Introduction
Airline privatization in Kuwait has been a topic of discussion for several years now, with the national carrier being at the center of the discussion. The state-owned carrier has had prospects of transfer from government ownership to private ownership, with this strategy set to take place shortly. Airline privatization 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 privatization. Provisions in the laws of the country are involved as to how this should take place.
Some of the other terms that privatization has been associated with include buyouts and demutualization. A buyout is a form of privatization 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 privatize air transport in a country. Air transport is a significant part of global business linking millions of people every year and contributing to the moving of goods (Cirafici 2001, p. 56). With the competition that has emerged in the industry, there is a need to ensure that the respective air transport companies in a country can remain relevant and contribute to the improved welfare of the population. This essay looks at the privatization plans of Kuwait Airways and tries to discuss factors such as competition, economic efficiency, trade, globalization, and other factors emerging from such a move.
Historical Background
The formation of Kuwait Airways took shape in 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 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 to 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 modernized aircraft being acquired. With the expansion, Kuwait Airlines targeted to link more than 50 nations to the country to contribute to tourism and international trade to develop the country.
The headquarters of the airline has always been located at the grounds of Kuwait International Airport, and this forms that legislative center for the company (CIA: The World Factbook: Kuwait 2011). Important steps to privatization include the partial privatization that occurred in the year 2010. During this year, the plans to privatize the company fully were scheduled after the acquisition of the modernized fleet that would increase the capacity of the company and increase efficiency. The other important step preceding privatization includes the formation of the Kuwait Airways Corporation that would manage the company in the case of complete privatization (Shibata 1994, p. 167). This was carried out in the year 2008, and the corporation would be mandated with the overseeing of the modernization and restructuring of the airline.
The move to turn the Airline into a private organization was taken through the national parliament, wherein 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 privatization and facilitate the transition from partial to full privatization through a series of stages. The legislature aimed 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, which 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 October in the year 2012, thus setting the pace for the privatization efforts (Shibata 1994, p. 167).
Process of privatization
The United States was a leader in the efforts of privatization of the Airways. The EU closely followed this headship (Shibata 1994, p. 167). The competition brought about by the privatization and the reduction of air travel charges in the US is some of the factors that led to the widespread privatization of these corporations. The efforts to privatize the Airlines were however not far different from the operations initially done by the government, and these are because of the expensive bailouts that had to be carried out after the privatization. The initial process of privatization in these two regions was preceded by legislation.
The laws created facilitated and forced the privatization 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 privatization, 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 privatization is important and should not be misused. Local companies should be given priority when ownership is considered. For the Kuwait Airways privatization, 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 privatizing the airways is of interest to several parties, and the employees constitute the most significant of these groups. In the original construction of the privatization law, 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 privatization
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 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 have 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 a 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 privatization became an alternative to the national ownership (Pilarski 1994, p. 51). However, many of the national carriers and airports in several 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 of 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 privatization 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). Privatization 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 privatization efforts in the airline industry, and these are important to ensure that the industry is streamlined.
Privatization has its 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 privatization 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 several other industries such as catering. For any government to achieve maximum benefits from the privatization efforts, the privatization must encompass all the areas that the industry requires to run with the liberalization of the same.
Competition
Would privatization encourage competition of the national carrier of Kuwait with other aviation companies in the world and locally? Many of the airlines that have been privatized have been thought to be more competitive on the global front compared to the national carriers of other regions. Privatization is known to inject capital into a company, with the introduction of new ideas, resources, and technical support (Neuman & Baglole 2003, p. 48). Several 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 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 cases, the company serves to propel and influence government policy by being a tool for the government to demonstrate its power and other qualities. The focus has not been to make a 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 privatization allows airline industries to compete financially with other bigger and more competitive companies (Al-Wugayan & Alshimmiri 2010). Some of the measures that private airlines can do to cut costs that may not be a 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 the companies are 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 privatization of Kuwait Airways, the competitive edge will be realized, and the company will be better than before privatization. Another factor about privatization that allows airline companies to be more successful when privatized as compared to the national carriers is the market that they can command (Iszak 2013, p. 4). The range of markets that national carriers can 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 privatization of the national carrier in Kuwait has attracted several companies, which will be involved in the whole process (AME Info 2009). Some of the companies that will be involved in the privatization already own other carriers elsewhere, and privatization through them would increase access of the airline to other markets. Some of the measures that would ensure that the company is profitable to include the ability to compete with other major airlines in the region and privatization 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 result of this (Sobie 2008, p. 18). Competitions, therefore, are not only good for the economy but the customers and other people using the services too.
