The global music industry is facing hard times. Over the last five years, sales of legal ‘hard copies’ (CDs, DVDs, cassettes and records) have declined sharply, due to the rise of MP3 and iTune formats, as well as Internet downloading. Some of these losses have been partially replaced by legal online sales — amounting to 15 percent of music sales worldwide by 2007, according to figures from the International Federation of the Phonographic Industry (IFPI), but the industry has been slow to grapple with new technologies and the changing consumer mentality. Add to this volatile mix the global economic crisis and a severe credit crunch, and the emerging picture seems gloomy indeed. Yet artists, retailers and producers are not all that pessimistic.

Tony Sfeir is the founding manager of both the retail shop CD-Thèque and independent label Incognito Records. He sees himself as the classic ‘disquaire,’ offering a near-complete knowledge of his products to customers and making it a point to let them discover new music. Sfeir takes his business extremely seriously. In fact, he even closed down CD-Thèque’s second outlet in Hamra when another professional disquaire could not be found.

“You know you have found a real tradesman when people say they bought their music from Raymond, not from the CD-thèque,” says Sfeir, referring to one of his employees. The closure has cost the company part of its turnover, but Sfier believes it has generated credibility, saying “CD-thèque has loyal customers who returned to the original establishment in Ashrafiyeh.” He quotes the 2008 turnover of CD-thèque as around $700,000 — down from $800,000 in 2007 due to the shop closure — estimating this to be 20 percent of the legal sales market in Beirut. He has yet to see a drop in sales due to the financial crisis.

The franchise guys

Anthony Ziade, CEO of the Virgin Megastore franchise for Lebanon and KSA, is equally optimistic about customer loyalty, feeling that Virgin has no real competition in Lebanon on the level of the overall shopping experience on offer. The concept of Virgin Megastore is a combination of music, books, films, multimedia hardware, musical instruments and a cafe. “Music is the anchor of Virgin, it is the first thing you connect with our Megastores, so we will keep selling hard copies – even if they represent only a fraction of our sales volume now.” Music has dropped from over 50 percent of turnover back in 2001 to a mere 15 percent in 2008. This is a global evolution. At Virgin France, music represents only seven to eight percent of total sales volume today and even that figure continues to drop. Yet Ziade is not considering selling MP3’s in the Megastore or through its website.

“I don’t think the Middle Eastern public is ready for that yet, even in Lebanon,” he says. The crisis is not making itself felt in Virgin’s sales yet, Ziade claims. It has, however, manifested on the supplier side, where the retailer is experiencing some shrinkage in its sourcing, as some producers and distributors have gone out of business or face difficulties obtaining credit. Suppliers are also less eager to give credit, demanding upfront payments instead and following up payments very closely. Despite the difficulties, Virgin Megastore has now branched out to Saudi Arabia, where it has taken the retailer some time to get started. The concept of Virgin Megastore is a controversial one in KSA. “We faced many hurdles from the side of the government, what with censorship and related issues, but we are now proud to present a respectable range of CDs, DVDs and books — albeit more limited than in Beirut of course,” says Ziade.

Hady Hajjar, marketing manager of the recording label Rotana Music, doesn’t see the global crisis as a major threat either. “We are not just selling ordinary products. Music is a universal language and people will always need music in one way or another. We have 120 stars in our portfolio, including all the big names in the Middle East.” Hajjar therefore doesn’t see the financial crisis as a major threat, although he admits Rotana has been affected by the global drop in music sales. To counter these losses, the Rotana empire, as Hajjar likes to call it, has been branching out to include management and event organization, as well as a digital department for the sale of ringtones and digital online formats. In 2008, the company signed contracts with Zain and Mediaphone to cover the region. Additionally, it has started licensing out its music to companies around the world in an effort to reach Arab households worldwide, and acquiring licensing contracts from Sony, Universal, Fox and Disney to distribute their music and films through its own distribution network in the region.

New scenes

Although Rotana is an established authority on the Arabic music scene, the company is always on the lookout for new talent, trying to keep its finger on the pulse of the ever-changing tastes of the young. Amanda Hartford manages Rotana Musiqa, one of Rotana’s multiple satellite channels, which features a show closely tracking hip-hop, techno and alternative music in the region. She is fascinated by what’s brewing now in terms of new developments. “Compared to only three years ago, young musicians — whether rappers, DJ’s or rockers — are becoming very professional. Scenes are rapidly evolving, especially in Lebanon, but also the clubbing scene in Egypt and hip-hop in Saudi Arabia, to name just a few.” Rotana has been sponsoring events like the Sound Bomb hip-hop festival in Beirut last fall and while these artists do not fit into any of the company’s formats at the moment, Hartford sees it eventually reaching the point where sub-labels will be set up for the different genres.

Yet questions are cropping up about how open the industry is to newcomers. Rima Khcheich is an up and coming Lebanese singer, who combines her classical tarab training with jazz influences. She has released three albums with the Dutch Yuri Honing Trio. She claims the situation for Arabic music in general today is bad, complaining that only commercial music has a chance to reach the audience, while artists who are working to develop their own voice do not get a lot of chances to produce their music, let alone to get it distributed.

“I produced my own first CD, so production is possible if you are determined, but distribution is another matter,” says Khcheich.

Sfeir feels the key is to create a separate or alternative scene. “With Incognito, we have started from the bottom up and I think that is the key to our success. We started with releasing budding musicians who gravitated around the CD-thèque,” he adds. The shop started publishing a magazine, organizing events and in that way eventually managed to create an interest in the music it wanted to release. The original Incognito label focused on rock and alternative music, such as Scrambled Eggs and Mazen Kerbaj. In 2006, the sub-label New Oriental Sounds was created, which releases classical Arabic music from across the region with a modern touch, in jazzy or experimental interpretations, or blended with a more Western-oriented sound.

