Gulf Business December 2009 | CEO Letters

THE EXECUTIVES

Adel Ali Air Arabia

Rabea Ataya Bayt.com

Markus Giebel Deyaar Development

Charbel Fakhoury Microsoft

Louis Hakim Philips

Maurice Flanagan Emirates Airline

The outgoing year has no parallels in the Gulf’s business history.

The global recession was the first serious trial of many companies in this region’s young economies. With no precedent to help them, chiefs employed a range of strategies to wrestle with the grim realities of 2009, while preparing for the anticipated upswing in 2010. This month, in the first of a two-part series, top CEOs from around the region share their experiences and strategies.

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THE EXECUTIVES AIR ARABIA

Adel Ali The chief executive officer of Air Arabia admits that 2009 has been challenging for Gulf aviation sector but predicts consolidation in the year ahead.

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oday, as a direct consequence of the global financial crisis, individuals and businesses worldwide are minimising their travel spend. Families are sticking closer to home, and business people are teleconferencing whenever possible. In typical times, passengers focus on valuefor-money air travel; in these exceptional times, passengers are generally moving to the back of the cabin – or opting for low-cost, rather than conventional, carriers.

The worldwide aviation industry is currently expected to experience total losses of $11 billion this year alone. In North America, annual airline losses are now projected at $2.6 billion; in Europe, the world’s worst-hit market, losses are expected reach $3.8 billion.

At the same time, yields and passenger traffic are projected to decline by 12 per cent worldwide, while cargo traffic is expected to drop by 15 per cent.

Airline professionals are used to challenges, however, and the ongoing consolidation in the sector is a clear sign that carriers are doing their best to adapt to this new reality.

Here in the Middle East, 2009 was certainly a challenging year for the airline industry – even if those challenges pale in comparison with the global downturn. Nevertheless, regional carriers are expected to post collective losses of about $500 million in 2009, primarily owing to a mismatch between

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capacity and demand, as well as a result of pressure on prices and, correspondingly, net income.

Despite these immediate challenges, the Middle East remains especially resilient by global standards. Indeed, the most recent data indicates that, in 2009, the region will outpace the rest of the world in terms of revenue per kilometre, an important industry benchmark. In the longer term, regional carriers remain strongly positioned – primarily because the macroeconomic outlook for the Middle East, and the Gulf states in particular, remains extremely positive.

Despite these immediate challenges the Middle East remains especially resilient by global standards.

With a young and vibrant population of 40 million and an economy that has grown threefold in only five years to $1 trillion, the Gulf serves as the trade, investment and knowledge hub for a considerably larger area. Increasingly integrated into the fabric of the global economy, the Gulf also lies at the heart of the wider Middle East, North Africa and South Asia region that stretches from Casablanca to Calcutta. The region is

home to 1.6 billion people and has a combined gross domestic product of $3.2 trillion.

Today, the region is the primary catchment area for Middle Eastheadquartered airlines, including Air Arabia, which now serves some 58 destinations from its hubs in the UAE and Morocco. With the start of operations at the carrier’s third hub, in Egypt, projected to take place in the first quarter of 2010, Air Arabia will extend its existing reach across Europe and Africa even further.

In just over six years since Air Arabia pioneered the low-cost carrier (LCC) model in the region, the LCC segment has witnessed significant, sustained growth – while the global financial crisis has also, of course, created new opportunities for LCCs as passengers increasingly look for value-for-money services. Today, lowcost accounts for more than five per cent of regional market share, and that figure will unquestionably increase over the coming years – outpacing growth in the sector as a whole.

Among both low-cost and conventional carriers headquartered in the region, however, medium-term concerns persist, including volatility in energy prices, monopolisation of skies and airports, uncertainty about the pace of global economic and concern about the sustainability of rapid expansion at some airlines with extremely significant order books and limited financing capacity.

