Saving plan called airline privatisation

Saving Plan

Called Airline Privatisation

Mohammad Aljeemaz, DBA Student

Dec. 2013

M. Aljeemaz, Saving Plan Called Airline Privatisation 2

Outline

I. Introduction

II. Historical background

III. Process of privatisation

IV. Perceived benefits of privatisation

V. Competition

VI. Economic efficiency

VII. Trade and globalisation

VIII. Protection of customers from anticompetitive

IX. Provision of better services and goods at

cheaper prices

X. Employment and economic growth

XI. Promotion of broad development objectives

XII. Growing demand

XIII. Reducing existing inefficiencies

XIV. SWOT analysis

XV. Recommendations

XVI. Conclusion


Introduction:

Airline privatisation in Kuwait has been a topic of

discussion for several years now, with the national

carrier being at the centre of the discussion. The

state-owned carrier has had prospects of transfer

from the government ownership to private

ownership, with this strategy set to take place in the

near future. Airline privatisation involves the transfer

of ownership of a state owned airline company from

the public sector to the private sector (Cirafici 2001,

p. 56). The transfer of any function of a business

previously owned by the government to the control

of the private sector can accurately be defined as

privatisation. Provisions in the laws of the country

are involved as to how this should take place.

Some of the other terms that privatisation has been

associated with include buyouts and demutualisation.

A buyout is a form of privatisation where an

individual or a private company holding majority

shares in a public corporation possesses the shares of


the government (Castel 2011, p. 755). There are

many reasons why the public sector may decide to

privatise the air transport in a country. Air transport

is a significant part of global business linking millions

of people every year and contributing in the moving

of goods (Cirafici 2001, p. 56). With the competition

that has emerged in the industry, there is need to

ensure that the respective air transport companies in

a country are able to remain relevant and contribute

to improved welfare of the population. This essay

looks at the privatisation plans of Kuwait Airways

and tries to discuss factors such as competition,

economic efficiency, trade, globalisation and other

factors emerging from such a move.

Historical Background:

The formation of Kuwait Airways took shape in the

late 1954, at a time when the nation was enjoying a

period of relative prosperity. The company was

privately formed, with the government only buying


50% of the shares in the second year after its

existence due to the economic hardships that it

experienced the same year (CIA: The World Factbook:

Kuwait 2011). The move to buy half the company by

the government meant that there was increased

funding that was enough to increase the capital and

improve profitability. The government later bought

the remaining share of the company to fully own it

(Cirafici 2001, p. 56). Some of the destinations that

were being served at the time include Jerusalem,

Beirut and Damascus.

The period following 1960 saw the rapid expansion

of the airline, with investments in the jet technology

and increased passenger transport as well as cargo.

The airline also underwent a massive expansion in

the routes that it served, with scheduled flights to

London beginning in the year 1960 (Cirafici 2001, p.

56). The 70s saw the expansion allow the airline

reach the Far East and west, contributing and gaining

from the global trade. Some of the significant lows

that the airline underwent include the destruction of


some of the planes on its fleet during the invasion of

the nation by the Iraqi army under the command of

Saddam Hussein (CIA: The World Factbook: Kuwait

2011). The airline was however re-launched with

newer and more modernised aircrafts being acquired.

With the expansion, Kuwait Airlines targeted to link

more than 50 nations to the country to contribute to

tourism and international trade in an effort to

develop the country.

The headquarters of the airline have always been

located at the grounds of Kuwait international

Airport, and this forms that legislative centre for the

company (CIA: The World Factbook: Kuwait 2011).

Important steps to privatisation include the partial

privatisation that occurred in the year 2010. During

this year, the plans to privatise the company fully

were scheduled after the acquisition of the

modernised fleet that would increase the capacity of

the company and increase efficiency. The other

important step preceding privatisation includes the

formation of the Kuwait Airways Corporation that


would manage the company in the case of a complete

privatisation (Shibata 1994, p. 167). This was carried

out in the year 2008, and the corporation would be

mandated with the overseeing of the modernisation

and restructuring of the airline.

The move to turn the Airline into a private

organisation was taken through the national

parliament, where in the year 2008, the National

assembly formulated a plan that would see the

creation of Kuwait Airways Corporation (Shibata

1994, p. 167). This, as stated above, would be the

body charged with the management of the company

after full privatisation and facilitate transition from

partial to full privatisation through a series of stages.

The aim of the legislature was to turn the company

into a private shareholding one, with the members of

parliament agreeing unanimously to the decision

(Cirafici 2001, p. 56). A foundation committee was

formed following the legislation of Kuwait Airways

Company by parliament, and this was through Kuwait

Investment Authority, that is charged with the


transfer of assets from the original company to the

subsidiary companies that will constitute the private

management (Cirafici 2001, p. 56). The final

declaration of KAC as a shareholding company was

made on the 23rf day of the month of October in the

year 2012, thus setting the pace for the privatisation

efforts (Shibata 1994, p. 167).

Process of Privatisation:

The United States was a leader in the efforts of

privatisation of the Airways. The EU closely followed

this headship (Shibata 1994, p. 167). The competition

brought about by the privatisation and the reduction

of the air travel charges in the US are some of the

factors that led to widespread privatisation of these

corporations. The efforts to privatise the Airlines

were however not far different from the operations

initially done by the government, and these is

because of the expensive bailouts that had to be

carried out after the privatisation. The initial process


of privatisation in these two regions was preceded by

legislation.

