Turbulent times
Gulf Air is bound for major restructuring. Dr Jasim Husain Ali analyses the issues before the carrier

Some 57 years after its establishment, Bahrain-based Gulf Air will soon have a single shareholder – the Government of Bahrain. The change will see Gulf Air join other firms controlled by Mumtalakat (the Arabic for ownership of assets), a holding company for all assets owned by the government of Bahrain. The change follows the exit of co-owner, Oman

During its heydays, the governments of Abu Dhabi, Qatar, Oman and Bahrain jointly owned Gulf Air. Qatar was the first to leave, seeking instead to devote its resources to its flag carrier, Qatar Airways. Abu Dhabi followed suit after deciding to set up Etihad, currently the official carrier of the United Arab Emirates.

However, Bahrain authorities have not ruled out limited privatisation of the company in the future. Undoubtedly, Gulf Air can only offer a stake to investors via an initial public offering (IPO) after it manages to reverse the trend of posting losses.

Focusing on Oman Air Oman’s formal withdrawal from Gulf Air was stated in an official letter delivered by its Economy Minister, Ahmad Bin Abdul Nabi Macki, to his Bahraini counterpart, Shaikh Ahmed Bin Mohammad Al Khalifa, in May. The Omani move followed reports that Muscat was planning to focus its energies on its national carrier, Oman Air. Lending credence to this was the fact that Oman Air decided earlier in the year to quadruple its paid up capital to US$130 million.

Oman Air now plans to double its network to 40 destinations by making stops in some European spots, such as London, Paris, Frankfurt and Zurich. Currently, Oman Air focuses on South Asia, notably India, ostensibly taking advantage of its geographical location. The Sultanate is uniquely positioned to serve as a key entry point to transport workers to and from the Indian sub-continent.

The withdrawal of Oman was preceded by press reports all through April that Bahrain would only become the major rather than single shareholder of Gulf Air by increasing its stake from 50 to 80 per cent. However, it will be several months before a viable plan is worked out allowing for Oman’s exit from Gulf Air and enable the airliner to work out a suitable strategy to check its losses.

Big losses
The fact that Gulf Air is loss-maker partly explains the logic behind Oman’s exit. According to deputy chair of Gulf Air Board of Directors, Mahmood al-Koheji, the company loses US$1 million per day from its operations and still higher after adding other costs such as financing. He projected accumulated losses and other costs rising to US$675 million by end-2007. But, press reports in Bahrain described the loss figure as somehow exaggerated and said these were aimed at justifying the case for extraordinary changes such as reducing manpower. This has been discounted by Bahrain’s crown prince Shaikh Salman bin Hamad Al Khalifa, who instead has predicted a return to profitability for Gulf Air in a span of two years. Of course, such turnaround will only be possible if a viable recovery plan is implemented.

Costly acquisition
It is not clear as to how much money Bahrain treasury must bear in order to fully acquire the carrier? Bahraini officials have spoken of the need of spending a hefty US$1.3 billion for increasing its share from 50 to 80 per cent. Certainly, the figure will be higher for full ownership.

Most likely than otherwise, the Bahraini government will look to the capital markets to help finance the cost of fully acquiring Gulf Air. This partly explains as to why officials from the country’s finance ministry have been arguing lately that Bahrain can afford additional debt burden. Bahrain’s debt amounted to US$3.8 billion as of 2005, which is nearly 35 per cent of the country’s gross domestic product (GDP), a level deemed manageable by international standards.

Get-well programme
Gulf Air believes that there is profitability gap of US$414 million. However, closing the gap or realising the potential requires a major restructuring of operations. Only days before Oman formally decided to leave Gulf Air, company officials revealed a two-pillar programme to be completed by the start of 2009. Termed the ‘Get-well Programme’, the US$834-million project consists of cost-saving plus performance-enhancement measures. The first phase involves investment of US$319 million aimed at revamping operations, including closing some and opening new routes. The second phase, costing some US$515 million, focuses on streamlining the fleet, including refurbishing existing aircraft, investing in lounges and facilities, and proving new services.

