Max Kingsley-Jones/BAHRAIN

Gulf Air is fighting back from financial crisis with a clear strategy for the future

Gulf Air has been through considerable pain over the past four years. Losses mounted to over $130 million and debts rose to $1.5 billion during two financially disastrous years in the mid-1990s. Efforts to tackle spiralling costs, fleet size and unprofitable routes have begun to reap rewards, however. The airline is now aiming for sustained profitability as it comes to terms with an increasingly competitive local environment.

The airline moved back into the black in 1997 and has reported a second year of profit because of a cost-cutting campaign and fleet culling which has led to a drop from 42 aircraft in 1997 to 28. More streamlining is planned.

The airline is owned equally by the governments of Bahrain, Oman, Qatar and the emirate of Abu Dhabi, having been created in 1973 from the BOAC-owned Gulf Aviation. By the end of the 1970s, the airline employed 4,500 people and its network spanned the Gulf region, Asia, India, the Mediterranean and Western Europe.

Based on the small island of Bahrain in the Arabian Gulf, the airline established a flight training centre in Qatar's capital, Doha, a maintenance base in Abu Dhabi (the GAMCO joint-venture with the Abu Dhabi Government), and registered its aircraft in Oman to ensure that each state was represented. President and chief executive, Sheikh Ahmed bin Saif Al Nehyan, become the first UAE national to head the carrier when he was appointed in 1996.

With four owners to keep happy, Gulf Air treads a careful path with its strategy. Although Bahrain is its base and most important hub, it aims to maintain a significant presence at the other capitals. For almost 15 years, the highly charged political environment in which Gulf Air existed had no significant impact, as the carrier effectively had a monopoly on air routes around the region.

Things began to change in 1985, with the Government of Dubai's creation of Emirates. Answering to a single master, Emirates was free of the chains of joint ownership, resulting in a hard-nosed commercial approach to the region's air travel business.

Threats on the horizon

The young Emirates quickly established itself as a serious force. It has rapidly expanded its network from Dubai and its fleet, providing direct links to the city and creating what has become an important transit hub between Europe and Asia. In recent years, more threats have appeared on Gulf Air's horizon, including the soon to be nationalised Qatar Airways, and publicly listed Oman Air, in which the country's government holds a 33% stake.

Growing pressure from rivals in the region combined with the airline's rapid over-expansion of its fleet and network hit Gulf Air hard by the mid-1990s as costs spiralled and debts rocketed. Its financial woes became fully apparent in 1995, when the airline recorded operating losses of $135 million and followed this with a further loss of $60 million a year later.

It was also forced to raise $200 million in fresh funding in the form of a "loan" from its four state shareholders. This was agreed in April 1997 after protracted wrangling. Significantly, the agreement was repeatedly delayed as Oman and Qatar, which are both developing national airlines unilaterally, initially declined to join in a capital injection or to agree to Bahrain or Abu Dubai increasing their holdings.

The restructuring included a 15% cut in seat capacity for 1997, with fleet size reined in and its network scaled back. The airline serves 49 destinations throughout the Middle East, the Indian subcontinent, Asia-Pacific, Australia, East Africa and Europe, down from a high of 60 in 1995. Despite these reductions, 1997's traffic figures, at 4.7 million passengers, fell only marginally, compared to around 4.8 million in each of the previous two years.

In 1997, the airline posted an operating profit of $8.3 million (3.12 million Bahrain dinars (BD)) on operating revenues of $1 billion (BD388.2 million), compared to a loss of $57.8 million (BD21.76 million) on $1 billion (BD395 million) revenues in 1996. The overall result transformed a loss of $87.5 million (BD33 million) in 1996 to a $48.1 million (BD18.12 million) profit in 1997, with the boost coming from $49.6 million (BD18.67 million) in non-operating revenue. That included the net proceeds from the sale of six Boeing 767s.

Despite the move into profit, with the airline's operating margin at less than 1%, it clearly has distance to go to provide satisfactory levels of return.

Walter Van West, Gulf Air's vice-president of finance, strategy and information technology, says the airline will report a second successive year for the black in 1998, but concedes that its financial performance has not progressed as far as he would have liked, largely because of yields that continue to fall. "We have consolidated our financial position and reduced debts to a little over $600 million," he says.

Van West acknowledges that Gulf Air has felt the impact of the new carriers, but does not expect them to impose any major damage on the airline in the near term. "Traffic within the Gulf is a growing business, about in line with the world growth rate [5%].Gulf Air has a bigger network with its four regional hubs," he says.

Fallout from Emirates' expansion has taken its toll on Gulf Air, but in Van West's view, Qatar Airways has become a greater headache. "Emirates' growth is not coming from Gulf Air [business], but it is more as a result of the growth of Dubai as a trading and tourist centre. But there is no doubt that Qatar Airways is taking away traffic - predominantly long haul - from us." Nevertheless, the new airline does not endanger Gulf Air's future, he adds. Despite Qatar Airways' suggestions that it is about to become its home country's flag carrier, Gulf Air says it understands that the Qatar Government has no intention of jumping the Gulf Air ship in favour of its own airline.

Although it is undertaking significant expansion, Muscat-based Oman Air says it has no intention of confronting either Emirates or Gulf Air, and is interested in codesharing with either when and wherever possible. Gulf Air confirms that it is examining how best to work with Oman Air and Van West says that the two parties have discovered certain synergies, which could lead to co-operation on regional routes.