The laws created facilitated and forced the

privatisation of the National carriers of the respective

countries. The open skies talks between the EU and

the US marked some of the greatest policies in the

history of privatisation, where negotiations were

made to aloe the ownership of UA Airways by foreign

nations such as those in Europe. The initial regulation

allowed ownership of up to 25% of the shares of local

airways, with this being increased to 49% shares

(Pilarski 1994, p. 51). The process of privatisation is

important and should not be misused. Local

companies should be given priority when ownership

is considered. For the Kuwait Airways privatisation,

the ownership should be by both local and

international firms, as this would inject the required

capital to boost the company into success on the

global front. The process of privatising the airways is

of interest to a number of parties, and the employees

constitute the most significant of these groups. In the


original constructing of the privatisation law, a

consideration was made for the employees that were

under the company. They would be considered even

under the new management, with the terms of

employment changing slightly (Cirafici 2001, p. 56).

Perceived Benefits of Privatisation:

The aviation industry is currently undergoing a

period of transformation and change, with the

competition increasing day by day. The growth in the

industry means that the regions and countries that

have the airways being controlled by the

governments have to undertake very big investment

programs to ensure that the companies are relevant

and competitive (Shibata 1994, p. 167). The Asian

region in particular is seeing a marked growth in the

aviation industry, with competition making the

market expensive to sustain.

The historical ownership of national carriers and

aviation infrastructure such as airports has been with


the national governments, which have always been in

control of the national aviation system (Neuman &

Baglole 2003, p. 48). National carriers and Airports

have, in this sense been considered as national

property. The control of the airport and national

carriers by the governments was consequently

considered vital for the growth of trade and

international relations. The existence of commercial

activities within the aviation industry has been

limited, with the national carriers often encountering

losses and requiring government support.

Due to the above reasons, most of the commercial

functions of airports and airways were not within the

reach of most governments, and outsourcing has

been the major activity for services, which are

required within the industry. Based on the poor

efficiency and the decreased sustainability that the

arrangement of ownership for the airlines has, the

idea of privatisation became an alternative to the

national ownership (Pilarski 1994, p. 51). However,

many if the national carriers and airports in a number


of countries remain under the control of the national

governments (Neuman & Baglole 2003, p. 48).

The traditional model of management that is

described above has largely been changed in most

countries, this starting in the 90s when profit making

was considered a significant part in the aviation

industry. As Neuman and Baglole state, most of the

governments considered airlines as infrastructure

suppliers, but this notion has largely changed to

include the potential for them to make profits (2003,

p. 48). The current approach to airlines by the

governments has been that of profit making

institutions. The introduction of privatisation has

consequently enabled the respective governments to

cut costs and increase revenues, while at the same

time improving on the service delivery to the aviation

customers (Iszak 2013, p. 4). Privatisation has also

encouraged competition in many parts of the world,

with the owners making wiser and consultative

decisions on the industry together with how it should

be run. A couple of laws regulate the privatisation


efforts in the airline industry, and these are

important to ensure that the industry is streamlined.

Privatisation has its own risks, and these accompany

the benefits. The management of companies of such

large magnitude requires prudent management, with

great risks being involved (Cirafici 2001, p. 56).With

the privatisation of the airlines, the major problems

associated with this include the collapse of the whole

industry if mismanaged. The aviation industry is not a

small one, and involves a number of other industries

such as catering. For any government to achieve

maximum benefits from the privatisation efforts, the

privatisation must encompass all the areas that the

industry requires to run with liberalisation of the

same.

Competition:

Would privatisation encourage competition of the

national carrier of Kuwait with other aviation

companies in the world and locally? Many of the


airlines that have been privatised have been thought

to be more competitive on the global front compared

to the national carriers of other regions. Privatisation

is known to inject capital into a company, with

introduction of new ideas, resources, and technical

support (Neuman & Baglole 2003, p. 48).A number of

aviation companies that have been released from the

control of governments have gone ahead to be among

the most successful and well managed. In most of the

instances, the management of an airline by the

government poses a challenge since the people

contracted with the management are mainly for

political reasons and not based on the qualifications

that they exhibit. In most of the cases, the company

serves to propel and influence government policy by

being a tool for the government to demonstrate its

powered and other qualities. The focus has not been

to make profit, with many employees being employed

for various reasons.

The above measures lead to the reduced profits and

efficiency that the airlines enjoy at the government


control level, and this makes them less competitive

compared to the privately owned companies. The

availability of funds through privatisation allows

airline industries to compete financially with other

bigger and more competitive companies (Al-Wugayan

& Alshimmiri 2010). Some of the measures that

private airlines are able to do to cut costs that may

not be luxury for the nationally owned ones include

the ability to recruit and employ highly qualified staff

(Iszak 2013, p. 4). They are also able to limit the

number of employees that work for the companies,

reducing the operational costs. This is reported to be

an important way of ensuring he companies is

efficient (Iszak 2013, p. 4). Another measure of

increasing competition in the market is the ability of

privately owned companies to offer more products

compared to the public owned companies. Due to the

limitation of resources on the national level, the

nationally owned carriers are not able to recruit the

best employees and offer the best services, and this


makes them less competitive on the local and global

front (Sobie 2008, p. 18).

With the scheduled full privatisation of Kuwait

Airways, the competitive edge will be realised, and

the company will be better than before the

privatisation. Another factor about privatisation that

allows airline companies to be more successful when

privatised as compared to the national carriers is the

market that they are able to command (Iszak 2013, p.

4). The range of markets that national carriers are

able to command is dependent on political factors.

The companies are only as competitive on the global

front as the policies made for them allow, and this

makes competition a less probable prospect for them.

