Repositioned for growth

Gulf Air has had much publicised problems, but its remaining owners are sticking with the airline. Aviation Business talks to James Hogan, Gulf Air’s CEO, the man brought in to turn the airline around.

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By  Neil Denslow Published  April 30, 2003

I|~||~||~|Change and efficiency are the buzzwords at the once cash strapped regional carrier Gulf Air. The last two years have been a roller-coaster ride for the aviation industry, and Gulf Air has experienced much the same. Now the airline is in a period of transformation.
Steering its restructuring process is James Hogan, who has been applying his experience from Australia to the airline to turn it around in three years.

Since his appointment, Hogan has worked closely with the three owning countries of the airline (Bahrain, UAE and Oman) to reduce its losses and maintain a good culture of customer service.

Hogan started his re-engineering plan by implementing a redundancy and early retirement plan in the summer of 2002. The strategy since has been to restore customer confidence. “When we look at the solution, we say the umbrella is to be a first-class airline but that’s underpinned by service. If we get the customer equation right, the customers will come back,” says Hogan.

Behind the scenes there is ongoing focus on re-engineering the cost, changing the way the company does business internally, and an ongoing communication with its employees. “If the business has to change for the customer, the company has to change within the way it works,” explains Hogan.

Balancing the books has been key, and so far the owners are firmly backing Hogan’s comprehensive turnaround strategy. In 2002, the airline told its owners the losses of the company would be around US $111 million. The airline reported losses of $139 million in 2001 and $98 million in 2000. The airline also owes $700 million to banks for past loans to buy aircraft and another $146 million in deferred debt to its three owners. Qatar, which is trying to develop its own national airline, withdrew from the company in May 2002. All of this makes the restructuring task seem overwhelming. But when Hogan took charge of Gulf Air in 2002 and asked the three owning governments for US $238 million they responded in kind with two tranches of US$119.3 million.

“As we look at 2003, the key thing to understand is that we set a three-year recovery plan. It takes time to rebuild an airline,” says Hogan. “Everything is on track. The injection of funds by the three owning states gave us the funding required to redraw the airline over the next three years,” he adds.

Gulf Air has all the ingredients that define a world-class airline, says Hogan. He points to a strong route network, a rich human resources body, and a load factor annualised around 70%. “We have to bring the brand alive, and, if you look at the period from October 2002 through December 2002, we improved the quality of the revenue by bringing back more first and business class passengers,” he says, adding, “We stopped the decline in yield. Month by month we have improved the quality of the revenue.”

The company has met its first quarter forecast and estimates that it will meet its first quarter budget even in what it calls “the tough times.” This, says Hogan, means that the company will have exceeded both its January and February 2003 targets. “March will be tough but we will meet our first quarter forecasts. When you look at the business, it is starting to remerge; it is getting back in shape; we are getting all the fundamentals right. All the activities that we said we would do to the board are on track. We said we would reduce the loss to BD 20 million this year: we’ll achieve that.”

The company is looking to win new customers and pleasing those already on board. “We will be continuing this focus of making sure we have the right network, which gives the right connectivity to our customers,” says Hogan. Rather than cut back on routes and services the company has looked at ways to spread its wings.

“Every quarter we revisit our strategy and look at route contribution and profitability. A route can make or lose money but it can make a contribution to the overall network because it feeds passengers into the rest of the network through the hub,” says Hogan. “We look very clearly at [the route] if it is not achieving a level of contribution. Is it the yield, the mix or is it connectivity; and how do we fix those elements,” adds Hogan.

He explains that in Paris and Frankfurt the airline used to operate four days a week and run at a 55% load factor, effectively losing money. “We looked at that and saw that there was enough market share to go to elsewhere and make money,” says Hogan. “We exhaust what are the options, then if we believe it doesn’t work we will withdraw. At the moment we have not withdrawn. We continue to add. My main focus is the customer. Everything I look at in building this business is what does it mean to the customer. For the customer it is about frequency and connectivity and that’s what drives the decision-making,” he explains.