This has proven quite popular, to the point where Incognito is now selling between 7,000 and 8,000 copies of its bestselling products. Together with their distribution of other labels, this has resulted in a turnover of $800,000 for 2008. “We are nowhere near the level of something like the Cuban scene yet, which is known and appreciated throughout the world, but we are trying to build a similar name for Beirut internationally,” he claims.

Piracy

Both independents and established companies agree that distribution is the biggest hurdle. In countries like Syria, Sfeir points out, there is hardly a distribution network for the simple reason that CD’s are downloaded and burned on demand in the retail shops — which brings us to the piracy issue.

The Middle East, as is well known, has a reputation for music and film piracy. Rotana’s Hadi Hajjar estimates illegal copying in Lebanon alone at 80 to 90 percent of the market. Ziade agrees, though he estimates that the effect on Virgin Megastore is not a sales issue, arguing that Virgin customers have a certain buying power and prefer the quality and extra features of the original. The issue, he says, is credibility.

“Customers ask us for season 17 of a series like ‘24,’ but we are still at season 12. We follow the official channels and we honor release schedules, whereas the pirated version is already on the market, of course,” said Ziade.

On the other hand, Ziade says he has seen a real effort from the Lebanese authorities in the last year and a half to crack down on piracy, although he agrees there is still a long way to go. Rotana has recently lowered the price of its CD’s drastically to combat piracy sales. Hajjar explains the concept, saying the price of a legal copy is now only a few dollars above the pirate price, as opposed to the previous 10 dollars-plus difference.

“We have also waged an awareness campaign and are moreover making a real effort to bring our CD’s closer to consumers, working not only with our own retail outlets and dedicated chains like Virgin, but setting up distribution to the small local supermarket-cum-fuel station chains,” he says. For smaller labels like Incognito, though, piracy does not have the same effect. Sfeir has no major problem with piracy, apart from the effect it has of impeding the establishment of a distribution network. On the contrary, he sees piracy as a form of promotion, bringing Incognito’s music to new audiences.

“A part of this public will eventually go looking for the original copy, attend concerts, or in other ways contribute to our scene,” concludes Sfeir. As Khcheich sees it, the main disadvantage is that with all the copying going on in the Arab world, “not only can you not count on the real CD selling in most countries, but there’s no way to know even how many you are selling.”

The warm weather this year may be celebrated by some but for the many keen skiers the snowy slush and closed slopes in the ski resorts of Lebanon are causing consternation. Despite this, however, people are still taking to the slopes at the ski resorts of Faraya and Kfardebiane in large numbers, allowing the businesses there to breathe a huge collective sigh of relief.

In fact, such is the nature of Lebanon that despite this being the worst ski season in terms of snow in recent history, businesses have seen robust growth year-on-year. Joanne Zarifé, communications manager of the Intercontinental Mzaar, says that, “the occupancy of the resort maintained a high level exceeding the percentage of the last two years by 26 percent and the hotel has occupancy averages of 90 percent until March 2009. Our restaurant outlets have also shown an increasing occupancy of 22 percent compared to 2008.”

Ronald Sayegh, general manager of www.skilebanon.co.uk, also announced that his company had achieved growth of 20 percent last year. So while the warm weather has kept the snow away, the lack of snow has not kept the people away.

However, companies in the mountains are not resting on their laurels and are keen to stress that there is enough snow to enjoy the slopes. As Zarifé claims, “Now since the weather conditions have changed due to global warming, there are periods where skiing conditions are perfect and periods where it could be much better. But since it snowed heavily [in February], it is guaranteed that the month of March will be great in terms of skiing.”

Lebanon is now in top gear for the parliamentary elections that will occur on June 7, and billboards throughout the land will soon bear images of leaders and the political symbols of the various competing parties. The new electoral law, signed post-Doha accords, not only puts a limit on campaign spending at roughly $100,000, with an added variable that depends on the number of voters within the electoral district determined by the Council of Ministers, but also stated that the private and public media wishing to take part in electoral advertising should create “a price list and information on the ‘spaces’ it intends to consecrate for electoral advertising and promotion.” An interesting facet about the new electoral law and electoral campaigning is that the Internet has been ignored. All references to the law refer to “radio, TV or printed media.” According to the International Telecommunication Union, 24 percent of Lebanese now has access to Internet. The role the Internet played in 2005 was relatively important, the 2009 elections will see the World Wide Web move center stage. It is likely that after this year’s elections there will be calls for regulation as the number of spam mail, abusive rumors and websites grows dramatically. However, those who try to regulate the Internet in Lebanon may find it as difficult as trying to regulate the politicians.

As the insurance world braces itself for a year or more of depressing outlook in terms of investment revenues, Lebanon’s insurance sector appears to be in a bullish mood as many industry insiders show little sign of worry. The confidence of Lebanese insurers is surprising given the extent to which the international markets they invest in have been affected. One of the premeire victims of the ongoing financial earthquake was the American International Group (AIG). AIG’s forth quarter 2008 losses are reported to have hit the $60 billion mark; that means they lost the equivalent of about $660 million per day. Accordingly, AIG’s local Lebanese arm, the American Life Insurance Company (Alico), may loose its big brother. “One of the things that AIG is trying to do now is to sell off Alico to get cash back and divest off profit making companies because they have to shrink the whole thing,” says Thomas Schellen, publishing editor and head of the insurance opportunities program at Zawya.

Roger Zaccar, assistant manager at Commercial Insurance, says there are three main areas that insurance companies around the world are concerned about in the current economic climate: “One is the assets invested by the company in the different financial instruments; two is the endowment policies which are linked to international investments; three is rate increases and commission reductions from international reinsurers.”

