Lebanon Outlook

Beirut Stock Exchange under pressure to meet regional standards

by Executive Staff
written by Executive Staff

The vision line of Lebanon’s capital markets on new horizons for 2007 is about as unrestricted as a peek across a Scottish Highland moor in a foggy night. The sights are potentially spectacular, but highly elusive.

And that although things had been looking exceedingly good early on in 2006—with a Beirut Stock Exchange that finally sparkled. As Solidere stock and banking values had acquired momentum and were pulling the market forward in the second half of 2005, banks, financial firms, pro-privatization politicians and fast thinkers in the country’s family-owned companies all started looking at the great new idea of the stock market and contemplated new concepts that included listings and private placements.

Gulf investors also paid attention and in January of 2006, the BSE was raging. Share prices shot upwards to reach the $100 range (BLOM Bank) and more than $25 for Solidere. The Audi Saradar Group and BLOM undertook successful capital increases. By early March, investment advisors at a regional financial firm were talking of a lineup of 50 Lebanese companies that could be candidates for flotation on the BSE.

Corrections set in

As Arab stock markets in the first quarter of 2006 woke up to the unrealistic valuation levels that the bull market sentiments of 2004 and 2005 had pushed them to, correction mood set in with a vengeance that affected the BSE along with the GCC bourses. However, the slowing of the BSE was far less painful than that of the GCC exchanges; for example, during the March 14 crash (which was the “Black Tuesday” of regional capital markets but in hindsight proved to be only one day of pronounced losses in a long chain), the BSE lost only 2%, less than any GCC index.

In promising news on the regulatory front, BSE officials proudly announced in early March that the Lebanese cabinet had forwarded to parliament a draft law for the establishment of an independent Securities and Exchange Commission as oversight authority for the Lebanese financial markets. Law and SEC were hoped to contribute significantly to the further vitalization of the country’s stock market.

During the 2005 full-year results season a little later, Solidere surprised with a new income record and announcements of spectacular new land sales. Banking sector results and a strong outlook for summer tourism added their parts to the buoyant prospects.

Thus, while regional market sentiments impacted Lebanon and led some IPO candidates such as Lebanese Canadian Bank reconsider the timing of listing plans, the perspectives of the BSE throughout the first half of 2006 remained substantially better than in many years before.

But war ensued and then, three months after its end—although Lebanese shares recovered better and more quickly from the shock than many had feared—the vagaries of Lebanon’s situation increased rather than decreased in November.

Especially thrown into doubt by this latest crisis were all prospects for new corporate listings on the BSE concerning both private sector companies and privatization candidates.

Already at the end of October, the secretary general of Lebanon’s Higher Council for Privatization, Ziad Hayek, said that a sale of mobile network operator licenses was planned for no earlier than mid-2007 and privatization in the landline telecommunications sector was expected to come as late as end 2008.

With the country stuck in political disputes between pro-Syrian and pro-sovereignty forces, experience of the past eight years in futile privatization debates makes it doubtful that telecommunications and other privatization projects with hypothetically positive capital markets implications—such as the flotation of flag air carrier MEA—will be possible in the first half of 2007.

One also must doubt that known or rumored private sector listing candidates, such as BankMed, Credit Libanais and Lebanese-Canadian Bank in banking, the confectioner Patchi, or some of the major trading companies in the country will find an environment in the first months of next year where they can be confident that initial public offerings would fully deploy their potential.

In this scenario, what flummoxes the future of Lebanon’s capital markets is—of course—the state of affairs brought about by external military pressures, confused world policy strategists and regional power plays, with added doses of local inefficiencies and political obfuscation.

As it is by now a sad and proven local tradition, the regional security and political tensions must be counted on to depress the prices of Lebanese stocks. The BSE may be strongly positioned to enter a new bloom with the return of political stability in this part of the Middle East, but the unanswerable question is at what time this return will occur, making it a matter of extremely chancy political fortune-telling to project stock market trends for the new year.

Another point adding to the forecasting uncertainty is that the Lebanese financial markets culture has had very little interaction with a growing regional financial analytical trend of stock market research and recommendations.

More financial research, please

Over the past year or two, investment advisory firms and finance houses as well as investment banking units in major banks—mostly located in the Gulf region—have greatly increased their production of financial research on listed companies, providing their client base and the interested public with corporate and sectoral analyses ranging from one to sometimes well over 30 pages in size, mostly including fair value assessments and buy, hold, or sell recommendations for the respective stocks.

This trend, in which firms like Dubai’s Shuaa Capital and Gulf Capital, Oman’s BankMuscat and Fincorp, Bahrain’s Taib Securities, Kuwait’s Global Investment House, Jordan’s Amwal, Atlasinvest and Capital Bank, Egypt’s EFG Hermes, Prime Securities, and HC Brokerage are among established or rising stars, has not yet caught on in Lebanon either on the side of research providers or on the side of research targets.

Research departments at institutions such as Audi Saradar, Blominvest, Byblos Bank, Credit Libanais, Arab Finance Corporation and others, have—with a recently increasing tendency—been generating regular economic and stock market reviews covering Lebanon and other countries, but have not published much in terms of local company research.

Thus, Lebanese firms in recent years could only rarely expect to receive coverage from local financial firms. Research by regional companies into individual Lebanese corporations in this small market has also been scarce.

It is hard to find any research by the region’s financial advisory firms that offers fair value analyses and stock recommendations for listed banks such as Audi Saradar, Bank of Beirut, Byblos or BEMO. Even Solidere, one of the region’s most interesting ideas in urban development and real estate corporations, has received only very limited coverage from financial firms outside of Lebanon.

However, a few recent reports with stock analysis and forecasts are in circulation.

Issuing a first company report on BLOM Bank and its operating environment in April of this year—including a few quaint statements such as saying that Lebanon’s banking sector includes “126 banks recognized by the central bank”—Shuaa Capital made an important step in covering Lebanese equities from the Gulf.

The initiation of coverage report identified BLOM Bank as an entity set to grow in size and profitability, with prospects of outperforming the markets in which it operates. Using discounted equity cash flow and relative valuation methodologies, Shuaa at the time arrived at an $89.42 target price for BLOM. This report was followed by an update in mid-November, in which the analysts said that the impact of the July war on the bank “was not that severe, given the magnitude of the crisis.”

Based on the conflict’s limited financial impact on BLOM’s nine-month figures, Shuaa lowered their target price for the stock slightly, to $83.05. However, due to the drop in BLOM share prices since spring of 2006, Shuaa saw the stock as having an upside potential of 22.5% and upgraded its recommendation to “Buy” from “Hold.”

One fairly solitary and bright recent opinion on the share price potential of Solidere originated with EFG Hermes, the Egyptian financial firm that become a stakeholder in Audi Saradar in early 2006.

In what it called “a contrarian play,” EFG Hermes in September issued a valuation opinion that put the long-term fair value of Solidere stock at $22.54. “We go against the conventional wisdom that Solidere will be greatly harmed by the war,” EFG Hermes said, and projected a scenario under which the company would feel a mild war impact and achieve a continuation of land sales, although at a lag.

