Mission Accomplished

James Hogan has completed the task of putting ‘pride back into the airline’ but the company has still not been brought back into profit, after underestimating the rapid rise in fuel prices

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By  Barbara Cockburn Published  September 1, 2006

|~||~||~|James Hogan’s main objective, when he became Gulf Air’s CEO in 2002, was to ‘put pride back into the airline’. The Australian has certainly accomplished this. The airline has been re-branded, has increased passenger numbers and cargo, and has added new services to its fleet. Hogan, who will leave the company at the end of the year, has also signed a new three-year agreement with the governments of Bahrain and Oman, called ‘Smart Airlines Successful Business’, which will focus on the creation of two hubs in Bahrain and Oman, re-equipping of the fleet and offsetting of fuel. However Hogan, who joined the company to complete a three-year turnaround project called ‘Project Falcon’, did not manage to bring the loss-making airline back into profit. The company has admitted that losses will be announced this year. AvB: So what could be the reason for the losses? JH: It comes down to one major mistake. Gulf Air underestimated the rapid rise in fuel costs. Unlike most national airlines, Gulf’s board of directors decided not to hedge the fuel. This has caused a serious blow to the company and has resulted in the additional costs of up to US$264 million over the three year period of Project Falcon. Although the company did make a profit in 2004, that was mainly due to the sale of assets that were no longer core to the airline. Despite the financial set back, Hogan remains extremely positive about the future of the airline and believes the company now has the right structure and business knowledge in place to keep up with competition within the Middle East. Hogan answers some challenging questions in an exclusive face-to-face interview with Aviation Business. AvB: Can you tell me how much Gulf Air owes? JH: We get surprised people keep asking this question. Compared to other Gulf airlines, you will find that we are in good shape. Total debt for 2006 is $169 million, The debt to equity ratio is 1.9, that’s not bad. When I joined in 2002, it was 12.3 and at $319 million. The debt follows the aircraft, so it depends on how many aircraft you have. Do we have a huge debt outside the aircraft? The answer is no. We own quite a number of our aircraft outright, we lease other aircraft and we have joint ventures on a number of our aircraft. The debt position is probably one of the healthiest in the industry, if you look at the ratio we are at today. The balance sheet is strong, the debt to equity is certainly acceptable. The only financial difficulty Gulf Air has had is the rapid rise in fuel prices. We are very open in the fact that we did not hedge the fuel and we have taken a knock because of that. Also, the cost of moving our headquarters from Abu Dhabi to Bahrain and Muscat has been substantial. We are expecting to be in a stronger position within a couple of years. Everything else within the business is in pretty good shape. We are one of the top ten airlines in the world. The capacity, and the number of seats has improved revenue, cargo has improved, gross passenger numbers has improved. And we are growing the business over the hubs. So if you look at Gulf Air from an operating perspective, we are in good shape. AvB: Can you confirm Gulf Air lost up to $264 million with fuel prices, wiping out most of the money invested by Oman and Bahrain? How are you going to acquire new aircraft? JH: We are unhedged. In 2002 there was 12% cost of fuel compared to 33% today. That’s a big whack. The fundamental point about Gulf Air, that people don’t understand, is that it is owned by two governments, Bahrain and Oman. We presented a plan to them in January called ‘Smart Airlines; Successful Business’ to develop over the next three years. The project will include focusing on the creation of two hubs in Bahrain and Oman, re-equipping of the fleet, offsetting of fuel, and investing in product, for instance, we put first class bed seats in our A330 and A340 aircraft. So yes, fuel has been an issue for us, and we are being covered by the two governments, but they are also giving us the finance to phase out our nine Boeing 767s. Not only will they finance new aircraft, but they are also going to inject money into product. This is a well integrated business. The only wild card for Gulf Air has been fuel. Since 2002, we have overcome war, overcome SARS, the Asian tsunami, so all the challenges that we have faced have been handled and Bahrain and Oman will fully fund the next three years. So the government support is there, we are going to order new aircraft, the debt to equity ratio today is acceptable. The brand is back, it’s a good service brand. We are doing ok. AvB: Gulf Air said it would spend $900 million on new aircraft, do you know which type? JH: Right now, it is about the best deal and the best bridging solution before taking delivery of the aircraft, because Boeing’s 787 and Airbus’s A350 won’t be available for several years. We are in negotiations with both manufacturers. The fact that Airbus has re-launched its A350 has made us re-evaluate our order. AvB: Gulf Air’s financial results for 2005 have been further delayed, why is that? JH: At the end of the day, that’s an issue for the board of directors. Our bankers and financiers are all aware of the results but again we are going through a restructuring period and there are losses, which we have been very clear about. But we don’t want to put an unnecessary focus on the loss. We want to focus on the governments’ commitment to funding the project over the next three years. The support is certainly there. AvB: When you brought the company back into profit in 2004, was that mainly due to selling assets? JH: Everything that was done with ‘Project Falcon’ was agreed by the board. What we saw in 2002 to 2003 was the price of fuel increase and, as you do with any management team, you look at ways to offset the fuel. And we did that in 2003 to 2004 by outsourcing what was non-core. So we had components, we completed a sale and leased back components to raise cash. We then did a deal with Sabre, where we had the distribution rights within the region, and again it was non-core, so we felt that if we were part of a joint venture, then we could put more of their expertise into the business and grow the business, putting cash back to offset the fuel. Many businesses would agree that these were good decisions to make. No one felt that fuel was going to continue at the rate it has. We are very upfront by saying we are unhedged, but most airlines are hedged. From 2002 the prices went up from 14% to 32 %. No one expected that kind of acceleration. In 2003-2004 we had fuel surcharges. AvB: The next big challenge for Middle East airlines is going to be a lack of skilled staff, is this going to affect Gulf Air? JH: We currently have A320s, A330s, A340s and B767s. Ideally, we would like to have two types of aircraft. Let’s say we get Boeing’s 737 and the 787s, or Airbus’s A320 and A350s, that means we can mix the fleet more effectively. There is not an issue of funding, it’s doing the right deal. We are a bit different to most Gulf carriers because 45% of our pilots are Gulf nationals, mainly from Bahrain and Oman. I have a very strong group of senior captains and first officers. We also have strong cadet pilot programme where we put pilots through Qatar aviation college and we also take only partly trained pilots. We believe we have the right training programmes in place, we stay sharp on our benefit programmes to keep our pilots. We are managing our pilots and we will certainly continue to do so. Yes, we advertise worldwide. We have staff from Brazil, Canada, Australia, Europe, so we advertise on our website. Five years ago there were too many pilots and now there aren’t enough. It’s a cycle.||**||

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