Kuwait Airways sale may not be a runway success

DUBAI Wed Aug 3, 2011 7:03am EDT

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DUBAI Aug 2 (Reuters Breakingviews) - Kuwait Airways' privatisation might not be a runway success. After two decades without profit, the oil-rich nation is seeking to off-load a 35 percent stake in its national carrier to a strategic partner.

The hope is that this could allow the company to turn itself from a bloated and inefficient business into a lean and mean flying machine serving the travel needs of the Kuwaiti population. But the implied asking price looks lofty, bidders face many political obstacles, and the business case doesn't look compelling.

True, the government appears to have overcome one major problem in the airline's restructuring: it has managed to convince the majority of Kuwait Airways' 2,600 plus well-paid staff to retire, or take other government jobs, according to a person close to the airline. That should bring down the crippling wage bill, estimated at around 30 percent of revenues by Kuwaiti ratings agency Capital Standards.

Yet the government might still have to revise its expectations down. It expects the post-privatised share capital of the airline to be around 220 million Kuwaiti Dinars. This implies that a 35 percent stake could fetch $282 million. That valuation was established by Rothschild in June 2009. Since then, shares in Kuwait's Wataniya -- which ceased operations this year -- and budget operator Jazeera Airways (JAZK.KW) have fallen by 87 percent and 20 percent respectively.

A lack of suitable bidders could also weigh on the price. Kuwaiti airlines aren't allowed to bid. And it is hard to imagine government-owned carriers like Dubai's Emirates or Abu Dhabi's Eithad Airways taking control, given the regional political rivalries. Meanwhile, Qatar Airways is looking at its own initial public offering. A bid probably makes most sense for an international airline that already has routes in the Gulf like, say, Lufthansa.

There are other niggles too. Kuwait's promise to provide cheaper fuel to Kuwait Airways than to other airlines operating out of the country might be seen as state aid. Assuming the airline is privatised with its existing debt and a new fleet is needed, it is likely to take a number of years before it returns to profit. By that time plans for a rail network linking Gulf countries -- which will ultimately reduce the need for air travel -- will be closer to reality.

If Kuwait wants this airline privatisation to take off, it might have to lower the ticket price.

CONTEXT NEWS

-- Kuwait is seeking $282 million for a 35 percent stake in loss-making carrier Kuwait Airways Corp in the initial stage of the first privatisation of an airline in the oil region.

-- The Kuwait Investment Authority, the country's sovereign wealth fund, will own 20 percent the new airline company which will have a predetermined share capital of 220 million Kuwaiti dinars, the Privatization Committee said in a statement.

-- Joint-stock companies listed on the Kuwait Stock Exchange and specialised global companies can submit expressions of interest but Kuwait-based airline operators are not eligible to bid.

-- The company recorded a net loss of $556 million on revenues of $771 million last year, according to confidential presentation documents seen by Reuters Breakingviews.

-- The airlines employees are expected to own 5 percent of the final new privatised company with the remaining 40 percent of shares sold to the public.

-- The national carrier, which was established in 1954, operates 17 aircraft and had a 31 percent passenger share among all Kuwaiti-based airlines.

-- The deadline for submission of initial expressions of interest is August 25.

-- Citigroup is advising Kuwait Airways.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

(Editing by Pierre Briançon and David Evans)

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