Based on its valuation of Solidere, EFG Hermes issued short-term “Accumulate” and long-term “Buy” recommendations for the stock.

Politics affects ratings

It has to be added here that the recently strengthened research team at Blominvest Bank, the investment banking arm of BLOM, in September produced a report on Holcim Liban, the leading industrial stock traded on the BSE.

Noting that the share was valued on the high end with a price-to-earning ratio of 25.78, the analysts reasoned that the valuation was comparable to that of cement companies in Egypt and Saudi Arabia and was moreover related to the lack of Holcim Liban shares available to the public. Blominvest issued a buy recommendation on the stock, based on its rising profitability, strong market share and substantial demand forecast for cement in Lebanon over the coming years.

While the BSE outlook for 2007 must prudently be considered uncertain in terms of political developments and the resultant prospects for private sector IPOs and public sector privatization measures, and while political uncertainties weigh on any stock market projections, the available analyst research on three Lebanese listed companies out of the country’s very small pool of traded firms thus provides a uniform view in recommendation of buying these stocks, even at price levels above those which the stocks reached at the end of November.

But the caveats remain. The banking implications of the country’s vulnerable state were expressed by downgrades of financial strength ratings for three Lebanese banks at the end of the year following the despicable assassination of Lebanese industry minister Pierre Gemayel. In its view on Solidere, EFG Hermes acknowledged that by the inclusion of divergent scenarios in their projections, the scenario analysis on the company resulted in high volatility in valuation. And Shuaa Capital said in its positive November research on BLOM, “we assume relative stability on the political front in Lebanon. Any future deterioration to Lebanon’s stability, however, may result in a downgrade to both our forecasts and our recommendation.”

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Lebanon Outlook

Lebanon’s industry leaders call for help but pleas fall on deaf ears

by Executive Staff
written by Executive Staff

While the Lebanese industrialists’ chorus of demands going into 2007 has certainly grown louder following the July-August war, their wish-list has changed only marginally. As 2006 approached, local manufacturers were lamenting the country’s perennial instability and pleading for the government to compensate the sector for lost income following the assassination of former Prime Minister Rafik Hariri. Industrialists bemoaned high energy prices and the inability of local exports to compete at the regional level with low-priced goods from Egypt and Syria, where both power and labor is far cheaper. They asked for the state to prioritize industrial development—which has traditionally taken a back seat to the hospitality and real-estate sectors—and decrease Lebanon’s reliance on imported raw materials and commodities.

Though the grievances are familiar, the fortunes of Lebanon’s vulnerable industrial sector have deteriorated precipitously. In the first half of 2006, exports of manufactured goods rose 51% to a value of $1.3 billion—only slightly more than the estimated $1.1 billion worth of cumulative losses suffered by the entire sector as a result of the war. According to figures compiled by the Lebanese Ministry of Industry, a total of 142 factories sustained material damage during the 34 days of fighting: in the end, the Lebanese economy was as much a target of Israeli aggression as Hizbullah.

In the fall, the Association of Lebanese Industrialists (ALI) presented a proposal to Lebanese and Arab governments to support the sector’s recovery. Alongside compensation, ALI requested that the governments lift customs duties on primary and raw materials, and exempt manufacturers from VAT payments and tariffs. It also asked that debts be rescheduled for industrialists who suffered serious losses during the third quarter of 2006, and that the banking sector extend loan facilities to finance the reconstruction of damaged factories.

Few industrialists were holding out for the government to reimburse them immediately for direct material damages from the war, but they expected the ALI plan to be circulated at the November Reconstruction summit of Arab League finance ministers in Beirut.

Deal on fuel requested

ALI asked GCC countries to sell fuel to Lebanese manufacturers at the same rates they charged domestically for a period of one year. In Saudi Arabia, for example, the domestic cost of diesel is 10% of the global market value. The association also proposed that Arab League members buy Lebanese products to prop up the ailing industrial sector, as opposed to giving direct financial aid in the form of grants and soft loans. ALI reported that of all Lebanon’s trading partners, GCC countries were the quickest to abandon the Lebanese market at the onset of hostilities. Finally, ALI requested that a portion of pledged reconstruction money be earmarked for a fund to make interest payments on outstanding loans.

According to ALI President Fadi Abboud, however, the government did not present any of the association’s suggestions at the conference.

“The government told me to my face, ‘you can’t be a begger and impose conditions,’” he says. “So basically what they are saying is that ‘we are ready to sacrifice Lebanese industry as long as the rest of the Arab world is happy with us.’”

Material losses notwithstanding, ALI is urging Fuad Siniora’s administration to adopt a principled policy on industrialization, and put incentives in place to encourage both local and foreign investment in Lebanon, where manufacturing has long been overshadowed by the more cost-effective environments of its neighbors.

“The war certainly did not make life for us any easier, but at the same time this country is not very friendly towards industrialists,” says Abboud. “We are finding it very difficult to convince this administration to adopt safeguards to protect various industrial sectors, even though we are only asking for measures that are approved by the WTO and the Greater Arab Free Trade Agreement.”

Aside from levying a 20% duty on imported ceramics in September—which only benefits Lebanon’s two tile manufacturers—the government has not imposed any new safeguard measures since most tariffs were abolished in 2000. The other industrial sectors that still receive government protection, including cement, electric cables and wine, do so not for economic reasons, says Abboud, but because “their owners have friends in the administration.”

Gemayel’s plan allowed to lapse

Siniora formally endorsed the “Lebanese Industry 2010” plan presented by late Minister of Industry Pierre Gemayel at the beginning of his term in 2005. The plan included a short-term “100 day” strategy to boost the manufacturing sector. But the 100 days lapsed 10 months ago, and the government has yet to adopt one of the proposed support measures, save what Abboud calls the “Uniceramic” safeguard, in reference to the company with a near monopoly on the tile trade.

ALI is in favor of the safeguard for ceramic manufacturers—whose local market share has been progressively eclipsed by cheaper Egyptian imports over the past three years—but it is demanding similar protection for other industries in 2007, particularly those that are energy-intensive.

Manufacturers of products such as plastic, glass, and paper—all of which require huge fuel expenditures—were already in an unstable position before the summer war. Now they are in dire straits, says Waji al-Bizri, the vice president of ALI. The Ministry of Industry figures show that local food and furniture manufacturers and construction companies bore the bulk of direct material damage.

“All sectors are in need of help right now,” Bizri explains, “the market has shrunk and customers are not willing to spend money, and the exporters are suffering because many of them lost trading partners during the war.”

Raja Habre, director of the EU-funded Euro-Lebanese Center for Industrial Modernization (ELCIM), agrees that restoring broken chains of production, both at the local and regional levels, will be one of the most significant hurdles for businesses in the new year. In addition to reestablishing regional trade with lost partners, industrialists have to remedy disruptions in local trade from a decline in production levels, damaged transport routes, and failure to collect and repay existing debts.

