The peculiar politics of the cargo business
by Sami Halabi
If one were to attempt to gauge the progression of Lebanon’s economy from the 1950’s until today, one would do well to observe the trials and tribulations of the region’s first all cargo airline that ebbed and flowed with the country’s fortunes. Trans Mediterranean Airways (TMA) started out as the brainchild of Lebanese entrepreneur Mounir Abu Haidar in 1953. In 1949, Abu-Haidar reportedly gave up a career in medicine to take up a job as a junior clerk at Saudi Aramco. Working his way up the corporate ladder, Abu-Haidar eventually became the head of transportation at Aramco and was assigned the task of providing food and equipment for oil prospectors in the countries now know as the GCC.
Having identified the need for air transportation to service the expansion of Saudi Arabia’s energy behemoth, Abu-Haidar used his contacts at Aramco to obtain a letter of intent from the company to use his still chimerical air charter service to facilitate the operations of the company’s oil prospectors. Letter in hand, he flew to London where he arranged the lease of an aging transport plane — and TMA was born.
Carry anything that pays
TMA literally and figuratively took off, operating out of Lebanon under the license of then independent Air Liban. As TMA grew, it began to diversify its cargo, transporting everything from vegetables to firearms.
“Weapons to me are the same as pieces of lumber. A European government charters one of my planes and asks me to haul rifles to Algeria. What do I do, let someone else have the business?” said Abu-Haidar in an interview with Time Magazine, published June 1968. When British, French, and Israeli forces attacked Egypt in 1956, forcing the closure of the Suez Canal, the need for air transport sky-rocketed, as did TMA’s revenues, which quadrupled in one year to $1.2 million.
By 1967, TMA was operating the world’s longest all-cargo route and by 1971 TMA became the first cargo airline to offer around-the-world service. This achievement came despite the fact that TMA lost two of its aircraft in 1968 when Israeli commandos destroyed 14 civilian aircraft at Beirut International Airport to avenge the hijacking of an El-Al flight earlier that year by the Popular Front for the Liberation of Palestine (PFLP). By the onset of the Lebanese Civil War in 1975, the airline employed around 2,000 people and was a beacon of the Lebanese aviation industry.
As the civil war took its toll on Lebanon’s economy, TMA’s fortunes made an abrupt about-face, ending in the red for the first time in 1979. Faced with an increasingly unstable situation in Lebanon, the airline moved the majority of its operations to the UAE between 1976 and 1986. TMA’s prospects continued to wane as a result of the war and by 1986, after having failed to attain government assistance, the company came under the control of the Lebanese government, then headed by President Amin Gemayel. With the airline now public its fortunes — already dampened by the effects of the Lebanese Civil War — became inseparable from the corruption and nepotism that permeated the Lebanese economic and political landscape during the war-torn 1980s.
The Lebanese government later reversed its decision to bailout TMA and gave five times the amount that Abu-Haidar requested to Jet Holdings, according to Najib Alamuddin, Middle East Airline’s (MEA) chairman for more than 25 years. Jet Holdings’ chairman at the time was the infamous Lebanese business tycoon Roger Tamraz.
By the time Tamraz took over TMA he had racked up an impressive resume of business mis-adventures, including the embezzlement of hundreds of millions of dollars from various projects, and been sentenced in absentia to 15 years imprisonment by a Lebanese court. Tamraz contested the sentence, claiming he was being politically persecuted
At the time of TMA’s purchase, Tamraz was head of the Intra Investment Company (IIC) and Bank Al Mashrek, the successors to Intra Bank. Based in Beirut, Intra Bank had been the largest financial institution in the Middle East until it collapsed in 1966. The bank — holding about 10 percent of total bank deposits and about 40 percent of Lebanese banks’ deposits — turned out to be carrying about $120 million in essentially non-existent collateral.
The scandal sent shockwaves throughout the Middle East’s financial sector and the Lebanese economy, where it held major stakes in many of the country’s largest companies, including its national air carrier MEA. Fifteen months later, the bank was re-floated by the US investment bank Kinder Peabody & Co. where Tamraz was an executive. Tamraz then took over Intra in August of 1983, three years before it bought TMA through Jet Holdings.
