Debts in Kuwaiti transportation industry - a cause for concern

Friday,22 October 2010
By : Jameel W. Karaki
KUWAIT: Transport is an essential element in the development of any economy. Advancement in transport technology has extended the range of markets and increased the level of production and strengthened economical ties between major geographic areas. Within an effective transportation system, a nation can achieve economic growth since transport services play a major role in supply and demand which make the strategic role of the economy indisputable.
According to a report published by, Capital Standards in October 2010 entitled 'Debt Analysis-Kuwait Transport Industry' the transportation industry in Kuwait comprises of companies engaged in air and ground transportation services as well as companies that provide logistics services. The report also included data on companies such as Aviation Lease and Finance Company (Alafco) and United Projects Group (UPAC), which provide aircraft leasing and other related services in the analysis of the transport industry in Kuwait. It is important to note that the debt analysis in the report takes into account only the on-balance sheet debt obligations of the transport companies.
The report highlights the fact that the Kuwaiti transportation industry was not significantly impacted by the global economic turmoil in 2008 and 2009. Only the passenger airline business suffered the most due to high price competition. In addition, the companies in the transportation industry did not have high exposure to equity investments, which shielded their profitability from the volatility of the local stock market. At the end of fiscal year (FY) 2009, the total investments accounted for 5.6 percent of total assets (5.9 percent as of FY 2008) in the transportation industry.

Snapshot of industry debt
In FY 2009, the total debt in the transportation industry increased by only 4.9 percent, amounting to 772.51 million Kuwaiti dinars. During the financial crisis in 2008 and 2009, the growth in total debt witnessed a slowdown. This can be mainly attributed to the stringent lending activities during these years. With the gradual recovery of the economy, the total debt in the first-quarter (Q1) 2010 significantly increased by 18.8 percent, and with the government's development plan the industry debt is expected to grow at a higher rate in the near future.
Agility's debt which amounts to KD 352.95 million as of December 2009 comprises 45.6 percent of the total industry debt. This is mainly driven by the size of Agility's business and operations. However, in terms of leverage measured by Total Debt to Total Assets, Agility's ratio of 19.7 percent is lower than the industry average of 25.3 percent.
Alafco is the most highly leveraged company in the transport sector, with debt amounting to KD 224.88 million. The company's leverage ratio in 2009 was 57.6 percent. This is mostly attributed to nature of the company's line of business which is mainly aircraft leasing. However, it is to be noted that approximately 80 percent of the company's debt is long term, significantly reducing Alafco's liquidity risk. Also, given the relatively low competition in the region for this sub-industry, profitability levels are expected to be stable in the near future.
Companies in the passenger airline sub-industry are the most vulnerable to credit risk in the Kuwaiti transport industry.
The absolute amount of debt may not seem significant for Jazeera Airways and Kuwait National Airways. However, it is to be noted these airlines also have a significant amount of off-balance sheet debt (approximately KD 105 million) in terms of lease payments. In addition, a significant portion of on-balance debt for both the passenger carriers is skewed towards short term.

Shift in the overall industry debt maturity
In FY 2009, 71.2 percent of the total debt in the transport industry is categorized as long term. Since the financial crisis in 2008, the growth in long term funding has been increasing.
However, a further breakdown of debt maturity by sub-industry reveals that even though the logistics sub-industry accounts for approximately 63 percent of the total industry debt, the companies in this sub-industry have the lowest percentage of short term debt as compared to the other sub-industries. The ground transport companies have 73 percent of their debt maturing within one year however the absolute debt amounting to KD 6.67 million is not very significant. The air transport sub-industry in Kuwait, which mainly focuses on passenger airline business, is highly exposed to liquidity and refinancing risks with 66.7 percent (KD 24.43 million) of debt maturing within a year. Also, given the high competition and deteriorating profitability, the debt levels of this sub-sector is expected to increase at higher rate than any of other sub-sectors.
In conclusion, the government of Kuwait is in the process of approving projects (such as the rail and metro project, cargo city project) to improve the transportation networks in Kuwait, keeping in pace with the other Gulf Cooperation Council (GCC) countries. After a number of years of slow development in terms of infrastructure, the recent initiatives by the government including the privatization of Kuwait Airways, are more likely to contribute to the growth of the transportation sector in the medium term. With the recovery of the economy and increase in business opportunities and competition, the Kuwaiti transportation industry may see a growth in the number of players as well as the overall debt levels.