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Fri 19 Feb 2016 01:12 AM

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Can Gulf Air become the fourth big player in the GCC?

Once owned by four of the GCC states, Gulf Air has been struggling to perform with only one left, Bahrain. Despite half-a-billion dollars in losses during the global financial crisis, its no-nonsense acting CEO Maher Salman Al Musallam is forging a path towards the airline's first profit in two decades

Can Gulf Air become the fourth big player in the GCC?

This is a new era for Gulf Air and there are figures to prove it.

The one-time Middle East giant has long since fallen from its lofty perch after its central supports — four state owners — left to form their own airline companies.

The story of the 66-year-old Gulf Air is well-known. Oman (until 2007), Abu Dhabi (until 2005) and Qatar (until 2002) all once upon a time referred to Gulf Air as their own, before one by one they exited and left Bahrain to forge ahead on their own.

What remained was an airline with significant legacy issues, including unprofitable long haul routes and too many staff.

In 2013 — six years after being left to Bahrain as the sole owner — Gulf Air finally decided to take control of its financial issues and sort out the various operational problems. The results have been spectacularly good under current acting CEO Maher Salman Al Musallam.

In its most recent financial results in September, the carrier announced its strongest annual figures since 2004, clawing back the $246m deficit in 2013 to $166m in 2014. Results prior to that had seen the company’s losses reach as much as $560m in the period between 2008 and 2012. But now there are even realistic hopes that Gulf Air can break even this year, as the national carrier looks to a brighter, more profitable future.

Coupled with an announcement at Bahrain Airshow last month that it would purchase $7.6bn worth of new Airbus and Boeing aircraft, it certainly appears that Gulf Air has finally found its own wings.

“We have been involved in the restructuring of Gulf Air since 2013. From that day up to now we have reduced the losses of Gulf Air,” Al Musallam says, speaking to Arabian Business in the airline’s chalet at the airshow.

“It’s not only that; we have also paid all the legacy [debt] that has formed over the previous years and that was a substantial legacy. We have paid each and every vendor, contractor and everything. There was a pile of money that Gulf Air owed over the years. It was kept aside. We are up to date with all our bills. Gulf Air will clear up all legacy commitments during 2016.”

The changes, he says, started when the airline revised its model, focusing more on high-yield, high-frequency, point-to-point regional services, moving away from the previous transit passengers through its Muharraq hub.

 

“We looked inside Gulf Air. We, at the time, leased a lot of aircraft that was not adding anything to Gulf Air; we could do without them. The lease amount was huge because we leased them during the high time, when there was a demand and a market. The rent was very high,” he says.

“Secondly, we have looked at the manpower that wasn’t required, and people have left Gulf Air.

We have [also] decided to have one common fleet, which is Airbus only. We stopped operating a variety of aircraft. The A330 captain can fly the A320 with no problems. So aircraft could fly to destinations and give us flexibility [with pilots].”

The focus on costs and fleet utilisation — using an Airbus-only fleet — meant that there was only one type of pilot required, leading to a cost-saving in manpower, which was complemented by administration staff who took voluntary retirement.

On the day before our meeting, at an airshow press roundtable, Qatar Airways CEO Akbar Al Baker suggested that Gulf Air’s multiple CEO changes during its history were to blame for the dire financial situation (he also said Kuwait Airways suffered from political interference).

“In Gulf Air, it was personal interests of people and the rotating chief executive regime to placate the four owning states that was a major factor in the decline, because there was no consistency, one after the other [they left]. Every CEO has a different mentality, different interests, operating out of four hubs in a very small market at that time,” Al Baker said.

He suggested that the current leadership, along with a changed model, would see the airline “rapidly progress”.

Al Musallam dismisses Al Baker’s comments: “It doesn’t matter who

the CEO is once he’s doing what is committed to in the plans that the board [has approved].”

“Unfortunately I didn’t attend this [Qatar Airways roundtable], otherwise I would have stepped in,” he later adds. “I am an acting CEO for the last three, four years, but I could challenge Mr Al Baker. I am here and I am acting CEO, I’m not even appointed yet.”

 

So why has he not been made permanent?

“It’s easy. I’m trying to make sure that I convince the board that I am delivering. And they love it. Once they have a CEO that is running the airline very cheaply, they don’t mind at all,”

he says, before pointing out the obvious. “But we are reaching a stage of saying ‘guys, wake up please’. They realise that it’s time to do something about it.”