No crisis here

Yet Lebanese insurers hasten to add that despite the turbulent international environment, they have been able to avoid the short-term adverse affects of the global financial crisis. René Klat, CEO of Adir Insurance, states, “in my personal opinion I do not think that Lebanon will be affected by the global financial crisis that much… I am not scared about this crisis — Lebanon has suffered much worse [than this].” Indeed, the fact that Lebanon has been so far behind the rest of the region in terms of economic growth and is only now starting to show signs of promise is a major factor spurring on growth in all industries, including insurance. But the main reason that Lebanon has been spared the worst of the economic downturn’s consequences is its prudent and seemingly anticipatory financial policies that applied not only to the banking sector but to the insurance industry as well.

Lebanese insurance companies have been restricted in the “variety of investment categories accepted under admitted asset parameters,” says Mounir Kharma, the CEO of Med Net Liban. Zaccar goes on to explain, “non-life [insurance] companies like ours… are mostly invested in the local available financial investments… i.e. cash deposits, treasury bonds and very little in the limited stock exchange. This is the reason the insurance industry will be minimally affected.” Thus, instead of the insurance industry seeing regression, the industry expects continued strong growth.

Klat states that Adir insurance achieved growth of 38 percent in 2008, with further growth expected in 2009, albeit at a lower rate due to losses in policies linked to the stock markets. This growth figure, however, needs to be taken with a grain of salt. “The crisis has affected those portfolios that invest in the stock market such as retirement plans and this has seen a 20 percent reduction. We sell retirement plans, for instance, that give the opportunity to invest up to 50 percent on the stock exchange,” says Klat.

Whatever the claims of insurance providers regarding their relative immunity to the afflictions of the wider insurance industry, there is no hiding from the fact that the outlook for investment revenues in 2009 is nothing short of dismal.

“Compared to the size of the industry and the premium volume, the investment volume is pretty significant and the indicators pointing to the sensitivity of non-underwriting practices is very strong today,” says Schellen. Although figures for the whole of 2008 and 2007 have not been released by the Lebanese Ministry of Economy, the total assets for insurance companies in 2007 is estimated to total around $1.55 billion, of which $850 million were in investments according to research conducted by Zawya. Given that global markets were still stable until the fourth quarter of 2008, surely many of Lebanon’s insurers tapped into investments and were exposed to losses. Currently, companies are reorganizing their strategies until things start to pick up again on the international markets.

“The average rate of investment income will drop heavily and become very conservative. Companies will start to think in terms of the bottom line… as well as practice further cost cutting,” says Elie Nasnas, director general of AXA Middle East. “Clients will expect the same level of service if not more and you will have to cut your costs accordingly.”

The insurance sector must do its utmost to produce technical results as opposed to financial returns

Covering the risk

Insurance clients in Lebanon, however, may be in for a big surprise when it comes to how much they will be asked to dish out in order to cover themselves for various risks. As investment revenue no longer represents the beefy figure that it used to on the income statements of most Lebanese insurers, they may have to look for other ways to compensate for a lack of revenue streams. “Some part of the burden will definitely fall on the consumer,” says Schellen. Accordingly, Zaccar warns that due to the reduction in interest rates on investment and pressure from reinsurers, the insurance sector must do its utmost to produce technical results as opposed to financial returns. “As a result, insurance rates must increase in all lines of insurance,” he asserts.

Indeed, the pressure on reinsurance agencies to tighten their belts has never been greater with some of the biggest names beginning to falter. Moody’s Investors Service has recently cut its rating on Swiss Reinsurance Co (SwissRe) from Aa3 to A1 because of concerns about weaker profits and lower capital. However, from a reinsurance perspective it is not as simple as raising prices. “Reinsurers are becoming more selective on the risks they insure. So rather than demanding higher rates across the board they have reduced their willingness to cover certain risks,” says Schellen. This tightening of standards will invariably affect Lebanon at some point.

“We have seen the reinsurance market become much more rigid and very focused on underwriting profits. In turn, this will necessarily impact the insurance sector throughout the world, including Lebanon. Reinsurance cover will become more difficult to come by,” adds Kharma.

Insurance companies will have two choices: either they calculate their risks more carefully and adjust their premiums to fit, or they will have to find other reinsurers who will provide them with lower prices but may not be rated as highly as their previous provider. Hence, the consumer will either have to pay more in terms of premiums or lose out on quality. Yet some insurance providers see a third option.

“The biggest reinsurers were affected by the global financial crisis, causing a price hike. We will try to carry this burden instead of increasing our prices and affecting the purchasing power of the end consumer,” assures Fateh Bekdache, general manager at Arope Insurance.

Tapping the breaks on growth

Although Lebanon has the highest level of insurance penetration in the region, registering around 3.4 percent, this does not necessarily indicate that there has been a boom in the country’s insurance industry. Compounded with the prospect of insurance becoming more expensive, this will certainly have a knock-on affect in terms of industry growth. Nasnas explains that in order to have higher penetration rates, the economy has to contain a larger middle class who can afford these products — something Lebanon has yet to enjoy. Moreover, the decrease in oil prices as a result of lower demand has crippled the region’s most profitable asset and affected the Lebanese market through a decrease in remittances.

“If you have a drop in oil prices, there is a slowdown in the regional economy… Therefore with less disposable income there will be less demand for insurance,” says Farid Chedid, managing director at Chedid Re.

Ironically, the fall in oil prices may also be a source of growth for the insurance industry in the form of Lebanese returning from the Gulf countries. However, the insurance industry appears not to be taking this prospect seriously. Most in the industry seem to believe that Lebanese in the Gulf that have lost their jobs have been able to obtain jobs in less affected markets.