Under it, Gulf Air intends to stop flying to Sydney, Jakarta, Singapore, Hong Kong, Johannesburg and Dublin. These are considered heavy loss-making long-haul destinations. Instead, the airliner plans to start services to other destinations while increasing the frequency to more profitable centres. Clearly, Gulf Air will be embracing the notion of niche or focusing on limited but promising business opportunities. Eventually, the scheme aims at improving punctuality, reliability and connection time.

Other measures to enhance revenue include drastically reducing the practice of offering free of charge tickets and discount travel facilities to employees and their relatives. Under the new scheme, the ticket-on-rebate facility will only be extended to Gulf Air’s direct employees, current board members and parties covered under International Air Transport Association and the airline’s commercial obligations.

Bahrain’s commitment
Crown Prince Shaikh Salman bin Hamad al-Khalifa visited Gulf Air’s headquarters in May ostensibly to raise employee morale. The visit followed reports that the company intended to axe some 1,500 staff, including Bahraini nationals. This is a sizeable number, as it represents about one-quarter of current manpower.

Shaikh Salman made it clear that employees should not pay for mistakes caused by others, a clear reference to the earlier managements. “No Bahraini will be made to pay for the mistakes of the previous administrations,” declared Shaikh Salman. To be sure, Shaikh Salman presides over the country’s Economic Development Board (EDB), which is believed to be the force behind the change of directions at Gulf Air.

Still, the company has no choice but to reduce operating expenses in order to turnaround its financial position. Staff cost is a major contributor to total operating expenses. Undoubtedly, a good number of employees are worried over their job prospects. A number of Gulf Air employees have called their members of parliament (including this writer) pleading for a generous exit package. Also, it remains to be seen whether or not Gulf Air will retain some 250 staff working in Oman, the majority (around 200) of whom are employed in the call centre. The company has promised fair treatment for the staff in Oman.

In addition, many other nationals have their jobs because of the positive spillover effect caused by Gulf Air’s activities. It is believed that around 3,600 jobs are indirectly linked to Gulf Air. These include individuals working in travel agencies and Bahrain Airport Services (BAS). In reality, Gulf Air is responsible for close to 70 per cent of operations at Bahrain International Airport (BIA), where, BAS handles ground services.

Reducing fleet
Currently, Gulf Air’s fleet consists of 34 aircraft, a mix of Airbus and Boeings. But the company has decided to reduce the size to 28 as part of the downsizing scheme. The airliner plans to get rid of nine Boeing 767 aircraft. While some Airbus models will also leave the service, they will be replaced by others. Eventually, Gulf Air will have all its airplanes from one source, namely Airbus. It is argued that this will lead to greater efficiency in operations. However, this could see some employees who work solely on Boeing aircraft lose their jobs.

What lies ahead?
While all agree that the restructuring will not be an easy process, the question that is attracting most people’s attention is whether current President and Chief Executive Andre Dose, a Swiss national, can steer Gulf Air to a soft landing? After all, he assumed his job only in April, replacing James Hogan, an Australian national, who left the carrier to join Etihad as its chief executive. But all agree that his 30 years of experience in the industry should stand him in good stead.

Bahrain’s Crown Prince has affirmed that the company will continue retaining the name Gulf Air as it has created the necessary goodwill and is a rich off-balance-sheet asset. The commitment emerged in the midst of another development – the right to use name on the internet. Until earlier this year, Gulf Air was forced to use the address www.gulfairco.com because another firm had managed to register the name www.gulfair.com. Company officials subsequently succeeded in reaching an out-of-court settlement with the company that had registered the name.

Gulf Air contributes some US$400 million to Bahrain’s economy – US$246 million directly and the balance US$154 million indirectly. Certainly, this is a sizeable amount for a small economy like Bahrain, representing about three per cent of the country’s GDP. As such, there is much at stake in Bahrain with regard to the future of Gulf Air.

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