Anatomy of a merger

Libya’s booming oil and gas-driven economy, coupled with the construction of new airports, is attracting lucrative business and leisure opportunities. 

Assisting to drive that growth are the country’s two national carriers, now bracing to enjoy the tailwind.

When the Libyan government granted approval for the merger of Afriqiyah Airways and Libyan Airlines, it was not quite clear as to what direction the merger would take. Taking into account the complexities involved in airline mergers, question marks are still hanging over the deal.

Industry experts in Libya have been quoted as saying that the intention is to have one carrier; but with different functions, similar to that of Qantas, which operates both the mainline and Jetstar Airways.

Combining the two airlines’ strengths would transform them from moderately-sized operators to a much more substantial entity. This would not only give them improved economies of scale but also greatly enlarge their route network, giving far more travel options to passengers.

Bringing the two airlines together has been mooted for several years and, in 2007, a move towards this goal was put in place with the creation of a new state-owned entity, Libiyah Afriqiyah Aviation Holding Company (LAAHC). This became the parent body for both carriers, as well as to several other related companies covering such fields as aircraft maintenance and catering.

Ultimately, the aim is to privatise these various component companies, although no timescale has been publicly announced for privatising the two carriers.

At the Arab Air Carriers Organisation (AACO) annual meeting in Cairo last October, Afriqiyah chairman Sabri Shadi was quoted as saying the airlines were on the verge of merging, a process that was likely to happen within weeks rather than months.

However, other senior Afriqiyah officials have since told Arabian Aerospace that no timetable for combining the two carriers has yet been set.

“Discussions are going on but the date has not been decided,” said CEO Rammah Ettir. He suggested the end of 2011 was a likely timescale but admitted: “That’s only a guess – there’s a lot to be done.”

Similarly, commercial director Khaled Sawese admitted he was not sure when the merger would be consummated. Among details to be thrashed out was the name under which the companies will operate. It was possible that both names and liveries would be retained, but with a single management team, said Sawese.

However, links between the two airlines are already increasing, he said. Co-operation is under way in the fields of planning and pricing, and code-sharing has been adopted on several routes.

Both companies have joined Arabesk, the informal ‘network co-operation project’ created under AACO’s aegis. Arabesk, whose membership now consists of 11 carriers, including major players such as Etihad, Gulf Air and Egyptair, aims to co-ordinate schedules, reduce duplication of effort and link members’ destinations.

“The benefits will amount to at least a three to five per cent increase in revenue,” said Sawese. “We will codeshare with many airlines to destinations where we don’t operate.”

Apart from their Arabesk venture, 2011 will see both carriers aiming to increase their passenger numbers, said Ettir.

The two carriers have different passenger profiles. Analysts indicate that Libyan nationals are more inclined to fly with Libyan Airlines, whereas Afriqiyah has a broader clientele of African and European passengers travelling from north to south.

Libyan Airlines currently serves domestic and regional routes, while Afriqiyah is strong in the African and long-haul sector.

Libyan Airlines – simply known as LN by its employees – dates back to its establishment in 1964 and was previously known as Libyan Arab Airlines. The company faced the full brunt of UN sanctions; the political landscape made it difficult to maintain normal commercial operations.

“Aviation in Libya suffered damage but we kept working while the embargo was on,” said Captain Fauzi Zaghonni, assistant commercial director for planning and development at Libyan Airlines .

Libya’s isolation meant that there was a ban on all flights to and from the country and the supply of aviation equipment was prohibited. By 1992, all international operations came to a halt.

Prior to the sanctions, the fleet consisted of some 35 aircraft – this was reduced to just two, a Fokker F28 and a Boeing 727 by 1999.

For a little more than 10 years, the company was forced to fly only domestic routes with ageing equipment. Reportedly, there were some days that not a single aircraft was in the air with some 450 pilots sitting idle. 

Over-employment was also an issue; Captain Zaghonni confirmed that Libyan Arab had 6,500 employees, a drastic reduction to the current workforce of 2,100.  

A US embargo continued for four years after UN sanctions were lifted, placing Boeing as a supplier out of range, so the airline turned to Airbus to equip its fleet. A letter of intent was signed in 1999 but the backlog of orders meant that LN had to wait until 2006 to receive its new fleet. Lease agreements were signed in the interim.

After the establishment of Afriqiyah, there was a general restructuring of the airline industry in Libya that led to a change in name from Libyan Arab to Libyan Airlines.

In recent times Libya has embarked on reforms aimed at rationalising its public and private sectors and promoting trade and foreign investment. The opening up of the economy has triggered the interest of opportunity seekers attracted by the lucrative energy, construction and promising new tourism sectors. In Tripoli, alone, at least 10 five-star hotels are under construction with a similar number of four and three-star hotels already complete.

Captain Zaghonni said: “The market is growing very fast in Libya, with the development of new airports, construction and oil exploration. You can see this by the demand in flights to Tripoli. All the main airlines fly in at least once daily, even twice daily during the summer season.”

The latest newcomer on the scene is British Midlands (bmi), which announced the start of Heathrow-Tripoli services from February 2011. The new flights are in addition to those already offered by Libyan and British Airways.

LN hopes to offer a competitive product to counter competition. An MOU signed with Airbus covered the purchase of 15 new aircraft, including four A350s, four A330s and seven A320s. The first new A320 was delivered in September 2010 and the A330s are expected by the end of 2011. The older leased A320s are expected to be phased out gradually.

With the arrival of the new A320s, LN is keen to showcase a modern side to Libya. The new Airbus deliveries are equipped with Internet connectivity supplied by OnAir – a trend that is sweeping the airline industry.

