Among the first airline companies in the Arab world, Middle East Airlines was established in the early 1960s and witnessed prosperity and development until the outbreak of war in Lebanon in 1975. Despite the closure of the airport and the war’s impact on the airline company, MEA was able to take advantage of the fact that it was one of the few airlines in operation, allowing it to limit losses and even realize profits.

However, the situation did eventually deteriorate with an accumulation of losses that the Central Bank of Lebanon began footing in 1996. A new administration was put in place in 1998, and four years later, MEA is recording its first loss-free year in over two decades, with profits expected by 2003.

Company Losses

Studies have shown that MEA’s losses from 1981 to 2001 reached $720 million (See Table 1), with $375 million footed by the Central Bank. The Central Bank began financing MEA at the request of the Lebanese government in 1996, and acquired sole proprietorship of the airline to save it from bankruptcy. In 1998, a board of directors was formed and headed by Mohammed El Hout with the objective of adopting a reform plan, paving the way to privatization.

Sources of Loss

Some of the main factors that played a role in MEA’s losses include:
• The civil war, which lead to the frequent closure of the airport. Losses over this period are estimated at $245 million.
• A recruitment policy which resulted in over-staffing, at roughly 3,700 employees for no more than 9 planes (including approximately 500 employees on a daily contract basis).
• The introduction of new and unprofitable routes.
• The questionable sale of some planes and high lease rates.
• An increase in the number of foreign flight carriers to 40, flying to and from Beirut International Airport, and the effects of the “open-skies” policy, which have yet to be assessed.

These factors have contributed to the decrease of MEA’s market share in terms of passengers, as illustrated in Table 2.
 

Reform Plans

After the new board of directors was put in place in 1998, the Central Bank appointed the International Finance Corporation (IFC) to study MEA’s status and propose suitable solutions. These are summarized as follows:
• Transform the carrier into a pivotal regional company.
• Downsize the staff to a level comparable to that of international flight carriers.
• Reduce operational and general costs.
• Restructure in order to attract investors, given the difficulty of the privatization process.

The restructuring led to the discharge of 1,280 employees in June 2001, with indemnities reaching $65 million. 740 employees were shifted to affiliate companies, leaving a total of 1,200 employees. A reduction in salaries and pilots’ indemnities was also implemented.

MEA owned a fleet of 17 planes in 1992, but these were gradually put up for sale due to high operating costs and the landing ban imposed on MEA flights in some airports. Currently, the company operates a fleet of 9 planes, with the lease of five coming up for expiry by the middle of next year, and one in early 2004.

MEA has arranged to buy a new fleet of 6 Airbus A 321-200 at a cost reaching in the region of $254 million and financed mostly (84%) by foreign banks at a rate of 1.475% above LIBOR. The remaining share (16%) is financed by local banks. MEA is due to receive a number of the planes by next summer and also intends to rent three A330 airbuses.

Profit Forecast

According to the MEA administration, the reforms will lead to projected profits of $570,000 in 2003, $2,742,000 in 2004, $12,624,000 in 2005, 23,048,000 in 2006, $25,555,000 in 2007 and $33,532,000 in 2008.