At the beginning of the year, Bahrain’s Foreign Minister Sheikh Khalid bin Ahmed al-Khalifa boarded a Gulf Air return flight from Malaysia only to be told he could not have his favourite seat, 1A. An ugly spat followed.

Gulf Air said it could not give the minister his chosen seat in the Falcon Gold Class cabin because it was already taken by a passenger and the minister had been moved onto the flight after a previous cancellation. Sheikh Khalid said the issue was more to do with delays and unsatisfactory service. Whatever the reality, on 8 January, the ministry issued a memo telling staff to stop using Gulf Air.

It was bad news for the struggling airline, especially since the government was trying to encourage staff to use Gulf Air to help boost passenger numbers.

Bailout plan for Bahrain carrier

This was not the only tough conversation going on between the airline and the government. A strategic review of its future has been under way for the past few months, culminating on 28 March when the upper house of parliament gave initial approval to a plan to bailout the airline and restructure its operations.

Once fully approved, the new plan will keep the airline going, but is not expected to do enough to turnaround its performance. Instead, it will merely reduce its losses.

The scheme involves the government injecting BD664.3m ($1.8bn) to help downsize the airline and cut losses. It envisages annual losses falling from BD200m to about BD100m, after deciding that a plan to restore the airline to profitability in the short term was unrealistic.

The government will keep the airline running, but it needs to do something dramatic to improve its efficiency

Bahrain-based source close to Gulf Air

In 2010 alone, Gulf Air lost about $500m. No figures are available for 2011, but after a year of local political unrest, they are not expected to show any improvement. Mumtalakat, the sovereign wealth fund through which the government owns the airline, says its losses are largely due to Gulf Air.

The good news for the airline is that much more radical options that were being considered by the government have been dropped. These included plans to shut down the carrier or sell it off.

Perennially loss-making, Gulf Air has long been a headache for Bahrain. Its origins go back to the 1940s when it was established by a British entrepreneur. By the 1970s, it was owned by the governments of Bahrain, Kuwait, Qatar, Oman and Abu Dhabi. About 30 years later, each government started to withdraw to establish their own national carriers, leaving Gulf Air in the hands of Manama by 2007.

Attempts to restructure the airline and turnaround declining profits have been under way since 2002. “This is about the fifth plan to get Gulf Air back to what the country needs,” says one Bahrain-based source close to Gulf Air. “They will keep the airline running, but they need to do something dramatic to improve its efficiency.”

The most recent attempt at improving things has been taking place for the past few months. A source at the airline says meetings between the parliamentary committee looking at Gulf Air and the Finance Ministry are scheduled for early April and the plan to inject new funds into the airline should be finalised by the middle of the month. The source adds that the airline is “cautiously optimistic” about the outcome.

However, it seems that the new funds are not yet a done deal. “There are still a few members of [the lower house of] parliament [MPs] who are against giving Gulf Air any more money,” says a Bahraini MP on the parliamentary committee looking into the future of the airline. “It will take some time before a deal is in place.”

He adds that the current deal to provide Gulf Air with BD664.3m over the next two years is to be followed by further government injections of BD498m for the subsequent two years.

Management changes for Gulf Air

Rumours have also circulated about the future of the airline’s chief executive officer Samer Majali. Although the company has said it “does not comment on unconfirmed rumours and speculation”, sources in Bahrain say that Majali, who is Jordanian, is planning to resign. The lower house of parliament is understood to favour a management shake-up at the firm and the news circulating in Manama suggests that the government is trying to delay his departure until it can be seen politically as a sop to those opposing further handouts to the carrier. MPs have already voted in favour of making it obligatory for a national to run the airline.

Within the next six months or so, whoever is in charge of Gulf Air will be faced with the herculean task of restoring profitability. In an already politically charged environment in Bahrain following last summer’s lay-offs of staff involved in anti-government protests, Gulf Air will have to trim its workforce to cut costs.

Redundancies have always been controversial and after the past year, they are likely to be even more troublesome than previous rounds of cutbacks at the airline. Gulf Air was one of the first firms in Bahrain to start reinstating sacked employees after the 2011 unrest, and is often seen as being under the wing of the reformist Crown Prince Salman bin Hamad al-Khalifa.

The crown prince is eager to see the airline return to its former glory and play a key role in promoting Bahrain internationally. Gulf Air is also one of the sponsors of the Formula One Grand Prix, which will begin on 20 April, another initiative of the crown prince to help bolster the country’s international reputation.

Cost-cutting measures ahead for Gulf Air

It is not just staff levels that will shrink. Part of the cost-cutting exercise will involve trimming down the routes that the airline operates, selling off landing rights that are no longer used and concentrating on profitable destinations. Here too, however, Gulf Air risks being dragged into Bahrain’s and the region’s fractious politics. Its two most profitable routes, to Iran and Iraq, have both been suspended. Other routes to Damascus, Athens, Milan and Kuala Lumpur have also been cancelled.

Other routes are being boosted though, with flights to Kenya, Medina and Yanbu increasing in frequency or newly introduced.

“The country needs a national carrier or it will be dependent on other airlines,” says the head of an international bank in Bahrain. “It just needs to focus on what the country really needs it for, which is flying in workers from India and operating flights to financial centres around the world.”

As a status symbol and sign of economic confidence, Bahrain needs Gulf Air to ensure that it can recover its reputation as a regional financial and business hub.

One aspect that will not change, regardless of a management shake-up, is political interference. “Whatever funds we put into Gulf Air will all be gone,” says the local MP. “The airline needs to be run economically, not politically. In the past few months, politicians have spent so much time involved with Gulf Air that they have almost become professionals in the airline industry.”

Political interference has long been a complaint among Gulf Air chief executives. While parliament has often blamed management for the problems at the airline, the succession of recent managers who have failed to turn the company around indicates that Gulf Air’s issues may go beyond its own boardroom.

If the airline does scale back its ambitions, it will have a knock-on effect on projects planned at the airport. Back in 2009, two new terminals were planned, costing about $4.7bn. Part of the scheme would have involved demolishing the existing terminal and replacing it with a more modern building.

Schemes of that scale are likely to be on hold for years. Instead, the government will focus on expanding the existing terminal, boosting its capacity by 50 per cent to enable it to handle 13.5 million passengers a year and increasing space at the airport by 40,000 square metres.

Gulf Air’s challenges are compounded by the presence of three well-funded neighbouring airlines. Dubai’s Emirates, Abu Dhabi’s Etihad Airways and Qatar Airways are all receiving major investment from their government owners and are benefiting from their country’s political stability, economic growth and ability to act as transit hubs between East and West. After years as a monopoly carrier in the region, Gulf Air is no longer in any position to compete with its regional rivals.

Rising fuel prices will also not help the airline’s recovery, nor will the continued low-level unrest in Bahrain. In 2011, bookings fell 25 per cent in the first five months of the year.

A previous three-year restructuring plan was intended to return Gulf Air to profitability in 2013, but it was aborted in January, making it the latest restructuring plan at the airline to have failed.

Short-haul carrier

The most likely outcome now for Gulf Air is that further government funds are handed over in the coming months and it refocuses on being a regional short-haul carrier, picking up routes that its rivals steer clear of. A few popular destinations such as the UK will be retained. This strategy will not be dissimilar to the one pursued by Majali since he took the helm in 2009.

With Bahrain’s limited finances, however, the government cannot offer Gulf Air the kind of financial support that its neighbours are able to provide to their airlines. Competition will be intense over the coming years and unless Gulf Air returns to profitability soon, it may find that the state’s willingness to keep funding a loss-making airline will eventually peter out.