Rivals Taxi as Iraqi Airways Rebuilds

National Carrier Orders New Aircraft and Competitors Increase Routes Despite Security Concerns, Hobbled By STEFANIA BIANCHI And DANIEL MICHAELS Agence France-Presse/Getty Images Iraqi Airways, which since 2004 has leased used jetliners, recently ordered new aircraft from Boeing Co. In a potentially hopeful sign for Iraq's battered economy, foreign airlines are increasing service to the country as its national airline is rebuilding after two decades of war, sanctions and neglect. Flying in Iraq remains difficult due to continuing security concerns and because airports and air-traffic control systems are just starting to be modernized. Iraqi Airways spokesman Abir Burhan said the carrier hopes the influx of foreign airlines "will add more credibility to Iraqi Airways and Iraq's aviation sector." The national airline, which since 2004 has leased used jetliners, recently ordered new aircraft from Boeing Co. and started flying new turboprops from Canada's Bombardier Inc. The carrier still faces big financial hurdles, however, and is engaged in a long-running legal battle with Kuwait Airways dating back to the first Gulf War that could impede the Iraqi airline's development. The risk, industry officials said, is that foreign airlines could snag the Iraqi market before the national carrier can establish itself. Rivals, including Bahrain's Gulf Air, Turkish Airlines Inc., Lebanon's Middle East Airlines and Austrian Airlines AG, already cater to locals, who are now free to travel abroad, and to outsiders from around the globe who want to cash in on Iraq's oil wealth and reconstruction needs. "It's a good market," said Turkish Airlines Chief Executive Temel Kotil. Turkish was one of the first foreign carriers to serve Baghdad after the end of Saddam Hussein's regime in 2003 and it plans in March to start flights to Basra, in southern Iraq. "We want to serve many Iraqi cities," Mr. Kotil said, adding that most of the carrier's passengers are Europeans. Gulf Air late last year started services to Baghdad, Najaf to its south and Erbil in northern Iraq. The carrier said it filled 74% of the seats on the flights last month—a high load for new routes. Gulf Air executives said they are considering adding two more cities. German giant Deutsche Lufthansa AG recently announced that it aims this summer to start serving Baghdad and Erbil, pending regulatory approval. Austrian Airlines, a unit of Lufthansa, is increasing flights to Erbil, the one Iraqi city it serves. Upscale Qatar Airways also is examining the Iraqi market, officials said. As ordinary Iraqis start to fly—largely to visit friends and relatives around the region—budget carriers also see opportunities. Low-fare Bahrain Air recently began service to Iraq, while rivals including Air Arabia and FlyDubai—both from the United Arab Emirates—and Kuwait's Jazeera Airways have said they also are assessing the market. 'We'd like to start very soon," said Stefan Pichler, chief executive of Jazeera Airways. "It's an attractive market with around-the-year demand." Iraqi Airways is trying to keep up but still needs funding from the state, which is already overburdened. "The Iraqi government doesn't have the financial incentives or resources to either draw in business or to stave off threats to Iraqi Airways," said Saj Ahmad, chief analyst of U.K.-based consultants FBE Aerospace. Mr. Burhan, at Iraqi Airways, brushed off the competitive threat. "Anything that connects Iraq to the rest of the world is good for the carrier and the country as a whole," he said. One factor limiting competition is security. Even carriers that have experience flying to less-developed markets get nervous about Iraq. A DHL Express cargo plane in 2003 was hit by a missile on takeoff from Baghdad but landed safely, thanks to heroic piloting. Austrian struggled to staff its flights to Erbil when they began in late 2006. Austrian in August 2007 suspended the service for 10 months due to security threats. An Austrian spokeswoman said many staff now volunteer for Erbil flights, although planes depart quickly after landing. Security concerns raise the insurance premiums carriers pay, increasing costs. Foreign airlines recoup the expense by charging high fares. But less-established Iraqi Airways may struggle to sell expensive tickets, analysts said. Iraqi Airways wants to start flying to London soon, Mr. Burhan said. For now, the carrier is focusing on the Middle East, mainly carrying Iraqis conducting business in the region. The strategy is driven partly by history. After Iraq was defeated in the first Gulf War, when it invaded neighboring Kuwait in August 1990, international sanctions largely kept the carrier grounded. The U.S.-led invasion of Iraq in 2003 opened new opportunities for the carrier, which started flying leased planes. In 2008 it announced plans to order up to 40 new Boeing 737s, valued at $3 billion at list prices. The carrier also said it planned to order 10 of Boeing's new 787 Dreamliners, allowing it to fly intercontinental routes. But the airline's ambitions are limited by the legacy of Iraq's invasion of Kuwait, when Iraqis stole planes and spare parts from Kuwait Airways. Kuwait later won a series of international court rulings against Iraq and a $1.2 billion compensation claim. Iraq hasn't paid the claim and representatives of the Kuwaiti carrier said they will secure payment of the debt by having Iraqi planes seized if they land in Europe. Mr. Burhan said the Kuwaiti and Iraqi governments "are in constant negotiations about this at a high level and are trying to sort it out."