The airline, which is to be based in Abu Dhabi, will initially fly Gulf Air's existing fleet of nine 767-300 ER aircraft configured with an all-economy cabin. The aircraft were converted to a two-class configuration last year from the standard three-class layout in response to the airline's commitment to offer cheaper flights on all regional services. Crews will also be relocated from the airline's existing headquarters in Bahrain to the emirate. Gulf Air's core operations will now rely on its 21 remaining A320, A330 and A340 aircraft.

The initiative is the first of its kind in the Middle East and follows the example set by pioneering budget airlines in Europe. Low cost carriers such as Ireland's Ryanair, and UK-based Easyjetand Gohave made significant inroads into the market for cheap European air travel. Hogan says the new subsidiary will follow a model similar to the all-economy service launched last year in Asia by Australia's Qantas.

The launch of the budget carrier is the next stage in Gulf Air's recovery plan which is designed to return the troubled airline to profitability by 2004. The three shareholders - Oman, Abu Dhabi and Bahrain - reiterated their support for the airline in December with a fresh BD 130 million ($345 million) financing package. The airline is understood to have amassed total debts of BD 304 million ($800 million - MEED 20:12:02).

'They are cash hungry at present so it is no surprise to see them take this step,' says a senior industry executive. 'It makes good sense to introduce a budget service in the Gulf for flights into the Indian subcontinent, which carries very little premium traffic. However, they will lose frequency if they increase seat numbers as they are already limited on the seats they can offer on services to India.'