But maybe Al Baker has a point. Apart from the sizeable debt, Al Musallam also has had to deal with the airline’s previous aircraft order commitments with both Airbus and Boeing, as well as Canada’s Bombardier, despite having an Airbus-only policy.

Musallam says instead of forfeiting the Boeing contract, he has been forced to adapt the current fleet strategy to accommodate the new planes, which are expected to arrive in 2018. While he readily admits that his first choice for a wide-body aircraft is an Airbus, a long consultation process has led him to agree to operate Boeing wide-body aircraft alongside narrow-body Airbuses. Deals with both plane makers were reconfirmed in revised formats during the Bahrain Airshow.

The Boeing contract upgrades a previous 2008 order of 16 787-8 Dreamliners, for the larger 787-9, which will offer greater range capability. The new aircraft will replace Gulf Air’s current wide-body fleet, with the first aircraft in the order due to be delivered in April 2018.

The $3.4bn deal for 29 Airbus aircraft is an upgraded order dating back to 2012 that will see Gulf Air receive 12 A320s and 17 A321s, all of which will be fitted with the fuel-efficient neo engines, with the first due to arrive in June 2018.

“We are committed to contracts that had been signed more than a decade ago, for both companies. It’s a firm contract with Boeing that we need to fulfil,” Al Musallam says. “But it’s good to have a Boeing product on board. Since we have a contract, let’s go for it and let’s make sure that we get it right. We have negotiated, and we have studied the network and the fleet and even the configuration of each and every aircraft that will enter Gulf Air fleet in the near future.”

Gulf Air also signed contracts for ten Bombardier CS100s in 2012, with the Bahrain carrier supposed to be the launch partner for the narrow-body aircraft in 2013. But the delayed deal remains in doubt, with Al Musallam insisting that he will look into the regional jet concept to see if it is viable for the airline.

A decision on that will be made next month, he says, and it will be based on whether it fits into his plans for the carrier’s future growth and development.

 

“Gulf Air is entering into a new era in which it will be the airline for Bahrain. We need to grow in this era with new aircraft and new product that our customers deserve. Secondly, Gulf Air will keep its hospitality and services that have been known for years.

“The task that Gulf Air did for this region in the past was massive. It took people in and out of the Gulf when there was nobody. It was the only airline operating it the region. It’s very difficult to see this airline just disappear, so Gulf Air is back.”

Musallam is coy about where he plans to deploy the new aircraft.

“They are coming in 2018, 2019 and 2020 and things change, and you never know. We will go back again to the plan and see which destination we might open if they are feasible. The industry is very dynamic and things could change like this,” he says, with a click of his fingers.

Looking to the year ahead, he says while Gulf Air has reached the limit of the utilisation of its fleet, the recent decision to stop 16 weekly flights to Iran — in line with Saudi airlines — offers a chance to redeploy those aircraft within the region. He reveals that Bahrain and Saudi Arabia signed a bilateral agreement at the airshow to allow more Gulf Air flights into Riyadh and Jeddah — which was confirmed with the recent announcement to up its daily service to Jeddah to four daily, along with an increased service to Kuwait of six daily flights.

“We are shovelling a few frequencies here and there to fulfil the network and looking to increase frequencies in areas where we want to get some more passengers. We have been operating with the same number of aircraft for 2014, 2015, 2016 and in 2017 we will be operating almost four years with the same number of aircraft,” he says.

This year will also see Gulf Air enter into a hedging agreement in the summer, but, Al Musallam says, not before careful consideration of all factors.

“We are going to hedge [but we need to ask], who has been successful in hedging, and who has suffered? You need to ask yourself if hedging is a good thing or not? It’s arguable. I think Emirates has suffered, I think Etihad has suffered, and a few others as well, because they hedged at higher prices. Now is it the time to hedge? I would say ‘yes’. I have a hedging formula, because it requires a clear policy. We have to get it right. I hope that by June we will be able to hedge, but we want to get it right otherwise it could backfire on us,” he says.

Musallam hopes that the formation of a new company, the Falcon Group — made up of Gulf Air, Bahrain Airport Company and Gulf Air Academy — might help achieve further savings.

“This group, a concerted business operation, is still in its initial phase. If this comes true and starts working, I am sure by getting additional catering, fuel, handling, engineering or any business in the airport, this will add to Gulf Air and it will help to eliminate the rest of the losses,” he says.