Some of the other reasons why the privatization 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 into the airline, allowing it to spread and acquire a new fleet of planes and increase its destinations. With the privatization 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 privatization include the increase in government revenue through the formulation of packages that will inject significant amounts of tax to the national government. The privatization of Kuwait Airways will therefore promote competition in the industry, leading to the development of the industry and improved trade and Globalization.
Economic Efficiency
In this section, the discussion will aim at establishing whether the privatization of Kuwait Airlines will enhance economic efficiency. As stated above, government ownership of the aviation industry was burdened, 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 the expansion of the companies or modernization (Jexed & Erick 2003, p. 771). The money was also being drained from other areas that were of economic significance 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 organizations. In Kuwait, the national carrier was managed privately at the start of the operationalization, with the government taking control a 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 costs 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 privatization of the company has several ways that it will promote financial efficiency in the Kuwait market. One way is the reduction of government spending (privatization 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 privatization, 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 private ownership. They have over the past few years resisted privatization, stating that such a move would deny them the services that they enjoyed while working under the government, with a 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 limited financial resources.
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 to the revenue that is usually collected with the surplus being applied to other areas of the economy. The privatization 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 privatization of the airline company is through the reduction of fares and travel logistics, as the company attempts to compete for both on the local and international front (Jexed & Erick 2003, p. 771).
The other method of financial efficacy enhancement is through the promotion of international trade through privatization. The process will open a way for more mergers and privatization of government-run companies in the country, and this, as stated above, will make the government save on the much-needed resources (Kuwait Airways privatization Approved 2013). The company also plans to privatize the other operations that it runs at its headquarters at the airport, and through these, the privatization will mean more money and resources at their disposal. The making of a 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). privatization would allow the company to raise funds through otherwise “forbidden” methods.
The other way in which privatization of the national carrier may prove to be financially efficient in the end is through the attraction of other businesses. With the introduction of privatized 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 industries 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 Globalization
The privatization of Kuwait Airways has several effects on trade and Globalization. Castel describes Globalization 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). Globalization has been the topic of many discussions in the recent past, with the last century seeing increased efforts towards economic Globalization. Many economies in the world are dependent on others, and this is possible only through the various trade agreements that exist (Pilarski 1994, p. 51). The aviation industry remains the most significant of the industries that facilitate Globalization, and this is through the movement of goods and people all over the world to form the global village (Cirafici 2001, p. 56).
The privatization 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 through increased cargo capacity that it will have through access to other airlines, Kuwait will be able to participate in the process of Globalization. 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 privatization 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.
privatization will also facilitate Globalization by allowing foreign companies to invest in the same company. Though the rules and regulations set out in the privatization 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 this making an effort towards Globalization. The benefits of privatization 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 a large number of goods and services that will be moved with increased efficiency compared to the era of public ownership.
The other effect that privatization will have on the economy will be the facilitation of global and local trade. As stated above, the privatization of the airline will lead to the expansion of trade in the country, due to many factors. One way is the facilitation of an efficient and cheap 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 aircraft that will modernize it and make it one of the most efficient in the region. The transportation of people and goods across the world will be a way of facilitating the trade, and this is underway with the privatization. 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 best way that an airway company can do a trade is through the leasing of planes to serve in the routes that it operates on (Pilarski 1994, p. 51). This is a recognized way of doing business for private companies, and Kuwait Airways will follow this path (Mestiri 2010, p. 97). This will be an assuring way of promoting the trade between the companies that will be involved in the leasing and the privatized 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 privatization and commercialization of the company.
