ANALYSIS: Gulf Air’s restructuring challenge

This story is sourced from Pro
See more Pro news »

For Gulf Air, the news has not been good for some time. The official 2014 Bahrain air show guide book described the airline’s financial situation with admirable candour: “Bahrain’s national carrier entered 2013 facing arguably the biggest challenge of its 63-year history.

“The previous year had seen it plummet to the latest in a series of large annual losses, the resignation of chief executive Samer Majali and the prospect of having to make huge cuts in costs, its fleet and personnel just to survive.”

Those cuts formed the basis of a restructuring plan under which Gulf Air dropped eight long-haul routes, cut its fleet from 38 aircraft to 26, and reduced headcount 27%.

In its 1970s and ‘80s heyday, Gulf Air was the pre-eminent carrier connecting the Arabian Gulf to the world. It still has long-haul routes to Bangkok, Frankfurt, London, Paris and Manila, but its current, more regional focus reflects a competitive environment that changed beyond recognition when Dubai, Abu Dhabi and Qatar decided to have their own flag carriers. Emirates Airline, Etihad Airways and Qatar Airways have, simply, muscled Gulf Air out of the long-haul market.

Speaking to Flightglobal at the Bahrain air show earlier this month, transportation minister Kamal Bin Ahmed Mohammed, who also chairs the Gulf Air reorganisation committee, pointed to some early success for this new-look airline.

In 2013, losses were 56% less than in 2012 (state-owned Gulf Air always speaks of its financial and operating results in percentages, not raw numbers). Revenue per available seat-kilometre was up 18% and 5% up on budget.

Though 2014 will be another loss-making year, he says, losses will continue to fall. And, he adds, during 2014 he and the airline’s management may be able to set a target date for moving into the black.

Mohammed aims is to position Bahrain as the “gateway to the GCC [Gulf Co-operation Council] market”, as a “multi-ethnic country with an open economy” at the geographic heart of a $1.5 trillion market. Clearly, he says, people want to travel within the region – he lists Jeddah, Doha, Riyadh, Abu Dhabi, Kuwait, Oman, Beirut, Iraq, Iran, Pakistan, India as valuable Gulf Air destinations – and “we have the largest concentration of flights within the region”.

Today, he says, this restructured Gulf Air is still “in the mode of proving our product and services” and beginning to look at new routes and ensuring it maximises fleet utilisation. Gulf Air’s 20 A320-family aircraft are young, and its A330s are, as announced at the Bahrain air show, being refitted with new cabins.

Mohammed does not want to delve into plans for the Boeing 787s and Bombardier CSeries airliners on order, as these will not begin arriving until 2018, but he suggested they will be used for a combination of fleet renewal and expansion “as the market grows”.

asset image

This grand project is also being supported on the ground. One Bahrain air show highlight was Paris airports engineering consultancy ADPI signing up to mastermind a major modernisation programme for Bahrain International airport, to take capacity to 13.5 million passengers annually. Part of that project is the imminent start to construction of a new MRO facility for Gulf Air, to realise an ambition of having all of the airline’s C-checks carried out in Bahrain.

But, ultimately, no infrastructure drive will return Gulf Air to its former role as the region’s long-haul champion. Instead, Mohammed implies, co-operation is key. “Connectivity is important,” he notes, “and to the extent that my national carrier cannot provide it, it is important to make sure we have the connectivity through other airlines. Today, Cathay Pacific serving Hong Kong, or KLM or Lufthansa, they are all adding to the network of Bahrain.”

How well Gulf Air fills its role in that connectivity network depends, clearly, on the success of its restructuring – and Mohammed is well aware of the need to take a “strong position”. Part of the deal for all the cuts at the airline was a 2012 injection of BD185 million ($500 million) in direct financial support, a bailout that followed an earlier BD664 million rescue package.

“Why we started the restructuring process is to stop this, and actually we are stopping it,” says Mohammed. “We want Gulf Air to be a commercially based company and today Gulf Air doesn’t get any subsidy.

“They pay the oil price, and actually plus a premium sometimes. But as I said we have to make sure we have a sustainable company, not a company reliant on subsidies.”

Gulf Air’s 2013 financial results will be revealed in February, and insiders are expecting management to show sufficient confidence in the airline’s performance to offer up some actual numbers.

However, challenges lie ahead. The Bahrain air show brought an order for up to 26 Bombardier CSeries aircraft by start-up carrier SaudiGulf, which may begin operations this year with leased A320s. The announcement included some fleshing out of the carrier’s business plan, which sounds very much like Gulf Air’s – regionally focused and upmarket – but based in the vastly more populous Saudi Arabia. And the show turn included the first appearance of the new head of SaudiGulf – ex-Gulf Air boss Samer Majali.

If nothing else, then, Gulf Air is facing a new dogfight while still licking the wounds inflicted by the region’s Big Three and coping with the inevitable lingering pain of its own reorganisation.

While rising stars have eroded Bahrain's position as the dominant commercial and financial capital of the Gulf region, current affairs also hold great risk for the carrier’s ambitions. When asked at the show to scan the year ahead, Gulf Air acting chief executive Maher Salman Al Mussalam said that “fingers crossed” some “settlement” between countries of the Middle East “will certainly relax the region a little bit, after two years of boiling”.

With Syria still in crisis, Lebanon under strain, Iraq hit by escalating violence and Iran’s rapprochement with the West far from certain, geopolitical risk remains a worry for anybody doing business in the region, and Bahrain itself remains a potential flashpoint. Tourism appears not to have recovered from the hit it took from the government’s lethal suppression of Arab Spring calls for democracy in 2011.