Re-birth of the falcon

With the withdrawal of one of its three major shareholders at the end of this month and fuel prices showing no signs of dropping, Gulf Air is being forced to re-think its strategy, and fast. James Bennett finds out why CEO James Hogan is planning a large-scale runway revival for one of the region’s most respected airlines

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By  James Bennett Published  March 13, 2006

|~||~||~|Despite suffering from a hacking air-con cough, James Hogan must have said hello, good afternoon, or g’day, in his native Australian twang a thousand times as he takes a tour of Gulf Air’s Bahraini campus complex. But that’s the kind of boss he is – and he’s determined to keep it that way. “Things weren’t always this way”, says Hogan as he explains that all his predecessors were nationals and referred to as ‘his excellency’. “The previous CEO even had his own lift, that’s why I never take it because you can say ‘hi’ to more people by taking the stairs,” he says refreshingly. “During my first meeting with the employees, I asked them if they had any questions and there was absolute silence. They just weren’t used to it.” Hogan isn’t afraid of doing things differently and ever since his arrival in May 2002 from British Midland in the UK has instigated a major u-turn, not just in the airline’s cultural bureaucracy, but also in the Falcon’s financial fortunes. His first move was to approve and implement Gulf Air’s three-year restructuring and turnaround plan, ‘Project Falcon’, on 18 December 2002. Hogan calls this “the first phase” of rebuilding, with his continual mandate to stabilise, and “make the airline proud again”. Among the project’s highlights was Gulf Traveller, the business’s first economy full service airline; it was the first Middle East airline to introduce self-service electronic check-in kiosks, SMS notification technology and a downloadable version of its timetable; it signed code-share agreements with Air India and Saudi Arabian Airlines; direct flights were introduced between Dubai and London and Muscat and London; it was the first carrier to introduce its own five-star chefs in first-class and it restructured financially now with a higher than average debt to equity ratio of 2.5:1. Hogan is extremely proud of his airline and its achievements under his stewardship but little did he know when he first started working on Project Falcon, that three years down the line the government of Abu Dhabi would drop the ultimate bombshell – relinquishing its 33-year shareholding with Gulf Air and form its own potentially powerful airline, Ethiad. Hogan insists that the loss of Abu Dhabi won’t change the way the airline operates and still refers to the UAE capital as “home” with over 50 flights in and out every week. But the swift departure of its third shareholder, to leave only Oman and Bahrain as its two major hubs, came as a significant blow to the business. Hogan refuses to comment on whether Abu Dhabi will write off its multi-million dollar investment in Gulf Air, but admits that the annual figures released in May 2006 will have to “swallow a big figure” when Abu Dhabi withdraws at the end of this month. Despite Hogan paying back around US $400 million in debts over the past two and a half years, Gulf Air, which returned to minor profitability in 2004 after several years of losses, still carries an estimated debt of around US $450 million, including investment ‘potentially’ owed to Abu Dhabi. But debt, argues Hogan, is synonymous with the airline industry, particularly when carriers have to contend with the rising pressures and price of fuel. “Our figures are not going to be half decent because of the price of fuel and it will push the company back into losses. But fuel’s the only issue,” he insists. “If you took away fuel and overlaid our unit costs and our yield over the previous ten years we would have made money every year that we lost money, so fuel has been the wildcard.” In 2003 the airline moved from a loss of BD 19.9 million (US $52.8 million) to achieve a profit of BD 1.5 million (US $4 million). The US $100 million sale of a business unit, recorded as an ‘exceptional item’, also helped Gulf Air back into the black. But it continues to spend and recently announced a US $900 million investment, likely to be a long-term loan on behalf of the Oman and Bahrain governments, to fund and replace nine aging Boeing 767s. Hogan says that in order to restructure the airline “once and for all”, it is not just new planes, seating and re-equipment that is necessary. He strongly believes that it is essential to choose the right ingredients with the principal objectives to implement an effective fuel hedging programme to monitor fuel flows, as well as crucially examining which costs can be cut from the annual bill. “This is why we’re focusing on hedging and getting