Despite the facilitation that the privatization of Kuwait Airways will have on Globalization 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 than that before the privatization of the company. This is a negative effect on trade and may end up being a hindrance to Globalization and the integration of Kuwait into the global market. Some of the other negative effects on trade include the reduction of the number of employees, with this having a social and economic impact on society. privatization 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 privatization of Kuwait Airways will have on the local economy is the protection of consumers from anticompetitive behavior that public companies promote. In the previous sections, it was discussed how public companies can influence consumers through the limitation of competition in 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 several 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 privatization 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 privatization of the company including the availability of other companies that will be serving the local routes (Mestiri 2010, p. 97). In the process of privatizing 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 the 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 privatization 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 privatization 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 with the airline industry, and privatization 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 privatization, 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 privatization efforts in Europe, with other countries closely following suit (Cirafici 2001, p. 56).
The privatization of Kuwait Airways will most likely have the same effects as those experienced in the EU and US at the time they were privatizing 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 privatization 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 privatization will affect to create the reduction of fares include the effect on other industries that offer services to the air transport industry. privatization 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. privatization will bring this to a stop, causing the average prices charged to reduce.
The other issue that is subject to discussion in this section is whether there will be an improvement in the quality of goods and services that will be offered after the privatization of the company. As described in the previous section, the operation of a company together with how well it can fulfill 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 can get feedback from the clients and other stakeholders and act on it (Shibata 1994, p. 167). The privatization 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 privatization include the EU carriers, including the German and Italian ones (Pilarski 1994, p. 51). Before the privatization, 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). privatization 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 privatization 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 can maneuver their way out easily because the government supports it directly without the need for 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 privatization has had in many economies is the generation of employment and economic trade. In the information and communication industry, the privatization 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). privatization 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 organization.
Some of the observed events and developments in the privatization 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 organization 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 stabilizes and the profits are sufficient. Some of how the creation of employment will occur include 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 privatization 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 centers (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 for 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 privatized company, and the creation of employment will be observed in the years after privatization.
The other possible outcome that the privatization of the company is likely to have is the probability of economic growth in the country. In the countries that privatization of the national carriers have 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 privatization of Kuwait’s national carrier, the economy will be open to competition with an injection of investments from other areas of the economy and outside the country (Pilarski 1994, p. 51). Many factors will influence the extent of economic growth experienced in the country after the privatization. These will be dictated by the success of the privatization. Over the last century, there has been a shift in ownership of public organizations offering critical services to the hands of able private companies (Al-Wugayan & Alshimmiri 2010). The same period has also been marked by a spurt in economic growth, and this will continue with the privatization of Kuwait’s national carrier.
In the United States where the privatization 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 sectors 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 the institution of laws to facilitate stable competition. Compared to the US, the aviation industry here is in the initial stages, with the growth targeted to be as fast as the initial stages in the US. In several years after privatization, 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 a collapse of the whole industry (Pilarski 1994, p. 51).
Promotion of Broad Development Objectives
Could the privatization 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 privatization 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 privatization 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 privatized national carrier, with the same occurring in line with her other European neighbors. The developmental agenda of the nation has been to be among the leaders in the field, and this it has achieved after the privatization of her national carrier (Al-Wugayan & Alshimmiri 2010).
