Amid the rapid expansion and vaulting ambition of Gulf aviation companies in recent years, the fortunes of one airline in particular serve as a cautionary tale.
Gulf Air, once the region’s leader in the international market and a symbol of bilateral co-operation between GCC nations, has been swept aside by the rise of bigger, bolder carriers such as Emirates, Qatar Airways and, more recently, Etihad Airways.
Jan 1996-May 1997: Assistant to the head of pilot training, Crossair, Switzerland
Jun 1997-April 1999: Punctuality manager, Crossair
May 1999-Dec 2000: Manager, operations control centre, Crossair
Jan 2001-April 2003: Executive vice-president, product and services, Swiss Inter-national Air Lines
May 2003-Jan 2004: Chief executive officer, Swiss Express
Nov 2004-March 2007: Chief executive officer, Transafrik International, Kenya
April 2007-July 2007: Chief operating officer, Gulf Air
July 2007-Jan 2008: Acting chief executive officer, Gulf Air
Jan 2008-date: Chief executive officer, Gulf Air
The Bahraini airline remains heavily loss-making and needs to continue cutting costs, according to Bjorn Naf, its chief executive officer (CEO), although it is starting to turn the situation around.
“To correct all of this takes longer than a year, but by 2010 Gulf Air will enter a new phase,” says Naf.
The company’s decline reached a nadir early in 2007, when then CEO Andre Dose lifted the lid on the company’s perilous financial situation.
Gulf Air was haemorrhaging $1m a day, he admitted, large sections of its network were making losses and its fleet of aircraft was diverse, old and costly.
Dose launched swingeing cuts to restructure the business, slashing six loss-making destinations from the long-haul network, trimming the fleet and warning the workforce to expect a significant reduction in staff numbers.
But Dose’s approach upset too many at board level, where the public exposure of the airline’s plight had caused embarrassment.
With the airline descending into acrimony and apparently bordering on financial collapse, dozens of pilots were poached by rival Gulf airlines offering greater security and larger salaries.
Dose was forced out in July 2007 after less than four months in the job. He was replaced, initially on an interim basis, by Bjorn Naf, the airline’s chief operating officer.
As the company’s third CEO in eight months, with a poor balance sheet and a divided workforce to deal with, Naf’s task of turning the company around was not an enviable one. Middle East aviation was booming, but Gulf Air risked being left further and further behind.
“The situation we inherited was a mess,” says Naf. “It was a huge challenge and a huge responsibility.
“We had an old fleet, a network that was not geared to the customer and morale was down because of the [restructuring] announcement last year, the staff departures and cutting the six destinations.”
Fast forward a little more than a year, however, and the airline has enjoyed a strong summer that has bucked the slowdown throughout the region.
Gulf Air had a record August, with a 20 per cent rise in revenues for each kilometre flown, compared with the same period in 2007.
Passenger loads exceeded 90 per cent on some routes and the airline is on target to carry 6 million passengers this year.
This, Naf points out, is the same target as Etihad, even though Gulf Air has a significantly smaller fleet than the Abu Dhabi carrier.
This follows a year when the airline has ordered 59 new aircraft, the first of which will arrive in 2009.
Gulf Air has also been expanding its network. It launched flights to Shanghai and Hyderabad in the summer, and will follow this with up to six new European destinations in 2009.
Amsterdam, Rome, Milan, Munich, Moscow and Warsaw are all being considered for inclusion, depending on what direction oil prices follow, a major step forward after the retrenchment of last year.
All this comes at a time when the global aviation sector has been rocked by soaring fuel costs.
Although the market in the Middle East has proved resilient, maintaining record growth for much of the year, a recent dip in growth has been a blunt reminder that the region is not immune from the economic downturn.
“The banking crisis presents us with a huge challenge,” says Naf. “You can see that demand is falling across all regions.”
Across the industry, there “is a cautiously pessimistic outlook”, he says, but it is not obvious in Manama, where Gulf Air is based.
Gulf Air’s workforce seem to be enjoying their work again. Staff and union members are fulsome in their praise for Naf, and parti-cularly for the clarity he has brought to communications between the airline’s management and staff.
The exodus of foreign expertise that followed Dose’s announcement of staff cuts in April 2008 has been halted and the relationship between local and foreign staff has been repaired.