THE EXECUTIVES AIR ARABIA

Name: Air Arabia (PJSC) Established: 2003 Turnover: $399.9 million Core activities: Air Arabia is the Middle East and North Africa’s leading low-cost carrier. It has a fleet of 20 Airbus A320 aircraft, which serves 57 destinations across Asia, Europe and the MENA region. It has two subsidiaries, Air Arabia Maroc, and the recently announced Air Arabia Egypt, and is headquartered at Sharjah International Airport in the UAE. Latest results: Net profit for the first nine months of 2009 increased six per cent to $97.7 million, with a nine-month turnover of $399.9 million. Net profit for Q3, ending September 30, 2009, stands at $39.2 million.

In 2010, it is likely that the region will witness at least the first signs of consolidation, a healthy trend that will stabilise the market and indicate its increasing maturity.

Likewise, gradual liberalisation will continue next year – though probably not as quickly as some would like.

Regional carriers will also see green issues rising higher on their agenda, including reduced emissions and improved fuel efficiency, both of which happen to be good for the planet and good for business.

For the world economy, most leading indicators now point to recovery in 2010, led by the Middle East, AsiaPacific and Latin America. The global aviation industry will probably remain in the red next year, however, with fuel prices further squeezing already tight cash flows.

Here the next 12 months will not be easy for airlines. But there remain significant grounds for optimism that the recovery will come early to the region – and that the collective future for the industry is bright and secure. n December 2009 gulfbusiness.com

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THE EXECUTIVES BAYT.COM

Rabea Ataya Internet recruitment agency Bayt.com’s chief executive officer reveals how his company adapted their practices to deal with the recession, and predicts an upswing for the year ahead.

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erhaps a good way to describe the effects of the global recession on this region is to look at a snapshot of how one company was affected by, coped with and, finally, took advantage of the economic downturn to plan ahead, retrench and reinforce its ranks.

On January 24, 2009, the Bayt.com board of directors’ heated discussion regarding the 2009 budget was finally over. Q1 to Q3 of 2008 had been phenomenal. Top-line growth was more than 80 per cent. Our bottomline growth had been in the high triple digits. The global economy then hit the brakes and suddenly Q4 flattened out for the first time in eight years of operation.

Interestingly, Bayt.com’s Consumer Confidence Index predicted as much.

Consumer confidence across the region had been declining since January 2008. We still remained divided: would we have a flat year in 2009 for the first time ever, or would we continue to grow, albeit at a more modest rate?

January 26 I called a regional management meeting. What was their outlook on their budget? Most managers expressed the view that we would experience a small dip at the outset of the year followed, by aggressive growth by Q4. They committed to their figures.

February 2 The results were in for the month. There was a big drop in employer recruiting activity when comparing January 2009 with

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January 2008. Companies were adopting a ‘wait and see’ policy.

I reverted to monitoring daily job posting counts and employer payments with religious rigour.

February 15 As part of our corporate social responsibility (CSR) activities, we held a free CV consultation and meal session in Dubai Internet City.

More than a thousand unemployed residents of the UAE lined up for advice. Among the group that I consulted was a project manager with more than 30 years’ experience in the Gulf; a dentist who had recently

The focus was threefold: tighten the expense belt; innovate new revenue streams; and continue our CSR programmes. relocated to Dubai; and half-a-dozen senior bank employees. While the scale of the problem was awe-inspiring, the personification was distressing.

Simultaneously, the news globally was becoming more challenging and uncertain. I knew frank communication was the key to succeeding in this period. On February 16 we conducted an all-hands staff meeting to disclose fully Bayt.com’s sales, expenses, profitability and

the general state of the economy.

The whole team needed to know our strengths and weaknesses to work through any challenges.

On March 7 our February Consumer Confidence Report saw the largest drop yet in our primary markets. It was a sign that the economy would become even more challenging before it began to improve. The focus now was threefold: tighten the expense belt; innovate new business and revenue streams; and do our part for the economy through continued CSR programmes.