The aviation industry is well-performing in Germany. It is said to support other industries such as agriculture, manufacturing, and processing. The efficiency and relatively cheap transport that the industry provides enable the transit of agricultural produce to markets elsewhere in the world within hours of production. The industry also enables the movement of labor 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 privatization 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 capitalized on include the aviation industry, and through effective marketing, the country could be a leader in tourism shortly. 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 unutilized, with the potential being larger than currently being applied. Through privatization, 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 privatized 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 revolutionize 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 privatization 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 government’s 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 stabilization 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 privatization efforts. With the success at instituting the measure, the industry will benefit from the transportation of goods and services in 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 privatization 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 the diversification of the economy.
The other way in which the privatization of the company will facilitate the attainment of the broader objectives is in the promotion of international relations between the nation and other countries such as her neighbors and trade partners. The airline will link several countries that were previously not covered under public ownership through a 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 privatization 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 air travel. It is reported that on average, millions of passengers across the Atlantic every year 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 can obtain financial input from various sectors and hence deal with the demand. privatization 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 utilizing the services. privatization and legislation of appropriate laws will allow the company to tap into the local market and increase the carrying capacity and the local destinations. Through privatization, 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 can fly, and the company will end up expanding on both the local and international markets. This expansion will be positive feedback, leading to an increase in 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 privatized, 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 privatization of the company. Does the plan have any effect on the demand for services provided by the company as compared to the current demand in the industry, and does it result in the satisfaction of the same demand? The people researching into the feasibility of privatization 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 policymakers both within the company and in government offices recognized 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 to 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 a crisis (Shibata 1994, p. 167). This issue is about the time that the government realized that controlling and funding the company would be expensive in the future, with plans being made to fully privatize 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 organization (Castel 2011, p. 755).
The resolution of privatization in the country and the industry is not the first in Kuwait, and the government has undergone a series of privatizations 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 privatization 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 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 privatization 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 nations where air transport is strictly owned and controlled by the government. The business environment has improved, with this part being attributable to the privatization of the industry. If Kuwait is successfully privatizing 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 privatization. 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 review subject. In most countries where aviation is a public industry, 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 organization is necessary for any company to be successful. There is also a 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 privatization of the national carrier, Kuwait authorities hope to benefit maximally through the above-stated methods.
Some of the strengths of the move have been analyzed in the previous sections, and include improved efficiency in the newly privatized company, reduced spending by the government, and improved competition in the industry. The other strengths of privatizing the company include the ability to raise more capital for the company, which will make it have more funds at its disposal and enable it to compete in the international and local market (Shibata 1994, p. 167). The most likely method to be used to privatize 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 privatize the company has, other implications 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 finalization. The privatization of a national carrier does not mean the end of government participation. In most of the nations where privatization has taken place, the governments have had to bail out 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 privatization (Al-Wugayan & Alshimmiri 2010).
Several opportunities that the privatization of the company could bring to the economy include the provision of economic resources 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 privatization 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 privatization, there are plans to modernize the company with the purchase of some of the most advanced aircraft in the world, and this will boost business and improve efficiency in the delivery of services.
According to Shibata, the company will purchase several aircraft from Airbus to replace the aging aircraft in its fleet (1994, p. 167). The deal involves the purchase of 25 aircraft, 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 privatization of the company has provided. Several threats are also present in the privatization movement, 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 privatization 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 structured process. The several privatization 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 privatizing 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 privatization, the process so far has been structured, with the formation of an agency to oversee the transition.
The government should also ensure that the privatization is fair and follows due process, as it could result in 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 includes 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 privatization are felt across the board (Castel 2011, p. 755). In many of the countries where privatization has taken place, the consideration is for 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 privatize 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 privatization law that will oversee the privatization 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 privatize the national carrier, with the process being at an advanced stage. The remaining government responsibility is in the modernization of the fleet of planes, with a deal being made with Airbus to provide a new fleet of aircraft for the company. The privatization 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 a public management to private management. The essay focuses on the possible outcomes of privatization, with comparisons being made to the other privatization 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 Globalization. Anti-competitive behavior that exists before the process will be overcome, with a better quality of services being provided. The expected outcomes include the creation of employment in the country with economic growth being realized. 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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