Naf is also credited with healing the rift between Bahraini and foreign employees that had sprung up in the last days of Dose’s management.
Tensions were exacerbated when former managers were accused by the board, itself under pressure from the royal family, of contributing to the company’s financial plight.
The case of Michael Kent, Gulf Air’s former head of in-flight services, who was accused of fraud and prevented from leaving Bahrain for a year, further divided staff. Under Naf, the case has been quietly dropped (MEED 29:8:08).
Naf has fostered the improved atmosphere through the simple expedient of paying his staff more.
Following Dose’s departure, Naf launched negotiations with employees to agree improved salary and benefits packages, with a particular emphasis on pilots and cabin crew.
In recent weeks, the company has launched further talks over improved benefits packages, including the introduction of a company pension scheme, health insurance for all employees, and other social benefits.
“If we want to be the carrier of choice, we must also be the employer of choice,” he says. “We need to offer a good, modern environment for our staff, and that means the right remuneration packages.
The whole company got an improved package last year, but to attract top employees, we need to pay the market rate.”
However, another round of pay increases will have to wait until the company’s financial position recovers.
“Losses remain around the $600,000 a day mark, after the spike in the cost of fuel this year wiped out much of the benefit of cost-saving initiatives. The improvements made at the airline to date are important, but they will not last unless the balance sheet shows a similar upswing.
Naf has pushed back the carrier’s break-even target from 2010 to 2013, but the fact remains that, as with many carriers in the region, this will not be achievable without the support of the government.
Naf is irritated at being constantly questioned about the airline’s daily losses, a legacy of Dose’s disclosure.
The $1m-a-day figure was, he says, “a snapshot in time” that “does not reflect the day-to-day operations of the company”.
“I understand that cash flow is king and, ultimately, you need positive cash flow to survive, but we have a supportive shareholder to bridge the gap as we move in the right direction,” he says.
Naf says he hopes to usher in a new period of financial transparency next year, and aims to begin publishing annual reports at the end of 2009. For the time being, however, Gulf Air’s plans remain unclear.
“We have a lot of legacy issues to deal with – contracts that we cannot get rid of until they expire,” says Naf. “We need time to correct all this.
“We want to be seen as a transparent, highly professional company that is honest about its performance. We are not there yet.
“If the system is cleaned of legacy issues and our five-year plan is approved by the board, we will introduce annual reports. We want the fruits we pick to have grown from seeds we planted.”
A critical part of that plan, which is under discussion with the board, will be the establishment of a hub for aviation services in Bahrain.
Naf is close to appointing a joint venture partner to take over the airline’s training academy, which the company will spin off to cut costs.
This will complement a new $50m hangar and maintenance facility to be built at Bahrain International airport.
“We want to add value to the business and to Bahrain, as well as cut costs,” says Naf. “We want to create local jobs.
“Training has a future. In the long run, the airlines will grow and need more and more staff. There is a lot of talent here in the Middle East, but it needs training.
The academy will contribute to the better running of a modern airline and put Bahrain on the map.”
In the meantime, he must continue to cut costs. Savings of 10-15 per cent have been targeted for 2009, excluding fuel, and closely guarded targets for reducing the workforce are under discussion.
Naf is aware that the issue remains sensitive, but needs to cut overstaffing in several departments.
“Every vacancy in the company comes across my table,” he says. “People might say I am micro-managing, but there are not many positions coming up.”
Naf is aware that Gulf Air is not likely to compete again with the region’s big three carriers in the long-haul market.
The five-year plan is not, he admits, “as ambitious as other carriers in the region”, but he says the airline can recover to secure a place in the second tier of airlines.
The arrival of new planes will improve efficiency and customer perception, and a better aligned network will cater for a range of markets, “not just the labour market going to India”, says Naf.
Compared with the issues Naf faced on his appointment, the outlook is much more positive now, but he acknowledges there is still a long way to go.
Until the legacy contracts can be discarded and more transparent systems introduced, questions about the company’s financial performance will continue.
“We are aligning the basics now and in 2010 you will see the fruits of this,” says Naf. “Then customers will believe in the airline again.
Punctuality, performance, reliability and product will all be better. But at the moment we are suffering and losing money.”