A month later, on April 15, I completed a region-wide customer tour. I needed personally to sense what was happening with our clients. For all the talk of one city or country being better off, it was clear no one was immune to the prevailing economic global climate. Organisations had not ceased to hire. However, as opposed to 2008, they were now hiring top-grade talent rather than growing headcounts.

The good news: we had become ideally positioned as a highly efficient, low-cost, large choice recruitment solution provider.

Budget-contrained employers were increasingly turning to us.

We have always been contrarians.

When others run away from a theme (for example, starting a dotcom in 2000), we have embraced it. On April 20, we launched Intilaq: our project to fund and support the next big thing out of the Middle East.

THE EXECUTIVES BAYT.COM

Name: Bayt.com Established: 2000 Core activities: Dubaiheadquartered Bayt.com is the largest job site in the MENA region, with more than 30,000 employers and three million registered job seekers from across the MENA region, and around the globe.

The website offers complete employment solutions and careerplanning tools. Bayt.com is also accessible in three languages – English, Arabic and French – and has offices in Kuwait, Bahrain, Saudi Arabia, Jordan, Morocco and Pakistan, as well as in the UAE capital, Abu Dhabi.

Latest results: Not available, but Bayt.com chief executive officer Rabea Ataya was recently quoted as saying the firm’s revenue was “double digit, millions of dollars, growing 100 per cent per annum”.

On May 27 we were awarded the ‘Company of the Year’ award by TECOM Investments Pearl Award.

On June 7 I flew in to Amman where I would be working for the next two months. This would be an opportunity for me to become highly involved in operations and efficiencies, and to gain a fresh perspective on our general business situation.

On July 30 we saw a massive bounce in employer activity. The year was beginning to look more like a scatter chart than a trend line. We celebrated the good news with staff bonuses.

Thankfully, by September 30 we were back to aggressively hiring. We were seeing an upswing in all markets and feel there has never been a better time to hire top-notch talent.

Looking back from the time of writing (early November) October was our best month of the year. Our last Consumer Confidence report shows a positive trend in most markets.

More than 50 per cent of the region’s employers are looking to hire in the next three months. Optimism is in the air. Perhaps we are out of the woods. n December 2009 gulfbusiness.com

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THE EXECUTIVES DEYAAR

Markus Giebel Deyaar Development’s chief executive officer explains how the real estate sector can use new business models to adapt to the economic climate.

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he global financial crisis is fundamentally reshaping the real estate sector, across developed and developing markets alike. What started with the busting of the subprime mortgage market in the US in late 2007 is now a prolonged downturn.

The International Monetary Fund estimates that the cumulative loss in enterprise and asset value as a direct consequence of the crisis will have exceeded $3 trillion by the end of the year.

While no sector has been hit as hard as financial services, the real estate sector has been among the worst victims of this financial implosion. Here in the region, short-term speculative investments, sometimes based on off-plan promises that never materialised, have gone terribly wrong. Access to funding has become difficult and, along the way, the fundamentals of supply and demand appear to have been occasionally ignored.

That said, every crisis is also an opportunity to innovate. While a fullfledged recovery is still to take effect across the region, new opportunities continue to emerge.

According to Euromonitor International, the middle-income segment in the Middle East is likely to grow by about 11 per cent by 2015. However, despite the longterm presence of demand for midincome or affordable housing, very few developers in the region have

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addressed this growing need. This is mainly because average incomes in the region have not kept pace with inflation in the real estate sector, including rising costs of land acquisition and construction.

As a result, there continues to be undersupply of affordable housing in the Gulf.

Saudi Arabia, for example, is expected to need more than 2.5 million housing units from now until 2020. Other markets, such as the UAE and Lebanon, are also expected to see significant demand for affordable housing over the next five to 10 years.

We at Deyaar are already working with a diversified product approach with the renewed focus on the mid-end segment.

