SAUDIA PRIVATIZATION ACCELERATED TO QUIET JUMPY

C O N F I D E N T I A L SECTION 01 OF 02 JEDDAH 000396 SIPDIS SIPDIS RIYADH, PLEASE PASS TO DHAHRAN; DEPARTMENT FOR NEA/ARP; EB/TRA/OTP FOR MATTINGLEY; PARIS FOR ZEYA, LONDON FOR TSOU E.O. 12958: DECL: 05/30/2016 TAGS: EAIR ECON KISL KPRV SA SUBJECT: SAUDIA PRIVATIZATION ACCELERATED TO QUIET JUMPY STOCK MARKET REF: A. JEDDAH 195 ¶B. JEDDAH 244 ¶C. RIYADH 3632 ¶D. RIYADH 3723 Classified By: Acting Consul General Hector Morales, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. This is one of a series of cables addressing developments in the civil aviation sector in Saudi Arabia. In private conversations, the director of the medical staff of Saudi Arabian Airlines (Saudia) announced that the company had just received an order from the King to prepare for its initial public offering (IPO) in eight months. The company has been preparing for privatization for some time, with a target date for its IPO in 2008. Airline management is seeking a major enterprise that would be a a minority partner with the Saudi government in a company to managing non-core operations once they are separated from the airline. One obstacle in preparing the airline for privatization is uncertainty concerning the ownership of a substantial number of aircraft. Instability in the stock market and the government's desire to calm frightened investors was advanced as a major reason for this change in the privatization schedule. There remains the question if this new schedule can be met without adverse effects on the airline and its personnel. END SUMMARY. SAUDIA TO BE PREPARED FOR PRIVATIZATION IN EIGHT MONTHS ¶2. (C) During conversation with Pol/Econ Chief on May 29 and 30, Dr. Osama A. H. Zahran (Protect),head of medical services for Saudia, revealed that management had just received an order from the King to accelerate preparations for privatizing the airline. At the beginning of this year, the airline had announced publicly that Saudia would be privatized. The initial plan (reftel A) had been to spend two years disposing of extraneous components of the bloated, state-run airline until just the core, passenger flight operations remained and then privatize the company through an IPO in 2008. However, Zahran said the King has ordered that these preparations should be completed in just eight months. MINORITY PARTNER SOUGHT FOR NON-AIRLINE OPERATIONS ¶3. (C) According to the doctor, the company will be divested of five or six non-core segments, such as the catering, pilot training and repair training academies (reftel B),cargo, and maintenance, over the coming eight months. These segments will be placed in a holding company, of which 51% would be owned by the Saudi government. Zahran also disclosed that during Saudi Arabian Airlines' biennial conference, titled "Future Horizons," held last weekend at the Jeddah Hilton, management quietly searched for a major organization that would be willing to take a 49% share in this holding company. He could not say if the search had been successful. Note: Public accounts of this conference on "Future Horizons" for the airline, did not carry the news that it would be privatized so quickly. End note. OWNERSHIP OF AIRCRAFT IN DOUBT ¶4. (C) In his most surprising revelation, Zahran said that the reason the airline itself would not be privatized until the very last was because ownership of some of the aircraft is not clear. It seems that 60, or perhaps even more, of the most recently purchase aircraft may actually be owned by the King and another member of the Royal Family. Until the title to the planes is clear, the airline cannot be taken public. SAUDIA IPO A SOP TO A NERVOUS MARKET ¶5. (C) The doctor said that the change in schedule was not dictated by conditions relating to Saudia itself, but because of the condition of the Saudi stock market. Gyrating wildly over the course of the last three months and losing nearly half its value, the Taduwal All Shares Index, has attracted increasing government attention, since unsophisticated small Saudi investors early profits, and often family savings evaporated as the market declined. The government has taken increasingly drastic measures to restore confidence in the market (reftels C, D). The government apparently wants to be JEDDAH 00000396 002 OF 002 able to offer an increasingly skittish investing public a chance to purchase shares in a large, important company in order to soak up some of the capital that had inspired neophyte Saudi investors to bid up dubious companies to outrageous, and ultimately, unsustainable levels. CONSEQUENCES OF HASTY PRIVATIZATION FOR SAUDIA? ¶6. (C) COMMENT: It is critical to monitor events to see if this abbreviated privatization schedule has an adverse effect on Saudia. A two year schedule had been planned and offered a reasonable time to divest the airline of unsuitable constituents, rationalize staffing and minimize disorder. Now the question arises, can the realignment of Saudia be accomplished in only one-third that time, without disruption or commission of costly errors? END COMMENT. Morales