After years of destruction during the war, Beirut International Airport (BIA) eventually re-opened its doors in May of 1987, prompting the return of TMA to Lebanon with a reduced fleet of seven Boeing 707s.
In late 1988, rumors of a liquidity crisis prompted a rush on Bank Al Mashrek and the bank collapsed. During the fallout over Mashrek’s collapse in 1988, Lebanon’s central bank took control of Jet Holdings and, by default, TMA. TMA’s fortunes continued to falter as a result of regular closures at BIA. When the war ended in 1990, the airline was in shambles, its ownership disputed and its routes diminished. TMA had become symbolic of Lebanon’s economy after 15 years of civil war.
In early 1991, a government committee was established to decide TMA’s future. The committee estimated that the company’s debt stood at $80 million, while its assets only totaled $45 million. Under these circumstances the committee proposed that the airline either merge with MEA or be granted a substantial amount of funds in order to resume operations. “There was a concept prompted by Hariri for a merger between MEA and TMA. The concept was that Lebanon needs one airline and MEA needs to be privatized so why not merge TMA and MEA and put them on the marketplace,” says Fadi Saab, CEO of TMA from 1996 to 2008.
In the end, the dispute over the airlines’ ownership was finally resolved when a 74 percent stake of TMA was bought by the Lebanese Air Investment Holdings (LAIH) in March of 1993 for $8.5 million, according to Mohamed Kabalan, the longtime head of TMA’s workers’ syndicate. The owner of LAIH was Farid Raphael, currently chairman and general manager of Banque Libano-Française (BLF).
Raphael refused to contribute to this article, stating only “the banks managers and owners do not talk about their personal investments.” At that time many rumors began to spread regarding the company; one of which suggested TMA was actually bought by the late Rafiq Hariri through Raphael and his holding company.
“The rumor has been going around ever since I came aboard that this is a Hariri company. I have not seen any proof that this is a Hariri company,” says Saab. Other factors further obscured the identity of TMA’s true owner. “The address on the letter of purchase was that of BLF, but the name registered was not BLF; it was LAIH,” says Kabalan.
All indicators, however, point to the fact that TMA was bought in order to be sold. “The idea of LAIH was to restructure the company and then sell it to a strategic partner,” explains Saab, a claim denied by his company in the past. In order to prop-up the airline’s prospects and its marketability, the government court appointed to handle the bankruptcy of Bank Al Mashrek forgave a total of $39 million that was owed by TMA to the bank, giving the airline some much needed wiggle room.
1953 — Mounir Abu-Haidar founds TMA to service Aramco’s oil prospectors
1959 — TMA obtains air proprietary cargo license
1966 — TMA introduces jet service through the acquisition of its first 707s
1968 — Israeli commandos destroy two of TMA’s aircraft in an attack on Beirut International Airport and the airline establishes the longest scheduled air cargo route in the world
1971 — TMA obtains the rights for the first round-the-world all cargo service
1976 — Beirut International Airport closes for 168 days because of Lebanese Civil War and TMA moves its operations to the UAE
1979 — Rights to fly a round-the-world cargo service are withdrawn
1985 — Operations ceased as a result of Lebanese Civil war
and labor disputes
1986 — Lebanese Government takes control of TMA from Abu-Haidar and transfers it to Jet Holdings under Roger Tamraz who moves its operations back to BIA
1988 — Bank Al Mashrek collapses sending Tamraz fleeing and Lebanese Government re-acquires TMA
1993 — A major stake in TMA is purchased by Farid Raphael’s Lebanese Air Investment Holdings
1996 — TMA decides to increase its capital by $40 million as part of a new restructuring program
1999 — TMA comes out of the red for the first time in decades
2000 — Lebanese Government adopts the Open Skies agreement putting TMA at a competitive disadvantage
2002 — TMA’s planes banned from flying over Europe
2005 — The Lebanese Civil Aviation Authority suspends TMA’s Air Operating Certificate, grounding the airline’s planes
2008 — A 99 percent stake in LAIH is sold to entrepreneur Mazen Bsat for a total of $1
Under the aegis of LAIH, the airline began a restructuring program with the hope of pulling the ailing carrier out of the red. After a tragic crash of one of its 707s in 1993, the company decided to reduce its staff, despite staunch opposition from TMA’s labor syndicate. TMA’s staff went from 750 employees in 1993 to around 400 by the end of 1996. With the company again in disarray the prospects of it being sold became negligible. “[Rafiq] Hariri had previously approached Raphael [and] told him to ‘hold off on the kind of reorganization you want to do because we might buy [TMA] from you’. There was political opposition at the time and in 1996 it was apparent that this would lead nowhere,” says Saab. With the prospects of a Hariri buyout all but wiped out and the perpetually unstable labor situation looming, TMA closed its doors from July to October of 1996. The company asked a then little-known consultant to perform a complete audit and create a restructuring plan. The consultant, Fadi Saab, then spent 12 years at the helm of TMA.
