Lebanon Outlook

Lebanon’s real estate sector in the air – Rebuilding Beirut on hold

by Executive Staff
written by Executive Staff

At the end of 2006, both good and bad news is emerging from Beirut’s real estate sector. On the positive front, none of Lebanon’s prime properties was directly hit in the summer war between Israel and Hizbullah. No major sell-offs took place, and prices across the board have held steady. Furthermore, there was no widespread freeze on construction: most projects that had broken ground before the war continued shortly after it ended. But if the good news is that most existing projects are moving ahead on schedule, the bad news is that few developers are willing to embark on new ventures under currently unstable conditions in Lebanon: no major deals were concluded in the final months of 2006. There is still interest—and there have been inquiries—but no sales.

This wait-and-see attitude is, of course, a reaction to the end-of-year stalemate in Lebanon’s political arena. Real estate only flourishes in a stable environment; with almost every Lebanese party at each others’ throats and a high potential for mass upheaval, Lebanon at the end of 2006 fails to inspire investor confidence. The lackluster attitude among project developers—and their clients—is likely to prevail as long as no political agreement is reached.

Political compromise will restart market

Most players are convinced, however, that as soon as the political leadership comes to some kind of compromise, the market will pick up where it left off when the war started on July 12. “The market will skyrocket immediately,” insists Raja Makarem of Ramco. “There is still a lot of trust and goodwill among Arab investors. I still remember, just days after the assassination of Hariri, someone signed a deal for 30,000 meters BUA [built-up area].”

Apart from goodwill, there is also plenty of cash looking for a destination. Ever since the crash of the Arab bourses, investors increasingly perceive real estate as a relatively safe investment, with likely returns of 15% to 25%. All over the region, from Marrakech to Muscat, construction giants like Emaar and Dubai Property Holdings and property developers such as Damac have set up shop, building luxury apartments, office towers, malls, hotels and holiday resorts. However, this doesn’t mean Lebanon should fear increased competition: for most Gulf Arabs, the country remains the preferred choice for holidays and second homes. Still, their patience may eventually run out if there is no upturn.

Walking through downtown and other parts of the capital, one would hardly know there has been a lull in Beirut’s real-estate market during the second half of 2006. Construction is underway everywhere, especially in the area around the Souqs and along the seafront. Work on the mixed-use Seramis building, the Berytus Parks office building and Hilton Hotel are nearly completed, while excavation has started for the Grand Hyatt Hotel and Capital Plaza, which will have 32 apartments with a total BUA of 13,235 m2.

Following the success of the Beirut Tower, which is due to be completed in the second half of 2007, its owners have started to lay the foundations for a second residential high rise, the 29-story Bay Tower. According to Sales Director Samir Diab, 75% of apartments in the Beirut Tower have been sold, spurring the initiative to build a second property. Facing the Beirut marina, the Bay Tower will offer luxury apartments varying in size from 250 m2 to 750 m2, and a top-floor penthouse of 1,500 m2. Ranging from $3,000 to $5,800 per m2, the prices are in tune with surrounding developments.

“We had started construction just before the war and never had any intention of stopping, as 30% of the apartments have already been sold,” says Diab. Interestingly, while 80% of apartments in the Beirut Tower were sold to Gulf Arabs and 20% to Lebanese, sales for the Bay Tower are thus far a 50/50 affair. Diab confirms that the market is weak today, yet insists that it remains strong on the long-term, which, according to him, is especially true for the relatively scarce seafront properties.

The Bay Tower is not the only new development facing the marina. In between the Marina and Beirut Towers, the $100 million, 8-story Dana Building is set to appear. One of the most significant “confidence boosters” has been the Abu Dhabi Finance House’s $600 million dollar Beirut Gate project, in heart of the capital. With its territory already demarcated with logo flags downtown and final plans pending approval from Solidere, the massive project is on track to break ground in early 2007. The “gate” will consist of eight separate buildings with a total built-up area of 178,500 m2, some two-thirds of which will be residential, with the remainder reserved for commercial and retail space.

