KUWAIT'S EMERGING AVIATION SECTOR

UNCLAS KUWAIT 000314 SENSITIVE SIPDIS STATE FOR NEA/ARP, EB E.O. 12958: N/A TAGS: EAIR ECON EFIN SUBJECT: KUWAIT'S EMERGING AVIATION SECTOR REF: A. 07 KUWAIT 881 ¶B. 07 KUWAIT 1510 ¶C. 09 KUWAIT 109 ¶1. (SBU) Key Points: -- Civil Aviation President Fawaz Al-Farah discusses growth in air and passenger traffic, KCIA expansion project and views on privatization of Kuwait Airways. -- Despite the economic slowdown, Kuwait's two new independent airlines appear to be thriving. -- Wataniya Airways and Jazeera Airways have both placed large orders for new aircraft. -- Kuwait Airways' rivals appear to benefit from the airline's faltering reputation. The Chairman is hopeful that the first step toward privatization (becoming a company rather than a corporation) would take place shortly. -- GoK airport expansion plans include new terminal and new runway, increasing annual capacity from seven million passengers to 20 million by 2025. ¶2. (SBU) In a March 11 meeting, Kuwait's President of Civil Aviation, Mr. Fawaz Al-Farah told Econcouns and Econoff that KCIA's air and passenger traffic had grown continuously since the 1990s and, despite the economic downturn, was continuing to grow. Total aircraft movements had increased by five percent from 2007 to 2008 and passenger movements had increased by five percent to just over seven million passengers. In addition, there have been a number of new airlines that have signed contracts to operate out of KCIA and many of the existing airlines have added additional aircraft and/or routes to accommodate the growing number of passengers. The expansion of the airport's runways and the addition of a third runway, would grow capacity to 20 million passangers by 2025. Kuwait would also upgrade the Air Traffic Management Center and build a new air navigation center and advance training courses for air traffic control personnel to meet the projected increased traffic. -------------- JAZEERA AIRLINES: KUWAIT'S LOW-COST CARRIER -------------- ¶3. (U) Kuwait's first private airline, Jazeera Airways (owned by the Boodai Corporation) launched operations in October 2005, less than a year after the Council of Ministers approved licenses for three private carries, Jazeera, Wataniya and Load Air (a cargo carrier). Jazeera currently serves 22 destinations in countries in the Middle East and South Asia: Bahrain, Egypt, India, Iran, Jordan, Kuwait, Lebanon, Oman, Qatar, Syria, Sudan, Turkey, Yemen. The airline opened its second hub in Dubai in 2007 and plans further hubs in 2010. ¶4. (SBU) Mr. Suhail Homsi, Senior Director of Support and Development at the Boodai Corporation, said that the financial crisis and economic slowdown have not adversely affected Jazeera's bottom line and that the company plans additional aircraft purchases. He said that Boodai has also invested in an aircraft leasing company. The company is expecting the delivery of two additional Airbus jets in June, bringing total inventory to ten. The airline also plans to increase its operations in the Middle East and South Asia. ¶5. (SBU) Homsi was not concerned with the planned privatization of Kuwait Airways. He said that even if KAC were to privatize, the company has numerous issues to iron out before being considered serious competition. He said that Jazeera's core competition comes from the low-cost carriers operating out of Dubai and Bahrain. -------------- --- WATANIYA BEGINS OPERATIONS WITH FLIGHTS TO DUBAI -------------- --- ¶6. (U) Kuwait's third airline, Wataniya Airways, began flights to Dubai on January 24 and recently launched service to Bahrain and Cairo. The airline operates as a premium service airline and is the first regularly scheduled airline to fly exclusively from the Sheikh Saad civil aviation terminal. The airline was founded by major Kuwaiti investment companies, including KIPCO (Chaired by Sheikh Hamad Sabah Al-Ahmed Al-Sabah, one of the Amir's two sons) and Global Investment House. Following an initial public offering, it is now 70 percent owned by Kuwaiti citizens. Its fleet currently consists of two Airbus A320s. ¶7. (SBU) Wataniya CEO George Cooper told Econoff that the airline is not overly affected by the current economic situation and has recently purchased five additional Airbus 320s and intends to launch service to Geneva, Milan and Munich in the near future. Cooper stressed Wataniya's success in gaining landing slots in Cairo, traditionally a highly competitive route. (Note: Cairo's airport operates a "closed skies" policy and operates under stringent aviation regulations that limit access for international carriers. End Note). In addition, Wataniya has invested in many build-operate-transfer (BOT) opportunities at KCIA, including a car-park building, shopping center and projects within the new Shaykh Saad terminal. -------------- KUWAIT AIRWAYS' PATH TO PRIVATIZATION -------------- ¶8. (U) In January 2008, the National Assembly passed legislation authorizing the privatization