Hijacking Iraq’s Skies The Secret Plans to Privatize Iraqi Airways

by Svetlana Tsalik, Isam al Khafaji and Julie McCarthy

Following Saddam Hussein's overthrow and the lifting of non-military UN sanctions on Iraq, many Iraqis expected that the flurry of reconstruction activities and opening up of the country would produce huge air traffic, providing opportunities for the revival of Iraq's aviation industry.

Coalition Provisional Authority (CPA) air industry consultants recently made the case themselves for increased investment in this burgeoning sector at the Middle East Aviation Finance Conference, arguing that with several million Iraqis abroad, strong traffic growth is foreseen.

Yet officially, the CPA and the Iraqi Governing Council have put the brakes on efforts to revive Iraq's air industry until a sovereign Iraqi government assumes power. Currently, the staffs of Iraq's civil aviation authority and Iraqi Airways sit idle, while the country's air industry is run by foreigners at Iraqis' expense. Iraqi Airways employees, who total over 2,400, in January staged riots in the streets of Baghdad, demanding that their airport be returned from foreign control and that they be put to work.

Privately however, an altogether different picture of Iraq's aviation industry is emerging. According to confidential documents obtained by Iraq Revenue Watch, plans to privatize Iraq's air industry appear to be moving full speed ahead, despite the CPA's recent pledge to leave the privatization of Iraq's industries to a new sovereign Iraqi government. A powerful family with well-known ties to Saddam Hussein's former regime is set to assume control of 75 percent of Iraq's air industry without a bid ever being publicly requested or offered. The deal would include the assets of Iraqi Airways, the former national carrier, which is currently seeking to revive its own operations. U.S. carriers are reportedly seeking to partner with these post-war oligarchs-in-the-making.

Iraq's Airports Leaking Revenue

Iraq's airports and facilities are the property of the State, and have traditionally been run by the civil aviation authority, a subdivision of the Ministry of Transport. The machinery, maintenance facilities, repair and fueling facilities are also the property of the State and have been run by Iraqi Airways, a separate subdivision of the Ministry of Transport. Currently, the CPA is using the civil aviation authority's property, and Iraqi Airway's machinery and facilities, without compensating either. The salary bills and costs of office maintenance for Iraqi Airways are being paid from Iraq's national budget, while the lucrative contracts to service the working airports have been given to foreign companies.

The country's three major international airports (Baghdad, Basra and Mosul) are all under military control with minimal Iraqi personnel. DHL cargo deliveries take place in Baghdad and Mosul. Baghdad's airport security is being handled by KBR (Kellogg Brown & Root), a subsidiary of Halliburton. Washington, D.C.-based Skylink Air and Logistic Support was awarded a $17.5 million contract from the U.S. Agency for International Development to manage the airport. The airports' reconstruction is being handled by Bechtel Corporation. The only commercial airline flying into Iraq, Royal Jordanian Airlines, is not paying for usage of Iraq's airport, for which the former regime charged $700 per plane. Meanwhile, Iraqi airspace has become the ultimate flyover destination for long-haul international flights, which at present do not have to pay for its use. In August, the coalition authority said it would collect $750 from each airliner that transits Iraq's airspace, but it is unclear whether these fees have been collected because they do not appear in the accounts of the Development Fund for Iraq.

All of this amounts to lost revenue for Iraqi Airways, the government of Iraq, and the Iraqi people. Essentially, the Iraqi government is still paying to support the air sector with Iraqi funds, but earning nothing from the use of its facilities.

Security is a genuine concern in terms of allowing increased traffic, non-military carriers and local Iraqi workers at Iraq's various airports. However, Airserv, DHL and Royal Jordanian are already using the Baghdad airport on a regular basis, making it difficult to justify a claim that security concerns require that Iraqi Airways remain grounded. The employees of Iraqi Airways are seeking the right to lease planes to fly along the same routes as the foreign carriers, and to be paid for the use of their property by foreign carriers. There are more than 70 airports in Iraq, some very small, which pose low security risks, and others that can handle international flights (Basra, for example) that are reasonably secure. An Iraqi-controlled carrier could reasonably be expected to operate as safely out of these facilities; especially if it were given the same protections afforded the international carriers now operating in Baghdad.