In terms of changes to Beirut’s urban landscape, the launch of the Landmark Project, a $250 million mixed-use development at Riad al-Solh Square, may be seen as equally significant. With its 168-meter-high tower, characterized by an asymmetrical design of balconies, terraces and gardens, this is a “love it or hate it” development and will undoubtedly be one of the most eye-catching structures within the Beirut Central District.

A Landmark landmark

Designed by French architect Jean Nouvel, the Landmark Building has a total BUA of 149,000 m2. The tower will host a 5-star hotel and, on the top floors, 16,300 m2 of luxury apartments. The two adjacent buildings, of 10 and 15 stories respectively, offer service apartments, retail and office space. The nine floors underground will house 37,500 m2 of parking and an 11-screen cinema complex.

However, not every developer is charging ahead. On a more negative note, Levant Holdings’ Phoenicia Village development has been temporarily halted. With a reported value of $1 billion, Phoenicia Village will be one of the largest real estate developments in the history of Lebanon. The project’s four buildings have a total BUA of 207,000 m2, some 60% of which will be residential, with the remainder consisting of office (20%) and retail (15%) space. The Kuwaiti-registered Levant Holdings issued shares for the project last June and had planned to start building as soon as it had collected $410 million in start-up capital. In light of recent developments, however, that scenario proved too optimistic.

The development climate in downtown may be illustrated by the price of Solidere shares that, after a yearly high of over $26 in January, decreased to some $18 during the war and hovered at that level for the rest of the year. However, the current lull in land and real estate transactions will likely result in a (temporary) decrease in construction in the near future, which will no doubt have consequences for the price of a Solidere share. These consequences may be mitigated by Solidere’s recently-announced plans to expand its operations outside Beirut.

Beirut is, of course, more than just downtown. In Clemenceau, Verdun, Ashrafieh and along the Corniche—to name but a few locations—construction of prime residential projects continues as well. Yet downtown is the capital’s barometer, the heart upon which everything else depends and around which everything else evolves. In that sense, it is interesting to note that there are a number of formerly inhabited, now vacant buildings in areas adjacent to downtown, such as Zokat al Blatt, Rue Spears and Qantari. As the political situation improves, no doubt they will soon make way for new developments.

Another kind of barometer

However, downtown Beirut is also a barometer in another sense. “We were about to sign contracts with five major multinationals to lease office space when the war broke out,” says Wael Makarem of the Berytus Parks, which is now in the final stages of construction. “Until now, no one has signed. They do not trust the political situation and would rather go to Dubai, even though it is much more expensive and a less pleasant place to live.”

Situated next to the nearly-completed Hilton Hotel, Berytus Parks offers 10 floors with a total of 12,200 m2 of office space. Annual rental prices conform with the average downtown: $275/m2. In Dubai, equivalent rentals are around $400/m2, and operational costs are significantly higher as well. Nonetheless, that may seem like a price worth paying when the alternative comes with political instability.

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Lebanon Outlook

Lebanon’s rosy 2006 shattered by war and political killing

by Executive Staff
written by Executive Staff

As recently as early November 2006, local and regional economic experts were projecting exponential growth across all sectors of Lebanon’s economy, including rapid recovery from the damages caused by the 34-day war between Hizbullah and Israel this summer. But given the assassination of Lebanon’s Minister of Industry, Pierre Gemayel, on the eve of National Day and threats for further eliminations of other high profile political figures, the country’s outlook was put in jeopardy. However, Lebanon is known above all else for its resiliency, and this, experts predict, will pull Lebanon through its political instability into 5% to 8% growth in 2007.

Before it was thrown into another period of turmoil, Lebanon’s economy had made impressive gains in the first half of 2006, and in some sectors, even afterwards. The banking sector—the strongest and most resilient sector in the country—registered strong profits and assets growth, with BLOM Bank leading the pack in terms of profits with LL199.65 billion ($132.2 million) at the end of September, and Audi Saradar coming out on top in assets with LL20.08 trillion at the end of September, up from LL16.42 trillion a year earlier.

