Last chance saloon

21 June 2002

In 1973, when Abu Dhabi, Bahrain, Oman and Qatar clubbed together to buy Gulf Aviation Company few could have questioned the commercial argument for establishing an airline to service the emerging market for air travel in the Gulf. By the mid 1980s, the pioneering airline, now known as Gulf Air, had grown fat, operating flights in and out of the region, at a time when Gulf economies were being transformed by their vast oil wealth.

Back then, few would have anticipated that the airline, supported by the seemingly endless benevolence of its founders, could fall foul of a mounting debt crisis. But a failure to put into place a coherent strategy to combat the emergence of regional competition in the 1990s has tipped Gulf Air's bottom line deep into the red. And while passenger numbers have dwindled the airline has gradually racked up debts that are said to amount to some $800 million in total.

Matters came to head on 29 May, when, following the airline's request for a $275.5 million rescue package, Qatar finally lost patience and withdrew its backing for the airline it had helped to create and support for almost 30 years. However, Doha's decision to concentrate on the development of national carrier Qatar Airways (QA) came as no surprise.

The blow could have been much worse: Oman had also been widely tipped to withdraw its support. In the end, Muscat remained on board and, alongside Abu Dhabi and Bahrain, contributed to an $81 million capital injection. All three shareholders have expressed their support for a broad recapitalisation and restructuring programme that will be led by the newly appointed president and chief executive, James Hogan.

'This is still a large airline,' says Hogan. 'Gulf Air was in the past one of the world's leading carriers. When you go back to the days of TriStar, in terms of service delivery it was seen as one of the innovators in the aviation industry. Our network is still the most extensive in the region with a fairly strong long-haul route structure into Europe and Asia. Unfortunately, that is the part of the business that has been cut back on the most in the past.'

The appointment of Hogan, previously chief executive of Australia's Ansett and the UK's British Midland International, marks a departure for Gulf Air, which has previously relied on leadership from the public sector. 'To a degree over the past year the airline has lost its way and the shareholders now want to see a much stronger commercially based business. It is very difficult to have a defined strategy when you have four state-owners trying to agree on a common direction for the airline. That is why for the first time they have brought in an airline professional.'

The shareholders' decision to fund the airline's latest restructuring plan is not the first time they have been asked to inject capital. In May 2001, at the request of the previous chief, Ibrahim al-Hamer, the shareholders ploughed $159.2 million into a proposed restructuring which was supposed to return the airline to profitability.

This time, it must be assumed, there is more urgency. 'The shareholders have come to an agreement to support the airline, so from a cash flow perspective it's business as usual,' says Hogan. 'However, they want to ensure that in three to five years the airline will move back into profitability. They are committed to Gulf Air and want to ensure the strategy that is eventually put into place is sound. The airline needs some polishing and tightening up but that is what we intend to do.'

Some have accused Gulf Air of being preoccupied with talking tough on strategy in the past and short on delivering results. What is clear is that its present flight path will have to change if it is to survive. US aviation consultant Simat Helliesen & Eichner (SH&E) was brought in last year to review the business and draw up proposals for a new long-term strategy that will involve a dramatic rethink of the way the airline is managed. Hogan, whose appointment was recommended in the report, intends to have a direct role in determining the eventual shape of things to come.

'My first task is to review the findings of the SH&E report and I now have a management review committee looking at this. If we are going to be a world-class airline once again we have to review a number of key areas in the business. Firstly, why have our customers in the region chosen to fly airlines other than Gulf Air? Then we have to look at opportunities to grow the business internationally and develop fresh revenue streams. One thing being looked at is how we as an airline can service the regional tourism market. That means supporting the destination strategy and marketing of our shareholder countries. I don't think we have pushed hard enough in the markets in our own backyard,' says Hogan.

A big factor in the airline's gradual decline has been the rise of competing regional carriers such as Emirates, QA and Oman Air. Of these, Emirates has taken the most business from its elder cousin in Bahrain. While the Dubai-based airline's fleet, passenger numbers and international route structure have grown Gulf Air's have shrunk. Hogan not only sees Emirates as his major competitor but also appreciates that Gulf Air can learn from its success.

'We can be as good as Emirates, if not better. They have done a good job in marketing Dubai as an integrated tourism package. That is airline and hotels working together,' says Hogan. 'The opportunity we have moving forward is to market the destinations of our three shareholders under one strategy. I have met with each of the owners and agreed to work on a three-year strategy based on this principle. We look to be much closer to them than was the case in the past.'

Reducing the airline's cost base is also an immediate concern for Hogan. Gulf Air has an unenviable reputation for being top heavy, employing too many staff, flying too many of the wrong aircraft and operating a number of non-core businesses and assets. Its existing fleet of 30 aircraft is mostly made up of small Boeing B767-300ER and Airbus A320-200 airframes.

'Nothing is sacred,' says Hogan. 'Inevitably we are going to shed staff. The redundancy and cost cutting programme has already started. However, it is important that our employees know why this has to happen. I am also reviewing our fleet structure, both above and below the wing. First we need to identify where we can generate revenue and then build our fleet around that. The idea is to develop our strategy first and then look at our fleet so that the aircraft we operate make sense for the routes we are going to fly.'

Returning to profitability - and swiftly - is at the top of Hogan's agenda. The airline recorded a net loss of $132.3 million in 2001, up from $98.1 million in the previous year. Selling more seats is a priority and on this issue Gulf Air intends to go head-to-head with its competitors on price. In early June, the airline introduced a price guarantee initiative and claims that it won't be beaten on ticket price. Taking the budget travel initiative is a compelling concept that has seen a number of European low cost operators test the nerves of the big airlines. 'Having worked against carriers such as Easyjet and Ryanair in the past I am aware of the opportunities in the industry they have created,' says Hogan.

Another option that Gulf Air is keen to pursue is joining up with strategic partners in one of the giant airline alliances that have helped to drive prices and operating costs down. 'It's a natural step for us to join an international alliance and we are in talks with a number of potential partners,' he says.

Whatever the outcome of the latest chapter in Gulf Air's long story there is a sense that time is running out for the regional stalwart. The airline has another three years to return to profitability and the remaining shareholders will be keeping a close eye as matters unfold. If Hogan fails to deliver over this period the next instalment in the Gulf Air story may be the epilogue.

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