Saddam's Allies Make Their Play

During the 1991 Gulf War, Iraq had 17 jets, all of which were moved to secret locations in Iran, Tunisia and Jordan in order to save them from war damage. Following Iraq's invasion of Kuwait, in August 1990, the UN Security Council imposed a package of sanctions on Iraq, which included a provision prohibiting Iraq from running its own flights for passenger or cargo trafficking.

After the imposition of UN sanctions, these "host" countries were required to keep Iraq's planes at their airports pending the lifting of the restrictions. The cost of baby-sitting Iraq's airplanes between 1990 and 2003 entailed significant expense for these countries, which now refuse to release the planes without compensation. The repatriation of the planes is further complicated by lawsuits filed by the Kuwaiti government, which claims that components of the planes grounded in Tunisia had been plundered by Saddam's troops during their invasion of Kuwait in 1990. Iran, which was at war with Iraq from 1980 to 1988, has repeatedly insisted that Iraq pay $200 billion in war damages, and has said that it considers the commercial and military planes held in its territory part of these reparations.

Officially, plans to launch a new Iraqi national airline in 2004 have been crafted by the U.S. consulting firm SH&E (Simat, Helliesen and Eichner, Inc.). Frank Willis, who is the top CPA official in charge of all aviation matters in Iraq, says these plans are now ready for execution.

According to a report in the Daily Star of Lebanon, SH&E, which examined civil aviation dynamics in Iraq, recommended the participation of a regional carrier as well as code-sharing arrangements with an international airline for the new Iraqi airline. SH&C has suggested that the new Iraqi airline might be part of a regional group of carriers which could include Royal Jordanian, Middle East Airlines and Syrian Air. Delta has been mentioned as the potential international airline partner. The existence of talks between Iraqi Airways and these carriers has not been confirmed.

"The value of the flying assets of Iraqi Airways isn't very much today," says Michael Lehrman, an independent aviation expert. "What is valuable is the civil air route agreements it owns that establish its route structure."

According to secret CPA documents obtained by Iraq Revenue Watch, these lucrative assets may end up in the hands of one family, reportedly sanctions-era oil-smugglers with close ties to the Saddam regime. This sell-off of Iraqi Airways' assets occurred with no public bidding, in a backroom deal where Iraqi Airways was not represented. The contract has not yet been made public.

Among the confidential documents is a copy of a contract signed on December 2, 2003, to establish a joint venture named Al Iraqiyya Air. The contract was signed by the director general of Iraq's civil aviation authority, acting as a representative of the Ministry of Transport, and three other members of the powerful Khawwam al Abdul Abbas family, which reportedly was involved in smuggling oil under UN sanctions. The ministry's share in the company's capital of U.S. $25 million will be less than 25 percent. This share would be paid from the assets of Iraqi Airways.

It is unclear what role the CPA has played in the process of negotiating and signing this contract, but given the CPA's efforts to revamp Iraq's air industry and launch a new carrier, it seems unlikely that a contract signed by a representative of the Ministry of Transport to establish a new carrier would take place without the CPA's knowledge.

The contract stipulates that the ministry must hand over all of its royalties and rights acquired through past agreements with any international carrier, company or government to this new company. Moreover, the contract protects the new owners' share by forbidding any new entry or participation into the newly established carrier, unless two thirds of Iraq's general assembly decides otherwise. The new carrier has no obligation to pay any debts, obligations, compensation or salaries owed due to past operations of Iraqi Airway. Finally, the Ministry of Transport takes on the sole burden of compensating all other parties for any loss due to sabotage that is not covered by insurance.

The contract's closing article states that the contract has been produced and signed in two copies, despite the fact that there are supposed to be four founding parties for the new national carrier. The three other private founders of this company who are signatories to the contract are members of the powerful Khawwam al Abdul Abbas family that had close connections and lucrative business partnerships with Saddam Hussein's regime and its chief officials.

A January exposÈ in al Mu'tamar, the Iraqi National Congress daily newspaper, has reprinted documents from Saddam Hussein's presidential office outlining the family's dealings with the former dictator. The family reportedly ran two front companies, al Huda and Alia, for Saddam's regime. Al Huda was a partner with the Iraqi State Oil Marketing Organization, and was implicated in the smuggling of oil under the sanctions. The family also owned an oil tanker that was seized in 2000 by U.S. forces in the Gulf. The newspaper printed photocopies of documents disclosing how this family was involved in oil smuggling, bribing of Iraqi and non-Iraqi officials, and importing expired food items to Iraq when the oil-for-food program was being implemented under Saddam's regime.

