Austrian Airlines provides link to the future for Iraq

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ERBIL, Iraq -- Upon hearing that Austrian Airlines has launched scheduled passenger service to the Kurdish city of Erbil in Iraq, the inevitable first question everyone asks is: "Why?" Sometimes "in heaven's name" precedes the question, or "in the world" follows.

The answer offered by Josef Burger, the airline's chief commercial officer, depends on who is asking. He may say, "We are building a sky bridge between Kurdistan and the world," or "Austria and Kurdistan have many historical connections," or, "There is a lot of interest in investing in Kurdistan from the Austrian business community; we're opening markets, facilitating exchanges."

All true, but none of these answers is complete.

Since the early 1990s, Austrian, the 13th largest airline in Europe, has been stalled at the borderline of profitability, its viability in question. Many of its woes can be traced to its diverse fleet, filled with a variety of Boeings, Airbuses, Fokkers and Bombardiers (described as "a butterfly collection" by one critic). This lack of fleet standardization has driven up its maintenance and operational costs.

Austrian has, for more than a decade, been viewed as a weak player. Since the millennium, it has sometimes eked out a percentage point or two of profit margin, sometimes not. The airline has been involved in various merger talks  and has inspired rumors of merger talks. (Since taking his position last May, Austrian CEO Alfred Otsch was observed traveling to Paris frequently, sparking conjecture that he was in meetings with Air France/KLM.)

In this context, opening a route to Iraq might be viewed as an act of desperation. It may well be, but it is also consistent with Austrian's articulated growth strategy.

The airline is betting its future in part on what Burger calls "the first-mover strategy." Its short- and medium-haul services have shown consistent profitability, but its losses in long-haul markets have more than canceled them out. It cannot expect to see growth in its long-haul business from Austria's relatively limited and stable population, nor can it easily compete for long-haul international service in European skies crowded by much larger, stronger, volume-driven players.

The concept behind the first-mover strategy is to identify traffic from second-tier cities, mostly in Central and Eastern Europe, that have no point-to-point service to airports offering transatlantic flights. Austrian then enters these markets and connects them to long-haul routes through its Vienna hub.

Since Vienna is the easternmost of Western European capitals, operational costs to serve these Central and Eastern second-tier markets are relatively advantageous for Austrian, compared with costs for carriers based in countries farther west.

Moreover, by looking mostly east for feeder traffic, it can reach out to markets that are beyond the preferred operational range of low-cost carriers such as EasyJet and Ryanair.

As a result, Austrian's route map has recently added red lines connecting Vienna to cities such as Timisoara, Romania; Podgorica, Montenegro; Lvov, Ukraine; and Chisinau, Moldova.

It carried 7.1% more passengers in 2006 than in 2005. In that same time frame, load factors rose 0.2%, revenue passenger kilometers were up 5.6% and scheduled availability grew by 5.3%.

All increases were to record levels, and Austrian ended the year ranking fifth in terms of passenger traffic growth among European airlines. But additional passengers do not necessarily result in profitability. The airline had not released its economic results for 2006 by press time, and Burger would only say that Austrian performed "better than in 2005," a year in which it lost money. Lack of fleet standardization, Burger noted, is still a drag on the airline.

Burger outlined a future in which the airline would address the fleet standardization problem to reduce cost while boosting yields through the first-mover strategy. It is no coincidence that Austrian has targeted countries whose own national carriers -- the only real rivals for international traffic originating from the second-tier cities -- do not have service standards as high as Austrian's. As long as that's true, Austrian can extract a premium fare from business travelers, and the plane doesn't have to fly full.

Burger said that this low-demand, high-yield strategy to feed traffic to long-haul flights is working.

"Out of the 44 destinations in Central and Eastern Europe, we pioneered a third as first-mover," he said. "Sixty percent of our business is now transfer traffic [through Vienna], and of that, 56% is from secondary markets."

The transfer numbers are expected to be even higher to Erbil, which falls into the first-mover category because Austrian's only real competition there is from a Royal Jordanian Airlines charter that will not interline baggage for connections out of Amman (not even with scheduled Royal Jordanian flights).

But the move into Erbil also fits Austrian's "focus east" strategy, which seeks to take advantage of its location nearer the Middle East than other Western European carriers.

It can also leverage its neutrality. It has, for instance, codeshare arrangements with both Libyan Arab Airlines into Tripoli and with El Al into Tel Aviv.