The tourism sector, which accounts for approximately 10% of total government annual revenues—saw a first ray of hope for recovery in September with an increase of 153% in the number of incoming tourists compared with August. The real estate sector continues to witness exponential growth despite the political upheaval. Gulf investors’ appetite for Lebanon’s real estate market seemed insatiable as new mega-projects worth billions of dollars were announced in 2006. Property taxes recorded a 51% increase in the first half of the year. The banking sector—which sustained Lebanon’s economy for many years during the civil war, and now continues to do the same after the assassination of former Prime Minister Rafik Hariri—has positioned Lebanon as a regional leader in banking and financial services.

Macroeconomic Check

According to the Lebanese Ministry of Finance, Lebanon’s budget deficit expanded by 54.95% during the first nine months of 2006, standing at LL2,989 billion at end of September, up from LL1,929 billion over the same period in 2005. Today, the country’s total debt to gross domestic product ratio is almost 190%, while the internal debt to GDP exceeds 120%.

According to figures issued by the central bank, Lebanon’s balance of payments (BoP) registered a surplus of $2.2 billion in the first nine months of 2006, compared to a deficit of $191 million a year earlier. In September 2006, the BoP registered a surplus of $640 million, compared to $235 billion in August 2006 and $152 billion a year earlier. September’s BoP came as a result of a $325 million rise in the net foreign assets of the central bank, coupled with a rise of $315 million in private banks’ net foreign assets.

Figures released by the Association of Banks in Lebanon shows the country’s gross public debt reached $39.4 billion in August 2006, up 1.6% from last July, and up 6.9% year-on-year. In turn, external debt rose by 2.4% from last July to $20.4 billion, while gross domestic debt increased by 0.7% to $18.9 billion. Year-on-year, external debt increased by 11% from $18.4 billion in August 2005, while domestic debt went up 2.8% in the same period.

Better late than never

After several tries and many delays, the 2006 Proposed Budget Law was sent to the Council of Ministers for approval in early November. (The 2005 budget was not approved until the start of this year due to political bickering). Although Minister of Finance Jihad Azour said that the 2007 draft budget wuld be ready by December 2006, analysts predict further delays and don’t expect the 2007 budget to be approved until mid-year.

The 2006 budget calls for a total spending of $7.4 billion, up $793 million from the 2006 budget. The Ministry of Finance had predicted a decline in deficit to 20% for 2006. However, the ministry’s plan went out the window when the devastating July-August war increased the projected deficit to 40%, compared with 30.83% in 2005. Azour said that Lebanon’s public debt would reach $41 billion by the end of this year, with the increase mainly due to material damage to the country estimated at $3.6 billion.

Revenues reached $4.4 billion, down from $4.6 billion in the 2005 budget. The drop in revenues and rise in spending is mainly attributed to the rise in military and defense expenditures after the Israeli war, and the decline in tax revenues after the ministry implemented tax exemptions due to the hostilities. The 2006 budget, which has yet to be approved, is expected to terminate the duties of the Council of the South and the Fund for the Displaced by the end of 2008. The 2006 budget deficit of $3 billion will be financed through the issuance of treasury bills.

Reforms? What Reforms?

Economic reforms and privatization of the state-owned companies was supposed to get started in early 2006. And sure enough, news about the good performance and planned privatization of the country’s flag air carrier, Middle East Airlines (MEA) and the rescue and successful sale of BLC Bank was encouraging to many local business leaders and analysts alike. Officials also re-started talks about the country’s power firm, Electricité du Liban (EDL), with plans to sell it to private investors or possibly float it on the stock market. But experts say that if the government is to be successful in its efforts to privatize state-owned enterprises, it must first strengthen the equity market, and make it efficient so that an average citizen—not just the elite—can participate in the privatization process.

Furthermore, reforms and privatization require a united will by all the parties involved in the governing of the country. Given the current tense political atmosphere, analysts say privatization plans will not see the light in early 2007. Possibly, if the Siniora government manages to create a united cabinet in the next three months, the privatization process and other economic reforms may start to move forward towards the end of 2007.

To Paris III or not to Paris III?

Lebanon is expected to receive major financial aid from the Paris III conference, scheduled for January 25, 2007. According to some analysts, the country needs about at least $8 billion for the reconstruction process and to repay its $2.4 billion Paris II loan that is maturing in December 2006. The Paris III meeting will mark the third time the French capital has hosted an aid conference to help Lebanon since 2001, when the Paris I conference raised 500 million euros.

