Rescue plan for Gulf Air shows promise

09 October 2013

Following years of failed attempts to resurrect the fortunes of the Bahrain-based airline, the latest government-backed restructuring programme finally seems to be paying dividends

In 2009, Talal al-Zain, then chief executive officer (CEO) of Mumtalakat, Bahrain’s sovereign wealth fund, described Gulf Air as an “unacceptable burden on the national economy” that only existed because of government support.

The statement came as the carrier, which Mumtalakat owns, started a restructuring programme led by Gulf Air CEO Samer Majali that would make the airline “a commercially sustainable business in 2012,” it said at the time.

Four years later, both Al-Zain and Majali have moved on from Mumtalakat and Gulf Air. The 2009 restructuring plan did not succeed in transforming the airline’s fortunes. Gulf Air is still surviving on state funds and remains a burden on the economy. But after years of failed attempts to turn the airline around since 2002, a new restructuring plan unveiled in January 2013 promises to succeed where previous efforts have not.

Significant risk

In late July, Gulf Air announced progress on the first six months of its latest restructuring drive. It said losses had been reduced by 50 per cent in the first half of the year. Although it did not disclose specific figures, the airline said it was performing 15 per cent ahead of its financial targets for the first half of the year.

The news will be a relief to Bahrain’s government and to Mumtalakat. The sovereign fund reported a loss of BD181m ($480.1m) for 2012, a significant improvement on its BD270.6m loss in 2011. Manama has taken a significant risk with Gulf Air. To complete the restructuring, the government agreed to provide a BD545m cash injection. The plan involves cutting back on routes, staff and aircraft, and renegotiating contracts with suppliers.

Mumtalakat says the plan will work this time because it is being done transparently. The request for government funding and the restructuring plan were both put before parliament and debated by officials before they were approved. By setting out annual targets for the airline’s performance, there are clear benchmarks to monitor whether the restructuring plan is working. So far, the evidence suggests it is. Gulf Air also says costs have been reduced by 26 per cent year on year, and yield in the second quarter was up by more than 6 per cent.

Its fleet of aircraft has been reduced from 36 to 26, and is now exclusively Airbus. Gulf Air’s revised order book for aircraft will reduce the airline’s long-term financial liability of about $5bn by more than 50 per cent.

Mahmoud al-Kooheji, the new CEO of Mumtalakat, says Gulf Air’s losses for 2013 will be under $100m, and below $35m in 2014. In previous years, the airline has lost $200m.

The payroll has been reduced by 25 per cent, or about 1,200 jobs. The airline has ensured that no Bahraini pilots have been affected by the cut-backs. The redundancy programme was not without controversy, however. The General Federation of Bahrain Trade Unions and the Gulf Air Trade Union opposed the original redundancy package when it was proposed in January. Gulf Air improved the package the following month and extended it into March.

In May, the carrier started a compulsory redundancy programme. Shortly afterwards, it was halted by the government, then resumed again. The confusion has not stopped the broad thrust of the downsizing, but has soured already strained relations between the airline and the unions.

Increased competition

Gulf Air says it has completed the realignment of its network, with a focus on the Middle East and North African market and maintaining select routes to destinations in Europe and Asia.

The challenge for Gulf Air in turning itself around is that the Middle East air travel market has become increasingly competitive. The UAE’s Emirates and Etihad Airways, and Qatar Airways all have ambitions to become global carriers. Each also has much larger financial resources, bigger networks and greater brand recognition behind it than Gulf Air. The development of budget carriers, such as Flydubai, has also had an effect.

The general trend in passenger throughput at Bahrain International airport is downwards. In June, passenger numbers hit their lowest level since March 2011, when the country was in the midst of a political crisis. The shrinkage is probably reflective of Gulf Air reducing its network, and the closure of low-cost carrier Bahrain Air. It also likely reflects Manama’s declining role as a regional business hub in the wake of more than two years of political instability.

When the government decided to go ahead with the latest restructuring of Gulf Air, it was after considering more radical options including closing down or selling off the airline. If it does not succeed this time, those options may be back on the table.

In numbers

50 per cent: The amount by which Gulf Air’s losses have been reduced in the first half of 2013

BD545m: Size of cash injection from the government to support the restructure of Gulf Air

Source: MEED

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