“The Lebanese are quality people and those that have lost their jobs in Dubai, for instance, have found jobs elsewhere in the Emirates,” Klat states.

Kharma adds that, “regional employers see an opportunity, at this time, to consolidate and improve on the talents available to them. The Lebanese expatriates should continue to be well sought after. In general terms, my feeling is that there is more talk and fewer Lebanese expatriates returning.”

As the throngs of repatriating Lebanese have yet to materialize at Rafiq Hariri International Airport, the country remains without what is arguably its most precious asset.

“In Lebanon, we had a huge human resources problem in 2008 because all the people we train get great offers from the Gulf and they leave… I still see people leaving Lebanon and going abroad,” says Nasnas.

A further avenue for growth — regarded as a potential panacea for the Lebanese insurance sector from the stagnation of the past few years — was the country’s booming real estate sector. That notion, however, seems to have been short-lived as systemic and natural factors have contributed to stifling the potential this industry once possessed.

“It did not take off as much as it was expected. This is particularly linked to the fact that the comprehensive construction and building insurance has not been legislated and is still not mandatory,” says Schellen. Moreover, the growth of the Lebanese real estate sector has leveled out somewhat over recent months curbing the growth scenarios that it was promising.

An opaque industry

All other considerations aside, perhaps the most debilitating and unrelenting factor halting the growth of the Lebanese insurance industry today is the lack of transparency and adequate legislative framework to support the industry.

“The success of the insurance industry is linked to its transparency,” confirms Farid Chedid. The Association of Insurance Companies in Lebanon (ACAL) used to publish an annual report on the Lebanese insurance industry, but has been unable to do so since the Lebanese Ministry of Economy stopped releasing annual figures on the insurance industry in 2006. According to the ACAL, when the association requested the figures from the Lebanese Ministry of Economy they were told that the government would be producing the report for 2007. The report is still not available to the public.

Nasnas believes that the lack of transparency in general has dissuaded many regional and international insurers, reinsurers and groups from taking the Lebanese insurance industry as seriously as they would if the figures had been available. Additionally, the government only requires insurance companies to provide their financial statements and not their breakdown figures, which further impedes accessibility to industry wide data. Moreover, there is some favoritism at play.

“In Lebanon the government is too concentrated on the banking sector. We have to diversify the importance of all of our sectors, especially in the financial sector, which includes insurance. In developed countries it is as important as the banking sector. So they [the government] should pay more attention to it,” concludes Nasnas. The Lebanese government has drafted a new insurance code but it has yet to be ratified and is still being tossed between political heavyweights and industry leaders.

“The draft law that started to be circulated around three years ago was never ratified. Last year there was a back and forth between the insurance industry and the regulator of the Ministry of Economy,” says Schellen. “As long as you don’t have political stability nobody really takes the time to discuss these things,” he adds.

Lebanon still operates under the insurance code drafted in 1977 by a legislative decree based on the old French insurance code. The code obliges the association of Lebanese insurers to insure the majority of passenger vehicles present in the country, as well as those entering the country from outside Lebanese territory. Accordingly, another decree issued by the government in 2003 aimed at implementing the law was passed.

However, according to Antoine Chedid, president of National Institute of Obligatory Insurance (NIOI) in Lebanon, the government has fallen short of its obligations to insure all vehicles inside Lebanon. “There are between 1.3 million and 1.4 million cars [in Lebanon and] only 750,000 of them are insured,” says Chedid. “We tried to develop the ‘105 regulation’ to include mandatory insurance on the material damages, but how could we move on this project if we can’t make sure that the one million… cars are not covered?”

The NIOI is not about to sit by and twiddle their thumbs while the untapped potential of the Lebanese market passes them by. The Lebanese NIOI launched an awareness campaign in late February urging the government to apply the 1977 decree. The campaign seeks to use a variety of media to encourage the government to apply decree 105/77 and specifically the clauses that are associated with insurance of bodily harm. The NIOI claims that for passenger vehicles the cost levied on the consumer to protect against the infliction of bodily harm would range from $40 to $60.

At the end of the day, the ability of organizations to pullout of investment and concentrate on technical underwriting will be the defining element in the Lebanese insurance industry. Remaining stationary is no longer an option in the current global economic climate as businesses turn inwards and shed the excess they were carrying through the recent period of growth. Hence, Lebanese insurers would do well to take advantage of Lebanon’s relative cushion from the global financial crisis to expedite the shift from investment to underwriting.

“We are back to the old school, which preaches adapting an acceptable risk factor and not relying solely on return on investment or financial income,” says Bekdache. However, as Kharma, the CEO of Med Net Liban stated, when all things are considered the global financial crisis is probably not the most important thing going, “other issues in Lebanon are likely much more profound.” With rockets fired across the border into Israel and elections coming in June, he may just be right. For now, it seems the most prudent course of action for Lebanese insurers’ is to do what they can and leave politics to the politicians. And it looks like they will do just that.  

If one were to attempt to gauge the progression of Lebanon’s economy from the 1950’s until today, one would do well to observe the trials and tribulations of the region’s first all cargo airline that ebbed and flowed with the country’s fortunes. Trans Mediterranean Airways (TMA) started out as the brainchild of Lebanese entrepreneur Mounir Abu Haidar in 1953. In 1949, Abu-Haidar reportedly gave up a career in medicine to take up a job as a junior clerk at Saudi Aramco. Working his way up the corporate ladder, Abu-Haidar eventually became the head of transportation at Aramco and was assigned the task of providing food and equipment for oil prospectors in the countries now know as the GCC.

Having identified the need for air transportation to service the expansion of Saudi Arabia’s energy behemoth, Abu-Haidar used his contacts at Aramco to obtain a letter of intent from the company to use his still chimerical air charter service to facilitate the operations of the company’s oil prospectors. Letter in hand, he flew to London where he arranged the lease of an aging transport plane — and TMA was born.