of state-owned Kuwait Airways. KAC has been in business since 1954 and was a pioneer of long-haul services for the region. KAC has operated at a loss since suffering a devastating set-back during the Iraqi occupation, losing most of its' fleet. In 2006, having accumulated over USD 700 million in losses, the Ministry of Planning agreed that the company should prepare a seven-year investment and operational plan, including a major overhaul of the aging fleet. Some parliamentarians, however, voiced concerned with such a costly overhaul of the airline and the GoK came up with a revised plan for privatization, which Parliament approved in January 2008. Under the plan, a single strategic investor would purchase 35 percent of the airline. An additional 40 percent would be sold to Kuwaiti investors, and 5 percent would be allocated to the airline's workforce. The GoK would own the remaining 20 percent. The airline would have until February 2010 to complete the privatization process. ¶9. (SBU) The airline is facing a number of challenges, including slipping service standards and dealing with its government work force to become competitive. The Chairman/MD of KAC, Hamad Al-Falah and Kuwait Civil Aviation Authority President Farah each agreed strongly that Kuwait Airways needed to be privatized. Both noted the difficulties inherent in being a state-owned enterprise in Kuwait, including using Kuwait's Central Tender Committee (which awards to the lowest bidder) and obtaining prior approval for certain expenditures from the State Audit Bureau. Both highlighted the difficulties KAC had in upgrading its aging fleet, noting by way of example the five year saga of trying -- ultimately unsuccessfully -- to update business class seats. With the GOK as a minority owner, they argued, KAC could be a more agile operation and would be better able to manage its workforce (public sector Kuwaitis can only be fired if they don't show up to work for a month). The first step according to Falah would be to convert Kuwait Airways from a state owned corporation to a state owned company. The major advantage to this switch would be that KAC would no longer need State Audit Bureau prior approval for expenditures, although the Audit Bureau would still have the right to audit the expenditures, post-facto. (Note: KAC has an outstanding $1.3 billion judgment against Iraq Airways and the GoI for damages incurred during the Iraqi Invasion of Kuwait. End Note.) -------------- -------------- AIRPORT EXPANSIONS EXPECTED TO ACCOMMODATE 20 MILLION PASSENGERS ANNUALLY -------------- -------------- ¶10. (SBU) KCIA will soon begin overseeing work on the first phase of a four-phase expansion project for Kuwait City International Airport (KCIA). The airport expansion project is part of the Government of Kuwait's overall Five Year Plan. The project includes the upgrade of KCIA's two runways and the construction of a third runway, in order to accommodate its growing number of airline companies and passengers. According to officials at MOCI, the completion of a third runway would help develop Kuwait's three airline companies and accommodate the growing number of passengers traveling in and out of KCIA. According to Kuwait's Civil Aviation Director of Projects Engineer Mahdy Al-Dakheel, the first phase of the project will begin in summer 2009. During this phase of the project, one of the two runways at KCIA would be shut down for approximately one year. Post has raised questions as to what impact the closure of the runway would be on airport operations, but KCIA's President of Civil Aviation assures Embassy officials that the impact would be minimal. ¶11. (SBU) The airport expansion project, which has been budgeted at 211 million Kuwaiti Dinars (USD 790 million) is expected to accommodate an increase in passenger volume from the current seven million persons annually to 20 million passengers in 2025. Engineer Mahdy said the first three phases of the project are expected to be completed in one and half years and the final project would take an additional two years for completion. The first phase includes the upgrade and expansion of the west runway from 3.4 km to 4.7 km and the construction of a third runway capable of accommodating the Airbus-A380. Phase II consists of construction of a new DGCA headquarters and new fire stations which will be completed concurrently with Phase I. Phase III includes the extension of the East runway from 3.5 km to 4.5 km and will commence following the completion of Phase I. The last phase is a two year project and will be carried out separately by Ministry of Public Works (MPW). It will include the construction of a new terminal with a capacity to accommodate an additional 20 million passengers. ********************************************* ********* For more reporting from Embassy Kuwait, visit: visit Kuwait's Classified Website at: http://www.intelink.sgov.gov/wiki/Portal:Kuwa it ********************************************* ********* JONES