Iraqi Airways: Stifled
No new national carrier has yet been launched, and Iraqi Airways employees report no changes to date. In official statements from the CPA and the Iraqi Governing Council, the state of Iraq's air industry remains highly ambiguous. Currently, Royal Jordanian's Amman to Baghdad charter flights comprise the only commercial service in and out of the Iraqi capital, in addition to Airserv, a chartered plane that has two daily flights of no more than 10 passengers each. The CPA has suggested that the new airline will not be a revamped version of Iraqi Airways, the assets of which are entangled in legal rows over Saddam-era compensation to various regional plaintiffs.

On May 30, 2003, however, independently of the CPA, Iraqi Airways' management announced it plans to resume international service. Under Iraq's existing laws, Iraqi Airways owns the planes, the commercial name and the crews' contracts as part of its legal status. Despite CPA statements indicating that Iraqi Airways is not being restored, Iraqi Airways' website gives the impression that it is ready to do business.

There are rumors of a possible future deal between Iraqi Airways and the European Airbus Company, where the Iraqi company would acquire Airbus jets, most likely for use on their domestic flights. This appears highly unlikely, however, given that Iraqi Airways is currently struggling for the right to run small flights and lease a few small planes, which the CPA and the Governing Council will not grant.

In a November memo from Iraqi Airways to the Governing Council, the company complained that, since the fall of Saddam's regime, it has been deprived of financing and support that it could have received through the reconstruction funds allocated to the Ministry of Transport. These funds were denied to Iraqi Airways under the pretext that its legal status is that of a "self-financing" company. In December 2003, the staff of the Iraqi Airways was informed that beginning in January, the state will stop payment of salaries, and that as a self-financing company, Iraqi Airways now had to find the resources to cover its costs. After an uproar from employees at dozens of such "self-financing" state enterprises, the CPA extended the ultimatum cut-off date to May 2004. Until then, the central Iraqi budget will continue to provide for the salaries of those employed in self-financing enterprises.

Although expected to become self-sustaining, Iraqi Airways has not been given the freedom to manage its business as a self-financing company, and the various contracts that it could have fulfilled have instead gone to foreign companies. The memorandum to the Governing Council requested that Iraqi Airways be allowed to use the many secure airports in Iraq, such as Mosul, Basra, Najaf, Kerbala and Arbil, rather than confining the use of Baghdad airport to certain foreign carriers.

Although Baghdad's airport is currently classified as vulnerable to "hostile" military operations and therefore "unsafe," it would be possible for Iraqi Airways to use the numerous other airports in Iraq. Kerbala, for example, is only 70 miles from Baghdad, and capable of running domestic and international flights.

As the spring 2004 pilgrimage season to Mecca approached, Iraqi Airways requested the right to lease commercial planes to run flights from Iraqi airports other than Baghdad's to transport the tens of thousands of Iraqis going to Mecca.

The Governing Council and the CPA rejected this offer and gave the business to a U.S.-Kuwaiti company instead. The concern is that Iraqi Airways is being deliberately grounded to keep down the price that its new owners pay for it. Other non-Iraqi companies are now hiring and leasing planes, but CPA has denied this right to Iraqi Airways.

Under law, a self-financing state corporation can conclude agreements and raise money, and Iraq Airways was seeking to do so in order to lease planes for this year's Hajj.

In the best interests of the Iraqis?

The CPA is required by United Nations Security Council resolutions to act in the best interests of the Iraqi people and to operate transparently. Yet recent actions do not support those aims. Refusing to allow Iraqi Airways to compete with foreign carriers and airline services undermines the company's ability to be truly "self-financing," as does the use of its facilities with no compensation to the company. Similarly, private deals to transfer control of Iraqi Airways assets to insiders who profited handsomely under the regime of Saddam Hussein undermine the goal of transparent and open competition.

Svetlana Tsalik is director of Revenue Watch, Isam al Khafaji is director of Iraq Revenue Watch, and Julie McCarthy is research associate with Iraq Revenue Watch. This article is based on the Iraq Revenue Watch report, "Controlling Iraq's Skies: The Secret Sell-off of Iraq's Air Industry."