However, realistic expectations for Paris III are estimated around $4 to $5 billion. Economy and Trade Minister Sami Haddad pointed out in early November that Lebanon would need to raise a minimum of $4 billion at Paris III in order to avert a financial crisis. "We expect to get double the amount of Paris II and we expect to get soft loans and grants,” he said. Haddad also hinted that Lebanon is “seriously” considering an IMF program and officials are working out the details before an announcement can be made.

Paris III was due to convene last year, but the conference has been repeatedly postponed amid political bickering over an economic reform program, including IMF requirements. The government is pressing the opposition to accept an IMF program to help the country—not simply to finance reconstruction, but also to restructure the economy. Prime Minister Fuad Siniora and his team have put together a comprehensive five-year economic strategy that includes plans to reduce the fiscal deficit, bring down state debt and spur economic growth. Other top items on the Paris III agenda include serious commitments by the Lebanese government on privatization, specifically the country’s two mobile telephone providers and EDL, increasing tax revenues and implementing measures designed to improve and increase private investment.

Discussions in business halls say that Paris III may not happen this year if a comprehensive solution for the country’s internal political disputes is not found soon. The opposition—made up of Hizbullah and other pro-Syrian groups—has made it clear that if they do not get the concessions they are looking for, they will derail any economic programs and obstruct the government from carrying out its duties. Almost 1/3 of all government expenditure is in interest payments on existing debt, and if Paris III and other forms of assistance could reduce this debt, Lebanon’s troubles could be quickly reduced. And should Siniora’s five-year plan play out, the country’s debt-to-GDP ratio would stabilize, raising GDP growth to an average of at least 3% over the life of the plan.

2007 projections

Central Bank Governor Riad Salameh has emphasized that prospects for growth in 2007 depend on a positive political environment, which in turn would provide a favorable investment climate. He also pointed out that a successful outcome to the Paris III conference would buttress projected growth.

Although it wasn’t an easy feat, Lebanon was able to maintain financial stability during the war with Israel and this has raised confidence in the country’s ability to protect its currency in the short term. With the assistance of $1.5 billion transferred to the central bank by Saudi Arabia and Kuwait, the Lebanese pound’s peg to the US dollar was sustained throughout the conflict. Nevertheless, a prolonged political crisis, adding pressure on reserves to meet demand for foreign currency, could still place the pound under serious strains.

Lebanon must now resolve its political disputes and allow the country to enter a new era of rebuilding its infrastructure, economy, social core—and its status on the world stage. All involved know that changes of such magnitude usually come with a heavy price, but alas, Lebanon has already paid a great price many times over. The time has come to move forward with all reform plans aimed at stimulating growth, creating employment and improving social indicators. For Lebanon, 2006 was a dramatic year. The economy ended the year almost unchanged in size from the beginning, with widespread forecasts of zero GDP growth or possibly a 5% contraction. Now, Lebanon must reduce the large public debt and its heavy burden, and foster a stable business environment conducive to investment and job creation.

Furthermore, it is time to pass a law promoting fiscal accountability limiting the government’s borrowing and reducing the risk of inflating the deficits. The capital market must be further developed and promoted among the country’s citizens, many of whom hold substantial savings that could be used in the privatization process, thus creating liquidity and encouraging internal investments. This will also encourage additional cash-flow from the GCC and other foreign investors.

Lebanon’s friends have already proven their willingness to assist Lebanon on all levels. Lebanon must now seize this opportunity to meet the people’s desire to live in dignity and prosperity, to live in peace, building a future based on consensus and coexistence. For citizens and foreigners alike, Lebanon’s diversity, multi-confessionalism, freedom of expression, democracy, tolerance and liberty is equal to none. Simply said, this must be preserved.

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Lebanon Outlook

Calling all tourists – Picking up the pieces

by Executive Staff
written by Executive Staff

After an outstanding first half of 2006 and a catastrophic second, any recovery for the tourist industry is once again at the mercy of political stability.