When asked if the political volatility of the region made shareholders nervous, Burger replied that the region accounted for only 6% to 7% of Austrian's traffic and that when, in the past, it had pulled out of markets because of political instability, as occurred last year in Beirut, the financial impact was negligible.

Austrian flies the Middle East routes at night, tapping capacity that would otherwise be sitting overnight in European airports. (Erbil, currently a day flight, will switch to night traffic later this year.)

Burger is encouraged enough by demand for Erbil that he will increase service from twice to three times a week in March. He hopes to increase frequency again in 2008. Austrian has secured the rights for daily flights, should demand rise significantly.

Increasing the frequency may also give pause to would-be competitors.

"There's nothing to prevent access [to Erbil] for other carriers, but with three flights, we're trying to close the shop," Burger said. The farther a competing carrier's hub is from Erbil, "the more difficult it gets" for the carrier to enter the market, he added.

Burger said he anticipated that 80% of the passengers to Erbil would be transfer traffic, with 25% originating in Scandinavia, where a large expatriate Kurd population lives; 40% from the rest of Europe; and 15% from overseas, particularly from the U.S.

To be profitable, Burger said that flights to Erbil must average 70 passengers in a 130-seat Airbus A319, a target he predicted the airline would easily reach by the end of March. "We're here to make money," he said. "We'll break even the first year. I have no doubt."

He added that the traffic was diversified: a third from ethnic markets, a third business and a third institutional, both government and nongovernment.

And what percentage does he believe will be international tourists?

"We are not anticipating any tourist traffic," he said.

Tourism, Iraq style

The complex political situation in the Middle East muddles everything, tourism included. On a visit to Iraq via the new Austrian service last month, I spoke with a wide range of officials, including both the president and prime minister of the Kurdistan Regional Government and an American responsible for the security of visiting U.S. officials in Erbil. To say that the messages regarding safety and security were mixed is to understate the varied responses. Confusing, even surreal, are far better descriptions.

I accompanied a trade mission to Erbil from Vienna that included the U.S. ambassador to Austria, Susan McCaw. Her presence increased the level of security and perhaps exaggerated the perceived risks for ordinary travelers. But it also made clear that our government perceived that even in U.S.-friendly Kurdistan, significant threats lurked.

The extra precautions became apparent before touching down in Erbil. When landing at the airport, our plane descended in a corkscrew fashion, remaining within the airport's secure airspace while at potentially dangerous lower altitudes. (Take-off, likewise, was a corkscrew ascent.) An airport official said that two U.S. military planes continuously circled Erbil during the four days of our visit, which to his knowledge was unprecedented.

Asked if Austrian had security qualms about flying into Erbil, Burger replied that the airport "meets the high safety and security standards of Austrian Airlines," but he added, "We are operating in high security status."

Within the city itself, there are certainly signs that security is taken seriously. For example, drivers must follow a serpentine route through a forest of concrete pillars as they approach the airport.

Government buildings and the Erbil International Hotel (locally known as "the Sheraton," though it has no affiliation with Starwood's brand), the only hotel approaching international standards, are surrounded by a tall perimeter of blast barriers, most covered with cheery murals of flowers and upbeat messages.

Guests must walk through a metal detector upon entering the hotel. If it beeps, they're frisked, and their packages are inspected by armed guards in fatigues.

Ambassador McCaw had a personal detail of four conspicuous American bodyguards, plus security provided by the Kurds. Trade mission delegates and journalists never traveled to scheduled functions except in a convoy bookended by armed security personnel. If one of us wandered from the pack while sightseeing, a young Kurdish man in a black suit, wearing sunglasses and an earpiece, would hurry to our side.

Still, no one officially discouraged any of us from taking impromptu walks during our free time, and when I went on such walks, I sensed far less surface hostility than I had discerned in parts of the world much farther from zones of conflict. In fact, the only confrontation I experienced was in a stationary store: After the shopkeeper found out I was an American, he insisted that I take the goods for free, while I insisted that I pay.

On the last morning of our trip, we were escorted by the police to the city's bazaar, but then turned loose in a disorienting warren of 3,000 stalls for two hours, without chaperones.

Embedded tourists

To be sure, the only tourists likely to be interested in traveling to Erbil are another variety of first-movers: Country-collecting globetrotters who, out of curiosity or desire for bragging rights, enjoy traipsing as far as possible off the beaten path.

Frequently, the reward for first-mover tourists is seeing marvelous sights in an uncrowded, authentic atmosphere. Think Lhasa, Tibet, in the early '80s, Angkor Wat in the early '90s and Bhutan at the beginning of this decade.