The privatisation of the national carrier in Kuwait has

attracted a number of companies, which will be

involved in the whole process (AME Info 2009). Some

of the companies that will be involved in the

privatisation already own other carriers elsewhere,

and a privatisation through them would increase

access of the airline to other markets. Some of the


measures that would ensure that the company is

profitable include the ability to compete with other

major airlines in the region, and privatisation is an

important way of ensuring that this happens. In the

US for example, the competition between airlines has

taken various shapes, with the lowering of travel

fares being a resultant of this (Sobie 2008, p.

18).Competitions, therefore, are not only good for the

economy but for the customers and other people

using the services too.

Some of the other reasons why the privatisation of

Kuwait Airways will promote competition include the

drawing of major companies to the plan and enabling

them to contribute through shares and mergers. The

company that will have the most control of the

company will control the operations as a major

shareholder, with this leading to the competition for

the shares of the company. This will inject significant

amounts of capital to the airline, allowing it to spread

and acquire new fleet of planes and increase its

destinations. With the privatisation of the airlines, the


Kuwait Government will be able to support other

areas of the aviation industry, and this will contribute

to the development of other equally competitive

companies and improve competition in the industry.

Some of the other positives of increased competition

that is likely to result from the privatisation include

the increase in government revenue through the

formulation of packages that will inject significant

amounts of tax to the national government. The

privatisation of Kuwait Airways will, therefore

promote competition in the industry, leading to the

development of the industry and improved trade and

globalisation.

Economic Efficiency:

In this section, the discussion will aim at establishing

whether the privatisation of Kuwait Airlines will

enhance economic efficiency. As stated above,

government ownership of the aviation industry was

burdening, with the governments suffering losses due


to the large sums of money required to keep the

prospects viable. The traditional management of

airlines and national carriers by the national

governments meant that the direct payments to the

employees, service providers and other expenses

encountered would leave little or no finance for

expansion of the companies or modernisation (Jexed

& Erick 2003, p. 771). The money was also being

drained from other areas that were of economic

significant to the governments, and this was not

economically efficient.

Funding of national carriers by the governments has

been made obsolete in most of the countries, with

this being taken up by the private organisations. In

Kuwait, the national carrier was managed privately at

the start of the operationalisation, with the

government taking control few years later (Al-

Wugayan & Alshimmiri 2010). The period was

preceded by another period of poor performance,

where the private company was compelled to sell the

shares partially to the government. The complete sale


of the shares followed, enabling the company to eject

and return its investment. The move is reported to

have cost the government in terms of money used to

bail out the company (Cirafici 2001, p. 56). This

proves that the government has been incurring

cumulative cost over the years, with the result being

the denial of other sectors of the economy that would

have received the funding (Pilarski 1994, p. 51).

The privatisation of the company has several ways

that it will promote financial efficiency in the Kuwait

market. One way is the reduction of government

spending (Privatisation Strategy Kuwait Airways

2008). As stated, above, the amount of spending that

went to sustain the airline company while at the

hands of the government was quite significant,

costing the overall developmental agenda of the

government (Sobie 2008, p. 18). With privatisation,

the government will raise funds through the sell-out

of the company and use it elsewhere. The employees,

previously under the government would also be

transferred to the private ownership. They have over


the past few years resisted privatisation, stating that

such a move would deny them the services that they

enjoyed while working under the government, with

change of terms (Jexed & Erick 2003, p. 771). With

the transfer of the employees, the government will be

relieved of the monthly bill that it has to offset (Jexed

& Erick 2003, p. 771). This is an avid way of saving on

the limited financial resource.

Another way in which the government and the public

sector will benefit includes the payment of tax that

the private company will have to undertake while

operating in the country (Cirafici 2001, p. 56). This

will add onto the revenue that is usually collected

with the surplus being applied on other areas of the

economy. The privatisation also means that the

government will also cut spending, and this explains

the overwhelming support that the resolution has

had within the government quarters. Another way

that economic efficiency will result from privatisation

of the airline company is through the reduction of

fares and travel logistics, as the company attempts to


compete both on the local and international front

(Jexed & Erick 2003, p. 771).

The other method of financial efficacy enhancement

is through promotion of international trade through

the privatisation. The process will open a way for

more mergers and privatisation of government run

companies in the country, and this, as stated above,

will make the government save on the much-needed

resources (Kuwait Airways Privatisation Approved

2013). The company also plans to privatise the other

operations that it run at its headquarters at the

airport, and through these, the privatisation will

mean more money and resources at their disposal.

The making of financial decision in the company has

previously been limited by the goal of the company

under the larger government goal of providing cheap

services (Cirafici 2001, p. 56). Most of the companies

that are run by the public sector have limited ways of

raising funds externally, and this is mainly due to the

policy governing their existence, which does not

allow them to do so in certain circumstances (Jexed &


Erick 2003, p. 771). Privatisation would allow the

company to raise funds through otherwise

“forbidden” methods.

The other way in which privatisation of the national

carrier may prove to be financially efficient in the end

is through the attraction of other businesses. With the

introduction of privatised air travel, there will be a

growth in the industry, as other companies try ad

competes with the new company. The move will lead

to the creation of one of the most vibrant industry in

the country, leading to the generation of income for

many people and the government (Cirafici 2001, p.

56). Some of the established companies will most

likely invest to attract the attention of the

shareholders, and any transfer of the shareholders

will enhance liquidity and flow of money in the

economy (Cirafici 2001, p. 56).


Trade and globalisation:

The privatisation of Kuwait Airways has a number of

effects on trade and globalisation. Castel describes

globalisation as the “process by which regional

economies, societies, and cultures have become

integrated through a global network of political ideas

through communication, transportation, and trade”

(2011, p. 755). Globalisation has been the topic of

many discussions in the recent past, with the last

century seeing increased efforts towards economic

globalisation. Many economies in the world are

dependent of others, and this is possible only through

the various trade agreements that exists (Pilarski

1994, p. 51). Aviation industry remains the most

significant of the industries that facilitate

globalisation, and this is through the movement of

goods and people all over the world to form the

global village (Cirafici 2001, p. 56).