The last two years have hardly been a smooth ride for those working in Lebanon’s beleaguered tourist industry. Beset by high-profile assassinations, troop withdrawals, car bombs, an under-funded government ministry and now a devastating war, they can largely be forgiven for being gloomy about the prospects for the coming year.

As is always the case in Lebanon, the health of the tourist industry depends on the country’s stability: something which is consistently impossible to guarantee. But the continued importance of the sector to the national economy is vital: it accounts for a double-digit percentage of GDP, provides hundreds of thousands of direct and indirect jobs, and has significant knock-on effects across some of Lebanon’s other core industries like construction, real estate and retail.

If anything, though, the war of 2006 reinforced an already apparent conviction that no one in the tourism industry should make any long-term plans. Lebanon’s image to most of the outside world has suffered incalculably thanks to the events of this summer, and repairing it will take a sustained period of stability, government promotion and a plentiful supply of loyal visitors. Unfortunately for a private sector whose total losses reach into billions of dollars, none of those things can be counted on in 2007.

Looking back

By all accounts, the first half of 2006 was rather good—at least compared to the first half of 2005, which was largely ruined by the Hariri assassination and the Syrian withdrawal. This time around, year-on-year arrivals were up by 47% and 39% in April and May, with hotels recording significantly improved occupancy rates and looking forward to a bumper summer of visits from GCC nationals, who were thronging restaurants and malls by the time the first bomb hit Beirut’s airport.

They were also spending lots of money. Global Refund’s index on tax-free tourist receipts, often a good benchmark of how much cash visitors have been pumping into the local economy, showed that spending rose by 45% in the first half of 2006 compared to the equivalent period in 2005. As in previous years, the biggest spenders were Saudis, who accounted for 27% of tax-free receipts, followed by Kuwaitis in second place with 14%.

Predictions were duly made for a record year. The Ministry of Tourism announced that an all-time high of 1.6 million tourists were expected over the course of 2006, whilst in June, the World Travel and Tourism Council (WTTC) released its annual research report. In it, experts optimistically predicted that the Lebanese tourism sector would cough up some $4.4 billion in economic activity over the year, generating 175,000 jobs and accounting for almost 11% of Lebanon’s GDP.

The damage done

All that turned out to be wishful thinking, rudely interrupted by a war which ground the tourist industry to a halt for several months and has doubtless put some serious brakes on next year’s prospects too. The mass exodus by land in the week after Beirut’s airport was bombed, coupled with the incessant television footage of Lebanese infrastructure being destroyed and western nationals waiting to be evacuated by warship, was more than enough to render the tourist industry defunct for the next few months.

Tourist arrivals in August dropped by 85.4% compared to 2005—not surprising considering the airport was closed for the entire month—and most hotels could do little but watch on as occupancy plummeted. Many even decided to shut down operations completely until the hostilities came to an end. One exception was the Rest House in Tyre, whose rooms were in great demand this summer and autumn from the hoard of journalists, camera crews and aid agencies based in the South.

But overall, Pierre Achkar, the president of Lebanon’s Hotel Owners’ Association, has estimated losses to hoteliers at around $2 billion, with overall occupancy down by half. No one knows exactly how long those losses will take to recoup, but layoffs have been made, and the worry is that unless things get better soon, qualified staff will simply pack their bags and head to the Gulf, where both demand and salaries are higher.

A silver lining or two

Hard though it may be to believe, there are some positives to be drawn from 2006 for those looking ahead to 2007. The first is the continued presence of the additional UNIFIL troops, assorted NGOs and the numerous other organizations involved in the post-war clean-up. According to a number of hotels, these sources are bringing in good business in Beirut, especially through block bookings.

Another is that the Ministry’s new website, Destination Lebanon (www.destinationlebanon.gov.lb), was finally launched in mid-June 2006, just before hostilities began. The five year-long project was funded partly by a $150,000 grant from USAID, and offers online booking, maps, virtual tours and all manner of listings and brochures.

More importantly, many operators report that Gulf tourists, if not their European counterparts, are becoming increasingly less sensitive to Lebanon’s perennial instability. It took only a few weeks after the ceasefire was signed for the gradual trickling-back of GCC visitors to begin, particularly for the Eid al-Fitr festival at the end of Ramadan.