The deciding factors, obviously, are cost and margins, which is why developers have been reluctant to invest in developments that were more accessible to those with lower incomes. In this regard, it is important to keep in mind that a commonly accepted guideline for rental affordability is that monthly housing costs should not exceed 30 per cent of a household’s gross income. In the UAE, for example, the median rent-to-income ratio is

estimated at about 40 per cent; in Saudi Arabia’s three biggest cities it is more than 40 per cent; while in Egypt, the median rent-to-income ratio is about 33 per cent. This is in striking contrast to North American and European markets, where the median rent-to-income ratio is less than 30 per cent.

The other main implication of new market realities for developers is the need to consider new business models to adjust to the change in demand patterns. We, at Deyaar, are already working with a diversified product approach with a renewed focus on the mid-end segment across key markets in the region. The company has already adopted a five-pillar strategy, comprising the Deyaar Easy Payment Plan, price reduction, customer consolidation, project consolidation and the Deyaar Opportunity Fund – Deyaar’s first real estate fund.

It is evident now that the real estate sector in the region has reached a tipping point, where developers have little option but to shift from a purely developmentfocused approach to a long-term investment business model to survive the crisis. Given current rates for prime assets in the region, the opportunity for a real estate fund is obvious.

While expanding revenue streams and focusing on underserved segments can address some of the immediate challenges for developers, the case for the security

THE EXECUTIVES DEYAAR

Name: Deyaar Development PJSC Established: 2001 Core activities: Originally the property management unit of Dubai Islamic Bank, Deyaar became its own private shareholding at the beginning of 2001. It develops both residential and commercial property, while providing a range of comprehensive real estate services for its tenants and customers.

Latest results: Third-quarter net profit for 2009 was posted as $22.2 million, an increase of eight per cent on the second quarter, while Q3 gross revenue stands at $122.6 million. Total shareholders’ equity and total assets stand at $2.04 billion and $2.99 billion respectively.

of the property market in the medium and long term is fairly simple.

The regional supply-demand dynamic is primarily informed by the need for homes, offices and retail space to meet the needs of this young, fast-growing population. Lower oil prices don’t change that fact, nor does the global financial crisis.

As far as the time frame for recovery is concerned, the establishment of government support funds, rapid action taken to ensure liquidity in the banking sector, and the start of consolidation are all strong steps to ensure t the correction in the regional real estate sector will not be prolonged, vis-Ă -vis other developed markets, such as in the United States or in Europe.

For the sector as a whole, now is the time to get back to basics. Focusing on infrastructure, committing ourselves to a sustainable business model and strengthening financial fundamentals will ensure that we are in a much better position to capitalise on emerging opportunities once the global engine of growth restarts. n December 2009 gulfbusiness.com

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THE EXECUTIVES EMIRATES

Maurice Flanagan Emirates Airline’s executive vice chairman on how his company, and the regional aviation sector in general, is staying airborne during the recession.

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he first lesson from the recession is: just keep on going. Emirates has been carrying on what it has planned. There really hasn’t been much of a change from the recession. Our flights have been full, yes, though we did have to adjust the fees, as they were too low.

Of course, we have looked more carefully at cost. But then, Emirates has always had an eye on that. When Sheikh Ahmed Bin Saeed Al Maktoum started the airline years ago, Sheikh Mohammed Bin Rashid Al Maktoum gave him $10 million and said: “Don’t come back for more.” So Emirates, perhaps more than many other groups, has had to be lean and mean. We were before the recession and we’re more so now after. One thing we decided to do to reduce expenditure is to put a hold on hiring because each person you take on is a cost multiplier. So we’ve only hired pilots and crew for our new planes, but no additional staff in our offices. Everyone is just working harder and being more productive.

That said, our planes are still going up. In the first half of the year we took on eight large aircraft and in the second half, we’re taking on 10. Now our focus is on capitalising on the routes that we already have rights for.

There are many destinations that we can fly more planes to or to more cities.