Carry anything that pays

TMA literally and figuratively took off, operating out of Lebanon under the license of then independent Air Liban. As TMA grew, it began to diversify its cargo, transporting everything from vegetables to firearms.

“Weapons to me are the same as pieces of lumber. A European government charters one of my planes and asks me to haul rifles to Algeria. What do I do, let someone else have the business?” said Abu-Haidar in an interview with Time Magazine, published June 1968. When British, French, and Israeli forces attacked Egypt in 1956, forcing the closure of the Suez Canal, the need for air transport sky-rocketed, as did TMA’s revenues, which quadrupled in one year to $1.2 million.

TMA employee numbers 1965-1984

By 1967, TMA was operating the world’s longest all-cargo route and by 1971 TMA became the first cargo airline to offer around-the-world service. This achievement came despite the fact that TMA lost two of its aircraft in 1968 when Israeli commandos destroyed 14 civilian aircraft at Beirut International Airport to avenge the hijacking of an El-Al flight earlier that year by the Popular Front for the Liberation of Palestine (PFLP). By the onset of the Lebanese Civil War in 1975, the airline employed around 2,000 people and was a beacon of the Lebanese aviation industry.

TMA traffic and performance indices 1970-1984 (all services)

As the civil war took its toll on Lebanon’s economy, TMA’s fortunes made an abrupt about-face, ending in the red for the first time in 1979. Faced with an increasingly unstable situation in Lebanon, the airline moved the majority of its operations to the UAE between 1976 and 1986. TMA’s prospects continued to wane as a result of the war and by 1986, after having failed to attain government assistance, the company came under the control of the Lebanese government, then headed by President Amin Gemayel. With the airline now public its fortunes — already dampened by the effects of the Lebanese Civil War — became inseparable from the corruption and nepotism that permeated the Lebanese economic and political landscape during the war-torn 1980s.

The Lebanese government later reversed its decision to bailout TMA and gave five times the amount that Abu-Haidar requested to Jet Holdings, according to Najib Alamuddin, Middle East Airline’s (MEA) chairman for more than 25 years. Jet Holdings’ chairman at the time was the infamous Lebanese business tycoon Roger Tamraz.

T.M.A. became inseparable from the corruption and nepotism permeating Lebanese politics

Silver-tongued Tamraz

By the time Tamraz took over TMA he had racked up an impressive resume of business mis-adventures, including the embezzlement of hundreds of millions of dollars from various projects, and been sentenced in absentia to 15 years imprisonment by a Lebanese court. Tamraz contested the sentence, claiming he was being politically persecuted

At the time of TMA’s purchase, Tamraz was head of the Intra Investment Company (IIC) and Bank Al Mashrek, the successors to Intra Bank. Based in Beirut, Intra Bank had been the largest financial institution in the Middle East until it collapsed in 1966. The bank — holding about 10 percent of total bank deposits and about 40 percent of Lebanese banks’ deposits — turned out to be carrying about $120 million in essentially non-existent collateral.

The scandal sent shockwaves throughout the Middle East’s financial sector and the Lebanese economy, where it held major stakes in many of the country’s largest companies, including its national air carrier MEA. Fifteen months later, the bank was re-floated by the US investment bank Kinder Peabody & Co. where Tamraz was an executive. Tamraz then took over Intra in August of 1983, three years before it bought TMA through Jet Holdings.

After years of destruction during the war, Beirut International Airport (BIA) eventually re-opened its doors in May of 1987, prompting the return of TMA to Lebanon with a reduced fleet of seven Boeing 707s.

In late 1988, rumors of a liquidity crisis prompted a rush on Bank Al Mashrek and the bank collapsed. During the fallout over Mashrek’s collapse in 1988, Lebanon’s central bank took control of Jet Holdings and, by default, TMA. TMA’s fortunes continued to falter as a result of regular closures at BIA. When the war ended in 1990, the airline was in shambles, its ownership disputed and its routes diminished. TMA had become symbolic of Lebanon’s economy after 15 years of civil war.

In early 1991, a government committee was established to decide TMA’s future. The committee estimated that the company’s debt stood at $80 million, while its assets only totaled $45 million. Under these circumstances the committee proposed that the airline either merge with MEA or be granted a substantial amount of funds in order to resume operations. “There was a concept prompted by Hariri for a merger between MEA and TMA. The concept was that Lebanon needs one airline and MEA needs to be privatized so why not merge TMA and MEA and put them on the marketplace,” says Fadi Saab, CEO of TMA from 1996 to 2008.

Landing ownership

In the end, the dispute over the airlines’ ownership was finally resolved when a 74 percent stake of TMA was bought by the Lebanese Air Investment Holdings (LAIH) in March of 1993 for $8.5 million, according to Mohamed Kabalan, the longtime head of TMA’s workers’ syndicate. The owner of LAIH was Farid Raphael, currently chairman and general manager of Banque Libano-Française (BLF).

Raphael refused to contribute to this article, stating only “the banks managers and owners do not talk about their personal investments.” At that time many rumors began to spread regarding the company; one of which suggested TMA was actually bought by the late Rafiq Hariri through Raphael and his holding company.

“The rumor has been going around ever since I came aboard that this is a Hariri company. I have not seen any proof that this is a Hariri company,” says Saab. Other factors further obscured the identity of TMA’s true owner. “The address on the letter of purchase was that of BLF, but the name registered was not BLF; it was LAIH,” says Kabalan. 