The destruction of the Maliban Glass Factory in the Bekaa valley, says Habre, is an example of collateral damage that has reverberated across the entire economy, since the company supplied bottles to manufacturers of goods ranging from food to pharmaceuticals.

“I think they are recovering,” Habre says, “but remember since the blockade was lifted there has been a foul mood amongst business leaders, and neither consumers nor manufacturers are feeling confident in the current political situation.”

Indeed, a lack of confidence was identified as one of the most damaging immediate consequences of the conflict, according to a study released in November by Infopro in cooperation with the Lebanese Finance Ministry. Some luxury retailers relocated their offices to the Gulf region or opened up branches elsewhere in the Arab world in anticipation of heightened political tensions. The report also expects a rise in unemployment levels since many factories have been forced to lay off workers due to a dip in consumer spending.

Before the resignation of six cabinet members, ALI had threatened to take legal action against the current administration at Majlis al-Shura if it failed to respond to its demands by Nov. 20, 2006. The association had planned to then hold a general assembly meeting and vote on how to proceed. Abboud said they would debate a series of options, including shutting down factories and “taking to the streets.”

Now that similar threats from Lebanon’s largest opposition party are paralyzing the government, the ultimatum is off the table and local industrialists are pleading once again for an end to political instability, which Bizri claims is the main deterrent to foreign investment, and the biggest obstacle facing the sector in 2007.

“The negative attitude from all political parties is bringing the entire business environment down.” Bizri says of ALI’s current demands on the government, “We are asking political leaders to reach an agreement, otherwise many institutions may be forced to shut.”

All is not negative, however

Habre paints a rosier picture of the mood among local manufacturers. He says many of ELCIM’s clients are continuing the projects they began before the war. So Lebanese exports can claim a larger share of global trade, industrialists are upgrading production methods and accounting procedures to meet internationally-recognized standards.

But the rising costs of moving goods in and out of the country, due to damaged transport routes and high energy prices—compounded by more electricity rationing—will continue to put pressure on Lebanon’s manufacturing sector, reports Infopro. A lack of available labor will also hinder recovery, since most foreign workers fled the country this summer. Though “replacement of foreign labor with local labor is a medium-to-long-term possibility,” according to Infopro, it is not a viable short-term solution.

Industry not a priority

“There are plenty of liberal economies led by governments that understand the importance of industrial development, but this is clearly not a priority of the current government,” Abboud says. “We are the people that can create enough jobs to stop this crazy immigration where we are losing the best we have.”

Abboud’s claims are supported by industry’s performance: despite the lack of government support, the industrial sector has become a linchpin of the Lebanese market: in the first half of the year, manufactured products accounted for 68% of total exports and 21% of GDP. The consequences of a poor second half of 2006 for the manufacturing sector—and, in the current situation, likely underperformance in 2007—will have a significant negative impact on the Lebanese economy.

As Executive went to print, Lebanese industry was struck another blow through the assassination of Minister of Industry Pierre Gemayel. Although Abboud (and indeed, the industrial sector at large) has been consistently critical of the Lebanese government’s policies towards industry, Gemayel was the one minister he identified as a real advocate in conversations with Executive over the past year. Industrialists felt Gemayel took his portfolio seriously, and recognized his tireless efforts in support of their embattled sector. The loss of such a vital ally on the eve of 2007 puts the future of Lebanese industry on ever more uncertain ground.

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Lebanon Outlook

Lebanon’s insurance industry survives war intact

by Executive Staff
written by Executive Staff

Lebanon’s insurance companies passed through the 2006 war between Israel and Hizbullah without having to pay crippling amounts for war-related claims, because this type of coverage is not a usual purchase option. (In any country, a house caving in beneath the impact of a force majeure is not calculable, and ineligible for cover under a standard home owner’s policy.)

In fact, the latest global insurance industry research by reinsurance giant Swiss Re positions Lebanon at a total premium volume of $664 million, up from $580 million in 2004, and an insurance density—the amount per capita invested in premiums—of $185.6, distributed at a ratio of 70:30 between general insurance and life insurance.

This compares favorably with insurance density of $54.2 in Jordan, $57.1 in Saudi Arabia and $113.7 in Oman. Lebanon is on equal footing with Kuwait ($185.5) in terms of overall insurance density, however the distribution between general and life insurance in Kuwait leans significantly more towards general insurance. With $414.2 and $442.3, the UAE and Qatar showed far higher insurance density than Lebanon but in terms of life coverage, Lebanon is still stronger than Qatar, whose citizens spent just $22.2 last year on life products, most of which are shunned under Islamic religious law.

Insurance growing globally

On global scale, insurance premiums last year amounted to $3.426 trillion, an increase of 3.9% in real terms from the previous year. Industry profitability in the life segment improved compared with 2004 and general insurance remained very profitable, according to Swiss Re. The reinsurance company added that non-life premium growth in 2005 was slow and ranged below GDP growth in most countries.

Swiss Re computed an overall premium volume of $16.3 billion for the Middle East and Central Asia in 2005, up 5.8% on the previous year. The realm accounted for a measly half percent of the world insurance market, even though Swiss Re conjoined the two geographic areas in its statistics. With 1.45% insurance premiums as percentage of GDP, it was the tail runner of all regions listed in the report in terms of insurance penetration. Lebanon’s 2005 insurance penetration was quoted as 3.15%.

On the national level, the November 2005 research figures by Swiss Re assess Lebanon’s premium production at $577 million in 2004, comprised of $180 million in life and $397 million in non-life insurance. With an average of 15.5 % annual growth over the five years 1999 to 2004, the 9.3% inflation-adjusted increase between 2003 and 2004 represented a decent result for the year 2004, and expectations for 2005 had initially been for good continued development.

This performance is not bad by regional standards, but it means that the country’s insurance industry is still not on a growth trajectory that would put it in reach of an adequate net for protecting society and individuals against calculable risks.

It should be added here that Saudi Arabia has (albeit with a delay of about 30 months since the presentation of its advanced insurance law) recently issued several licenses for insurance companies to operate in the kingdom and can expect some real sector growth. Syria is another country where authorities moved ahead with licensing new insurance companies and three Sharia-compliant insurance firms are scheduled to go operational there early next year. All three have been established as joint venture companies between Gulf-based companies and Syrian shareholders.

As for the inactive side of the Lebanese insurance industry in 2006, it suffices to say that insurance industry association ACAL is still advertising Beirut Rendez-Vous, a regional gathering of industry members, as “upcoming” on its website: the event actually took place—and flopped badly—in the spring of 2005.

Sector survives political tumoil

But under Lebanon’s current political climate, it is admirable enough that a sector such as insurance can sustain its position, given the suppressed purchasing power of individuals and the cash flow situation of many businesses, whose cash reserves have been depleted by the summer war and the economic repercussions of the fourth-quarter political crisis, which many predict will lead to serious debt rescheduling issues and a wave of bankruptcies in the first quarter of 2007.