For instance, in Australia, as of January we do 70 flights a week, but we have the rights to 84. That is something we’ll be looking at in the future. And we’re also

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exploring underserved routes, such as Durban in December and Luanda in November, which is already doing well.

As you know, we’ve just announced our first half results and they are good.

The airline had profit of $204.9 million in the first half of 2009. Compare that to the $77.4 million we had in the same period last year, and recession or no, that is positive. We are fairly confident that the second half of 2009 will be even better. We think December will be good and January, better than that.

Emirates, perhaps more than many others, has had to be lean and mean.

We were before the recession and we’re more so now.

I don’t really get what some other businesses are on about, especially in aviation. You hear of businesses cancelling their advertising budgets.

That is the daftest thing to do. When you do that, the first to rejoice is going to be your chief financial officer, and then the next is your competitor. We have not cut advertising.

For the year ahead, we’ll continue to look at cost and we’re also looking at increasing our capacity and managing that well. The challenge is really the same as it has always been for us. When you are part of an airline that doubles

in size every four years, you have to realise that means that nearly at any given point in time, your organisation is short some capacity somewhere.

You could look at being in that kind state of change and pressure as being in one of constant crisis management.

But maintaining that kind of constant growth is a sort of luxury for this sector that we’re used to. Emirates will be receiving, on average, an Airbus A380 and Boeing 777 per month over the next 12 years.

The Gulf region is obviously different to the global aviation sector as a whole. It has room to grow and it is also uniquely placed. For an airline like ours, to be based out of Dubai is a great thing. The way the world works, we’re sort of smack dab in the middle.

You can get to nearly any destination with just one connecting flight in Dubai. That said, I don’t think there is much room left in the region for any new carriers. The competition is all operating nicely as it is.

In the airline business the bigger you are, the more complicated things get.

After a certain early point of growth, the economies of scale start to work backwards and bring added complexity.

Management and maintaining your brand becomes more difficult. You see a lot of organisations trying to add more and more brands and I think that isn’t smart. With Emirates, we have one brand, and that is of excellence.

Providing that is our focus. And it seems the consumer likes us. They know they get value for their money.

THE EXECUTIVES EMIRATES

Name: Emirates Airline Established: 1985 Core activities: Emirates is the official carrier of Dubai in the UAE. A subsidiary of The Emirates Group, which is owned by the Dubai government, the airline has diversified into several related sectors, such as aircraft ground handling, aviation engineering and airline catering, as well as engaging in the tour operator industry.

Latest results: The airline posted a 165 per cent rise in H1 2009 net profits to almost $205 million, while revenues fell by 13.5 per cent to $5.4 billion over the same period. million. Total shareholders’ equity and total assets stand at $2.04 billion and $2.99 billion respectively.

It is when things return to normal in the global economy that is a bit frightening. Passenger traffic has been growing at something like 5 per cent a year. When you factor in increased capacity from airlines such as Emirates, and increasing demand from a growing globalised economy, that means airlines will have to deal with even more. It’s a challenge for all airlines.

As far as looking at oil prices goes, that is something no one can predict.

No one ever really knows what is going on with it. The airline industry is a price-sensitive one. There is only so much you do can on price and you have to be very careful. If the price of oil starts to rise, there is a little you can do. We’re not into surcharges and prefer to look at ticket prices.

But we have had to put some in for some areas.

So for Emirates, the challenge of 2009 will be the challenge of 2010, as it was the challenge of the years before: be profitable, keep standards up and manage the business in a sustainable way. Even more simply our plan is: get our planes on the routes that need them. n

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THE EXECUTIVES MICROSOFT

Charbel Fakhoury The regional manager of Microsoft Gulf believes that investing in innovation can spur a recovery in the technology sector.

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s instability continues to ripple through the global economy, it is clear that no one is immune to the effects of tighter credit and slower consumer and business spending.

