By Nayla Razzouk and Caroline Alexander

July 14 (Bloomberg) — Iraq is transforming from a battleground into a focus for civil aviation as the collapse of its national airline and a decline in violent attacks attract international carriers and business-jet operators.

Deutsche Lufthansa AG will begin flights to Baghdad on Sept. 30, helping to fill a void left by Iraqi Airways, which the government is dissolving to prevent Kuwait from seizing planes as compensation for 10 jetliners plundered by Saddam Hussein’s invading forces in 1990. Middle Eastern carriers have also begun services and charter company Royal Jet is flying twice a week from Abu Dhabi as attacks in Iraq fall to their lowest level since the 2003 U.S.-led invasion.

“The constantly improving security situation combined with ongoing reconstruction and investment has created ideal conditions for private aviation into and out of the country,” John Morgan, Royal Jet’s vice president for commercial operations, said in an interview.

The economy, ravaged by war and starved of investment, is sparking to life, with Exxon Mobil Corp. and Royal Dutch Shell Plc securing rights to develop untapped crude that Iraq needs to pay for its reconstruction. Iraq has the world’s third-largest oil reserves and aims to more than double production to 6 million barrels a day by 2015. The country is also home to important pilgrimage sites for Shiite Muslims.

Royal Jet caters mainly to executives in the construction and oil industries. Bookings have boomed since January, said Morgan. Royal Jet began flying seven years ago and has a fleet of 11 corporate aircraft based in Abu Dhabi.

Local Airlines
As the new entrants restore Iraq’s links with the outside world, the Transport Ministry is also encouraging privately owned local operators immune to financial claims from state-run Kuwait Airways. As many as three private carriers may begin operating within a year, though Al-Naser Airlines, which has two Boeing Co. 737s and a widebody 767, is the only one up and running so far, said Aqeel Kawthar, a ministry spokesman.

Baghdad-based Al-Naser serves Najaf, about 100 miles south of the capital, and Kuwait City. Executives at the company, which began operating in 2009, declined to comment on its plans when contacted by Bloomberg News.

Lufthansa will fly to Baghdad from Munich, the German airline announced on May 28, two days after Iraq’s government revealed plans to liquidate Iraqi Airways.

Flight to Erbil
The Cologne-based company made its first flight to Iraq in 20 years on April 25, flying from Frankfurt to Erbil, a city in the country’s more peaceful Kurdish north. Lufthansa followed the lead there of its Austrian Airlines unit, which became the first Western carrier back in Iraq in 2006.

“We want to get back in there as soon as possible to become an established player, especially for corporate contracts,” Lufthansa spokesman Klaus Gorny said.

In flying to Baghdad, Europe’s second-biggest airline will join Turkish Airlines, or Turk Hava Yollari AO, Bahrain-based Gulf Air, which began services in September, and Etihad Airways of Abu Dhabi, which started flights in April.

Dubai’s Emirates aims to commence flights this year, though it postponed plans to introduce the route on July 1 for “operational reasons,” spokesman Steve Double said. Air France-KLM Group and British Airways Plc are assessing opportunities, spokesmen for those airlines said.

While attacks have fallen from their peaks of 2006-2007, when the country tipped toward civil war, violence continues and political leaders are still arguing over the formation of a new government four months after parliamentary elections on March 7.

Double Capacity
Iraq aims to double the capacity of airports including Baghdad International as it spends billions of dollars to improve a shattered and outdated infrastructure.

Iraqi Airways, founded in 1945, hopes to be around to reap the benefits even amid the legal clash with Kuwait, Commercial Director Gulseren Abdul Kadir said in an interview. While the carrier has ceased flights to Britain, Germany and Sweden, it still has routes outside the European Union and will contest a U.K. ruling favoring Kuwait Airways in a court case on Aug. 8.

Iraq’s flag carrier is clinging to a rump network of flights within the country and to nations where Kuwait hasn’t filed lawsuits against it.

“We’re surviving, and we’re still hoping to negotiate a solution with Kuwait, pay some dues and reverse the government decision to dissolve the airline,” Abdul Kadir said on June 22.

When the government announced the liquidation, Iraqi Airways was awaiting delivery of 10 Boeing 787 Dreamliner aircraft and 30 single-aisle 737s, worth $3.8 billion at list prices. Mike Tull, a spokesman for the Chicago-based planemaker, said the contract is with the government, not the airline, and therefore still valid.

‘National Honor’
Six regional jets ordered from Bombardier Inc. are on hold because of a lawsuit the Kuwaitis filed in Canada last year, said John Arnone, a spokesman for the Montreal based company. That case is on appeal with the Canadian Supreme Court.

Iraqi Airways curtailed operations after a Boeing 737 making the company’s first flight to London for two decades was impounded on April 25, by order of a British court acting on an application from the Kuwaiti carrier.

Officials in Kuwait say the payment of reparations is not their primary concern. “The factor of national honor is paramount,” Kuwaiti government spokesman Mohammed al-Busairi said. “This case is a matter of public funds of Kuwaitis, and therefore it’s a national right before being an economic or financial matter.”

Donation Offer
The 3,500 employees of Iraqi Airways have offered to donate a part of their wages to settle the Kuwaiti dispute, said Akram Luaibi, a company spokesman. The claim is in addition to $40 billion in debts amassed under Saddam Hussein; Iraq allocates 5 percent of its annual oil revenue to repay this sum, roughly half of which it owes to Kuwait.

“Kuwait restated its demands at a time when Iraq has one of the largest foreign debts worldwide, while Kuwait is one of the few countries with an actual budget surplus,” said Stefan Wolff, a professor of international security at the U.K.’s University of Birmingham. Neither country has risen to the challenge and opportunity of reconciliation, he said.

In Baghdad, employees showed up for work as usual one day last month at the airline’s ticketing office on central Saadoun Street. So too did customers.

“Iraqi Airways overcame a lot under the economic sanctions imposed in 1990, the 13-year forced stoppage and the loss of many of its planes in so many wars,” said Khalil Al-Zaidi, a 58-year-old businessman and frequent flier with the carrier. “It’s not easy to let go of such an important symbol.”