All indicators, however, point to the fact that TMA was bought in order to be sold. “The idea of LAIH was to restructure the company and then sell it to a strategic partner,” explains Saab, a claim denied by his company in the past. In order to prop-up the airline’s prospects and its marketability, the government court appointed to handle the bankruptcy of Bank Al Mashrek forgave a total of $39 million that was owed by TMA to the bank, giving the airline some much needed wiggle room.

Under the aegis of LAIH, the airline began a restructuring program with the hope of pulling the ailing carrier out of the red. After a tragic crash of one of its 707s in 1993, the company decided to reduce its staff, despite staunch opposition from TMA’s labor syndicate. TMA’s staff went from 750 employees in 1993 to around 400 by the end of 1996. With the company again in disarray the prospects of it being sold became negligible. “[Rafiq] Hariri had previously approached Raphael [and] told him to ‘hold off on the kind of reorganization you want to do because we might buy [TMA] from you’. There was political opposition at the time and in 1996 it was apparent that this would lead nowhere,” says Saab. With the prospects of a Hariri buyout all but wiped out and the perpetually unstable labor situation looming, TMA closed its doors from July to October of 1996. The company asked a then little-known consultant to perform a complete audit and create a restructuring plan. The consultant, Fadi Saab, then spent 12 years at the helm of TMA. 

At the behest of Saab, LAIH decided to prop up the company with a capital injection that totaled $40 million. “The infusion was done by Farid Raphael’s group and it was done in two phases. The first was $20 million and the second phase was $20 million,” says Saab. Accordingly, Saab promised to get the company out of the red at any cost. “He made all employees sign a two-year salary freeze without the consent of the syndicate. He said that either you sign or you don’t have a job,” claims Kabalan. “The syndicate never accepted conceptually what we were doing and so we took a management decision to freeze salaries. There was no agreement between us and the syndicate,” Saab furthers. The salaries of TMA’s employees have remained frozen ever since. 

“He made all employees sign a two-year salary freeze without the consent of the syndicate. he said that either you sign or you don’t have a job”

Back in the air

Nonetheless, Saab managed to bring the company into the green, albeit kicking and screaming and without the kind of support he was looking for from the LAIH injections. “The two injections of capital did not come in time; they came in bits and pieces. They ended up as funding for working capital requirements and not as an investment capital, so we were unable to use the funds ‘front end’. We had to use them to pay bills,” explains Saab. Even so, TMA’s revenues grew by $5 million from 1996 to 1998 and it started to make a profit by 1999.

However, in the typical yo-yo fashion of TMA, things started to go awry again in 2000. One of TMA’s biggest clients was Kuwait Airlines who had leased three of TMA’s 707s to operate its cargo arm. In late 1999 the Kuwaitis requested TMA install the TICAS navigation system on its planes because they needed the system installed by January 1st, 2000 in order to fly over several countries. “We made about $1 million a month from the Kuwaiti contract,” says Kabalan. “Saab didn’t install it until the last minute. The Kuwaitis said they didn’t want to take the planes two or three months later because they had obligations to fulfill in the mean time. They left us for someone else and we lost $1 million per month.” As far as Saab was concerned, Kuwait Airlines were on their way out anyway. “Kuwait Airways were shopping for a replacement for TMA because our planes were old and expensive to operate and maintain. We knew they would cancel.”

Scheduled and charter production 1998-2004

Capacity per ton mile (CTM)/ revenue per ton mile (RTM) scheduled & charter operation 2001-2004

External factors and government favoritism also played a major role in TMA’s demise. In 2000, the Lebanese government decided to adopt the Open Skies agreement, effectively opening up Lebanon’s airspace and BIA to all foreign companies with no restrictions on route rights, the number of designated airlines, capacity or frequency. The agreement effectively crippled TMA’s competitive advantage in the Lebanese market and consequently nullified its attractiveness to investors. “Open Skies was one of the main factors why TMA was not able to find an investor. All the international airlines we were talking to said ‘why do we need you anymore?’” says Saab.

Compounding this decision was the government’s longstanding favoritism of MEA, of which it owns 99 percent through the Lebanese central bank, despite several initiatives to privatize the airline. Moreover, MEA still enjoys a monopoly, which expires in 2012, on scheduled air transport of passengers. MEA’s monopoly, which expires in 2012, has curbed the aspirations of many airlines — including TMA — looking to expand into scheduled passenger transport. “In concurrency to Open Skies, the government protected MEA. The government renewed the exclusivity of MEA, erased debt that MEA owed to the government and injected millions of dollars of capital,” explains a high-ranking member of the aviation industry, who spoke on condition of anonymity. “When you tell the government MEA is against the WTO and its unfair competition, they tell you it’s a private company,” the source added.

To date, MEA’s monopoly remains in place, in spite of the International Civil Aviation Organization’s (ICAO) principles, to which the Lebanese Civil Aviation Authority (LCAA) is a member. “Monopoly is out of the question when it comes to civil aviation; its not part of the formula. No one in the world encourages it anymore,” says Mazen Hamdicouk, Head of the LCAA. “However, our position is dictated by the minister [of transport] and the government has to make that decision at the end of the day.”

As far as Lebanese Minister of Transport Ghazi Aridi is concerned, there is no reason why MEA cannot continue to be Lebanon’s only national carrier for some time to come. “Some people think that MEA’s exclusive rights end in 2012, but I think of how to keep protecting the national carrier after this date,” said Aridi at the opening of MEA’s new pilot training center in November 2008. Aridi was unavailable for comment. What’s more, the EU banned TMA’s aging 707s from flying over Europe in 2002 due to requirements on emissions standards eliminating many of TMA’s most profitable routes. 

