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