Evolution and progressive change is how Hogan describes the transition at Gulf Air. The results of the last quarter of 2002 and the strong January and February results, says Hogan, reflect confidence coming back into the marketplace. “The reliability is there and we exceeded the targets that we set. The product in Europe is exceptional and we will be rolling that out to Asia and the Middle East. What you are going to see during the months April and May, even during these tough times, is continuing change,” says Hogan.

The air carrier is investing heavily in changing its image. In June 2002, Gulf Air will launch what it says is a value based airline, out of Abu Dhabi, with a fleet of six 767s. If all goes well, the airline, which has sustained heavy losses over the last decade, should return to profitability by 2005, says Hogan. The airline has been looking at different segments and travel characteristics in the Middle East.

“When you look at our geographic positioning, our network integration opportunities, we believe we have three different businesses. We have a long-haul airline, Gulf Air, with three classes that operate throughout the Middle East, Europe and Asia. We have a regional business among the GCC that may be enhanced by using aircraft from Embraer and Bombardier’s 70 seater planes, We would like to introduce them by 2005,” says Hogan. The third business is a leisure.

The company has examined its business related to expatriate workers and the leisure segment. “When we looked at our recovery plan we looked at how Gulf Air would sit in this region 10 years from now and what we should look at in changing trends.” That is why the company decided to create an all economy leisure subsidiary. A driving factor has been that the six Gulf States and neighbouring Iraq, Yemen and Iran have an estimated 10 million workers from the Indian subcontinent.

“When we started looking at routes in the Indian sub-continent where we have a two-class product, 18% of the seat space is business class and the penetration is about 0.5%. That means we fill those seats but we don’t use space properly. It’s still Gulf Air but it’s a different service proposition,” says Hogan. The new subsidiary will allow the airline to carry more passengers and generate more revenue. “Because its one class it’s less crew, and reduced catering. From a cost point of view, we can be more efficient,” says Hogan.

The potential market for the new venture is huge. Although it is an all economy airline, officials insist that they are not following the example of the so-called ‘no frills’ airlines that have had such an impact in Western markets.

||**||II|~||~||~|The success of the airline’s turnaround strategy will only be seen over time, but there is an early indication that things may be heading in the right direction. Gulf Air is also working on diversifying its revenue streams. The airline has always had a good traffic carrying profile through the network: what it hasn’t done effectively in the past, says Hogan, is apply strong revenue management principles. “In the last six months, one of our big wins has been revenue management; we have improved the quality of the yield,” he says.

“The second big win on Europe has been the new product, introducing a chef on board, has seen a massive increase in first and business class sales. That means the quality of the revenue is much stronger,” explains Hogan.

At the same time the airline has been working very hard with its staff to improve communication and upgrade the cabin crew to provide good service. “On the street, the perception of Gulf Air is certainly improving. We are focusing on business processes, working hard on the way we source, cutting out waste, putting pressure on receivables and getting money that is owed to us,” says Hogan.

Another key objective for Gulf Air is to join an international alliance. “With the recovery programme, we have spent a lot of time looking at our positioning in the global market and that’s why I am very keen to join one of the global alliances,” says Hogan. “I believe Gulf Air is a natural fit for one of the global alliances. We can strengthen our offering to the customer by joining one of the alliances.” Hogan makes no secret that he wants the airline to join either the Star Alliance or One World.

The war in Iraq has not thrown Hogan off track. “It’s business as usual. On the first day we didn’t operate to Kuwait but we resumed services. My first focus is that my crew and customers are safe, and that my assets are safe,” says Hogan. “From day one we have not dropped a beat. We are looking at ways in which we can utilise our assets and bring forward checks. To me it’s a cycle and by summer it will be business as usual. We’ll meet our objective for this year,” he adds.||**||

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