This bodes well for the future: such greater resilience and speedier returns will be necessary, given that more sporadic crises are fairly predictable. Indeed, a trend that many in the industry foresee for 2007 is more last-minute bookings, with few tourists—perhaps understandably—having the confidence to lay down deposits on advance holidays.

Mending the image

Although very little physical damage was done either to Lebanon’s hotel infrastructure or the main tourist sites in the country, the biggest challenge in 2007 will perhaps be one of confidence-building among clientele.

For many tourists, especially Europeans and Americans, Beirut’s image has reverted back to that of the civil war days. Despite the fact that the vast majority of the capital remained untouched by conflict, the television images and photo montages from the southern suburbs suggested total apocalypse—and that impression will take some time to erase.

Thomas Cook, for instance, says that Lebanon is still not appearing in its European brochures after being on hold for more than a year and a half. The travel agency told Executive that it would prolong its “watch and wait” approach for 2007, even though Lebanon does appear in the company’s Egypt-based brochures.

Similarly, some of the country’s most prized cultural assets such as Baalbek and Tyre lie in zones which were amongst the worst-hit by Israeli air strikes. For these attractions, which even before the war were still trying to shrug off respective images as a 1980s kidnapping hotspot and an Israeli-bombarded town, it will be another step backwards in their efforts to tempt visitors out of the capital.

Also affecting Lebanon’s image for the 2007 season are environmental concerns. According to Tourism Minister Joseph Sarkis, some 50-60% of Lebanon’s tourist industry is based around the Mediterranean, which received an unwelcome gift of thousands of tons of oil after Israeli missiles struck a depot in Jiyyeh, south of Beirut.

It appears, however, that the damage is not as bad as previously thought. When the spill first happened, some environmental experts had claimed that the summer seasons for the beach resorts around Beirut would be “ruined for years”, with 150 kilometers of Lebanese coastline affected and the oil even spreading north to Syrian waters. According to more recent reports, though, most of the oil has dispersed from the areas further away from Jiyyeh, although some serious PR efforts will be required to repair outside conceptions.

Some of these might come from the government. In late August, the tourism ministry announced that it was launching an aid plan to help struggling the industry out of the quagmire: tourist-related businesses were being told to fill in forms detailing their war-related losses, tax breaks and other aid was being discussed, whilst a special account at the central bank was set up to receive donations.

But whatever government aid does come out of this over the coming year will almost certainly make only minor inroads into overall losses, given that the ministry has traditionally struggled even to maintain its modest annual budget of around $8 million. A delegation did, however, make a brave appearance at the World Travel Market (WTM) in London in November, along with the biggest private-sector players in the industry.

Peace and quiet, please

Despite all the woes, recovery may come quicker than expected if some stability can prevail. An important litmus test will be the Christmas/New Year period, which in 2006/7 will coincide with the Eid al-Adha, and which many tourist professionals hope will enjoy high arrivals from GCC visitors.

Some signs are good—one five-star hotel in Beirut told Executive that they were already almost fully booked for the holiday period—though others are less encouraging. The ski booking site www.skileb.com, for instance, says that its advance bookings are down by 40-50% for the coming winter season, whilst its sister hotel booking site has seen business fall by the same percentage.

Another vote of confidence will be the construction of the clutch of new luxury hotels in downtown Beirut. According to the companies’ original timetables, the next year should see the completion of Four Seasons, Grand Hyatt and Rotana Suites hotels in Solidere, with a Hilton and a newly-renovated Saint-Georges in the pipeline before 2010.

The extent to which building has been delayed by this year’s events should prove instructive, as should the progress of what is by far the biggest blueprinted project in Lebanon, the $1.2 billion Sannine Zenith. This giant ski resort, which when finished will reportedly cover almost 1% of the country’s territory, had already been delayed due to planning issues.

There’s no doubt that if peace and quiet do somehow ensue next year, then tourist business will be good. But trying to convince most of the outside world that Lebanon is a safe place to visit will be an uphill struggle. Instead, hotels, retailers and restaurants dependent on tourism revenues may have to rely even more on a high-spending Gulf Arab clientele, for whom Lebanon’s charms remain popular.

