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EgyptAir reform plans run off course
Published in Al-Ahram Weekly on 26 - 02 - 2004

The aviation industry is deeply divided over attempts to steer the national carrier out of its financial quagmire. Amira Ibrahim investigates
Almost two years since the national carrier EgyptAir witnessed a makeover in its management, the company remains in the red. Last month, a decision to suspend flights on loss-making destinations has renewed the controversy surrounding the company's reform plans.
"Nothing could be worse for an airliner than to suspend routes it had already developed," said one industry expert who asked to remain anonymous. "Reform plans launched two years ago have been a failure, particularly in managing the business of marketing flights and developing an international network."
Twenty-two months of desperate efforts to stop the losses incurred by long routes did not bring any success. Last week, EgyptAir's management decided to indefinitely suspend some 13 international routes, pushing the number of international routes suspended since 2002 to 16 routes. Suspended routes include Kiev, Copenhagen, Stockholm, Vienna, Hamburg, Aden, Dar Essalam, Ras Al-Kheima, Harare, Fujira, Karachi, Manila and Entebbe. In addition, three domestic destinations have also been suspended.
It was in July 2002 when the national carrier was turned into a holding company in hopes of making its various entities profitable. It was thus divided into seven independent affiliated companies. The move was expected to improve the performance and efficiency of the carrier. But this did not happen.
"Dividing up the company was not the problem," said the source. "Instability and changing policies seriously affected the newly restructured company."
For 22 years of management by former chairman Fahim Rayan, EgyptAir had been a profit- making company adding up to one billion pounds every year to the state budget. But in July 2003, one year after the reconstruction, Atef Abdel- Hameed, chairman of the holding company, disclosed that the carrier had recorded losses of LE300 million for the fiscal year 2001/2002. Losses for the current year, ending in June, have not yet been estimated.
"The new management justified losses by blaming most of the problems the airline faces on the former management system, but no one buys these excuses," said one official who specialises in air transport economics at the Civil Aviation Ministry. "The fact is that the company's management is suffering from instability. The chairman has been changed three times in a year and management for affiliated companies have been subjected to continuous change every few months," the official added.
Reform plans were announced by Aviation Minister Ahmed Shafiq nearly two years ago to prepare EgyptAir's affiliates for survival in an open and competitive market. However, there was another sudden change in policy which placed affiliated companies under the complete control of the holding company, the ministry expert said. As liberalisation plans were derailed, affiliated companies became incapable of acting either as independent entities or as a cohesive entity as before the reforms.
Among the seven companies, the airline affiliate was the most affected by unstable policies, he explained. The company had been overburdened with loans to purchase new aircraft to modernise the fleet, while it has no resources to finance its activities other than marketing its flights. Its marketing sector, meanwhile, remains a major headache for the airline.
"All other six companies have the resources to finance their activities, selling their services to EgyptAir and other private and foreign airlines flying to and from Egypt," stated the ministry expert. "But this policy ignores the fact that those companies were previously formed as sectors to help the airline, not to live apart from it or to sell its services at high prices. If the airline cannot afford to operate its fleet, it would become inactive. Ironically, EgyptAir would have affiliated companies working in air and ground services, cargo and duty-free markets but there would be no fleet or flights operated. It is impossible to imagine that situation but this is what is going to happen," he explained.
But EgyptAir Chairman Abdel-Hameed argues that purchasing new aircraft is essential for the company's survival. EgyptAir had taken out a $220 million loan to purchase the five new Airbus 320 aircraft that joined the fleet three months ago. "We are negotiating with international banks to obtain another loan of $720 million to fund the purchase of seven AB 330 due to be delivered by the summer," Abdel- Hameed told Al-Ahram Weekly.
EgyptAir's fleet consists of 37 planes including the five new aircraft. However, this fleet's abilities are stretched by its need to cover flights to 82 cities around the world.
"The airline cannot compete strongly with such a limited fleet," said Abdel-Hameed. "It has to concentrate on operating a smaller network, and adopt strategies similar to other international airlines that have succeed in reaching more points through agreements with other airlines." He pointed to Alitalia as an example of a company which operates a fleet of 223 planes and flies only 50 international routes, yet reaches an additional 70 destinations through code share agreements, through which it flies its passengers on other companies' aircraft.
