Overstaffed, undercapitalized and losing money at an alarming rate, Middle East Airlines needed help. A giant of the regional airline industry before the Lebanese civil war, MEA emerged from the 15-year conflict in tatters. Ten years after an emergency buyout from the Central Bank, the now successful and profit-making airline is still a state asset, enjoying government protection through exclusivity rights as Lebanon’s only commercial passenger airline, despite efforts to end the arrangement.

Standing alone

While 2008 has seen many airlines in the region doing tailspins, MEA has been soaring. Net profits are set to reach $70 million, up from $60 million in 2007, during a year when carriers in the rest of the Middle East are expected to see collective profits fall by nearly $100 billion.

Part of MEA’s success is derived from the lack of local competition. MEA has been standing alone for decades. Air Liban, founded months after MEA in the mid-1940s, disappeared in a merger with the company in 1963 after its financial backer, Air France, lost interest in the carrier that never turned a profit. The other competing airline, Lebanese International Airways, went bankrupt after an Israeli Defense Forces attack on Beirut’s international airport in December 1968 destroyed three of its planes. The next year, an agreement was signed granting the troubled MEA – which lost eight planes in the Israeli attack and went into the red for the first time in a decade – exclusivity rights as Lebanon’s commercial passenger airline. Originally a 20-year contract, it has subsequently been extended until 2012 and appears set to continue thereafter.

The arrangement does allow for small chartered jet operations from Beirut’s airport, but the going for new companies looking to start such an operation is not always easy. In July, the Daily Star reported that a charter-jet company paid MEA $2 million in royalties to begin operations only to be denied a license.

Firmly in state hands

Government ownership of MEA was meant to be a quick in-and-out to bolster the airline. In 1996, as MEA continued struggling after being devastated during the Lebanese civil war, the Central Bank filled the company’s coffers with cash to prevent bankruptcy and took a 99.3% stake in the corporation. The plan was to restructure MEA so it would stop bleeding profits and then have the Central Bank sell its shares.

In 2000, the International Finance Corporation signed on to advise the sale, but the deal fell apart. Then, in 2001, MEA decided to reorganize. Despite protests from employees, it streamlined routes and slashed its bloated 4,000-strong workforce by about one quarter, turning a $3 million net profit in 2002, its first profitable year in decades. It has been earning money every since, and privatization became less and less of a priority. “Profits surge postpones MEA sale,” read a Middle East Economic Digest headline from 2003.

The issue stayed on the back burner until 2005, when the idea of a “soft privatization” became the popular solution. MEA Chairman Mohammad al-Hout began telling reporters the company would float 20 to 25% of the Central Bank’s shares on the Beirut Stock Exchange, a proposal MEA’s general assembly of shareholders approved in May 2005. But the 2006 July War and the ensuing political instability thwarted progress.

Another extension?

The status of MEA’s exclusivity privilege seemed questionable earlier this year. At the beginning of May, speaking in Beirut during the Arab Economic Forum, then-Finance Minister Jihad Azour said the government was preparing to allow bids for more commercial passenger airlines in Lebanon. Several news sources reported that MEA staff strongly opposed the former government’s plan to end exclusivity and lobbied to stop the move. In the months that followed, a new government was appointed and the proposal died out. When asked what happened to it, Azour told NOW Lebanon, “I don’t know. You’ll have to ask the new government.”

Recently, Minister of Transportation and Public Works Ghazi Aridi made it clear that privatization is not in the offing any time soon. Speaking at a ceremony to launch the building of an MEA pilot training center, he said, “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,” the Daily Star reported on November 12.

And though MEA and Central Bank officials say that the latest postponement of privatization is due to the global financial meltdown, Faisal Nsouli, co-founder of the Lebanese Economic Association and a former professor of economics at the American University of Science and Technology, disagrees.

“The global financial crisis means that a lot of investors have already liquidated a certain portion of their portfolio in Europe [and] the States, and currently have excess liquidity although they lost some money,” he said.

Nsouli insists that the real reason for the most recent delay is a bid to wait for the new political arrangement in Lebanon after the parliamentary elections in 2009. Others argue that it is entrenched patronage networks that would disappear under private ownership that are keeping the government from selling.

Whatever the reason, it seems the airline is too profitable for the state to give it up and lift its shield from local competition.