http://www.gulfnews.com/business/Aviation/10071073.html
Published: 09/30/2006 12:00 AM (UAE)
Saudi airline privatisation gets off the ground
Special to Gulf News
The long-anticipated privatisation process of Saudi Arabian Airlines has finally taken off, and local entrepreneurs are eager to become involved in the company's activities.

Last week, Khalid Al Molhem, the director general of Saudi Arabian Airlines, told a group of businessmen at the Jeddah Chamber of Commerce that the process was initiated with the consolidation of ancillary business centres into separate entities.

These would then fall under an umbrella holding company, he said. The business centres include catering, ground handling, maintenance and the Prince Sultan Flight Academy in Jeddah.

It is in these areas that he feels the private sector has the potential to make the most of the opportunities presented by the privatisation.

Privatisation of certain state-owned institutions is seen as key to the development of the Saudi economy, and one of the linchpins of King Abdullah's economic reform programme.

A source from the French bank BNP Paribas that is assisting in the process told the press, "Some of these firms can be listed, mainly catering and cargo, but others will probably need to be managed by the private sector, or outsourced."

The catering arm of the airline is the first to be earmarked for the transition, which will be effectively out-sourced, albeit remaining under the parent company. Bids were invited for 30 per cent to 49 per cent of the company and were to be made by September 27. The catering arm includes on board duty free sales with a turnover of $172 million in 2005 and posted a net profit of $38 million.

Cargo, the next area of business pegged for privatisation, posted revenues of 1.5 billion Saudi riyals ($400 million) for the same year. Companies bidding will be able to take a managerial position in the newly formed company and will ideally bring with them experience in the industry.

Past success

Many observers interpret the appointment of Al Molhem as an indication of the government's commitment to an expeditious privatisation process. During his time as CEO of Saudi Telecom Company (STC), he presided over the successful flotation of 30 per cent of the company in 2003.

Al Molhem's speech was clearly aimed at emphasising the authorities' intention to kick-start proceedings. A source close to the planning told Oxford Business Group (OBG): "The renewed emphasis on divesting ancillary business centres is no surprise, as the threat of private Saudi [airline] operators entering the market is becoming a reality".

Meanwhile, insiders speak of an inefficient institution in need of root-and-branch reform, which they fear will only be partially addressed in the current privatisation strategy. Over-staffing poses the largest challenge to the process. Any move which may see redundancies in the thousands is likely to make the government think twice about pushing on. A process of early retirement is now being developed to tackle this. "A fat organisation such as this is always going to have reduced margins," said one OBG source.

Meanwhile, throughout the region, competition has reached heights never experienced before, with new entrants such as Qataria, Etihad and budget carrier Air Arabia taking a share of the market.

Domestically, with some 28 regional airports, Saudi Arabian Airlines held a monopoly until the arrival last year of National Air Services, a privately-operated airline primarily running routes between Jeddah and Riyadh.

Prince Bandar Bin Khalid Al Faisal's company, Investment Enterprises, is developing a Saudi-based budget airline with British company Mango aviation.

National Air Services is looking to develop its routes outside the kingdom to other Gulf capitals and the General Authority of Civil Aviation, the organisation charged with liberalising the sector, is preparing to offer licences to private companies. It has referred to the possibility of licences being awarded to private Saudi carriers to compete on international routes.

Time is ticking away for Saudi Arabian Airlines and the pressure to turn itself around is being cranked up from all sides.

The author is Senior Country Editor, Saudi Arabia, Oxford Business Group.