the world in a vertical position, and underwater archeology at Tyre, yet we are not a diving destination. Even when it comes to hiking, we do not take things seriously. There are a lot of jacks-of-all-trades anywhere in the world, yet people want professionalism. We do not take anything seriously. And that is what I’m trying to change. In Arabic we have a saying ‘you do not drink from a well and throw a stone.’ I am embarrassed to say what we throw in this well. It is not just stones. It is rubbish. Tourism represents 22 percent of our GDP. We should invest in it. You cannot create an industry if you do not promote it.

Talking about promotion, what happened to the LL5,000 ($3.33) airport tax you suggested in 2010?

It did not happen. It was refused as usual. It was meant to be an extra LL5,000 departure tax, which would have enabled us to promote Lebanon. But the whole 2010 budget was refused, including the extra tax. It was not even debated properly. The Ministry of Finance always emphasizes the unity of the budget, but, personally, I don’t see what a LL5,000 promotion tax has to do with the budget of, say, the CDR (Council for Development and Reconstruction).

What is the budget of the ministry?

It’s ridiculous. It’s less than $20 million, which includes all wages. It is by far not enough to promote the country. But suppose they give me $30 million, even then I cannot spend them. If I tell the World Travel Market I want to participate and ask if I can pay six months later, they will ask me politely to f*** off. For a stand at a fair you pay up front, regardless of what is the official way of doing things in Lebanon.

Will attracting more Western tourists be difficult considering travel warnings issued by many Western embassies?

Usually, we are not in the market of mass tourism. We cannot compete really. That does not mean we only want jet setters staying in 5-star hotels in Solidere. I love them, don’t get me wrong, but we cannot only rely on them. Fortunately, most educated people in the West know that these travel warnings are political. For example, why did England not issue a travel ban when earlier this year two young Britons were massacred in [Florida]? Is Beirut more dangerous than Bogota? I feel safer in Beirut with an expensive watch than in London, Paris or any city in the United States. Now, I don’t think these bans and warnings are working, but is it making our life any easier? No, not at all.

In a few words, how would you describe 2011?

2011 was not as good as 2010, yet it could have been much worse. Overall, certainly seeing what is happening in countries around us, I’m happy.

What to expect for 2012?

Of course, security is very important, but all things being equal, 2012 could be a good year. But, unfortunately, we are experts in losing opportunities. We have an excellent opportunity to build our position. We are currently one of the safest countries in the region. We should grasp this opportunity.

What are the main challenges?

Well, regional politics of course. Look, if I were responsible for Israeli security I would have only one thing on my mind: a Shiite-Sunni war. Israel is usually very good at studying our weak points, and that is one of our weak points. Today, with the rise of Sunni fundamentalism everywhere, it is very feasible to instigate such a conflict. And the US would be happy with that, as they need a market to sell their weapons. If this scenario becomes reality, all hell will break loose. Closer to home, we really need to redefine tourism in Lebanon. We really need to become a serious destination for the hiker, the religious tourist, the diver, etc. We really need world-class facilities. In addition, I strongly believe that monopolies, and the sisters and brothers of monopolies, are still controlling the Lebanese economy. This has to stop. I don’t believe that Lebanon should have just one casino, one airport and one port. We have to free the travel market, especially when it comes to flights. If you talk to tourism professionals in Jordan and Egypt, they will tell you that they could only break their records once they broke the travel monopoly. If we don’t free the market, we will never substantially expand.

December 25, 2011 0 comments

Real estate

Business talk

by Executive Editors December 25, 2011

written by Executive Editors

“Beirut is reaching its normal prices, but it’s still undervalued compared to Jordan, Syria and all the countries around us, although not as undervalued as the Metn [area]. The most undervalued area for me is the Mechref area [south of Beirut]; it’s nicer than Rabieh and Faqra, and I think it’s on the way up.”

Capstone Investment Group: Ziad Maalouf, CEO

“We have only seen a slowdown in sales but it has not affected prices of land, which remain high. Expectations of landowners keep increasing despite new realities in the market today. If I were to buy land today in Ashrafieh, I would have to sell at a starting price above $6,000 per square meter, which should not be the case… The owners have to readjust their expectations to market realities. Since 2005, land prices have increased exponentially per year, so they assume that this will continue. But that was when Lebanon was underpriced in the region; it’s not true anymore. Growth of land prices and apartment prices should be around 5 percent per year, if there is any at all.”

Seven Invest Developers: Fawaz Sawaf, Director

“The biggest problem in Ashrafieh is parking. The government is trying to improve roads in Ashrafieh, but it wasn’t originally made for this many cars, if all the buildings come up in the area.”

FFA Real Estate: Mireille Korab Abi Nasr, Head of Sales and Marketing

“While prices have generally risen for the past several years, in 2011 we have noticed a standstill in the market in some areas which has caused some developers to resort to giving discounts to sell their apartments. This is all due to the mismatch between the market needs and the supply. This has been the case especially with large-scale apartments. The market will always correct itself, and this is very healthy in order to regain the balance between supply and demand.”

Ramco Real Estate Services: Karim Makaram, Director

“A couple of years ago, a project would have sold half by the time excavation was complete… The absorption rate would have been 80 percent by the time it was delivered; now it is about 60 percent. But if you’re selling the right size in the right area, there is still demand.”

Benchmark Real Estate: Zina Dajani, Managing Director

“Last year you could get a 5 percent or 10 percent discount at best, if you are a serious buyer, except at the launching of new projects where discounts were more substantial. This year, buyers are expecting around 20 percent and 25 percent discounts and are making counter offers to developers before they accept a deal. Given that the sales momentum has slowed down, these numbers may have been achievable in some projects.”

Prime Consult: Massaad Fares, General Manager

“Clients tend to be more selective; they know what they are looking for… the ones interested in city living tend to require mostly smaller sizes but very sophisticated buildings. Being environmentally friendly is very important [and] tall buildings are becoming more and more interesting as views of the city can be guaranteed, and as you know this is not always available. Environmentally friendly projects and gated communities will be more and more in demand.”

December 25, 2011 0 comments