From a GCC vantage point, the Lebanese insurance industry appears advanced, well-regulated and overall more open and private sector-driven than insurance sectors in other Arab economies. However, not terribly much is known about the Lebanese insurance sector outside a narrow group of local and regional specialists. Information circulating regionally and internationally about the sector relies predictably on reports produced by these specialists and often contains dated and vague performance numbers, with unaudited 2004 results being cited. The sector also still requires internal development, in order to march forward into alignment with global best insurance practices.

Thus, when Kuwait-based Global Investment House issued a report on the Lebanese economy in November, it said, “We expect the insurance sector [in Lebanon] to grow in the future, provided we see political stability in the country and thriving economy; because we see a great scope in terms of market for the life insurance and until we have stability in country and generally well going economy, it’s hard to expect to have higher sales of insurance policies.”

It carries a very limited risk indeed to say that these issues will be as valid in 2007 as they were in 2006.

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Lebanon Outlook

Lebanon’s media has tough year but confident of turnaround

by Executive Staff
written by Executive Staff

Last year, Lebanon’s media industry went on a proverbial rollercoaster ride far more thrilling and precarious than anything America’s major theme parks could possibly dream up. Next year looks to be equally action-packed, as the sector struggles to make up for $38.7 million in losses sustained during Israel’s month-long war on Lebanon, overcome low advertising revenues and face up to increased competition domestically and regionally.

In business terms, the summer war could not have come at a worse time for the media industry—as indeed for the whole economy—with certain Lebanese TV channels planning rebranding and new print publications launching that would have helped retain Lebanon’s position as a media hub in a region where media growth is amongst the highest in the world. Competition is increasingly cut-throat among the 200-plus channels vying for limited ad spending.

City TV, formerly NBN, had planned to revamp its broadcast schedule and New TV was looking for investors prior to the war. City TV, which sustained $1.25 million in damages, is now gradually implementing changes and is expected to relaunch in January, depending on funding, and New TV, which lost $2.65 million, is still in the same boat as it was in July. Murr TV’s (MTV) planned relaunch was also scuppered by the conflict and is slated to start next year.

Investors fleeing

Production houses saw investors and clients scurrying for the door during the war, and confidence in the lucrative sector—production houses generate more revenue than TV channels—has taken a beating, particularly in regard to foreign investors that had come to Lebanon in droves in recent years to take advantage of the country’s varied geography and educated populace.

Newly-launched magazines such as entertainment guide Time Out Beirut also ceased publication as the country’s reputation as a nightlife and beach hot spot slid off the map. Talks are still underway as to whether TOB will grace newsstands again, the publication having suffered considerable losses after bringing out only four editions. Other publications were also hit and the country’s sole English-language newspaper, The Daily Star, stopped publishing The International Herald Tribune (IHT) and slashed staff salaries by 30%. The IHT is rumored to return in January.

However, although all media outlets sustained financial losses and in certain cases severe damages—Al Manar TV’s studios were leveled by Israeli warplanes—viewing figures soared when the world’s eyes were directed on the July-August conflict. Al Manar’s popularity ranking, for instance, went from 83rd in the Middle East to the tenth slot between July 15-28 according to Israel’s Market Research. Likewise, newspapers have seen increases in readership as people focus on the country’s fractious politics in the months following the ceasefire.

The snag of course is that politics don’t generate advertising revenue. According to ArabAd there was a 40% drop in ad spending during the war; with the economy limping along on half empty, advertising, like consumer spending, is still down despite a tentative peace.

“The best guy to predict the future is a tarot card dealer,” quips Dani Richa, Chief Creative Officer for Impact BBDO. “He’s probably more accurate than me in a country like Lebanon, as the future doesn’t depend on heads of industry, clients or consumers.”

In the absence of prophetic powers, the media is groping in the dark as to what next year will hold.

“The market is operating on a day-by-day basis and advertisers are acting cautiously,” confirms Roger Darouni, Executive Marketing Director for LBC.

But as Richa points out, “Everyone is so committed, over-invested and paid such dear prices that there is no choice but to continue.”

And continue the media and advertising sector must.

Crucially, major production houses have remained committed to Lebanon. Music TV powerhouse Rotana is still operating out of Lebanon and has just opened a Rotana Café in downtown Beirut, although the network moved two channels to Cairo before the war. Saudi Arabia’s MBC, however, said production had actually increased.

“We are staying here in Lebanon. Nothing has changed and we are increasing production with eight shows in Lebanon, two in Dubai and four in Cairo,” says Nadine Tarabay, Commercial PR Manager at MBC Lebanon.

Nevertheless, with foreign investors shying away from Lebanon, knock-on beneficiaries of the TV production business, like equipment rental companies, are feeling the pinch. “Rentals are down, and productions have been postponed. Maybe next year things will pick up,” says Elie Battah, General Manager of Audioland.

Going Orange

Despite a fairly gloomy outlook for the media in general and the instability caused by the political situation, one upcoming media outlet has decided to enter the fray in a rather unusual and daring way.

As can be seen on billboards throughout Beirut and the surrounding areas, Orange TV, or OTV, plans to raise funds through a joint stock company, Al Lubnaniah Lil I’lam, that is open to the public. Starting with a paid-up capital of $2 million, OTV plans to raise $40 million via four million $10 shares to establish a terrestrial and satellite channel, and a holding company that will include a production house that will be a joint venture with France’s Societe Francaise de Production (SFP) if negotiations are finalized.

To Lebanon observers, the colorful name of the channel will immediately be associated with a political party—former General Michel Aoun’s Free Patriot Movement (FPM). And true to form, Aoun came up with the idea of a channel “For the People, By the People” through collective ownership.

So will the channel be yet another addition to Lebanon’s highly politicized media landscape where every channel, radio and newspaper has a political connection of some form or another?

Roy Hachem, the CEO of OTV, says it will not be. “Aoun won’t influence the channel, and it will be independent of the party. I know it’s hard to prove, we need to start transmission and broadcast news,” he says.

What about the color though? “People may ask about the color, as orange, but it’s the only [political] link we have and a color the publicists wanted,” Hachem explains.

Media observers are not as convinced however. “I think the station is portraying a very specific political point, which is clear from the color and symbolic,” says Habib Battah, Managing Editor of Beirut-based Middle East Broadcasters Journal. “I think it will follow a pattern, of a political constituency for a station. There is no reason to believe it will be different, as when you open the first page of their brochure there is a photo of Aoun.”

Hachem assures it will be independent and objective in its delivery of news. “We want something like the BBC. I want to hear people saying—even if not good for the FPM—‘I heard it on OTV.’”

Hachem also points to the different categories of shareholders as a further example of how the channel is not being solely supported by FPM followers.

“Some are looking for a dream, others are serious investors. We have people buying $300,000 to $500,000 of shares,” he says. Supporters, on the other hand, tend to buy between 100 to 300 shares.

As money rolls in through the IPO—$10 million was raised by the end of November—the challenge for the channel will be to attract a broad array of viewers and generate advertising revenue when it launches in 2007. As Hachem points out, OTV already has a head start in terms of guaranteed viewers through shareholders and political supporters, something the advertising industry is equally aware of.