At the behest of Saab, LAIH decided to prop up the company with a capital injection that totaled $40 million. “The infusion was done by Farid Raphael’s group and it was done in two phases. The first was $20 million and the second phase was $20 million,” says Saab. Accordingly, Saab promised to get the company out of the red at any cost. “He made all employees sign a two-year salary freeze without the consent of the syndicate. He said that either you sign or you don’t have a job,” claims Kabalan. “The syndicate never accepted conceptually what we were doing and so we took a management decision to freeze salaries. There was no agreement between us and the syndicate,” Saab furthers. The salaries of TMA’s employees have remained frozen ever since.
Back in the air
Nonetheless, Saab managed to bring the company into the green, albeit kicking and screaming and without the kind of support he was looking for from the LAIH injections. “The two injections of capital did not come in time; they came in bits and pieces. They ended up as funding for working capital requirements and not as an investment capital, so we were unable to use the funds ‘front end’. We had to use them to pay bills,” explains Saab. Even so, TMA’s revenues grew by $5 million from 1996 to 1998 and it started to make a profit by 1999.
However, in the typical yo-yo fashion of TMA, things started to go awry again in 2000. One of TMA’s biggest clients was Kuwait Airlines who had leased three of TMA’s 707s to operate its cargo arm. In late 1999 the Kuwaitis requested TMA install the TICAS navigation system on its planes because they needed the system installed by January 1st, 2000 in order to fly over several countries. “We made about $1 million a month from the Kuwaiti contract,” says Kabalan. “Saab didn’t install it until the last minute. The Kuwaitis said they didn’t want to take the planes two or three months later because they had obligations to fulfill in the mean time. They left us for someone else and we lost $1 million per month.” As far as Saab was concerned, Kuwait Airlines were on their way out anyway. “Kuwait Airways were shopping for a replacement for TMA because our planes were old and expensive to operate and maintain. We knew they would cancel.”
External factors and government favoritism also played a major role in TMA’s demise. In 2000, the Lebanese government decided to adopt the Open Skies agreement, effectively opening up Lebanon’s airspace and BIA to all foreign companies with no restrictions on route rights, the number of designated airlines, capacity or frequency. The agreement effectively crippled TMA’s competitive advantage in the Lebanese market and consequently nullified its attractiveness to investors. “Open Skies was one of the main factors why TMA was not able to find an investor. All the international airlines we were talking to said ‘why do we need you anymore?’” says Saab.
Compounding this decision was the government’s longstanding favoritism of MEA, of which it owns 99 percent through the Lebanese central bank, despite several initiatives to privatize the airline. Moreover, MEA still enjoys a monopoly, which expires in 2012, on scheduled air transport of passengers. MEA’s monopoly, which expires in 2012, has curbed the aspirations of many airlines — including TMA — looking to expand into scheduled passenger transport. “In concurrency to Open Skies, the government protected MEA. The government renewed the exclusivity of MEA, erased debt that MEA owed to the government and injected millions of dollars of capital,” explains a high-ranking member of the aviation industry, who spoke on condition of anonymity. “When you tell the government MEA is against the WTO and its unfair competition, they tell you it’s a private company,” the source added.