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Capitalist Culture

Political uncertainly, economic suicide

by Michael Young
written by Michael Young

As Lebanon ended the year 2006 in a spell of indecision and instability, alarmingly little attention was given to what arguably may be, short of war, the most debilitating result of the country’s political deadlock: economic collapse. The giant bubble of confidence that has, miraculously, kept Lebanon afloat financially in the last decade will not last forever.

Reportedly, that stark message was transmitted by Central Bank Governor Riad Salameh to political leaders involved in the national dialogue last November. Salameh warned that the country’s finances could not withstand much more political bickering. As Hizbullah and the anti-Syrian parliamentary majority went at each other over expanding the government, the main economic representative institutions began sounding the alarm bells—and it’s easy to see why.

Heavy losses from the summer’s war

According to some United Nations estimates, Lebanon may have endured losses of over $10 billion during the summer war. Economists have calculated that GDP, previously around $20 billion, had contracted by 2% due to the conflict. With Lebanon facing a public debt of over $40 billion, the GDP-to-debt ratio stands at around 200%, one of the highest rates in the world. Economic confidence is declining because of the ambient uncertainty, and whatever force is buttressing the pound is certainly less hardy than ever before.

Given all this, why do neither Lebanon’s politicians nor much of the public quite realize what an economic collapse could mean?

That economics are invariably politics is a truism, but in Lebanon that interplay has been taken to dangerous extremes, with economic policy usually a hostage to political power plays. Take the long-awaited Paris III meeting, scheduled for early next year to help Lebanon face its economic tribulations. In recent weeks, as the parliamentary majority and a coalition of March 8 groups and the Aounist movement confronted one another, President Emile Lahoud was repeatedly heard condemning French President Jacques Chirac. Why Chirac, as if Lahoud didn’t have enough enemies as it is? Few doubted that his target was less Chirac than the Paris economic conference, which could only boost the credibility of the cabinet and parliamentary majority at a time when its adversaries, Lahoud among them, is trying to bring the cabinet down.

One can deplore Lahoud’s methods, but the Lebanese system has always invited such behavior, if not necessarily so egregiously. Capitalist culture in Lebanon is political culture, and nothing would so worryingly emphasize that point as a financial collapse, the result mainly of Lebanese banks being unable to roll over the public debt one more time.

Disaster looms

One needn’t try hard to predict the results: social unrest, the government forced to resign, inflation, financial controls to avoid, if possible, the meltdown of the banking system, which holds the bulk of the debt, etc. However, since money is also politics, the political repercussions of an economic breakdown would be ominous. Lebanon has been floating on an impossible wave of self-confidence since 1992, when Rafik Hariri became prime minister, despite many signs in recent years that the state has simply been unable to take control of its debt. But between the war last summer and increasing political polarization, confidence has been shaken.

The harsh reality is that no one would be spared. Any presumption that one side would come out of the maelstrom stronger than the other is foolish. When economies collapse, the initial reaction of most people is to turn against their politicians. The real danger is the second phase, when demagogues take over. But demagogues thrive on conflict, and if Lebanon were to dissolve into a new generalized conflict (against the premises of class solidarity), everyone would pay a high price.

That’s precisely why, whatever happens in the coming months, the political class must impose a consensus that Lebanon’s financial policies remain outside their mutual struggle; but also that general principles be agreed at the soonest in order to move toward a necessary and successful Paris economic conference to provide funding for the state. This means agreeing to advance privatization, streamline the bureaucracy, and cut spending where possible. Why not start by setting up a national economic dialogue with major economic actors, presided over by Salameh, to parallel the stalled political dialogue? The different political parties would be allowed to have their say, but ultimately the major economic representatives and the relevant government ministries would be the ones drafting a final document, to be presented to the broader cabinet and parliament for endorsement.

Too idealistic? Perhaps, but it’s one idea among many possible ones, at a time when new ideas are scarce. In our obsession with politics, we should understand that an economic breakdown would sweep everything else away—the political class first among them.