The privatisation of Kuwait Airways will have global

effects on the industry, facilitating the growth of the

region and opening it to international markets that

were previously out of reach. The national carrier will

market the country to the other regions, and though

increased cargo capacity that it will have through

access to other airlines, Kuwait will be able to

participate in the process of globalisation. Kuwait

remains an important part of the global village

besides being a tourist destination attracting

thousands of tourists every year (Castel 2011, p.

755). Through successful privatisation of the

company, there will be renewed and aggressive

marketing of the country as an ideal tourist

destination, and this will promote the people around

here integrating with the population of the world.

Privatisation will also facilitate globalisation by

allowing foreign companies to invest in the same

company. Though the rules and regulations set out in

the privatisation of the company allow the

participation of local companies, international


companies are also welcome to participate in the

shareholding (Castel 2011, p. 755). Through the

participation of these international companies, the

Kuwait economy will be integrated into the =global

economy with this making an effort towards

globalisation. The benefits of privatisation will not

only be felt by the country alone, but by other

countries in the region that participate in trade with

it. This is with the large amount of goods and services

that will be moved with increased efficiency

compared to the era of public ownership.

The other effect that privatisation will have on the

economy will be the facilitation of global and local

trade. As stated above, the privatisation of the airline

will lead to the expansion of trade in the country, due

to many factors. One way is the facilitation of efficient

and chap way of doing business by altering the

transport of commodities around the country and to

the international market faster than the current state.

The airline is also in the process of acquiring a new

fleet of aircrafts that will modernise it and make it


one of the most efficient in the region. The

transportation of people and goods across the world

will be way of facilitating the trade, and this is

underway with the privatisation. The acquisition of

multiple planes to service the airways is a way of

promoting the trade between the country and the EU

as well as the US, which are the primary sources of

the planes (Cirafici 2001, p. 56).

The nest way that an airway company can do trade is

through the leasing of planes to serve in the routes

that it operates on (Pilarski 1994, p. 51). This is a

recognised way of doing business for the private

companies, and Kuwait Airways will follow this path

(Mestiri 2010, p. 97). This will be assuring way of

promoting the trade between the companies that will

be involved in the leasing and the privatised

company. The companies that will have increased

dominance in the airline include Boeing and Airbus,

both of which are competitive in the airline industry.

Trade will also be promoted in another way, through

the participation of companies that were not free to


engage directly with the airline while it was still in

public hands (Mestiri 2010, p. 97). These companies

include the catering companies that service the

passengers and the employees, the many airports in

the world that will be involved in the privatisation

and commercialisation of the company.

Despite the facilitation that the privatisation of

Kuwait Airways will have on globalisation and trade,

there are possible negative effects that it will have on

the same. Through private ownership, the company

will be able to increase the fares and prices of goods

and services that will fall under its control. This

means that the commodities that it will transport will

be sold at a higher price that that before the

privatisation of the company. This is a negative effect

on trade, and may end up being a hindrance to

globalisation and integration of Kuwait to the global

market. Some of the other negative effect on trade

includes the reduction of the number of employees,

with this having a social and economic impact of the

society. Privatisation of companies is known to be a


major cause of mass layoffs in any industry, and this

is likely to happen in the case of Kuwait Airlines.

Protection of Consumers from Anti-competitive

Behaviour:

Another effect that the privatisation of the Kuwait

Airways will have on the local economy is the

protection of consumers from anticompetitive

behaviour that public companies promote. In the

previous sections, it was discussed of how public

companies are able to influence the consumers

through the limitation of competition the markets (El

Mallakh 1966, p. 431). Since the government is the

sole authority in public companies, some of the

means that it uses to ensure that public companies

are successful include the killing of competition from

other sectors in the industry (Pilarski 1994, p. 51).

There are a number of ways that the governments

can kill competition in an industry, and one is

through the enacting of legislation that does not


promote competition in that industry (Cirafici 2001,

p. 56). One of the reasons that the government may

take such a measure is to protect the domestic

markets from the control of stronger international

forces, denying the local economy the much-needed

space in which to operate. One such economy is the

United States, where the legislation has discouraged

the operation of local airlines by foreign companies

for a long time (Castel 2011, p. 755). However much

this is protective to the companies operating here, the

market is only available to the local companies that

may not offer competitive rates for the customers

(Mestiri 2010, p. 97). If other international and

foreign companies were allowed to operate within

the region, the fares would significantly reduce as the

new companies use their financial base to provide

competition.

The above has also taken place over the last decades

in Kuwait, with the national carrier enjoying rights to

operate in areas that would otherwise be allowed to

all the airlines. The result of this has been the


escalation of fares and other charges. With

privatisation in the offing, the airline industry will be

open to competition and consumers will enjoy better

rates. There are also other reasons for the increased

competition in the industry with the privatisation of

the company including the availability of other

companies that will be serving the local routes

(Mestiri 2010, p. 97). In the process of privatising the

company, some of the smaller companies operating

flights in and out of Kuwait will be able to negotiate

for better terms with the government, as the

company will no longer enjoy the protection that it

currently enjoys.

Some of the other reasons include the exit of the

government from the industry, with the only function

being that of a regulation authority (Shibata 1994, p.

167). With this in place, the government will be able

to compel the companies competing with Kuwait

Airlines to take a more aggressive approach to the

industry, and this is so that the government can earn

more revenue through the increased competition.