On the surface, Erbil offers nothing so attractive. It's a relatively homely city with a population of just under a million people and a handful of interesting sights that are common throughout Asia Minor, such as mosques and a bazaar.

But a bit below the surface -- both literally and figuratively -- there's significant tourism potential.

In the center of town is a half-mile-wide, 100-foot-high, circular tel, a raised area built up over centuries by a series of succeeding civilizations. Labeled the Citadel, the area is said by the Kurds to have been inhabited continuously for more than 9,000 years, though its current appearance is defined primarily from the period in which it served as an Ottoman fort. It was until recently a city neighborhood, but its denizens were evicted so that its historic importance could be unearthed, restored, protected and ultimately presented. A Czech company, Gemaart, was first hired to oversee the project, but UNESCO stepped in. Though the Citadel is not a World Heritage Site, the agency now must approve all excavations and restorations.

At present, there is nothing ancient (and little that is old) in its appearance. Even its gates and parts of the wall around it were built by Saddam Hussein's Baathist government. Because the gates were constructed in a Babylonian style that suggests civilizations farther south, Kurds regard them as an abomination and an intentional insult. The present regional government intends to tear the gates down and replace them with ones constructed in a traditional Assyrian style.

Walking through the area today is a bit eerie. Trash and abandoned personal effects are being carted out of deserted homes (some of them quite ornate) in wheelbarrows and carts. It's possible to still find ceramic urns in the corners of a large, empty, dry and dusty Turkish bath.

I visited two businesses that were operating within the perimeter of the Citadel: the privately run Kurdish Textile Museum and, next door, a cavernous second-hand store selling everything from framed portraits of Saddam Hussein and his generals to carpets, coins and used kitchen utensils. Both are certainly worth the time to investigate, as they present, by far, the best opportunities in the city for souvenir shopping.

The other prominent historic attraction is the ruin of an 800-year-old minaret in Minaret Park.

Though Kurdistan lacks tourist-specific sites, its mix of religions provides a fascinating entry point to the local culture. The overwhelming majority of Kurds (97%) are Muslims, and among the mosques in Erbil is Al-Hajj Jalil Khayat, a large and beautiful structure completed last month, financed by a local wealthy family (the patriarch is buried in a room on the grounds).

There is also a community of 15,000 Chaldean Christians living in the Ain Kawa neighborhood, an area that got high marks for safety even from the hyper-cautious U.S. government security officers. The Chaldeans are unusual in that they switched allegiance from the Eastern Orthodox church to Rome 550 years ago, while almost all other Christian communities this far east adhere to Orthodox traditions. The Chaldean archbishop speaks English and is happy to meet with visitors.

The village of Lalish, about 100 miles northwest of Erbil, is the center of an indigenous Kurdish religion known as Yezidi. Its followers pay particular attention to the sun, going outdoors to pray at dawn, noon and dusk. Its holy text, "the black book," is the only scripture written in Kurdish.

Among the Yezidi beliefs is that Lucifer is not evil but rather more of a yin to God's yang, and that Noah landed on Mount Everest, then set out again and landed near Lalish, at an area known locally as "India Cave."

There is also a substantial community of Assyrian Christians who trace their history to a schism with other branches of Christianity in the fifth century.  

Boomtown

It is obvious to even the most casual visitor that Erbil is a boomtown. Despite sporadic electrical service, the lack of a postal system, nonpotable water and no obvious major industry, development and construction are occurring on a massive scale. I counted nine cranes from my hotel window, and my view did not overlook the areas that were being developed most actively.

The drivers of the boom are wealthy refugees, thousands of rich businesspeople and professionals fleeing the war to the south and finding safe haven in Erbil.

The influx has resulted in improved medical care, better restaurants -- the owners of two of Baghdad's best, El Mahar and Today, have moved to Erbil -- and the opening of dealerships in consumer goods, from automobiles to computers. The building frenzy and growth even inspired Kurdish Regional Government president Massoud Barzani to compare Kurdistan to Dubai.

While the president also conceded there were significant differences between his region and that United Arab Emirates city, it is nonetheless true that enormous tracts are being developed under names like "Dream City" and "Empire World" that promise modern luxury housing, upscale restaurants, hotels and shopping centers.

For the most part, one need not lament the destruction of the traditional to make way for the modern in Erbil. When it came to development and infrastructure, Saddam Hussein ignored Kurdistan, and most of Erbil's look and feel was developed after the 1991 Gulf War.

