Fresh air

Gulf Air will announce shortly that it broke even in 2004, and is now considering a public offering to raise cash for new aircraft. But with oil prices remaining high and competition intensifying, has the region’s oldest airline shaken off its troubles for good? Richard Agnew reports.

  • E-Mail
By  Richard Agnew Published  April 10, 2005

Fresh air|~|CONFIDENT-LEADER-200.jpg|~|CONFIDENT LEADER: James Hogan has introduced a more open management style since taking over.|~|DURING a walkabout with James Hogan around Gulf Air’s HQ near Bahrain International Airport, the Aussie chief executive is often brutally honest about the airline’s recent difficulties. But Hogan is confident that the culture change he is trying to promote at the region’s oldest airline is starting to show results. Except for a brief frown that appears on his face when he notices staff watching the national football team playing Japan on TV, he also seems to have genuinely struck up a good rapport with the employees he meets during the stroll. “When I came here there was no life in the place,” he says. “I’m the first non-governmental chief executive the company has had in 50 years. The CEO position used to be seen as very formal — if you saw him you’d probably shake in your boots, probably because you’d have screwed up. [But] I have a very open style of management, very focused on solving problems and cutting the ****,” he adds. Such an approach seems to be working so far for Gulf Air, at least in terms of the company’s financials. Unaudited figures seen by Arabian Business show that the carrier, which is owned by the governments of Bahrain, Abu Dhabi and Oman, broke even in 2004. For Hogan, this means that he has hit the latest target set out by ‘Project Falcon’, the three-year rescue plan he was recruited from British Midland to oversee in 2002. But getting out of the red is also no small matter for the 55-year-old airline which, the chief executive admits, had “completely lost its way” after the first US-Iraq War. It fell heavily into debt in the wake of the conflict and posted losses in five of the seven years between 1995 and 2001, when it came up short by some US$138 million. One of the airline’s four original state founders, Qatar, also withdrew from the venture in 2002, after an investigation into a crash two years earlier revealed shortcomings high up in the firm’s management. Morale at that stage, Hogan concedes, was at a very low ebb. “When I started, the staff had had no pay increases for 10 years,” he says. “The payroll grading system had also been totally manipulated over the years to give people artificial pay rises. I introduced the 3% annual cost of living adjustment and by the end of this year we will have scrapped [the old system and] have a new grading system based on performance. We have to be fair,” he adds. The achievement also suggests that there is light at the end of the tunnel for Gulf Air, despite recent investments by its major shareholders in other carriers, such as Abu Dhabi’s Etihad. Although it remains heavily burdened by debt, the figures show that the company had reduced its outstanding loans to US$540 million by the end of 2004 — their lowest level since 1989. And although Hogan says that Gulf Air is only “60% to 70%” of the way through the rescue plan, consumers seem to be reacting well to the changes and improvements he has introduced. In 2004, the airline carried a total of 7.4 million passengers, beating predictions and breaking its record for the second year running. Figures published towards the end of last year also showed growth in passenger traffic out of Abu Dhabi, Bahrain and Oman of 46%, 36% and 105% respectively, over the course of the restructuring. “We’ve hit the numbers for 2002, 2003 and 2004. We’re break even, minimum,” Hogan adds. What is most surprising, however, is that this turnaround has happened during a period of huge difficulty for the airline sector, both regionally and globally. Rises in the price of oil caused the carrier’s fuel expenses to increase dramatically during 2004, exacerbating the combined effects of terrorism fears, the war in Iraq, SARS and the ongoing march of low-cost alternatives to traditional carriers. “The most difficult aspect of the project has been the wild cards — oil, SARS and new competition. But that’s business and you have to adapt,” Hogan says. Rescuing the airline has therefore taken a lot of financial manoeuvring. Fuel costs, in particular, have taken a heavy toll on Gulf Air’s attempts to restructure — a rise of merely US$1 in the price of a barrel of oil, it says, adds some US$6.6 million to its cost base. So it’s not surprising that Hogan sums up the approach of oil prices towards US$60 a barrel as “disastrous”. He claims that the airline would have made a profit of US$83 million last year, had fuel costs come in at an average of the previous three years. The airline was also unprepared for the situation, having budgeted for fuel prices to be US$0.78 per US gallon at the start of the three-year plan. They averaged out at US$1.18 during 2004 and stood at US$1.55 in November last year, almost double what it had originally predicted. Despite its decision to add fuel surcharges to fares, Hogan says that this presented the airline with a shortfall of US$100 million during 2004. It had to surmount