The government may also legislate for the increase in

the number of airports and airlines operating in the

country, and the privileges will be open for

competition and not as a monopoly as the airline

currently enjoys. This will be an important step in

promoting competition within the industry, causing

protection of the consumers.

Some of the complaints that have been made by the

consumers concerning the competition in the airline

industry in Kuwait include that the monopoly by the

national carrier is not healthy for development

(Regional Aviation 2008). This assumption has been

existent for a long time, and has led to the

development of policies limiting the travel fares for

some of the destinations served by the airline. This

has not been convincing to the consumers, and the

privatisation of the company will be a positive step

towards the creation of competition that will be

protective to consumers.


Provision of Better Quality Goods and Services at

Lower Costs:

In many economies and areas of trade, the

privatisation of the companies that were initially

under the control of the government has led to the

reduction of the cost of goods and services in the

industry. An example is in the agricultural industry,

where many governments in the world have

relinquished control of the industry and allowed

private companies and individuals to participate

(Castel 2011, p. 755). The only control left in the

industry exists in the form of legislation that is aimed

at reducing the cost for the companies and protecting

them as well as consumers from substandard

products that may be harmful to them and the

economy.

The agricultural industry and other industries are

compatible to the airline industry, and privatisation

of the companies has led to the reduction of costs in

the industry as witnessed in the US and the EU


(Cirafici 2001, p. 56). As had [previously been

discussed, the US and the EU were the pioneers of

airline privatisation, and this has contributed to the

profitability that is witnessed at some time in their

history (George 2012, p. 71). With the increased

expansion of the industry and the coming down of

operating costs, the consumers got to enjoy the

reduction of prices of fares, with this being

experienced in the US first. This further led to the

increased privatisation efforts in Europe, with other

countries closely following suit (Cirafici 2001, p. 56).

The privatisation of Kuwait Airways will most likely

have the same effects as those experienced in the EU

and US at the time they were privatising their

airlines, and this is likely to cause a reduction in the

fares for the customers. Some of the measures that

will lead to reduced fares include the competition

that will take place once the privatisation is

completed. The competition will compel the

companies to provide the services at costs that are

lower to keep them relevant in the competition. They


will also have to improve on service delivery, with the

packages increasing in number and taking care of the

diverse needs that clients have. These qualities of

competition are already felt in the regions that have

the most numbers of airlines operating within their

borders, including the US, which has some of the most

convenient service rates in this industry (Al-Wugayan

& Alshimmiri 2010).

The other things that privatisation will affect to

create the reduction of fares includes the effect on

other industries that offer services to the air

transport industry. Privatisation will make it easier

for companies to work together with the most

efficient companies that provide services to the air

travel clients, and this will bring down the charges for

the respective services (Butkevičius & Jarašūnienė

2006, p. 143). The cumulative effect of having the

reduction of the prices for these commodities will

lead to reduced charges and more profits for the

companies. For a long period now, the air travel

industry in Kuwait has operated under the command


of the government, which had always dictated the

operational rates of most of the services charges.

Privatisation will bring this to a stop, causing the

average prices charged to reduce.

The other issue that is subject of discussion in this

section is whether there will be an improvement in

the quality of goods and services that will be offered

after the privatisation of the company. As described

in the previous section, the operation of a company

together with how well it is able to fulfil the wishes of

its clients depends on the quality of the products it

produces, or the services that it provides. With this in

mind, a more competitive company is one that

provides quality services to the clients and is able to

get feedback from the clients and other stakeholders

and act on it (Shibata 1994, p. 167). The privatisation

of the company will make it take such measures to

make it relevant in the industry and the region as a

whole.

Some of the other airlines that have been able to offer

cheaper services after privatisation include the EU


carriers, including the German and Italian ones

(Pilarski 1994, p. 51). Before the privatisation, the

governments in the EU were faced with increased

running costs, and this threatened to erode the gains

made in the industry since its establishment (Cirafici

2001, p. 56). Privatisation in line with the same in the

US allowed them to save on the money and at the

same time lower the cost to the consumer of the

services. However, there were shortcomings with the

privatisation of the companies, with the governments

still being forced to pay expensively for the bailouts

that were to follow (Regional Aviation 2008). The

economic crises of the year 2008 also contributed to

increased losses for the companies. In this kind of

crisis, the publicly owned companies are able to

manoeuvre their way out easily because the

government supports it directly without the need of a

bailout. This was the scenario in Kuwait, with the

national carrier experiencing little effects from the

crises (Cirafici 2001, p. 56).


Employment and Economic Growth:

The other effect that privatisation has had in many

economies id the generation of employment and

economic trade. In the information and

communication industry, the privatisation of many

firms has led to the creation of employment through

the development of new methods of economic

generation (Samad 1997, p. 14). In each of the new

developments in the industry, employment avenues

have been created (Al-Wugayan & Alshimmiri 2010).

Privatisation in the airline industry has the same

potential of creating employment in the end, and this

is through the emergence of other companies that

will be able to compete with the new private

organisation.

Some of the observed events and developments in

privatisation of companies in many areas of the world

include the laying off of employees to ensure that the

company is profitable and there is efficiency (Samad

1997, p. 14). True to this, most of the employees


currently working for the organisation have started

to worry about their future in the company

(Kinninmont & Partrick 2006, p. 30). The government

has however moved to assure them that the terms of

employment that they processed will not be subject

to change, even though they might not enjoy the same

privileges that they currently do (Castel 2011, p.

755). It is expected that once the private company to

run the airlines takes over, the employees will be

working with it, with those willing to leave opting to

do so.

