MAX KINGSLEY-JONES / BAHRAIN
Our six-page special looks at prospects for airlines in the Gulf, where Gulf Air is confident that its can return to its former glory days within three years
A year ago, the vultures were circling the falcons. The region's most famous carrier, Gulf Air, whose livery sports a falcon, looked doomed after it had failed to remain competitive with new players such as Emirates and Qatar Airways. It had been badly affected by 11 September, and was enduring a barrage of criticism over its safety standards following a high-profile fatal air crash at its Bahrain base.
But the owner states at last took some decisive action - one left the group and the three others installed a new management team tasked with steering the carrier into calmer waters and setting out a long-term plan. The turnaround is already under way, but Gulf Air still has some difficult waters to navigate.
Created by Bahrain, Oman, Qatar and the emirate of Abu Dhabi, the airline has functioned for over 50 years as the region's flag carrier operating from hubs in Abu Dhabi, Bahrain, Doha and Muscat. It celebrated its 50th anniversary in 2000, but as debts spiralled to $800 million 12 months ago, many observers thought that the chances of the airline making it to the grand old age of 53 were remote. In June 2001 shareholders injected $160 million to keep Gulf Air afloat. Management consultants SH&E were appointed in late 2001 to advise on the best way forward for the airline. With losses of 50 million Bahraini dinar ($133 million) forecast for 2002, SH&E's recommendation was that the shareholders take the drastic move of switching off the ailing carrier's life-support machine.
But rather than dissolving the airline or reorganising it into a minor player, last year the shareholders - minus Qatar which decided to pull out and focus on its own national carrier Qatar Airways - agreed that Gulf Air should be returned to its former glory days. Qatar's decision cleared the complication of a shareholder being involved in a competitor airline.
The three shareholders agreed to provide a 90 million dinar cash injection in two 45 million dinar tranches - one in January 2003 and the other at the end of 2003 - and to defer government debt. In May 2002, the owners recruited ex-BMI British Midland chief operating officer James Hogan to be Gulf Air's president and chief executive and to head a new management team. They also agreed to provide an immediate 30 million dinar injection to enable the airline to continue operating.
Australian Hogan is the first outsider to head the airline in its modern history, with previous chiefs being appointed from one of the shareholder countries on a rotational basis. He says he was "given the minimum amount of cash needed to stay in business, tasked with running the airline on a day-to-day basis and formulating a long-term plan to turn the business around". He adds that the shareholders made it clear that the management team would be free to structure the recovery plan, suggesting that the interference of old would not be rearing its head. "The ownership of the plan had to be with the management. We had to, and were cleared to, run the business commercially."
Despite SH&E's concerns, Hogan was quickly impressed by what he saw as a huge potential within the airline's infrastructure and staff, and took the contrary view, believing that the once fabled Gulf Air brand "still had value, particularly in the Middle East and Indian sub-continent".
Although Gulf Air's fortunes had been in decline for many years, Hogan is reluctant to blame previous management for the airline's rapid collapse in the past two years, which he says was due to a combination of factors. These included the high-profile crash of an Airbus A320 at Bahrain in August 2000 in which 143 people died, and the inevitable fall-out from the 11 September terrorist attacks in the USA.
Through to September 2001, Gulf Air had suffered a 6% year-on-year fall in passengers, but things then rapidly deteriorated. The first two weeks of October showed traffic declines of over 20%, while load factor fell 10% and revenue passenger kilometres by a quarter.
Capacity was slashed with routes dropped and aircraft leased out or returned to lessors. Gulf Air vice-president finance Ahmed Al-Hammadi says: "Yields had tumbled as the management chased load factors". The result was that the airline's small profit in 1999 of 400,000 dinar fell to a loss of 38.3 million dinar in 2000 and 52.2 million dinar in 2001.
Hogan was pleasantly surprised to find when he arrived that the airline was achieving 70% load factors - a level much more successful airlines often yearn for. He immediately set about formulating a three-year recovery plan, which he expects will see a return to profit by 2005.
Company turnaround
After his arrival, Hogan says he went looking to see why the airline "wasn't making money". What he found was that the airline's staff lacked focus and good communication lines with management, and processes such as revenue management were not being applied. Through a series of external appointments and internal promotions, Hogan has created a strong new management team underneath him, which immediately identified a major yield erosion problem.
Attention turned to the network and on-board service: "We didn't have the right frequencies on certain routes," says Hogan. Examples of this were the trunk Europe-Gulf business routes from Paris and Frankfurt, which had dropped from a daily service following the cuts. "We restored daily services and there was an immediate yield improvement as we started picking up the business traffic."
The Gulf Air first class cabins lack the latest creature comforts installed on new aircraft delivered to Emirates and Qatar Airways, which Hogan has addressed with improved on-board service. Using a plan he previously applied at BMI and Ansett, a "five star chef-on-board" service is gradually being rolled out across the Gulf Air long-haul network in first class.
Hogan says the revised schedules and the new on-board service, which is a first for the Middle East, have been extremely well received: "First-class passengers are up 25% year on year, while business is up 50%."
Hogan is proud that these "quick fixes" halted five years of yield declines in September for no loss in load factor, and the airline is now seeing month on month improvements. This ensures that 2002 losses will be narrowed from the 50 million dinar predicted by SH&E, to "less than 41 million dinar", says Hogan.
Hogan's prime task was to bring the airline back on to an even keel. What resulted was a proposed three-year network plan and three-year product development plan, which he began presenting last September individually to each of the three shareholders, receiving formal board approval on 18 December.