 

Construction work has already started on the new $1.1bn terminal at Bahrain International Airport, which will increase its capacity to 14 million passengers annually when it is completed in 2019. He says the plans will maintain the “cosiness” of the airport, without the need for significant movement from check-in to the gate.

“We are going to have bridges that will get rid of the harsh air levels and environment that exists in this part [of the world]. The passenger will come directly to the air bridge instead of having to struggle a little bit with a bus to and from the terminal,” he says.

In the past there has been talk of an initial public offering (IPO) of Gulf Air. Just last year, MPs in the kingdom submitted plans to list the carrier as a means to stop the flow of funds they argued it was draining from Mumtalakat, the kingdom’s investment arm and owner of the airline. There was a strong proposal to privatise the airline in 2010, but neither have materialised into anything concrete.

Al Musallam says any IPO would need to be initiated by Mumtalakat, but for now Gulf Air will proceed with its current plan, which includes footing the bill for the $7.6bn aircraft order.

“Believe me, it’s very nice when you sit and smile and sign for an aircraft order, but it’s very difficult when you start paying for it. If you are asking who is paying for it, it’s us, not the government. One of my chiefs here asked ‘are you sure you have done the right thing, committing Gulf Air to a new thing?’” he says.

“I am sure that I am not harming Gulf Air by doing what I have done. This has come from a study of the business that the board has signed and approved.”

His confidence comes from an insistence that things have changed for Bahrain’s national carrier.  “Everything you do in Gulf Air is right,” he insists, “Sorry is not enough. That’s why we end up with these massive losses because nobody knows what they are doing. They do things, but they are not adapting to the market or to the current situation. They have been told to do this 15 or 20 years ago, and they are so experienced. That’s not the thing we want,” he says.

It comes down to changing the culture, according to Al Musallam, and moving away from its complicated past.

 

“Whether Gulf Air has been left with the legacy of having four state owners is good or bad, I think now it’s bad because all the four countries that owned Gulf Air — Abu Dhabi, Qatar, Oman and Bahrain — could afford anything in the ‘80s. It was the start of a big bubble. They gave everything to Gulf Air — employees, people, stations, you could do anything. There was no clear audit or processes.

“But now it’s different because we are holding everybody accountable to what they are doing. You work and you get paid according to what you produce. This concept wasn’t initiated at the beginning.”

In Maher Al Musallam, Gulf Air has a key figure who looks perfectly placed to guide the carrier into the new era that the airline craves.

Arabian Business: why we're going behind a paywall

Joe 4 years ago

I how hope the 'head in the sand' comments about on board service and ground service "hospitality" are addressed and realistically looked at. They are both VERY average on the whole. Bahraini male cabin crew have always been a weak point in my extensive experience. They certainly have the ability but seen to lack any enthusiasm are abrupt and make announcements at 1000 miles and hour...place their personal baggage on spare seats in anticipation of a quick get away once aircraft lands ......and I could go on and on. Crew wearing of uniforms and appearance have been very inconsistent also compared to the immaculate cabin crew of the ME3. Go back to the Landor 'Gulf Air' script and not the plain cheap current 'Gulf Air' written livery. The rest of the livery is immaculate and quite spectacular so please don t touch it!. As far as chefs go food is average at least...almost a waste having chefs whose hands are tied. Remember when GF would win awards for best First Class food?

Bahraini 4 years ago

I hope that Gulf Air management / board take a long hard look at this airline and realize that the fundamentals do not currently stack up. The country seems to be wasting more money propping up this airline then it would to keep all the Bahraini staff on hire until retirement in just 12 months - an opinion. Yes I have heard the arguments that there are other sectors that benefit however I do not trust in those figures. Gulf Air in my opinion should focus on being a small carrier that takes people cheaply from Asia to the middle east and from the gulf countries for to the Shiite areas of worship in Iran and Iraq. Again just an opinion however it is clear that the previous/current strategy has not yielded positive results.

yousef Al Ghareeb 4 years ago

Bahrain is not a big market, which reflects on any business growth. GF will not be the fourth airline in GCC, with Oman and KSA having new airlines starting up. Given today's market condition and the oil price, this will force number of companies to hold or slow their growth plans, especially with the government downgrading its expenditure ...