Power to the people

“Letting people own TV creates loyalty before the station even starts—a smart model,” advises Richa. “The challenge is to attract people that don’t agree politically but agree with entertainment.”

But for OTV to grab a 10% slice of the Arab advertising market, as their investment guide says the channel is aiming for, OTV will have to find a careful balance between Lebanon and regionally-orientated content.

“To live in Lebanon as a TV channel, you need half subsidized by a satellite arm, and although OTV might be successful here it’s a lot more trying to compete on a pan-Arab scene with budgets of tens of millions of dollars,” says Richa.

While Lebanese TV stations compete for just $35 million in TV ad spending, other Arab countries advertising revenues are skyrocketing, with Qatar, for example, soaring 60% in the first half of 2006 to $101.5 million for all ad spending. Lebanon only accounts for 5% of the region’s $2 billion ad market.

To remain commercially viable, OTV aims to acquire 30% of Lebanese viewers and, in the long-term, gain 20-25% of the advertising market. To do so, OTV will have to bite into the ad revenue of LBCI and Future TV, which control around 65% of the country’s advertising expenditure.

LBC, however, seems unphased by the prospective competition. “OTV will certainly capture viewership from different TV stations, but LBC’s market leadership won’t be affected,” said Darouni.

He thinks TV ad spending will increase if the political situation stabilizes, a factor all channels, and OTV in particular, will be banking on for 2007.

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Lebanon Outlook

Obituary- Pierre Gemayel 1972-2006

by Executive Staff
written by Executive Staff

Pierre Gemayel, the 34-year old Minister of Industry, who was gunned down in broad daylight in Jedideh in East Beirut on November 21, was the fifth member of one of Lebanon’s most prominent Maronite dynasties to meet a violent, untimely death. Gemayel, who won a parliamentary seat in 2000 as a representative of the Phalange Party, the once dominant Christian faction established by his grandfather in the 1930s, became the youngest minister in the 2005 Siniora government. As the latest incident in a string of violent attacks targeting anti-Syrian figures in Lebanon over the past two years, the assassination will arguably have more influence on local politics than Gemayel had during his lifetime.

Nonetheless, during his short tenure as minister of industry in a country whose economy is driven by the service sector, he accomplished a great deal, and will be remembered equally for his commitment to the principles of sovereignty and freedom and Lebanon’s industrial development. In contrast to his predecessors, Gemayel believed that Lebanon could be industrially competitive at both the regional and global levels. At just 33-years old, he came to office with a clear-cut strategy to promote the local manufacturing sector. Before making any move in his new post, Gemayel drafted the “Industrial Outlook 2010 Strategy,” which included both a long-term and 100-day plan for the sector.

Strategy of increasing competitiveness

Along with an overview of the obstacles hindering Lebanon’s industrial growth and a vision for the sector in 2010, based on research and feasibility studies, the strategy focused on increasing the competitive advantage of local exports in the international market. The plan outlined a set of specific objectives involving the modernization of production techniques and the introduction of internationally recognized quality management standards, as well as the creation of strategic alliances with regional and European trading partners. Also, he included target dates for their completion.

Though the plan was endorsed by Fuad Siniora’s administration, Gemayel was not able to fully implement Industrial Outlook and its 100-day plan during his short lifetime. Under his leadership, the ministry did successfully lobby the government to introduce the first industrial safeguards since 2000, when the majority were abolished, to protect local tile manufacturers.

Gemayel was also instrumental to the growth of one of Lebanon’s most well-known exports, wine. He had signed a decree along with the Agricultural and Economy Ministers supporting the creation of a National Institute of Vines and Wines, a necessary prerequisite for six-year old legislation regulating wine production in Lebanon to be passed. The bill was finally going to be presented to cabinet ministers in November, but the resignation of the Shia ministers from Parliament and Gemayel’s subsequent assassination stalled the introduction of a modern wine law yet again.

Dogged champion of manufacturers

Though the July-August war and the ensuing political stalemate delayed many of Gemayel’s plans, he had been a dogged champion of manufacturers over the past three months. Immediately following the August 14, ceasefire, the ministry developed a three-point plan in to support the recovery of Lebanon’s industrial sector. The first step of the strategy, a comprehensive damage assessment, was completed in November, and the ministry had moved on to the second, interim solution phase, which sought to temporarily relocate production of destroyed factories to other facilities, and lobby the government to provide industrialists with tax relief.

Despite Gemayel’s assassination, the industrial sector will still push ahead with the third and potentially most controversial aspect of the strategy, loosening existing legislation governing industrial production to allow manufacturers more room to maneuver during the recovery process.

For Lebanese manufacturers, the late-minister’s most lasting legacy may be his Industrial Outlook 2010, which will hopefully outlast its author and serve as a model for the sector’s development.

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Levant

Tough choices

by Executive Editors
written by Executive Editors

Turkey’s farms face reforms

With a 2007 deadline looming, the Turkish government is desperately trying to overhaul the agricultural sector in time to receive structural funds from the EU. By 2007, the EU candidate country is expected to have a system in place to disburse some 9-10 billion euros ($11.4-12.66 billion) to both farmers and state agencies involved in agriculture. Efforts to transform the sector, however, are likely to have far-reaching and potentially serious consequences for Turkey, as agriculture continues to account for around one-third of employment and is particularly important in often-impoverished rural areas with little else in the way of industry.
According to the most recently released figures from the Turkish Statistics Institute, 6.77 million workers, or 29.3% of the total Turkish workforce, were employed in the agricultural sector as of June 2006. Perhaps even more troubling, however, is the small size of Turkish farms, which limits productivity: 65% of farms are 0-5 hectares, while 94% are smaller than 20 hectares, making Turkish farms significantly smaller than those in EU member states. The smaller the plot of land, the harder it is to justify the expense of new equipment and technology, making modernization difficult.

Upsetting the applecart
Wages in the sector, however, are rising, albeit from a low base, with the average daily wages of a seasonal agricultural laborer increasing to YTL13.62 ($9.02) for women, up 14.26% year-on-year, and YTL18.06 ($11.96) for men, up 16.82%. Permanent workers in the sector have also seen a salary hike of late, with the average monthly wage now at YTL314.41 ($207.93) for women, up 9.89% year-on-year, and YTL403.49 ($266.74) for men, up 11.39%.
Government efforts to harmonize the local agricultural sector —a vital economic lifeline in many poorer areas of the country—in line with EU standards could upset the system, sparking a large increase in rural unemployment and forcing millions of farm laborers to head to cities in search of jobs. According to some independent estimates, the agricultural reforms could cut the industry by as much as 40%, leaving roughly 2.5 million people jobless.
The knock-on effect of reforming agriculture will likely be a wave of urban migration, straining employment, housing and social services in Turkey’s already-crowded urban centers. With a national unemployment rate of 8.8% as of June 2006, rising to 11.2% in urban areas, it is unclear where these largely unskilled and poorly-educated workers will find jobs.
As part of the reform effort, the government has taken aim at the overproduction of particular crops, especially hazelnuts, by introducing quotas. Turkey is the world’s largest producer of hazelnuts, accounting for some 70% of total production. With backing from the World Bank, the state has tried to reduce the area under hazelnut cultivation by 100,000 hectares through cash incentives, though the project has so far been less than a success: to date, only 885 hectares have been converted to other crops.