To date, MEA’s monopoly remains in place, in spite of the International Civil Aviation Organization’s (ICAO) principles, to which the Lebanese Civil Aviation Authority (LCAA) is a member. “Monopoly is out of the question when it comes to civil aviation; its not part of the formula. No one in the world encourages it anymore,” says Mazen Hamdicouk, Head of the LCAA. “However, our position is dictated by the minister [of transport] and the government has to make that decision at the end of the day.”
As far as Lebanese Minister of Transport Ghazi Aridi is concerned, there is no reason why MEA cannot continue to be Lebanon’s only national carrier for some time to come. “Some people think that MEA’s exclusive rights end in 2012, but I think of how to keep protecting the national carrier after this date,” said Aridi at the opening of MEA’s new pilot training center in November 2008. Aridi was unavailable for comment. What’s more, the EU banned TMA’s aging 707s from flying over Europe in 2002 due to requirements on emissions standards eliminating many of TMA’s most profitable routes.
Purge of pilots
With everything seemingly working against TMA, the blow came in 2005 when a row with its pilots over pay resulted in all but a few of its 53 pilots losing their jobs. That same year the LCAA suspended TMA’s Air Operator’s Certificate (AOC), citing the fact that they no longer had the capability to operate effectively, and so the airline ceased flying. The company’s planes currently sit amongst a pile of shrubs on the outskirts of TMA’s facilities at BIA waiting to be scrapped.
By the end of 2005, TMA’s debt stood at $85 million dollars. From 2005 to 2008, the airline managed to bring its down debt to $60 million through renegotiation with its various creditors. The company’s operations are now restricted to maintenance and handling at BIA. TMA needed new blood; it needed a new vision, which came in the form of a one dollar bill.
In late December 2008, LAIH was purchased for $1 from Farid Raphael. The new owner of TMA is Mazen Bsat. The mild-mannered Bsat started his career in his family-owned pharmacy business, which he later took over and built into one of Lebanon’s most successful pharmacy chains — Mazen Pharmacy. Bsat also owns a series of childcare and toy stores around Lebanon, as well as a mall that carries his name — Mazen City — on the outskirts of Beirut.
Bsat first entered the commercial aviation world in 2000, when he opened his charter airline and named it the Flying Carpet — Bsat al-Rih in Arabic. Flying Carpet got its start by flying to Iraq before the American-led invasion in 2003. At the time, there were no direct routes from Beirut to Baghdad and charter service was the only avenue for direct flights between the two cities. From a one plane operation eight years ago, Flying Carpet now operates point-to-point eight times per week to Baghdad, Irbil and Suleimania.
As Flying Carpet expanded in unison with the post-war Iraqi market and it too became marred by the type of controversy that has become synonymous with the country. On 15 January 2004, one of Flying Carpet’s airplanes flew into Beirut carrying $12 million in new Iraqi dinars, the same day the Coalition Provisional Authority (CPA) stopped disseminating the currency in Iraq. The plane, its passengers and its valuable cargo were all seized by the Lebanese authorities who suspected the money was part of widespread smuggling associated with the currency at the time. The authorities also arrested Michel Mkattaf, the owner of a local currency exchange business and the only son-in-law to former president Amin Gemayel. The other passengers were Richard Jusurati and Mohammed Abu Darwich.
The New York Times reported that Bsat was actually flying the plane at the time, a claim he vehemently denies. “I wasn’t flying the plane, I was in Beirut at the time. I don’t have even have a license to fly [commercial aircraft],” says Bsat. “They leased the plane from me to transport cargo and I had no idea what was in the cargo.”
The issue was finally resolved when the Iraqi Ministry of Interior — in effect under the auspices of then head of the CPA Paul Bremer — sent a fax to the Lebanese government stating that the money was being legally transferred for the “urgent purchase” of armored vehicles and “sophisticated equipment intended to confront the dangerous security situation in Iraq,” reported The Independent.