The outcome however is expected to be an increase

in employment after the company stabilises and the

profits are sufficient. Some of the ways in which the

creation of employment will occur includes the

expansion in the operations of the company,

especially with the increased fleet that is expected in

the next several years. As Pilarski states, the

privatisation of a company allows it to open

subsidiaries in other areas of the world or even in the

same region, and this creates employment at these


centres (1994, p. 51). The company could also

develop other minor companies that deal with allied

services in the aviation industry, and this is likely to

create employment to the locals as well as other

people. The existence of a company under the control

of the government is sometimes limiting to the

expansion and acquisition of other companies, and

thus the limited chances of creating employment.

This is not the case in a privatised company, and the

creation of employment will be observed in the years

after privatisation.

The other possible outcome that the privatisation of

the company is likely to have is the probability of

economic growth in the country. In the countries that

privatisation of the national carriers has taken place,

the aviation industry is reported to have significantly

grown, and makes up a very important source of

revenue for the economy. With the privatisation of

Kuwait national carrier, the economy will be open to

competition with injection of investments from other

areas of the economy and outside the country


(Pilarski 1994, p. 51). There are many factors that

will influence the extent of economic growth

experienced in the country after the privatisation.

These will be dictated by the success of the

privatisation. Over the last century, there has been a

shift in ownership of public organisations offering

critical services to the hands of able private

companies (Al-Wugayan & Alshimmiri 2010). The

same period has also been marked with a spurt in

economic growth, and this will continue with the

privatisation of Kuwait national carrier.

In the United States where the privatisation of the

aviation industry took place at an early age, the

hardships that followed were quickly succeeded by

periods of prosperity in the industry (Al-Wugayan &

Alshimmiri 2010). It grew to provide mass

employment and now constitutes one of the pillars of

economic growth around the member states. The

collaboration of the private and public sector in the

aviation industry here has also enabled the industry

to be a leader in the provision of services. The


government is also able to nurture the industry

through the creation of laws that protect it from

unfair competition from other internationally strong

companies that are better placed in the competition

(Shibata 1994, p. 167).

In Kuwait, the government could take a leading role

in the promotion of economic growth in the industry,

by institution of laws to facilitate stable competition.

Compared to the US, the aviation industry here is in

initial stages, with the growth targeted to be as fast as

the initial stages in the US. In several years after

privatisation, the industry will be a significant

contributor to the economy. The measure is therefore

an important one that should be undertaken with

caution, as there are also risks of collapse of the

whole industry (Pilarski 1994, p. 51).

Promotion of Broad Development Objectives:

Could the privatisation of the national carrier in

Kuwait lead to the promotion of the broader


development objectives in the country and the region

at large? This can only be answered accurately by

looking at other privatisation measures that have

been undertaken elsewhere, and the effect that they

have had on the broad development policy here. The

country that comes to mind is Germany, with the

privatisation efforts that have taken place in the past

in the aviation industry (Kinninmont & Partrick 2006,

p. 30).Germany is one of the nations with a privatised

national carrier, with the same occurring in line with

her other European neighbours. The developmental

agenda of the nation has been to be among the

leaders in the field, and this it has achieved after the

privatisation of her national carrier (Al-Wugayan &

Alshimmiri 2010).

The aviation industry is well performing in Germany.

It is said to support other industries such agriculture,

manufacturing and processing. The efficiency and

relatively cheap transport that the industry provides

enables the transit of agricultural produce to markets

elsewhere in the world within hours of production.


The industry also enables the movement of labour in

and out of the country, with local distribution taking

place. The economy has observed increased growth,

and the proportion of this growth facilitated by the

aviation industry is significant.

With the privatisation of the national carrier in

Kuwait, the government holes that the broad

objectives that it has will be met or facilitated by the

move. Kuwait targets to be a leading tourist

destination in the Middle East. It has embarked on

vigorous campaigns to ensure that the objective is

met (Kinninmont & Partrick 2006, p. 30). Some of the

avenues that it has capitalised on include the aviation

industry, and through effective marketing, the

country could be a leader in tourism in the near

future. The main travel route used by the many

tourists visiting the country every year remains to be

through air transport. However, this mode of

transport remains largely unutilised, with the

potential being larger than currently being applied.

Through privatisation, the government will be able to


promote the nature of tourism that exists, and the

national carrier will use this as a marketing strategy

to lure customers to its service.

The privatised company will also be able to promote

domestic travel through the subsidiary companies

that are to be under it. The objective of the

government to have the revenues increase over the

coming years will be achieved through this measure.

The growth of the industry means that the

government will have another major contributor to

economic growth. Ever since the discovery and sale of

oil in Kuwait, the government through a series of

rulers has made it an objective to revolutionise the

economy and reduce reliance on oil and mining as the

main sources of revenue to the government for

economic growth (Al-Wugayan & Alshimmiri 2010).

Should the privatisation of the national carrier be

successful, the aviation industry will grow rapidly,

causing the revenues from this side to increase, and

hence the achievement of part of the governments

objective.


The other objective that the government has had for

the national carrier is to have it as successful as other

areas of the economy. The industry has continued to

underperform over the last few years, costing the

national government here large amounts of money in

the stabilisation and prevention of collapse (CIA: The

World Factbook: Kuwait 2011). The agricultural

industry is one of the other industries that will be a

beneficiary of the privatisation efforts. With the

success at instituting the measure, the industry will

benefit from the transportation of goods and services

at a more efficient and cost effective manner. The

country is largely dependent on agricultural imports

to feed her population, and this is due to the nature of

the land that is available for farming that is mainly

desert soil (Castel 2011, p. 755).

Another broad objective that the government hopes

to achieve through privatisation is the reduction of

public spending (Kinninmont & Partrick 2006, p. 30).