Far-reaching consequences
The government is also working to curtail the practice of farmers’ divvying up land among their children, which has resulted in ever-smaller plot sizes, limiting productivity and modernization. In order to raise the average size of Turkish farms, the government is now pushing farmers to consolidate fragmented family holdings, making it a requirement for EU funding. While this may spur consolidation, the government is also running a risk, as farmers who refuse to merge their holdings—likely the worst-off farmers most in need of funds—will be barred from receiving EU money.
Already, state subsidies on seeds, fertilizer and fuel are being cut, with total subsidies scheduled to fall from $6 billion to $2 billion a year. While these cuts will in theory be more than made up for by funds from Brussels, farmers will first have to qualify in order to receive EU money, a process which may create problems.

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Levant

Back to school in Jordan

by Executive Editors
written by Executive Editors

Prepping the next leaders

This month, while much attention was focused on the landmark opening of a branch of the Sorbonne in Abu Dhabi, a potentially more daring educational initiative was taking form in the Middle East, as Jordan’s King’s Academy officially began accepting applications for the 2007-08 academic year.

Modeled on New England prep schools
King’s Academy, which is modeled after the elite preparatory schools of New England (in particular, Deerfield Academy, where King Abdullah graduated in 1980), has given itself the ambitious mandate of introducing the prep-school ethos to the Arab world, blending rigorous American-style education and community life with Arab culture and values. More ambitious still, through a strong financial aid program—15% of tuition fees will go towards scholarships, and approximately 30% of the student body is expected to receive partial or full need-based financial aid—King’s Academy plans to host a diverse student body, where class lines and other divisions are blurred in favor of tolerance, respect, and coexistence.
No small undertaking ideologically, King’s Academy also represents a significant financial investment. The school cost around $62 million dollars to build, with King Abdullah, the founding donor of King’s Academy, contributing $7 million and a 575-dunum site southwest of Amman.

The school cost around $62 million dollars to build


The idea behind the Academy came from the King himself, inspired by his experiences at Deerfield Academy in Massachusetts. Several years ago, King Abdullah stayed with then-headmaster of Deerfield Eric Widmer while in town to deliver the school’s commencement address. “I knew he was thinking about [developing a school] before he brought it up,” recalls Widmer, whom Abdullah subsequently asked to serve as founding headmaster of King’s Academy. Although Widmer had planned to retire in 2006, he found the offer irresistible—partially because, by destiny or coincidence, the Middle East had always been close to his heart. Widmer was born at AUH; although his family moved away while he was still an infant, he has always felt a strong attachment to the Arab world, and he and his wife have been regular visitors to Lebanon.
King’s Academy is gleaming on paper, boasts a beautiful campus and has already begun recruiting an enthusiastic, elite faculty. However, initial success may be an uphill battle: in addition to the standard array of challenges facing a new school, King’s Academy will have to sell the prep-school concept to a wary Arab audience. In a region where children often remain in their parents’ homes until marriage, the boarding aspect in particular is likely present difficulties. A King’s Academy education also comes with a fairly high price tag—$28,000 a year for full-time boarders, $25,000 for five-day boarders, and $16,500 for day students. Although these costs are comparable to those of the New England prep schools King’s Academy is modeled on, it is significantly higher than most local fees.

Culturally conscious rules
The absence of existing prep-school culture in Jordan creates further challenges. While touring King’s Academy’s state-of-the-art athletic facilities—which would rival those of any small American college—Executive asked Widmer whether the students would be able to participate in competitive athletics, which form a core component of the traditional prep-school experience.
“Oh, certainly!” replied Widmer. Hearing his own response, the headmaster chucked. “That is, as soon as we figure out who our competition is.”
Nonetheless, King’s Academy staff are confident that they can meet these challenges. The dormitories will enforce a far stricter separation of genders than the school’s American siblings: no boys will be allowed into the girl’s dorms, and vice versa, under any circumstances; single female faculty members will live in every girls’ dorm, providing around-the-clock supervision, and single men and faculty families will live in the boys’ dorms. While costs are high, they are all-inclusive, covering everything from uniforms, meals and books to health insurance and a school-issued laptop computer; furthermore, need-based financial aid will ease the burden for lower-income families.
As for the absence of rival schools, King’s Academy hopes to organize both athletic and academic leagues and competitions throughout Jordan, initiatives that promise to benefit not only the Academy’s own students, but their peers across the country.

Preparing for university
Finally, the Academy believes that its commitment to academic excellence, fostering intellectual curiosity and promoting coexistence in an Arab setting will appeal to parents and students alike. For the many families that already consider boarding schools in Europe or the US as options for their children, King’s Academy may offer a strong alternative far closer to home and in an environment more sensitive to their needs.

As with any secondary school, the ultimate test will come when its first class reaches the cutthroat college-admissions stage


As with any secondary school, the ultimate test will come when its first class reaches the cutthroat college-admissions stage. King’s Academy students will be groomed for the best universities in the Arab world, the US, and Europe; actually placing them in these elite institutions will be essential to gaining currency and trust among prospective parents and admissions officers alike. However, as King’s Academy will only admit first- and second-year students in 2007, it will not graduate its first class until 2010.


Fortunately, timing is on the Academy’s side. As the brainchild of King Abdullah, it is widely expected that he will send his children to the school; the eldest, Prince Hussein—the likely heir to the Jordanian throne—would matriculate in 2008. The King’s vote of confidence will obviously carry tremendous cachet—as likely will the prospect, especially to Jordanians, of placing their own children in such an intimate setting with a future monarch.
Overall, the prospects for King’s Academy seem encouraging. And in the Middle East in particular, a new generation of creative, tolerant, independent-thinking leaders could not be more welcome.

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Levant

Smoke Smuggling

by Executive Contributor
written by Executive Contributor

The invasion of Iraq opened a Pandora’s box of troubles that have been felt far beyond the country’s borders. One less noted consequence of the invasion has been the emergence of Iraq as a regional hub for smuggled cigarettes, exacerbating a regional problem and further denting the coffers of finance ministries from Amman to Tehran.
“Illicit trade is an issue in the region. Everybody has some brand affected,” said Emile Moukarzel, Philip Morris International’s (PMI) area manager for Lebanon, Jordan and Syria.