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Levant

Turkey’s CA woes Reform needed

by Thomas Schellen
written by Thomas Schellen

With the release of the International Monetary Fund’s (IMF)’s report on the fourth and fifth review for Turkey’s standby agreement, the state of the country’s finances has come under fresh scrutiny from market observers, with ongoing concern over the size of the current account (CA) deficit.

Strong economic growth coupled with high oil prices has helped account for growing debt over recent months, according to the report, but alarmism would be misplaced following closer inspection of the CA issue and overall resilience of the economy, say local analysts.

Current account deficit causing concern

The size of the current account deficit is nonetheless causing concern, with analysts expecting a whopping $31 billion in early 2007. Yet, Turkey’s success at enduring the global run on emerging market economies in May and June 2006 was notable, thanks to such macroeconomic buffers as the floating exchange rate, the independence of the central bank, a gradual shift away from hot money to an increased FDI-weighted portfolio, a disciplined banking regulatory agency and the closely-associated strength of the banking system and the independent budget process. True, the economy was among the hardest hit by tightening global liquidity conditions in the middle of the year, but the situation could have been much worse—a reflection of the economy’s increased ability to absorb external shocks. Accumulating external reserves has also been key in protecting the Turkish economy from external hiccups and storms.

Some observers say that Turkey’s market will be unlikely to experience a serious crisis under the present administration, due to the government’s disciplined monetary and fiscal policies. Raising savings, be it through reform of insurance law or mortgages, is one way that the government would be able to address the current account deficit. The all-important inflow of foreign direct investment (FDI) into the economy remains essential too.

Turkey’s restructured banking sector has been credited in helping stabilize the economy, with consolidations and mergers and acquisitions ensuring increased competition between constituent players, not to mention much-needed revenue for state coffers. Many are following preparations for the privatization of Halkbank, Turkey’s second-largest public bank, the terms of which were announced at the end of 2006. Meanwhile, Ankara has indicated that Ziraat Bank, Turkey’s market leader, will also be sold off. This follows on the back of a string of mergers and acquisitions in the banking sector, with Citibank recently acquiring a 20% stake in Turkey’s private giant Akbank. In 2005, Fortis and General Electric Consumer Finance (GECF) also moved into the country, with the former taking over Disbank and the latter taking a 50% stake in Garanti Bank. BNP Paribas’ acquisition of a 50% stake of TEB Financial Investments also seized headlines last year. Thanks partly to the introduction of the Banking Regulation and Supervision Authority (BRSA), Turkey’s banking sector has undergone a dramatic change since the 2000-2001 recession. Balance sheets are now much stronger than before, with high capital adequacy ratios and the seemingly-manageable open foreign exchange positions of banks, according to a July IMF report.

Although important, acquisitions and privatizations on their own are not enough to fill the CA gap in a sustained manner, with long-term income perpetuating investments key to balancing the budget, according to former World Bank Turkey representative Andrew Vorkink. Though not expecting a further economic crisis, Vorkink underlined the risk of failing to balance Turkey’s books. If an international disruption occurs, people will wonder how Turkey can finance the gap and will get nervous, Vorkink said during an interview with the local press. But if Turkey continues to attract funds, not only internationally but also through domestic savings, then the ability to finance the gap is OK because the alternative is to cut the deficit, which will cut growth.

Meanwhile, Ankara is more than aware of the political considerations that are likely to impact investor confidence. It was not only the widening current account deficit that made Turkey vulnerable in May and June, but also some delays in implementing structural reforms, in pensions and tax, for example, and some delay in the privatization of state banks – all flagged by the IMF report. The delay in appointing a new governor of the central bank following the departure of Sureyya Serdengecti, the president’s veto of the government’s pension reform law and the assassination of a high court judge in May did investor confidence little good either.

Now, political and economic analysts are closely following developments on Cyprus—with Brussels demanding that Ankara lift trade restrictions against Nicosia—a demand that Ankara currently rejects. Turkey’s commitment to EU membership and the ongoing accession process is, after all, considered as a form of insurance that Ankara will continue to push ahead with economic, political and social reform even if the pace may fluctuate.

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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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