Purge of pilots

With everything seemingly working against TMA, the blow came in 2005 when a row with its pilots over pay resulted in all but a few of its 53 pilots losing their jobs.  That same year the LCAA suspended TMA’s Air Operator’s Certificate (AOC), citing the fact that they no longer had the capability to operate effectively, and so the airline ceased flying. The company’s planes currently sit amongst a pile of shrubs on the outskirts of TMA’s facilities at BIA waiting to be scrapped.

By the end of 2005, TMA’s debt stood at $85 million dollars. From 2005 to 2008, the airline managed to bring its down debt to $60 million through renegotiation with its various creditors. The company’s operations are now restricted to maintenance and handling at BIA. TMA needed new blood; it needed a new vision, which came in the form of a one dollar bill.

In late December 2008, LAIH was purchased for $1 from Farid Raphael. The new owner of TMA is Mazen Bsat. The mild-mannered Bsat started his career in his family-owned pharmacy business, which he later took over and built into one of Lebanon’s most successful pharmacy chains — Mazen Pharmacy. Bsat also owns a series of childcare and toy stores around Lebanon, as well as a mall that carries his name — Mazen City — on the outskirts of Beirut.

Bsat first entered the commercial aviation world in 2000, when he opened his charter airline and named it the Flying Carpet — Bsat al-Rih in Arabic. Flying Carpet got its start by flying to Iraq before the American-led invasion in 2003. At the time, there were no direct routes from Beirut to Baghdad and charter service was the only avenue for direct flights between the two cities. From a one plane operation eight years ago, Flying Carpet now operates point-to-point eight times per week to Baghdad, Irbil and Suleimania.

As Flying Carpet expanded in unison with the post-war Iraqi market and it too became marred by the type of controversy that has become synonymous with the country. On 15 January 2004, one of Flying Carpet’s airplanes flew into Beirut carrying $12 million in new Iraqi dinars, the same day the Coalition Provisional Authority (CPA) stopped disseminating the currency in Iraq. The plane, its passengers and its valuable cargo were all seized by the Lebanese authorities who suspected the money was part of widespread smuggling associated with the currency at the time. The authorities also arrested Michel Mkattaf, the owner of a local currency exchange business and the only son-in-law to former president Amin Gemayel. The other passengers were Richard Jusurati and Mohammed Abu Darwich.

The New York Times reported that Bsat was actually flying the plane at the time, a claim he vehemently denies. “I wasn’t flying the plane, I was in Beirut at the time. I don’t have even have a license to fly [commercial aircraft],” says Bsat. “They leased the plane from me to transport cargo and I had no idea what was in the cargo.”

The issue was finally resolved when the Iraqi Ministry of Interior — in effect under the auspices of then head of the CPA Paul Bremer — sent a fax to the Lebanese government stating that the money was being legally transferred for the “urgent purchase” of armored vehicles and “sophisticated equipment intended to confront the dangerous security situation in Iraq,” reported The Independent.

In the end, all the men and the money were released and Bsat claims the entire issue boiled down to the usual political bickering between Lebanon’s politicians. “It was basically political. Mkattaf is the son-in-law of Amin Gemayel. Amin Gemayel and Emile Lahoud [Lebanon’s president at the time] didn’t like each other and this is how it started,” says Bsat, banging his fists together for emphasis. Mkattaf’s legal council could not be reached for comment. 

TMA liabilities

Bsat began his relationship with the TMA in 2001 when he contracted the company to service his fledgling airline. The relationship blossomed and allowed Bsat access to the inner workings of TMA. “I knew TMA inside and out: the structure, the facilities and the manpower. I knew that there was huge potential for TMA,” he says. The potential that Bsat refers to is rooted in TMA’s facilities at BIA, a rare and valuable asset considering the fact that the airport can no longer expand because it is surrounded by residential property and the sea. Furthermore, because Bsat already owns a functioning airline he can benefit from economies of scale by using the same back office to run both TMA and Flying Carpet. But was TMA really worth $60 million of debt?

“Perhaps the company is not worth $60 million and maybe I am buying it for more than its worth,” admits Bsat.

Upon entering TMA’s various facilities, one can clearly see that the company had been neglected by its previous owners. Old telephones and their cords are stacked behind a door in one of the buildings, chips of paint cover the floors inside and outside of the facilities and even the ceiling of the chairman’s office is beginning to cave in. Therefore, it’s little wonder that the first phase of TMA’s restructuring plan under Bsat is to renovate TMA’s buildings and facilities and upgrade maintenance and handling capabilities.

Labor storm

By acquiring TMA, Bsat took on a great deal of financial burden. He also placed himself smack in the middle of the seemingly unending battle between TMA’s labor syndicate and its management. The constant labor disputes at TMA have, in the past, seriously affected the company’s ability to market itself as a reliable carrier. While the decision to upgrade and renovate the facilities may seem to be a logical and necessary step, given their abysmal state, it has angered many of TMA’s employees as well as the country’s labor rights advocates.

“What the administration is doing in reality is making the problems of employees their lowest priority by focusing on fixing the buildings and painting them,” says Ghassan Ghosn, head of Lebanon’s General Confederation of Labor Unions. Ghosn threatened to encourage widespread strikes and protests at TMA, as well as to sue TMA’s administration “if possible,” unless TMA meets the labor syndicate’s demands.

Bsat is dealing with this threat head on. “We have sent the union a rejection letter pertaining to their demands. I told them that it’s not the time for it,” says Bsat. “[Management decisions are] not their business. Their business is to work and ours is to manage.”