Smuggling cigarettes nothing new
The smuggling of cigarettes is nothing new, with the global trade in contraband cigarettes equivalent to 6% of yearly sales, or 355 billion puff sticks according to Tobacco Control. But in a region where the smoking incidence is among the highest in the world—over 50% of the Lebanese and Syrian adult populations are smokers—and wages are low, there is a ready market for contraband cigarettes.
Nasser Qudah, British American Tobacco’s (BAT) Corporate Regulatory Affairs Director for the Levant and Yemen in Amman, said that over the past few years Iraq has become the region’s smuggling hub with over 300 brands of cigarettes available in the beleaguered country, including eight different packets of BAT’s Kent brand manufactured in various locations around the world.
The problem stemming from Iraq is not so much counterfeit cigarettes but smuggling, as taxes are low enough to make Iraq a favorable export market, said Paul Oakley, BAT’s Beirut-based head of demand chain for the Levant and Yemen.
With one truck container carrying 900 master cases—equivalent to 9 million sticks—selling for as much as $1 million, smuggling is a lucrative business.
BAT estimates that contraband cigarettes account for between 5% to 6% of Jordan’s $500 million cigarette market, with 10% of all smuggled cigarettes BAT brands and the highest illicit brands PMI followed by Altadis.
Contraband cigarettes enter Jordan via Syria or directly from Iraq, with some cigarettes returning to where they landed in the Middle East.
“Some products go to Aqaba, are smuggled into Jordan, then sold in Iraq, and then smuggled back into Jordan,” said Samer Fakhouri, vice chairman and general manager of Jordan’s International Tobacco and Cigarettes Company.
There are no estimates on how rife counterfeit and smuggled cigarettes are in neighboring Syria, but observers think the figure is high due to minimal government legislation and enforcement, particularly in regard to street vendors.
“We have a big problem with illegal imports and counterfeit brands from Iraq,” said Dr. Faisal Sammak, director of Syria’s tobacco monopoly, the General Organization of Tobacco.
Bucking assumptions that counterfeit cigarettes are mainly imported brands, the Syrian press reported cases last year of counterfeit Al Hamraa cigarettes, the country’s most popular brand but also one of the cheapest.
Syria and Jordan’s struggle to combat smuggling pales in comparison to Iran’s battle, with the government admitting last year that the cigarette black market accounts for a staggering 70% of all cigarettes consumed, amounting to over $1 billion in illegal trade and hundreds of millions of dollars in lost tax revenue. Iran is also pointing the finger at Iraq as the primary source of its smuggling problems. To limit cigarettes smuggled to Iraq, companies have cut down on the number of cigarettes sold to the Aqaba Special Economic Zone, a duty-free haven, and increased local production.

Flooding the market?
BAT said it has increased the price of its Viceroy brand in Iraq to the same as in Syria to discourage smuggling. Companies have also started brand protection groups (BPG) to increase public awareness about the dangers of counterfeit products, legal trade and loss of revenue to governments.
However, there are claims that tobacco companies are deliberately shipping in extra quantities of cigarettes to Aqaba and other regional ports to spur sales. By encouraging smuggling, observers say, tobacco companies are also able to pressure governments not to raise tobacco taxes, arguing that lower taxation curbs illicit sales.
Major tobacco companies have been investigated for involvement in cigarette smuggling in the past decade in Europe, North America, Colombia and Honduras.

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Levant

Soft drinks sales

by Executive Contributor
written by Executive Contributor

Surge in Syria

Syria’s soft drinks market is experiencing record growth, expected to surge 17-18% this year compared to last year’s 12% growth, and Pepsi’s market share continues to grow after just over a year of operation in the country.
Syria took tentative steps last year to open up its drinks industry to foreign competition, with Pepsi and Coca-Cola taken off a blacklist and foreign mineral water imports allowed for the first time. Pepsi and Coca-Cola were blacklisted along with other US and Western firms more than 50 years ago by the Damascus-based Bureau for the Boycott of Israel, which is connected to the Arab League.
Pepsi, which is franchised to Syrian drinks and industry giant Joud, launched in August of last year with an aggressive marketing campaign to overcome any possible anti-American sentiment associated with the brand. “We didn’t give it a chance to be a foreign brand. We made it known it was bottled here, and used the same marketing strategy we did for 7-Up,” said Lilas Rabbat, a Joud marketing manager.
Pepsi’s entry into Syria’s $100 million market has taken the sector by storm, driving growth by up to 6% from last year’s 12% growth and 2004’s 6.5% growth, according to IMES.

Highly fragmented
The soft drinks market is highly fragmented between five major brands and around 100 smaller brands, usually of the returnable glass bottle variety, which account for around 10% of the market.
The market is divided between Cadbury-Schweppes/Salsabil at 30%, which has five bottlers and includes brand Canada Dry, Ugarit at 15%, Master-Cola at 8%, and RC Cola with 4% market share.
But due to strong sales of Pepsi and 7-Up, Joud is rapidly claiming the lion’s share of the market, expected to increase from 47% market share to 50% by year end, according to Rabbat.
Coca-Cola, on the other hand, is not faring as well in the Syrian market, despite being taken off the blacklist. With no bottling plant, Coca-Cola is imported from Jordan and Lebanon, and sales account for less than 2% of the market.
Affecting sales is the price of a can of Coke, which sells for 20SP ($0.40). “Price is very important here,” said Rabbat, where low-level government employees earn as little as $100 a month. Cans of Pepsi, like any other soft drinks, sell for 15SP ($0.30).
Management problems with the Coca-Cola franchise have also affected a potential launch. Coca-Cola was run by the son of the recently disgraced former Vice President Abdel-Halim Khaddam, who is now in exile in France following an outburst against President Bashar Assad at the end of 2005. His son has reportedly sold his shares in the franchise to a Saudi investor. Coca-Cola is expected to launch local production in the coming months, although the company would not confirm this.
“If Coca-Cola starts manufacturing, they are not to be underestimated. They have learnt from Pepsi’s experience how to market here. They will copy us,” said Rabbat.
But as people associate Coca-Cola with America more than Pepsi, Rabbat points out, Joud is at a marketing advantage.
2001 boycott campaigns throughout the Arab world in a show of solidarity with the second Palestinian uprising saw Coca-Cola lose market share and Pepsi control 75% of the Middle East market, which it has retained and expanded with its presence in Syria.

‘Give me a Pepsi’
Pepsi’s strong marketing in Syria has also had other impacts. “A year ago, people would have said, ‘Give me a cola,’ but now they say Pepsi. They say it tastes better than the others,” said shopkeeper Manaf Abdulghani.
Syria’s mineral water market is also diversifying. Until last year, bottled water was controlled by the state, with 51% of market leader Balkein owned by the government. With the government allowing foreign water imports for the first time, there has been a deluge of players entering the market from Lebanon, along with Nestle Pure Life from Jordan and Masafi from the Gulf.

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Special Report

Clipped wings

by Executive Contributor
written by Executive Contributor

Airbus postpones Emirates’ A380s again

With Airbus facing well-documented difficulties in delivering its A380 passenger aircraft, Emirates Airline has reached a deal with Boeing to meet its aggressive expansion plans for its cargo business. The move comes at a time when Abu Dhabi’s Etihad Airlines has been actively adding new planes to its fleet and continues to expand service to an increasing network of international destinations.
On October 8, Emirates, the Dubai-based national carrier, signed a contract for 10 Boeing 747-8Fs, the manufacturer’s new freight series. Also included in the agreement was the option of buying ten more aircraft in the future, bringing the combined value of the deal to Dh20.54 billion ($5.6 billion).