Clearly, the current economic climate demands that businesses become more frugal. But I feel the danger lies in the fact that, as the global economy slows, companies will shift so much of their focus to controlling expenses that they will lose sight of the critical importance of investment in innovation. Economic turbulence may mean reprioritisation, but it should not imply an abandonment of investments.

There is never a bad time to reduce costs and increase efficiencies and never a wrong time to become more competitive.

In any economy, innovation is the foundation for creating opportunity and success. Companies that continue to pursue innovation position themselves to better weather difficult economic times, and they create the conditions for more rapid growth when the economic climate improves.

Organisations can choose to retrench, or they can choose to prepare for success and leadership roles. If they take the latter approach, returns from hard-fought costreduction battles can be turned into infrastructure improvements, more rational integrated processes and fundamental changes in market

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presence or positioning to fill new niches or those surrendered by competitors. Seeing opportunity in times of turmoil reframes challenges in a way that projects the lessons of history onto the future. Organisations that can balance near-term concerns with forward-looking expectations will be better poised to succeed as markets calm; those that retreat risk becoming an anachronism while the world reinvents itself.

Microsoft, which itself has not been immune to these economic pressures, is optimistic and even bullish about the prospects for innovation and the pivotal role it can play in stimulating

Microsoft is optimistic and even bullish about the prospects for innovation and the pivotal role it can play in recovery. recovery. Internally, we have been innovating in our own way by doing more with less. For example, we have implemented our unified communications solutions across the regional network to drive down costs and improve operations in the short term, while increasing productivity in the long term.

So, what I believe is this: companies should work to save money, but not at

the expense of the future.

There is another reason why I think this is a particularly important time to invest in innovation. Right now, technology is revolutionising the role that computers and computing play in our lives. Just look at the mobile phone, for example, and the way these small gadgets help us stay connected and get more out of our days. For those of us in the technology business, these are very exciting times.

So while it is impossible to predict how long the current uncertainty will last or what the final impact will be, I am optimistic about longterm economic prospects, here and around the world. The trends that have made the last decade so dynamic for businesses in every corner of the globe have not changed. The pace of technological advancement continues to quicken as a multitude of macrotechnology trends continue to rise to the surface to help fuel this recovery.

Therefore, this is not a time to sacrifice innovation for short-term gain, as there are tremendous opportunities for new trends and innovations to propel us forward. The next few years are going to see a real revolution in how information and communication technologies fit into our lives. Smart investments by the public and private sectors that create the conditions to enable innovation to flourish will provide the foundation for a faster recovery today and greater prosperity in the years ahead.

THE EXECUTIVES MICROSOFT

Name: Microsoft Corporation Established: 1975 Turnover: $0.40 per share Core activities: The multinational Microsoft Corporation is a developer and manufacturer of computer software, consumer electronics, video games and consoles, and produces the computer operating system Microsoft Windows and software suite Microsoft Office. It makes computer hardware devices, such as mice and keyboards, and entered the home entertainment market with its Xbox and Xbox 360 games consoles.

Latest results: Revenue stands at $12.92 billion for the quarter ending September 30, 2009, with operating income, net income and diluted earnings per share of $4.48 billion, $3.57 billion and $0.40 per share respectively. .

During this difficult economic climate, I have been focused on retaining key talent to meet operational needs; employing strong governance practices to manage operational efficiencies and costs; and differentiating ourselves within the market. I believe that if organisations focus on these three areas together and do not allow circumstances to overwhelm them, they will be poised to recognise and react to opportunities and be rational and decisive about where to drive efficiencies.

As with all turmoil, navigating change as a business leader is a difficult task – especially when changes are made in isolation. At Microsoft Gulf, I constantly strive to renew the company’s commitment to helping our customers and partners survive and thrive. Through smart investments, innovative processes, relevant products and appropriate technology, it is our hope that the strength of the technology ecosystem can help the economy recover faster. n December 2009 gulfbusiness.com

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