The constant labor disputes at t.m.a. have, in the past, seriously affected the company’s ability to market itself as a reliable carrier

The wrap up

Essentially Bsat has paid $60 million, in the form of debt, for TMA. The debt itself is owed to a number of banks and other creditors, including the National Social Security Fund (NSSF) and the LCAA. While the company has managed to make an agreement with the NSSF over how it will pay off the $15.5 million TMA owes. A Lebanese court is considering the amount owed to the LCAA. The main point of contention is whether or not TMA owes the LCAA the total amount of land rented from the LCAA based on the actual land or the built-up area. The outstanding amount has been pending for around 15 years and the difference in calculations stands at around $6 million — $15 million as opposed to $9 million. Bsat has agreed to pay the amount requested by the LCAA because he has “decided to take all the problems out of the way of TMA.” Prior to the decision, Bsat paid the LCAA $1 million dollars as a “goodwill gesture” but he cautions, “at anytime, I can ask the court to be part of the issue again.” 

Given TMA’s tumultuous past, its labor issues, its massive debt and the Lebanese governments favoritism of MEA, the odds are against Bsat. Nevertheless, Bsat is determined to expand TMA’s operations, promising to take on new planes once he has completed the first phase of his restructuring program and casting off doubts about the acquisition being merely another ploy to reposition the company for a sale. “I’m in it for the long run,” says Bsat.

So far, Bsat has taken bold steps to address many of the airline’s longstanding issues. With Bsat running the show, TMA now stands to benefit from a new and inspired vision backed by a history of success in the regional aviation industry. How high and how long this new chapter in TMA’s, and Lebanon’s, history will last is anyone’s guess. The two options appear to be up or out. If Bsat’s past is anything to go by, TMA seems to have its sights firmly on the sky.  

Politics can make for strange bedfellows, but also curious financial deals. The granting of a preliminary license by the Syrian government last month to establish a joint Syrian-Iranian commercial bank, Banki or “My Bank,” has raised eyebrows.

Both of the banks behind the joint venture, Bank Saderat (BS) and the state-owned Commercial Bank of Syria (CBS), are under United States (US) sanctions. Saderat, the Iranian export bank, has faced sanctions since 2006 for the alleged transfer of hundreds of millions of dollars to Hizbullah and other “terrorist” organizations. CBS has been listed under US Patriot Act Section 311 since 2004 as a “money laundering concern.”

It’s a curious deal. Bilateral trade between Syria and Iran is estimated at a mere $200 million, a figure that would seemingly not warrant more than a correspondent bank, much less a new institution.

“Iranian investments are very limited. They don’t go beyond the $150 million mark,” said Jihad Yazigi, editor of financial publication The Syria Report. “Each time Iran and Syria meet they say $1-to-$2 billion in trade, but trade is only around $200 million.”

“You can count the number of investments on a single hand. And the Iranians don’t have a cash surplus, while the Syrians don’t invest abroad. Both economies are not complimentary and have no real added value,” he said.

Yazigi said that there are no Iranian investments in the banking, real estate, tourism or manufacturing sectors, other than the Iran Khodro, the largest automobile manufacturer in Iran, and SAIPA car assembly plants.

“Many of the projects here are government tenders, so if you look into the details it’s not investment,” he said.

Growing, but still small

Bilateral trade has increased over the years however, from $67 million three years ago to $105 million in 2007, and to $130 million by 2008. This figure could reach $500 million in a few years, “but you don’t need a joint bank for that,” said Yazigi.

The minimal trade volumes could explain why the set-up capital for the bank is the minimum requirement of SYP 1.5 billion ($32 million). But what other motivations are there for setting up such a bank?

“It is a small venture and a way of avoiding scrutiny if they deal with each other and not through international channels,” said Yazigi. Given the reputation of the two banks and their alleged financial links to Hamas and Hizbullah, that makes sense.

But according to a well-placed banking source, the real motivation is political, with the project being a joint commission between the two countries. Tehran has allegedly been pressuring Damascus to create the bank, with the preliminary license pushed through faster than expected. The Syrian prime minister reportedly even stepped in to say the bank is to be licensed despite all the relevant papers still being collected by the Central Bank. Meanwhile, CBS is supposedly not happy about the project, having been strong-armed into the venture as they realize that such a partnership is not good for their reputation.

“I’m sure CBS could’ve found a good Lebanese bank to partner with, as CBS is the largest commercial bank in the country with around 60 percent of all banking assets,” said Yazigi. “Who would be willing to partner with a bank if it’s under sanctions?”

The Mahdi connection

The shareholders give an indication. The Commercial Bank of Syria and Bank Saderat each have a 25 percent stake, while 27 percent is to be divided up between Ghadir Investment Company, a BS subsidiary, car manufacturer SAIPA, and Khalil Sultan al-Abid, the Syrian representative of Iran Khodro.

Al-Abid came late to the deal, according to the banking source, as Iranian and Syrian Shiite investors already involved were selective regarding the other investors.

“It [wasn’t about] business but solidarity,” the source said, as the bank is — for all intents and purposes — a partnership between Shiites in Iran (which is predominately Shiite, ) and Shiites in Syria (which has a small Shiite minority). “Effectively it will be looked at as a Shiite bank,” said the source.

But while Banki appears to be bypassing the usually lengthy registration process, the initial public offering (of 23 percent) could take longer as other banks are already in line at the Central Bank. As a result, the source said the bank is unlikely to be operating before mid-2010.

How well the bank will be received, commercially and internationally, will have to be seen. A senior source at a Middle Eastern Central Bank said it would be logical for Banki to be put under the same US sanctions as the parent institutions.

Unless Washington’s relations with Tehran change, the bank will likely face more than a slap on the wrist if it engages in activities the US disapproves of, unlike LloydsTSB in January. The British bank was fined $350 million under US law for falsifying wire transfers from Sudan and Iran, having completed more than $300 million in transfers for Iranian banks Melli, Sepah and Saderat. A further nine EU banks are also being investigated.

“It [wasn’t about] business but solidarity… effectively it will be looked at as a shiite bank”