The architecture is, for the most part, profoundly uninteresting. What charm the city has is provided by a distant backdrop of mountains.

The only threat to tradition from the new construction is that a "shopping mall" is being built in the area of the traditional bazaar. At present, the bazaar has a virtual monopoly on scenes of local color.

A mysterious runway

Perhaps the most controversial aspects of Erbil's future as a travel destination are connected to the expansion of its airport.

The boomtown activity prompted Austrian Airlines, and the Austrian trade delegation it transported to Erbil, to be very optimistic. Burger called his two weekly flights to Erbil "the tip of an iceberg," and hopeful regional aviation officials, with the aid of consultants from Swedavia, a subsidiary of Sweden's civil aviation authority, have completed the superstructure of a modern airport terminal, built a new control tower and have almost finished a three-mile runway, which, when completed in October, will be one of the five longest in the world -- long enough to land the space shuttle.

The need for so long and wide a runway is curious, and what makes it even stranger is that there are many different authoritative explanations for why it is so long and wide.

Serdar Allaf, the supervising engineer of the airport extension, said that details about the Airbus 380 (the delay-plagued jumbo liner that can hold 550 to 800 passengers) were announced during the planning phase, and that the runway was lengthened to make it possible for the craft to land in Erbil.

Johann Rollen, an airport development specialist working for Swedavia, had a different take. "We're at a high altitude [1,404 feet above sea level], and in summer it's very hot, as much as 130 degrees. Those extreme conditions really affect operating conditions for planes. It requires a very long runway to take off and land in heat like that," Rollen said.

Taher Horami, director general of the airport, said the runway and other improvements were simply designed to make Erbil suitable as a trans-shipment point between Asia and Europe. "Cheaper than Dubai," he said.

Another government official, who asked that his name be withheld, called the new airport a "lifeline" to the world. Though Kurdistan officials, including the president and prime minister, maintain they want to remain part of a free and democratic Iraq, they have also made clear that they want no part of an Iraq that falls short of that goal.

However, none of Kurdistan's neighbors -- Turkey, Iran nor Iraqi provinces to the south -- are particularly keen to see an oil- and-mineral-rich, independent Kurdistan. It's not unreasonable that the landlocked Kurds might worry about overland access routes being cut off should they declare independence, and an airport capable of receiving a high volume of large planes could be seen as an appropriate precaution.

In fact, none of these explanations conflict, and all may be legitimate reasons contributing to the decision to construct such a long a runway. But only Herbert Felber, Austrian Airlines' director of network and sales for the Middle East, acknowledged for the record another theory, one widely assumed to be true by locals: "It's for the American military."

The future

Kurdistan has been semi-autonomous since 1991, when the no-fly zones were established after the first Gulf War to protect the region from Saddam Hussein's vengeful feelings toward Kurds. At that time, the Iraq flag was lowered and since then, only the Kurdistan regional flag has flown, even at government buildings.

Asked about the future of Kurdistan, President Barzani answered, "Statehood is a national right of our people, and it will come when circumstances are correct."

One fears that the status quo of relative peace and prosperity in Kurdistan, safeguarded in large measure by the U.S., may be as good as it gets for the region in the foreseeable future.

Should Iraq disintegrate as a functioning state and the U.S. withdraw, Kurdistan would find itself surrounded by stronger enemies covetous of its oil and mineral wealth and fearful of a rise in nationalism from their own Kurdish populations.

"Go back and tell everyone that if the U.S. wants another Israel in the region, a democracy in the Middle East, they don't need to look further than Kurdistan," said Subi Schakir, a local project manager for the German Zublin contracting and construction firm. "But they need to make a commitment not to betray us."

Whether the U.S. has the stomach to expand its Middle East commitments is, of course, a great unknown.

The disconnect between the tenuous nature of the political situation and the optimistic investments that Austrian Airlines and other businesses are making in Erbil is viewed as an inspiring and hopeful sign by the Kurds.

Whether it is inherent in the nature of free enterprise to seek opportunity where none is obvious or whether businesses entering the region truly feel bullish about the long-term prospects for Kurdistan, the effect of Austrian Airlines choosing Erbil as part of its first-mover strategy is seen locally as a palpable endorsement of optimism.

"We're here to make money, but this [show of support for Kurdistan] is an extra for a businessman," said Burger. "At the end of the day, it makes me feel like we're in a worthwhile business."

To contact editor in chief Arnie Weissmann, send e-mail to [email protected].

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For more on this article, see "In the Hot Seat: Nimrud Youkhana."

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