The governments of Qatar and Oman have been reported as being reluctant to participate in the proposed $272.5 million rescue package. A third shareholder in the airline – Abu Dhabi – is expected to be cautiously supportive of the company. Bahrain – the fourth shareholder – has shown full commitment to Gulf Air and is understood to have tabled an offer to meet any funding shortfall.

The reluctance of Doha and Muscat to participate in the deal has not come as a surprise. Both countries have, in recent years, devoted considerable energies and funds to the development of their own flag carriers, Qatar Airwaysand Oman Air.

A final decision on the proposed capital increase is expected to be taken by the four shareholders in a meeting scheduled for mid May.

The current crisis in Gulf Air’s finances came to a head during a 22 April meeting between the carrier’s management and representatives from the four shareholders. A request for a $272.5 million equity injection was submitted, following a second consecutive year of massive losses by the airline.

MEED learns that Gulf Air recorded a net loss of $132.3 million in 2001 – full financial figures for 2001 are yet to be published – after a loss of $98.1 million in 2000. The airline is also understood to have a debt pile amounting to more than $800 million.

‘Some of the shareholders are baulking now because they are unwilling to throw good money after bad, and because they feel their own national airlines have a better future,’ says an international banker with exposure to Gulf Air. ‘They may not be wrong.’

This is not the first attempt by Gulf Air to raise fresh finance from its shareholders after a weak trading performance. Last May, a BD 60 million ($159.2 million) capital injection was received – on a pro rata basis – from all four shareholders. However, the recapitalisation fell some way short of the BD 100 million ($265.3 million) requested by the airline’s management (MEED 15:6:01, Cover Story).

‘The basic assumption is that Bahrain, primarily, and to a lesser extent Abu Dhabi, will not let Gulf Air fail,’ says the banker. ‘Even leaving the employment question to one side it would be catastrophic to Bahrain if Gulf Air stopped operating – how could it function as a financial centre? It’s unthinkable.’

Another banker says it is no coincidence that Bahrain is in the process of taking a $600 million, 10-year loan from a club of six banks (MEED 12:4:02, Banking & Finance). ‘They saw the Gulf Air situation coming and wanted to be in a strong cash position,’ says the second banker. ‘The sovereign borrowing gives them the necessary liquidity, and more.’

Attempts to restructure the airline launched last summer were stymied by the damage inflicted by the 11 September terrorist attacks in the US on the international airline industry. Gulf Air was quick to reduce its cost base, but some of the impact filtered through to the bottom line. In addition, growing competition from increasingly aggressive regional carriers such as Dubai-based Emiratesand the growth of Qatar Airways and Oman Air has hit Gulf Air.

US aviation consultant Simat Helliesen & Eichner (SH&E) were appointed last year to assist in the development of a new strategy for Gulf Air. Among the recommendations tabled in March are reductions in the carrier’s fleet and a radical restructuring of routes flown.

Carrying the process forward will be Gulf Air’s new president and chief executive officer (CEO), James Hogan, who will take up his new post on 12 May. Hogan, who previously served as CEO of Ansett Australia, replaces Ibrahim al-Hamer, who has served as Gulf Air’s president and CEO for the last 18 months.