With the daily changes in the prices of oil on the

international market, the economy keeps suffering


losses, and thus requires a stable source of income to

fund some of the ambitious projects that are being

undertaken around the country (Shibata 1994, p.

167). The aviation industry is one of the promising

industries that the government is looking to target to

facilitate the transition from dependence on oil to

diversification of the economy.

The other way in which the privatisation of the

company will facilitate in the attainment of the

broader objectives is in the promotion of

international relations between the nation and other

countries such as her neighbours and trade partners.

The airline will link a number of countries that were

previously not covered under the public ownership

through partnership with other carriers (Shibata

1994, p. 167). This is one way that the move will

promote global integration, which is a national

agenda in Kuwait. As seen, therefore, the process of

privatisation is not a local event, but one with

multiple implications on the local and international

developmental objectives.


Growing Demand:

Over the last decade, there has been a marked growth

in the number of passengers that are transported

every day through the air travel. It is reported that on

the average, millions of passengers cross the Atlantic

every years to and from the west (Shibata 1994, p.

167). The increase in demand has been both at the

international front with local airlines reaping from

the growth in internal air transport (Al-Wugayan &

Alshimmiri 2010). Air travel has become the most

preferred method of migration and trade between

nations, and this is due to the relative speed that this

mode provides to the interested individuals. The

growth in demand means the companies providing

air travel services are forced to adjust their

companies to deal with the demand, and this is

mainly expansion requiring significant financial input

(Shibata 1994, p. 167).

For the airlines that are publicly owned, decision-

making is usually slowed, and the financial


requirements often exceed what the government has

allocated. This makes it difficult for the companies to

compete with the privately owned companies that

are able to obtain financial input from various sectors

and hence deal with the demand. Privatisation of

Kuwait Airways will provide the company with the

flexibility that is required to adjust in the wake of

growing demand on the international front (Al-

Wugayan & Alshimmiri 2010).

On the local market, there is also an observed

improvement in the demand for air travel, with a net

increase in the number of passengers utilising the

services. Privatisation and legislation of appropriate

laws will allow the company to tap to the local market

and increase the carrying capacity and the local

destinations. Through privatisation, there will also be

adequate competition, and this will bring down the

service charges for the clients. With the observed

demand, a reduction in the charges will mean more

clients are able to fly, and the company will end up

expanding on both the local and international market.


This expansion will be a positive feedback, leading to

the increase of demand. The result of this will be

profitability and eventual success of the company and

the move in general.

Of the reason for the proposal to have the company

privatised, there were concerns that the government

was not able to handle the growing demand within

the industry as the number of passengers increased

beyond the level that the company could not handle

(Castel 2011, p. 755). The question of dealing with

the increased demand was also a cause of concern for

the administrators of the company, with the

argument being that the growth will cause

unsustainable losses to the national economy (Al-

Wugayan & Alshimmiri 2010). This necessitated the

privatisation of the company. Does the plan have any

effect on the demand of services provided by the

company as compared to the current demand in the

industry, and does it result in satisfaction of the same

demand? The people researching into the feasibility

of privatisation of any public company ask this


question in the evaluation of the same before the

completion of the process (Castel 2011, p. 755).

Reducing the Existing Inefficiencies:

The current state of public ownership for the

company has been rocked by inefficiencies according

to Castel (2011, p. 755). Some of the inefficiencies

include a reduction in the profitability of the

company to eventual loss making at a point in its

operations (Castel 2011, p. 755: Al Mutawa 2009, p.

23). With the reported inefficiencies, some policy

makers both within the company and in government

offices recognised the need to relieve the government

of its role as the main management authority. Some of

the other inefficiencies that are being experienced

through the public ownership of the company include

the large sums of money and financial implications

tot the government functioning (Shibata 1994, p.

167).


The inefficiencies in the running of the company

came in the form of salaries paid to the employees

and other costs of running the company. The price of

fuel and the global economic crises that followed in

the year 2008-09 also cost the industry, with large

sums of money going to the rescue of the company

from crisis (Shibata 1994, p. 167). This issue is about

the time that the government realised that controlling

and funding the company would be expensive in

future, with plans being made to fully privatise it

(Castel 2011, p. 755). In the recommendations of the

audit that were made in the company, the significant

amounts of revenue lost were as a result of

inefficiency of the various processes followed in the

organisation (Castel 2011, p. 755).

The resolution of privatisation in the country and in

the industry is not the first in Kuwait, and the

government has undergone a series of privatisations

in various industries (Shibata 1994, p. 167). This has

seen an increased revenue collection from the sale of

the public institutions, with increased efficiency in


the respective sectors. There is also increased

competition in the industries where privatisation has

been done, and the government is reaping big

through the number of growing companies because

of the competition.

The United States is one of the countries with a very

efficient aviation industry, this being a change from

the original framework and performance of the

industry (Shibata 1994, p. 167). Researchers partially

attribute the improved efficiency to the privatisation

of the aviation industry, with rules to streamline the

sector (Castel 2011, p. 755). With the improved

efficiency, the average charges to the users of the

industry as lower than those of other nation where

air transport is strictly owned and controlled by the

government. The business environment has

improved, with this partially being attributable to the

privatisation of the industry. If Kuwait is successfully

privatising the aviation industry, the same will be

observed in contrast to the situation now where

inefficiencies are the order of the day.


The reduction of inefficiencies is not only through

privatisation. A lot still needs to be done to ensure

that the industry is free of them. The existence of

stringent aviation laws in the country, some of which

were meant to curtail the development of

competition for the publicly owned company should

also be a subject for review. In most countries where

aviation is a public industry, the legislated laws do

not facilitate the existence of competition in the

industry. Some of these laws include the provision of

subsidies and government funding for the companies,

which makes their services to be cheaper compared

to other firms offering similar services. This creates

an environment where there is little allowance for

competition.