The airline also operates the CRJ-900, including the next generation versions fitted with all leather interiors. “We have configured the CRJs with six business class seats in addition to economy, which is unique – you don’t see a premium offering in Europe with this type of aircraft,” boasted Captain Zaghonni.

In addition to the five CRJ-900s already in service, the airline recently placed an additional order for three CRJ-900 Next Gens plus three options. The order is valued at $131.5m and if all options are exercised it could rise to $267.8m.

Captain Zaghonni is keen to have on-board connectivity on the CRJs too. He said that LN has asked Bombardier and OnAir to study the possibility of retrofitting the CRJs. “It is an option – we are trying to get a compromised deal from both parties. With regards to the CRJs, the OnAir certification was done after the aircraft was built so, at the time of the order, the OnAir application was not available for this fleet,” he explained.

The CRJs are deployed domestically and on a number of European routes such as Kiev, London, Milan and Malta. Zaghonni noted that, ideally, the plan is to assign sectors of more than two hours to the A320s.

In 2007 LN began to issue electronic tickets. “We started to catch up on industry practices that had passed us by; some are already done and others are still to follow,” admitted Zaghonni.

He was also quick to point out that the one area of the business that people do not see is the change in distribution philosophy at the airline.

“We came from a very closed environment. We now have billing and settlement plans (BSP) connections in every country we operate. Older global distribution systems (GDS) are connected, or are being connected, to our host Amadeus – basically opening up to travel agencies around the globe. Five to ten years ago this was unseen, especially at our airline,” he added.

Developing an airline from a closed environment to having a modern distribution system is a substantial achievement. A comparison of passenger reviews on websites such as Skytrax over the past couple of years somewhat backs up LN’s claims of transforming its operations into a professional airline service. Despite a mixed bag of opinions, the general theme seems to be in support of the changes taking place at the airline – especially fleet wise.

With the backdrop of A350s on order, LN was unable to confirm at this stage how long-haul prospects will blend in with Afriqiyah’s plans.

Afriqiyah (meaning African in Arabic) took to the skies on December 2, 2001; the first flight was a 737-400 that carried 75 passengers from Tripoli to Khartoum. 

The airline was established within the framework of linking Africa to Europe and the rest of the world, and providing year-round cheaper fares. In fact, the airline is popular with adventure-seeking backpackers and independent travellers between Europe and Africa.

The airline’s goal is to improve accessibility to major African cities through Tripoli with connections that make it possible for travellers to reach their final destination by evening of the same day.

Looking at the route network, the African strategy is quite clear; 17 out of the 29 destinations served are on the continent, nine in Europe and three in the Middle East and Asia.

Last year Afriqiyah added Lyon and Milan to the portfolio of European destinations with strategic connection to several African cities.

The Afriqiyah fleet consists of A319s, A320s and A330s. The LAAHC is spending a reported $5.4bn on new aircraft for both carriers. It was not immediately clear if changes will be made to the fleet strategy once the merger is complete.

“That will be revised and decided by the strategy of the merged company,” said Ettir. “However, I don’t expect much of a change in the current fleet on order for both companies.

“The fleet orders were co-ordinated from the time the two airlines’ ownership was moved to LAAHC ,” clarified Ettir.

The airlines operate to some common destinations such as London – LN operates out of Heathrow while Afriqiyah uses Gatwick. Both carriers insist that they have a different set of passengers and there is little in the way of competition. “In my opinion Libyan and Afriqiyah were never competing, although operating from the same airport to a few common destinations,” Ettir said. “However, we complement each other’s network; that is the way I see the merger – bringing together two sets of routes and products that can be further aligned and marketed better.”

Afriqiyah has continued with its expansion in the long-haul market with the launch of a recently inaugurated service to Beijing. The twice-weekly service, using A330-200s, began in November 2010 and is the first direct route from Tripoli to the Far East. As expected, the new flights are carefully planned to connect with several African cities such as Abidjan, Accra, Bamako, Lagos and Niamey.

Additional capacity has been added on the Tripoli-Cairo route that is now served six-times per week. Also, the airline rescheduled its flights to Amsterdam, adding a fourth weekly flight that took effect from January 2011.

Ettir is determined to see more long-haul operations over time: “ We started flights to China and further Asian destinations may be introduced, but the major expansion will happen when the new airport is complete,” he said. “Services to North America will be launched and further frequencies to China, India and the Far East will be introduced in addition to more destinations and frequencies to Africa.”

In 2007, the Libyan government announced a project to upgrade and expand Tripoli International Airport to increase passenger capacity to 20 million annually. The monumental project consist of two new terminal buildings, each having an area of 175,000sqm, with 48 lifts, 26 elevators, 160 check-in counters, 12 baggage-handling carrousels and 32 fixed and 64 mobile passenger boarding bridges.

However, construction work has caused some problems; at Libyan Airlines on-time performance was slightly down due to works taking place. The airline said it is making preparations for the new airport and is working out measures to address on-time performance.

Ettir pointed out that Afriqiyah had suffered a lot due to the shortage of proper facilities at Tripoli International Airport. “Our expansion plans were, to a large extent, slowed down by the lack of proper transit services and, hence, the impact on the number of passengers carried, the number of destinations served and the frequencies to each of these destinations,” he said.

“The new airport, when completed, will bring with it better passenger services and better transit facilities. In addition, the facility will provide more efficient passenger services and economical operations for the airlines using Tripoli. The new airport will enhance the picture of Libya and Tripoli as a modern transit hub that connects the world.”