the structure right and looking at areas of cost that we generate that are outside our control and how we bring them under control. In a global aviation world where carriers in the Middle East get criticised for being subsidised, it is imperative that Gulf Air restructures so that it can stand on its own two feet.” The real challenge, however says Hogan, is that the two remaining owners want him to restructure the airline to ensure the longevity of the business. “You’ll see over the coming months we’re going to have make some hard decisions in financial restructuring to ensure there’s a strong road map for the future,” he warns. The hard decisions will mean cutbacks and re-integration. One core area that could be re-integrated into the airline, suggests Hogan is within its airport services such as engineering that are currently sourced from other companies depending on the tarmac Gulf Air lands on Although he does not implicitly reveal a sale or a specific contractual pullout Hogan gives the distinct impression one could soon be around the corner saving the business millions of Dinars and Riyals in expenditure. “We have businesses such as Bahrain Airport services, Oman Aviation services and Gamco that are all doing well in their own right but on the back of Gulf Air. And we’re the only airline that doesn’t have control of its airport services, all its catering and all its engineering because that gives you another revenue stream to buffer against the tough times.” Re-integrating areas of the business to cater for rough rides in fuel prices and a possible heavy landing in profits in May is an area at which Hogan has slowly but surely chipped away – but he’s determined to do more. “At present we’re very much purely a core airline. We’re very keen to get some of those businesses re-integrated into Gulf Air to improve our efficiencies, to improve our cost base and to give us the ability to negotiate with other airports on landing and on airport services. “For example, if I fly to another GCC airport I can’t trade on my ground handling services because I don’t control them, but I’m 70% of that company’s revenues in Oman or Bahrain. These are things that we want to work more into the Gulf Air business.” Another issue on Hogan’s agenda is the development of Bahrain and Oman airports and how they can compete with their neighbours and rivals such as Dubai and Abu Dhabi. Both Emirates have invested heavily in infrastructure as well as the number of carriers that land and leave their respective runways. Seeb in Muscat, for instance is a reasonably minor airport compared to others in the region but Hogan believes in the product and is confident both countries have diverse enough propositions to the business and leisure sectors to grow in line with Gulf Air’s expectations. “Seeb is dramatically upgrading. It is planning half a billion dollars worth of investment to upgrade the airport and a million more passengers over Muscat airport during the next 12 months. We’ll be working very closely with the airport authority to ensure that the planning is there. “If you look at Oman, there is a range of five and six-star hotels that have just been opened such as the Shangri-la, Greg Norman golf courses are being built and it is one of the top ten locations for UK travellers. We have the opportunity to fly them into Oman and Bahrain and tap into emerging tourism, IT and call centres, the status of Bahrain as a business short break destination and Oman as a long-break destination.” Hogan is also keen to build on the huge influence the business has on the Bahrain economy – one of the only countries without a national airline – as well as its location as a bridge between Europe and Asia. “We represent 4% of the GDP of Bahrain and for every one job we have it generates between four and five in the economy. What you’re seeing here is strong focus from the Minister of Transport and the Crown Prince on upgrading this airport. It’s functional, but as a financial centre it needs to grow and we have plans to extend the terminal and expand the facilities. As we improve connectivity we’ll increase dramatically the traffic through Bahrain in the next 12 months.” The warming thing about Hogan is his open, honest, effective man management and optimism for the airline’s future. For example, I ask Hogan what made him sign a new contract in summer 2005. He dodges the question but at this stage it doesn’t matter. What’s important is that he instead refers to himself as purely the “coach”, in charge of some “great people” and top-level management who have remained loyal since he arrived. “It’s teamwork that counts,” he adds. Hogan simply wants what’s best for the airline and for the Falcon to finally repair its damaged wings and fly smoothly into the profit and stability it has always longed for.||**||

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