SWOT Analysis:

An analysis of the strengths, weaknesses,

opportunities and threats (SWOT) of an organisation

is necessary for any company to be successful. There


is also need for a SWOT analysis of every move that a

company intends to take, and this will make the

evaluation of such a move successful leading to wise

decision making. In the privatisation of the national

carrier, Kuwait authorities hope to benefit maximally

through the above stated methods.

Some of the strengths of the move have been

analysed in the previous sections, and include

improved efficiency in the new privatised company,

reduced spending by the government and improved

competition in the industry. The other strengths of

privatising the company include the ability to raise

more capital for the company, that will make it have

more funds at its disposal and enable it compete on

the international and local market (Shibata 1994, p.

167). The most likely method to be used to privatise

the company is through public offers for shares, and

this will be the most appropriate method to allow the

public to also own part of the company (Castel 2011,

p. 755).


Despite the above stated strengths that the move to

privatise the company has, there are other

implications that may not be positive, and may end

up affecting the company or the government. These

constitute the weakness of the move, which should be

adequately examined before the finalisation. The

privatisation of a national carrier does not mean the

end of government participation. In most of the

nations where privatisation has taken place, the

governments have had to bailout the companies in

times of financial crises as witnessed in the year 2008

and 2009 (Castel 2011, p. 755). Governments end up

spending unplanned money, and this may negatively

affect the economy. Caution and the institution of

laws protecting the companies from such crisis

should therefore be done before full privatisation (Al-

Wugayan & Alshimmiri 2010).

Several opportunities that the privatisation of the

company could bring to the economy include the

provision of economic resourced and the creation of

employment in the sector. This will have positive


effects on the economy, and cause the economic

objectives to be met in the future. There are also

opportunities that the company will have with the

privatisation of the institution, and these are the

expansion of market improves service delivery and

the ability to determine the prices for perfect

competition with the other companies in its class

(Shibata 1994, p. 167). Before the privatisation, there

are plans to modernise the company with the

purchase of some of the most advanced aircrafts in

the world, and this will boost business and improve

on efficiency in the delivery of services.

According to Shibata, the company will purchase a

number of aircrafts from Airbus to replace the ageing

aircrafts in its fleet (1994, p. 167).The deal involves

the purchase of 25 aircrafts, from Airbus, with

additional leasing of 13 planes. This deal would cost

the government about 2.98 billion dollars, a figure

lower than the market prices that would have cost it

an extra 2 billion outside the agreement. This issue is

therefore one of the opportunities that the


privatisation of the company has provided. Several

threats are also present in the privatisation move,

and these include the threat of collapse of the

company once the new management is unable to

sustain it (Castel 2011, p. 755). This could also be

caused by the prevailing market and industry

conditions, where the company is not able to deal

with the prevailing competition.

Recommendations:

In the privatisation of the national carrier, the

government needs to take several precautions. One is

that the transfer should not be rushed, and should be

done through a structures process. The several

privatisation efforts in several areas around the

world have attracted criticism in the manner in which

they were performed (Castel 2011, p. 755). If

anything arises during the process, the liability falls

on the privatising authority. In this case, the

government will be liable. Some of the things that can


occur as stated above include the reduction of

profitability and even loss making. For this particular

privatisation, the process so far has been structures,

with the formation of an agency to oversee the

transition.

The government should also ensure that the

privatisation is fair and follows due process, as it

could result to some of the influential individuals

earning greater shares than the other interested

people and companies. The method that the

government can use to ensure that the company is

fairly sold include conducting a public offer where the

potential investors are evaluated to find out their

ability to fund the transition and to keep the company

viable (Castel 2011, p. 755). A proportion of the

shares should be reserved for small shareholders,

and this will make sure that the benefits of the

privatisation are felt across the board (Castel 2011, p.

755). In many of the countries where privatisation

has taken place, the consideration is for the

international companies with subsidiaries in other


countries, often-other aviation companies (Castel

2011, p. 755). This move has enhanced competition

in those countries in the aviation industry, and this is

likely to occur should the same be followed in Kuwait.

The government should also enact laws to streamline

the industry and prevent malpractice. In the previous

attempts to privatise the aviation industry in the

country, a change in authorities has meant that the

pace of reforms is slow. Since the current

administration has enacted laws to facilitate the

transfer of the company to the private sector, the

transition will likely be smooth. Some of the laws that

are required in this industry include the privatisation

law that will oversee the privatisation of other key

state agencies and companies. This will ensure that

the country remains viable on the global front.


Conclusion:

In conclusion, the Kuwait government has

undertaken to privatise the national carrier, with the

process being at an advanced stage. The remaining

government responsibility is in the modernisation of

the fleet of planes, with a deal being made with

Airbus to provide a new fleet of aircrafts for the

company. The privatisation started taking shape with

the passing of a law by parliament that allowed for

the creation of a body that will see the transition from

the public management to private management. The

essay focuses on the possible outcomes of the

privatisation, with comparisons being made to the

other privatisation efforts elsewhere in the world.

The plan has been found to encourage and

promote competition in the industry. This will also

lead to the enhancement of economic efficiency in the

country, where the government will save on the

money it initially used to sustain the company. The

plan will see the integration of Kuwait to the rest of


global trade, hence facilitating globalisation. Anti-

competitive behaviour that exists before the process

will be overcome, with better quality of services

being provided. The expected outcomes include the

creation of employment in the country with economic

growth being realised. It will also promote the

existing broad development objectives of the

government. The experienced inefficiency in the

company under the government will also be

overcome.


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