In the end, all the men and the money were released and Bsat claims the entire issue boiled down to the usual political bickering between Lebanon’s politicians. “It was basically political. Mkattaf is the son-in-law of Amin Gemayel. Amin Gemayel and Emile Lahoud [Lebanon’s president at the time] didn’t like each other and this is how it started,” says Bsat, banging his fists together for emphasis. Mkattaf’s legal council could not be reached for comment.
Bsat began his relationship with the TMA in 2001 when he contracted the company to service his fledgling airline. The relationship blossomed and allowed Bsat access to the inner workings of TMA. “I knew TMA inside and out: the structure, the facilities and the manpower. I knew that there was huge potential for TMA,” he says. The potential that Bsat refers to is rooted in TMA’s facilities at BIA, a rare and valuable asset considering the fact that the airport can no longer expand because it is surrounded by residential property and the sea. Furthermore, because Bsat already owns a functioning airline he can benefit from economies of scale by using the same back office to run both TMA and Flying Carpet. But was TMA really worth $60 million of debt?
“Perhaps the company is not worth $60 million and maybe I am buying it for more than its worth,” admits Bsat.
Upon entering TMA’s various facilities, one can clearly see that the company had been neglected by its previous owners. Old telephones and their cords are stacked behind a door in one of the buildings, chips of paint cover the floors inside and outside of the facilities and even the ceiling of the chairman’s office is beginning to cave in. Therefore, it’s little wonder that the first phase of TMA’s restructuring plan under Bsat is to renovate TMA’s buildings and facilities and upgrade maintenance and handling capabilities.
By acquiring TMA, Bsat took on a great deal of financial burden. He also placed himself smack in the middle of the seemingly unending battle between TMA’s labor syndicate and its management. The constant labor disputes at TMA have, in the past, seriously affected the company’s ability to market itself as a reliable carrier. While the decision to upgrade and renovate the facilities may seem to be a logical and necessary step, given their abysmal state, it has angered many of TMA’s employees as well as the country’s labor rights advocates.
“What the administration is doing in reality is making the problems of employees their lowest priority by focusing on fixing the buildings and painting them,” says Ghassan Ghosn, head of Lebanon’s General Confederation of Labor Unions. Ghosn threatened to encourage widespread strikes and protests at TMA, as well as to sue TMA’s administration “if possible,” unless TMA meets the labor syndicate’s demands.
Bsat is dealing with this threat head on. “We have sent the union a rejection letter pertaining to their demands. I told them that it’s not the time for it,” says Bsat. “[Management decisions are] not their business. Their business is to work and ours is to manage.”
The wrap up
Essentially Bsat has paid $60 million, in the form of debt, for TMA. The debt itself is owed to a number of banks and other creditors, including the National Social Security Fund (NSSF) and the LCAA. While the company has managed to make an agreement with the NSSF over how it will pay off the $15.5 million TMA owes. A Lebanese court is considering the amount owed to the LCAA. The main point of contention is whether or not TMA owes the LCAA the total amount of land rented from the LCAA based on the actual land or the built-up area. The outstanding amount has been pending for around 15 years and the difference in calculations stands at around $6 million — $15 million as opposed to $9 million. Bsat has agreed to pay the amount requested by the LCAA because he has “decided to take all the problems out of the way of TMA.” Prior to the decision, Bsat paid the LCAA $1 million dollars as a “goodwill gesture” but he cautions, “at anytime, I can ask the court to be part of the issue again.”
Given TMA’s tumultuous past, its labor issues, its massive debt and the Lebanese governments favoritism of MEA, the odds are against Bsat. Nevertheless, Bsat is determined to expand TMA’s operations, promising to take on new planes once he has completed the first phase of his restructuring program and casting off doubts about the acquisition being merely another ploy to reposition the company for a sale. “I’m in it for the long run,” says Bsat.
So far, Bsat has taken bold steps to address many of the airline’s longstanding issues. With Bsat running the show, TMA now stands to benefit from a new and inspired vision backed by a history of success in the regional aviation industry. How high and how long this new chapter in TMA’s, and Lebanon’s, history will last is anyone’s guess. The two options appear to be up or out. If Bsat’s past is anything to go by, TMA seems to have its sights firmly on the sky.
First Published in Executive Magazine’s March 2009 issue