this in order to balance the books, so the airline didn’t break even on an operational level. It hit its 2004 target by selling off and outsourcing some departments, such as distribution, which it spun off recently through a joint venture with Texas-based Sabre Airline Solutions. Last month, it also restructured its maintenance operations with the Technik unit of Germany’s airline, Lufthansa, after selling off much of its stock of components. Under the US$138 million deal, Lufthansa will manage the components for Gulf Air’s planes, which Hogan points out will lower aircraft downtime as well as cutting the costs of keeping track of their spare parts. “The sale of our rotable stock has released capital for use in the active, core elements of our business,” says Hogan. “Because the entire maintenance function is outsourced, we have no exposure to asset residual value, no capital investment and no expenditure on interest. It also means that we minimise the financial risks associated with stock holding, and more especially those that potentially arise when aircraft exit the fleet,” he adds. Next year could well be just as difficult, however, for the airline to eek out further savings , if oil prices stay high. For 2005, the airline projects that its average cost will be US$1.40 per gallon, but oil prices continue to soar globally as suppliers struggle to meet demand. “2005 will be a tough year if fuel doesn’t come down, but we’re properly structured now. It’s a good business now, that ticks over,” Hogan adds. Another obvious hurdle that Gulf Air will have to overcome this year is the expanding presence of low-cost carriers in the region. The airline was itself the first of the regional carriers to dip its toes into the low-fare market, launching the all-economy Gulf Traveller brand in Abu Dhabi during 2003. This caters to the large expatriate community based in the region from the Indian subcontinent and East Asia. But Hogan insists that Gulf Traveller is not following the example of the so-called ‘no frills’ airlines that have had such an impact in Western markets — it’s merely removed business class from planes flying to destinations where providing premium services was unprofitable. “In the past, with business class on certain routes, 18% was [empty]. We can now generate more revenue from that space,” he adds. As would be expected from a legacy airline, Hogan also talks down the chances of carriers looking to adopt the no-frills business model for short-haul flights within the Middle East, such as Air Arabia in Sharjah and Kuwait’s upcoming low-cost carrier, Al Jazeera. “Having worked in Europe, I believe that the low-cost model just doesn’t apply in this part of the world,” he says. “Their strengths in Europe are secondary airports, internet penetration and they’re point-to-point, not to points beyond.” “There is no such thing as a low-cost carrier — only low fare carriers,” adds Ahmed Al Hammadi, vice president of finance at Gulf Air. “They have to incur the same costs as we do, if they are run commercially. Not having meals on board is not enough to call yourself a low-cost carrier,” he says. Rather than the low-end of the market, Hogan sees a greater threat coming from the rapid expansion of Etihad, Emirates and Qatar Airways, which are all aiming to cement their position as high-end, global carriers. He says that he is positioning Gulf Air at a regional level, primarily serving customers travelling within the Middle East and Asia. The airline is also making efforts to improve its appeal for business and first-class passengers to counter their threat, having recently launched completely new seating, furnishing and services in its A330s’ premium-class cabins, as part of a US$10 million investment programme. Further down the line, however, Hogan accepts that the company will need to eventually expand its existing fleet of 35 aircraft if it is to compete more effectively. The airline, he says, is currently in talks with Boeing and Airbus to purchase or lease up to 15 aircraft in the next six years. With the new planes to be launched in 2006 at the earliest, the move would increase Gulf Air’s fleet to 50 planes by 2010. “We have to look over the coming years at how we upgrade and replace equipment and take advantage of new aircraft coming into the market,” Hogan says. With its existing shareholders having already pumped US$238 million into the restructuring programme, however, the problem for the cash-strapped airline would be how to raise the funds to expand. “We have an issue [that] we have to re-equip the airline which means we have to go to the financial community to raise cash,” says Hogan. “We’ve brought the business back and we’ve got the support of the financial community. Probably the opportunity we believe for Gulf Air is to look at some form of privatisation,” he adds. If a sell-off was feasible, Hogan says that it would secure the airline’s future and allow it to move on to the next stage of its development. But with the end of his own contract looming this summer, the Australian is tight-lipped when asked whether he will be there to guide the company back in full health. “You’d better ask the board,” he says, simply. If he carries on at this rate, it is unlikely Hogan will be leaving for some time yet. ||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code