In 1994, Gulf Air began direct services between Bahrain and New York using Airbus A340-300s, but this route was at the limit of the airliner's range and sometimes required technical stops westbound. A deal with Cyprus Airways led to a stop at Larnaca, but Gulf Air then suspended the US flights.

The airline has recently expanded its links with oneworld partner American Airlines, but says it is too early to to draw any conclusions about an alliance involvement. Having initially carried the "AA" code on its London-to-Gulf services, Gulf Air recently revived its presence in the US market with a codeshare deal on American's flights between London and New York Kennedy, Chicago and Miami.

Brian McElligott, Gulf Air's new manager for alliance development and interline, recently joined the airline from oneworld partner Canadian Airlines. He describes Gulf Air's relationship with American as "very close" and "depends heavily on the power of the 'AA' code for feed into our Gulf network - it works beautifully." He adds that an extension to the codeshare is being studied. This could lead to adding three more US destinations to the Gulf Air network in the near future.

Transatlantic options

American is not its only potential associate or its only option for transatlantic traffic. As far as North America is concerned, Van West does not rule out the possibility of Gulf Air "returning to that market in its own right". He adds, however, that Gulf Air does not have the appropriate aircraft to relaunch direct transatlantic services. To return to the market, Van West sees the need to acquire the new breed of ultra-long-haul aircraft such as the A340-500 or Boeing 777-200X. Any decision on such a move, and a return to North America, is at least two years away, he says. For now, the airline is "much better off relying on the codeshare" for its US traffic, he adds.

Despite its strong links to American, however, McElligott warns that Gulf Air "is not heading in the oneworld direction yet, but we know it's there". The airline is also talking to other carriers about tactical links, particularly on Asia and East Africa. Van West adds that it is Gulf Air's intention "not to get involved in any global groupings, but focus on the niches".

The airline is keen to undertake further fleet rationalisation to drive down costs and boost productivity. It has reined in its fleet from a peak of over 40 aircraft in 1994-6 to fewer than 30 aircraft. This was achieved largely through the retirement of ageing Lockheed L-1011 TriStar 200s and the disposal of several 767-300ERs. Some 767s were transferred off the books and on to operating leases, providing an important cash boost.

At the same time the airline cancelled orders for 777s and Airbus A321s. It also revised its future fleet plan, with an order for six Airbus A330-300 twinjets switched for a similar number of smaller, longer range A330-200s.

The airline's fleet consists of 13 Airbus A320s, five A340-300s and 10 767-300ERs, plus the six A330-200s on order. While the 123-seat A320s meet the airline's short-haul requirements in capacity terms, Van West is keen to boost utilisation. This aim will be helped by expanding co-operation with GAMCO, which is setting up a maintenance base at Gulf Air's Bahrain hub. This will enable more efficient scheduling of light maintenance, with work being undertaken at Bahrain and so eliminating wasteful "dead-leg" ferry flights to and from Abu Dhabi. Utilisation gains from the revised maintenance arrangements are expected effectively to provide the airline with an extra aircraft available for service.

A more pressing concern covers Gulf Air's long-haul fleet of 263-seat A340-300s and 200-seat 767-300ERs. Delivery of Gulf Air's 243-seat A330-200s will begin in June, and Van West would like these aircraft to replace the A340s, but the airline has so far been unable to remarket the four-engined Airbuses.

"We would prefer to dispose of the A340s. They don't fit our network as the average sector length is too low," he says.


With the elimination of the US services for which they were originally intended, Gulf Air's three- to-five year old A340s are operated on routes to Europe and Asia. The aircraft can also be found flying short intra-Gulf sectors of less than 30min which are operated as extensions of international services.

Gulf Air takes its first four Rolls-Royce Trent 700-powered A330-200s during the summer. The airline would ideally like two A340s to leave its fleet this year and the other three in 2000, says Van West. An early departure of A340s is unlikely because of the lack of any takers, so the carrier looks likely to have to switch to the less favourable option of dropping more of its 767s.

"Four of our 767s are on operating lease through Rolls-Royce, while the other six are on financial lease," says Van West, who explains that the current plan will see two of the operating leased aircraft returned this year and the other two in 2000. He says this plan could change if a taker is found for the A340s.

Airbus aim

The long-term aim is to operate an all-Airbus twinjet fleet of A320s and A330-200s, with the remaining 767s to be gradually replaced by the A330 as the airline's six options are exercised. With the carrier seemingly lumbered with the A340s, at least in the short term, a cabin configuration revamp is planned which will increase capacity by 10% to 293 passengers for deployment on the airline's services to Asia. Van West says the new layout will be achieved by reducing the first-class cabin, providing a less dense, more comfortable business-class cabin and increasing the number of seats in economy.

Gulf Air's fleet plans are clearly focused on consolidation and the assimilation of its small order backlog in the short term. Van West says short-haul traffic growth will initially be catered for through frequency increases, rather than a move to a larger aircraft, but concedes that more A320s will be needed "in a few years". He adds that at the same stage, the airline will have to address the capacity gap between its A320s and the widebodies.

The pressures of recent years have forced a mini-revolution in Gulf Air's strategy, and a moderately successful turnaround in fortunes. But with ever greater threats from the increasingly consolidated and globalised airline industry, only time will tell whether the airline really has learned its lessons of the mid-1990s.

Source: Flight International