Emirates and Boeing flying high
Emirates and Boeing signed a purchase agreement for the 747-8Fs back in July at the Farnborough Air Show, as part of the Dubai-based airline’s desire to expand its cargo tons as rapidly as its passenger numbers.
“Developing this side of our business is elemental to Emirates maintaining a leading position amongst the world’s airlines,” said Sheikh Ahmad bin Saeed al-Maktoum, the chairman of Emirates Group and president of Dubai Civil Aviation Authority.
Boeing brought its 747-8F to the market in late 2005, billing it as a lower-cost, quieter and environmentally-conscious option for air cargo. With a capacity of 140 tons, it has 16% more capacity than the Boeing 747-400F. The 747 F series is already the market leader with over 50% share in global air cargo.
With the 747-8Fs, Emirates SkyCargo, in charge of airfreight for the airline, will add to a swelling order log for Boeing.
The deal with Emirates comes only a week after Boeing archrival Airbus announced it will again delay the delivery of its A380 Superjumbo series.
On October 3, Airbus told Emirates they would have to wait an additional 10 months from the previous delivery date before starting to receive the first of its A380s. It is the third announced delay for the Superjumbo, which already has 159 orders for the 555-seat aircraft on the books.
Expecting more than 40 of those aircraft, Emirates is showing its frustration.
“Emirates has been advised by Airbus of a further 10 months delay to its A380 program, which means that our first aircraft will now arrive in August 2008. This is a very serious issue for Emirates and the company is now reviewing all its options,” said Tim Clark, the president of Emirates Airline, in a company press release.

‘This is going to cause a huge problem’
Emirates’ senior vice-president for corporate communications, Mike Simon, told local Emirati news, “On top of the previous delays, the new 10-month delay is going to cause a huge problem for us.”
The airline, which currently flies to 85 global destinations with 98 jets, hinges its expansion timetables on when its airplane orders will be delivered. With more than 100 wide-body jets ordered and awaiting delivery, Emirates has plans to significantly increase the frequency of its flights to its existing network, along with opening new cities.
As Maurice Flanagan, vice-chairman and group president of Emirates, said, “We don’t buy a single aircraft without knowing in advance where it is going to go to, and knowing that it will be profitable on those routes—including those 45 A380s.”
The A380s are especially vital for expansion into the Americas—markets that, so far, have received limited attention. Currently, Emirates only flies to New York, but has done feasibility studies to start service to Houston, Los Angeles and San Francisco. Meanwhile, the airline is in talks with Argentina and Brazil to begin their first flights to South America.
Also important will be the further penetration in Australia, by increasing the frequency of daily flights to Sydney, Melbourne, Brisbane and Perth to three.


Much of the profitability of these long-haul routes depends on the operation of the A380s, which will significantly drop the operating cost per seat.
The effects of the delay could also hit closer to home. Besides opening flights to distant cities, the A380s were important to plans at Dubai International Airport, which is undergoing a $4.1 billion expansion. Some of the new boarding gates were exclusively tailored to service the A380s.
But in the face of continuing delays, the Boeing 747-8, the passenger version of the 747-8F, seems to be the only viable alternative for airlines that are looking for the largest planes. It is smaller—450 seats to 555—and even if the orders were placed now, 747-8s would still take longer to build and deliver than the delayed A380s.
While expressing disappointment with Airbus, the airline has not made any indication that it plans to cancel its order.
Direct compensation is also an option. Reports recently surfaced in the foreign press saying that Emirates had demanded $281.3 million (Dh1.03 billion) from Airbus, although Emirates officials have since denied the claim.
Meanwhile, the expansion of Abu Dhabi’s aviation industry is having a direct impact on the numbers of visitors to the emirate and hotel occupancy rates.
Kevin Brett, general manager of the Hilton Abu Dhabi, said recently that the airline’s expansion has spurred tourism in the emirate. He said, “In 2004, the occupancy at the Hilton Abu Dhabi finished the year at 56%, whereas in 2005 we finished at above 85%. This huge jump in occupancy was largely underpinned by the emergence and growth of Etihad airlines, bringing large numbers of tourists to the emirate.”
The airline’s fleet will see the addition of an A330 next month, followed by the arrival of an A340-500 long-range aircraft. These purchases will bring the total size of the fleet to 24 aircraft with 10 more on the way in 2007. All this as Etihad is also continuing its geographic expansion, adding two new destinations over the next two months, bringing the total to 36.
Etihad’s growth coincides with plans for Abu Dhabi Airport’s infrastructure expansion.
The airport has already been supplemented by a second terminal, which has brought its handling capacity to 2 million passengers a year. This was opened at a cost of Dh21 billion ($6.8 billion) in August 2005. However, Etihad’s rapid expansion means that the volume of traffic and trade is already opening up a need for even further expansion.
The government has created a new operating company, Abu Dhabi Airports Company (ADAC), with the authority to oversee the development of the airport through a number of outsourcing initiatives. The company, set up under presidential decree in March, will be empowered to operate, manage and maintain airports in the emirate. This marks a departure from the old structure, under which the department of civil aviation was responsible for the regulation, operation and development of all aviation matters. Regulation at the local level will now be dealt with by the department of transport, as ADAC has now assumed formal control of the operation and development of the airport.
Growing Etihad
Khalifa al-Mazroui, the chairman and managing director of ADAC, recently told emirati media that one of the purposes of the company was to facilitate the growth of Etihad rather than cap its expansion. As a result, the interim solution of providing a new terminal for the dedicated use of Etihad was established. The interim terminal and the development of a new runway will increase the capacity of the airport to five million travelers by the end of 2007.

The boeing 747-8 is the only viable
alternative for airlines looking
for the largest plans


Meanwhile, some observers are concerned that expansion may outpace demand.
The development of Etihad and the new airport are a reflection of and a stimulus for Abu Dhabi’s economic growth and diversification ambitions. The airport will aim to serve this growth; however, it is also a reflection of the expansion of the industry at a regional level, which is leading to greater competition that may lead to over capacity. For example, with the establishment of a new airport at Jebel Ali, which will eventually have an annual handling capacity of 120 million passengers and 12 million tons of cargo, the UAE will have three major airports.
However, Gordon Dixon, the CEO of Oasis Leasing, a substantial player in the aircraft leasing industry, believes that this dramatic increase in the airport’s capacity would be sustainable.
He also pointed to even more opportunity in the sector.
Dixon alluded to low-cost air travel as an area of potential growth, saying, “The growth of low-cost carriers will be huge. The market is very under-served, the demand is there and the histories of low-cost carriers show that they create demand. The biggest factor, however, is the expatriate community, who would be able to return home to see their families on a more regular basis.”
These infrastructure developments will also be completed in time for the arrival of the A380 airbus, the biggest passenger aircraft in the world. In addition, ADAC will also be looking to develop a free zone at the airport within the next twelve months.

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