"The plan started with the customer. Then addressed the revenue and revenue management - how you sell in a global market place," says Hogan. "From that came the network plan which led into the fleet plan and then the P&L [profit and loss]."
Hogan is pledging a three-year programme to return the airline to profitability in 2005. This year should see losses halved to around 20 million dinar, says Al-Hammadi. The forecast is for 2004 to be a break-even year, before a solid profit of 5 million dinar is returned in 2005.
According to Al-Hammadi, some clear conditions have been set as part of the recovery plan: "Over the next three years, debt to equity ratio must not exceed 3:1 and cumulative losses must not exceed share capital by more than 50%," he says.
Revenues are forecast to increase by 18% in 2003, and costs by no more than 13%. Last year, costs fell by 6.3%, but revenue slipped by just 1%. Al Hammadi expects that the debt-to-equity ratio should be about 2.5:1 at the end of the year.
The plan comprises a series of initiatives that will be rolled out in the coming months and years, and will include a Landor Associates designed rebranding, network development, a new all-economy division based at Abu Dhabi, and a fleet-renewal programme which will see the fleet double in size to 60 aircraft over the next 10 years.
"There are three key elements of the plan: the repositioning of Gulf Air; sorting out the regional business; and the all-economy airline," says Hogan.
John Butler, appointed last year to head Gulf Air's marketing and sales, dismisses the suggestion that Gulf Air's recovery efforts could be flawed by the necessity to maintain its three hubs to placate the national pride of its three shareholders, which has resulted in the costly replication of long-haul services. "I am entirely comfortable with the three hubs," he says. "All routes [from each hub] will be undertaken on a purely commercial basis."
Hogan adds the shareholders are clear "we don't want to split the business three ways". This is already manifesting itself with the elimination of some replication, through the redirection of certain international flights to specific hubs.
Qatar's withdrawal has reduced the airline's presence at Doha, which had been its fourth hub, and as it is no longer the country's designated carrier on bilaterals Gulf Air has had to drop direct international services. Butler says the development plans for the three remaining hubs will see frequencies boosted by 40% over three years and initiatives to expand traffic at the secondary hubs in Abu Dhabi and Muscat. Several routes are already planned for introduction or revival in June including Sydney (via Singapore) and Athens - both of which were dropped a year ago. Additional destinations are being evaluated in Africa (including Johannesburg), Asia and the Americas.
Hogan says he wants to "better utilise the assets" on intra-Gulf services and a possible move to smaller sub-100 seaters for the first time. Discussions have been held with Bombardier and Embraer about a possible order for 70- to 100-seaters, but the airline is also evaluating the 100-seat members of the Airbus A320 and Boeing 737 families.
Fleet roll-over
The airline's current fleet is predominantly Airbus - with 10 A320s, six A330-200s and five A340-300s in service alongside nine Boeing 767-300ERs. A partial or complete roll-over is being evaluated as part of the long-term plan, and Hogan says he has already held meetings with both Airbus and Boeing to discuss outline plans.
"We will meet short-term expansion needs by taking aircraft on operating lease in 2003-4 - the fleet-renewal deal will take longer to finalise unless we get such a good offer that we bring it forward," says Hogan, adding that this year Gulf Air will lease two A320s and two A330-200s to cover expansion.
Hogan is reluctant to expand on the details of the long-haul evaluation. However, the competition is likely to be between the ultra-long-range Airbus A340-500/600 and Boeing 777-200LR/300ER families, given the airline's ambitions for its long-haul network development which include direct services to Sydney.
The biggest departure in the short-term is the creation of a leisure airline division at Abu Dhabi. Observers see the move, which has puzzled other airlines in the region, as Hogan's answer to a number of issues. It provides a strong business opportunity for the Abu Dhabi hub, which currently plays second fiddle to Bahrain, as well as a better way of utilising the airline's Boeing 767 fleet.
The as-yet unnamed arm is due to start operations in June with six of Gulf Air's nine 767s reconfigured into a single-class economy layout. Initial services will be to key points in the Indian sub-continent, the Middle East and South-East Asia - routes which are traditionally light on premium traffic. Pilots will be relocated from Bahrain, but cabin crews will be recruited locally on separate contracts to the mainline crews.
The leisure airline will initially be restricted on services to India as the market is regulated by strict limits on the number of seats available. "Initially some routes will be substitutions [for existing Gulf Air flights]," says Hogan, adding that the leisure airline's long-term route development could see services to "northern England" and Africa.
Hogan sees Abu Dhabi International Airport's location 120km (75 miles) south of Dubai as providing huge opportunities to becoming the second gateway into the rapidly expanding Dubai market, and providing some competition for Emirates. "It's a bit like Gatwick versus Heathrow for serving London," says Hogan.
Gulf Air is evaluating how it boosts business at its southern Gulf hub in Muscat, which is the smallest of the three. The airline aims to capitalise on Oman's huge potential as a tourist destination, which has grown significantly following simplifications of the country's entry requirements.
Another key item on the recovery plan's "must do" list is to join a global alliance. The airline already has codeshares with Oneworld's American Airlines and Qantas, and Star Alliance's BMI.
Need for an alliance
Hogan concedes that the airline is in advanced discussions with these two alliances, but dismisses industry speculation that the airline is close to a deal with Star. Earlier this year Star confirmed that it was negotiating with Gulf Air, but says it has not ruled out the possibility of allying with Emirates or Qatar Airways instead. Although Hogan maintains there is no rush to finalise an agreement, he said last December that a decision "can be expected in the first half of 2003".
The components are now in place for Gulf Air to bounce back, but it will still take a strong resolve by the airline's shareholders and management to ensure that the effort is carried through to a successful conclusion.
Source: Flight International