Improving the airliner's network appeared as a sensitive vital mission that should be achieved only through foreign experience. "The US airline consultant company SABRE helped EgyptAir reorganise its network to provide optimum conditions for the fleet and to improve methods of managing revenues and price marketing system," Abdel-Hameed explained. After SABRE recommended suspending 13 international routes and three domestic destinations, EgyptAir acted promptly.
"An extensive survey showed that from these 13 points to which EgyptAir flies, Egypt receives 1,075,000 passengers every year. We only transport 49,900 passengers or five per cent of the total movement. Thus we decided to suspend those routes and replace them with code share agreements, a trend that we plan to expand," Abdel- Hameed stated.
However, he explained that the airline will maintain its offices abroad in cities to which it suspended its flights, "to coordinate with other airlines that would sell our seats on its flights".
But other experts see no need to maintain these offices, in light of the company's financial problems. "Abdel-Hameed's justifications cannot be acceptable particularly when we realise that EgyptAir's staff abroad receive their salaries in hard currency to market only five seats on four to five flights operated by airlines with which it has code share agreements," said one opponent of the company's reform policies.
Another EgyptAir official, who stepped down from his post in protest of reform plans spoke to the Weekly on condition of anonymity: "When we started to develop more code share agreements with foreign airlines, we were seeking to reach more points and to replace low-occupancy routes with more code share agreements," said the source. "I believe the management should review the marketing and pricing policies which failed to attract customers and seize a considerable share of air transport market at those points."
But Abdel-Hameed defended the decision to suspend routes arguing that the Manila route would have generated over LE120 millions in losses over ten years. "We are negotiating with British Airways and South Africa Airlines to transport our passengers to remote destinations like Sydney through code share agreements," he stated.
EgyptAir suspended its route to Sydney in July 2002 due to continuous losses in excess of LE70 million annually. A few months before, it had suspended its Los Angeles route, attributing the move to tightened security procedures at US airports and concerns about the safety of air travel following the events of 11 September as reducing its customer base.
However, a newly established route with Beijing only operated for three months and was suspended in April 2003 allegedly in response to the outbreak of war in Iraq. "For political reasons, the company ignored a feasibility study that recommended establishing a route with Shanghai, with which Egyptian businessmen have close commercial ties," commented the former EgyptAir official.
The frequency of service to long routes will be also affected, with the number of flights operating on a weekly basis falling from 85 to 45, while the number operating twice a week will decline from 36 to 28 flights. "Re-organising fleet operation during the summer would save up to LE132 million out of adding more frequencies at high occupancy routes. Applying the plans on winter schedules would bring in an additional LE140 million," Abdel-Hameed said.
He added that the airline plans to increase the number of flights to Kuwait and Jeddah to capture a larger share of those markets. "We only get 20 per cent of air transport movement between Cairo-Riyadh, 31 per cent of Cairo-Abu Dhabi and 40 per cent of Cairo-Kuwait," he said. "We currently cannot cover those routes with high frequencies though they are very profitable. This is due to our limited fleet being occupied with long-distance routes that make losses while nearby profitable routes are not adequately covered."
The domestic network, which covers 12 destinations, has now contracted with the suspension of three destinations -- Taba, Mersa Alam and Al-Wadi Al-Gadid. The move was necessitated by losses of over LE34 million.
The Cairo-Taba flight was started a year ago through a six-month programme financed by the Tourism Ministry, but failed to become a profit- making route.
"The Mersa Alam route has been operating at exorbitant costs due to expensive fees paid at the airport, operated under BOT management, and the high prices of flight services," commented Abdel-Hameed.
On the other hand, the company three months ago instituted a new pricing system for its domestic flights increasing ticket prices by up to 50 per cent. The new policy is applied to Egyptians and foreign residents and is only applicable to economy-class passengers.
Sherif Fathi, director of the EgyptAir Pricing Department, said that the new system calculates prices according to how early the passenger books the ticket, the flight destination, the class of seat chosen and the occupancy percentage of the flight. "The idea is that seats would be sold at prices decided by the laws of supply and demand," Fathi told the Weekly. "If there are few seats left in an almost-booked flight, they would be sold at higher prices," he added.
These criteria then classify passengers into four new categories, with tickets either maintaining their original price or increasing in cost by 30, 40 or 50 per cent.
However, there is no provision in the new pricing system for "dead seats" which are booked shortly before takeoff. A last minute passenger who buys an EgyptAir ticket from the airport would not enjoy the large discounts given by most airlines in this case. Counter-intuitively, according to the new EgyptAir pricing system, "dead seats" will be sold at higher prices.

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