Loading

Gulf Air further trims network as Arab Spring losses continue to mount

Another wholesale turnaround effort is underway at the perennially troubled Gulf Air. The airline, which lost more than BHD380 million (USD1 billion) between 2008 and 2010, suffered deep losses last year exacerbated by the Arab Spring. The exact scale of the losses has not been disclosed, but it is clear that the carrier’s multi-year turnaround and plan to break even has suffered a major setback.

A decade ago, Gulf Air was one of the largest players in Middle East aviation. As its multi-national ownership disintegrated due to various governments choosing to focus on their own national carriers, Bahrain was left as the sole owner. Locked out of its old hubs, Gulf Air faced a new and increasingly hostile competitive environment. It has also suffered due to high fuel prices, poor traffic demand and the recent unstable local and regional political situation, which continues to rumble on in Bahrain.

Gulf Air has been forced once again to reassess its commercial priorities. After launching a major turnaround in late 2009, the carrier made “significant gains” in 2010 according to CEO Samar Majali. Losses were cut from approximately BHD190 million (USD500 million) in 2009 to BHD135 million (USD360 million) in 2010. Over the two-year period, the carrier underwent a major route reorganisation, cut staff numbers by nearly 1000 over 12 months – around a fifth of the total workforce – and launched a fleet renewal, which has seen the carrier’s average fleet age halved, bringing cost efficiencies.

The aim was to cut almost BHD1.1 billion (USD3 billion) of costs over five years and to refocus the airline as the Middle East’s “carrier of choice” by offering a diverse, high frequency regional network, backed by excellent service. By late 2010, the effort appeared to be paying off. The renewed focus on the Middle East and nearby South Asian and African markets was matched with a tighter network, targeting higher yielding markets with convenient flight timings and connection banking. Mr Majali was bold enough to announce that Gulf Air was projecting breakeven by the end of 2012.

Arab Spring puts paid to breakeven hopes

The end of 2010 saw the start of the Arab Spring, which spread into local social and political unrest in Bahrain, with disastrous implications for Gulf Air. The first five months of 2011 saw Gulf Air’s traffic down more than 25%. As if this was not enough, the Bahraini Government put in place a ban on operations to Lebanon, Iran and Iraq, due to security considerations. While flights to Lebanon have resumed, Gulf Air remains shut out of the potentially lucrative Iranian and Iraqi markets, and has been forced to turn to other markets, such as Saudi Arabia, to compensate.

See related article: Forced out of Iran and Iraq, Gulf Air looks to Saudi market

Gulf Air’s owners – the Bahrain Government via its Mumtalakat sovereign wealth fund – are looking at another major shake-up of the airline. A late Jan-2012 announcement made it known that a range of strategic options were under consideration for the carrier. These included another major injection of funds into Gulf Air, a significant downsizing of its operations, a comprehensive restructuring or dissolution, or complete sell-off of assets along with the formation of a new carrier.

Mr Majali has dismissed suggestions that Gulf Air could be sold off or dissolved. Reports in from the Bahrain-based Gulf Daily News suggested that the cost involved with dissolving the airline could be as high as BHD600 million (USD1.6 billion) and the price tag for selling Gulf Air and launching a new carrier would be as high as BHD460 million (USD1.0 billion).

Europe, Asia and African destinations cut

Under the latest restructuring attempt, Gulf Air has begun a cull of its route network, cutting operations into Europe, Africa and the Asia Pacific. Gulf Air said the cuts have been made to allow it to concentrate its fleet and resources more efficiently, focussing on high-demand, high-yield routes. Mr Majali called the closures “pragmatic commercial decisions”.

Services to Geneva and Entebbe were terminated earlier this month; the Entebbe route after only two months of operations and the Geneva service after less than 12. These cuts will be followed by the suspension of routes to Damascus, Athens, Milan and Kuala Lumpur, to be terminated progressively over Mar-2012. Gulf Air had previously reduced capacity, including from nine weekly Kuala Lumpur flights and switching Damascus flights from A320 to E170 equipment.

See related article: Gulf Air Middle East and South Asian operations enhanced for Winter 2011 schedule

The carrier has also indefinitely delayed the launch of a planned new route to Juba, the capital of the newly formed African nation of South Sudan.

Gulf Air route suspensions

 Destination

Weekly frequencies

Seats per week

Aircraft

Entebbe

4

496

A319

Geneva

3

282

737-700

Damascus

6

426

E170

Athens

7

672

E190, A320

Milan

4

544

A320

Kuala Lumpur

4

876

A330

Reinforcing its regional approach, Gulf Air has already added three more destinations in Saudi Arabia this year. The carrier announced this week that it would expand its operations to Saudi Arabia even further: it will increase Jeddah frequency from 10 to 14 times weekly and Riyadh frequency from two to three times daily.

Gulf Air has also been reported as among the carriers interested in securing a Saudi Arabian operating licence under the radical move by the Saudi General Civil Aviation Authority to open up its domestic market to foreign carriers.

The carrier is seeking permission to operate to more destinations in India and Bangladesh. The South Asian nations are a tempting target for Gulf Air, although it faces stiff competition from both full service and LCC competitors in the region.

Fleet renewal going ahead, more focus on narrowbodies

At the end of Jan-2012, Gulf Air issued a request for proposals for six A320 family aircraft, two A321s and four A320s. Gulf Air is reportedly looking at phasing out a number of its older aircraft to be replaced with newer narrowbodies. The carrier’s fleet consists of 34 aircraft: 16 A320 family narrowbodies, four Embraer regional jets, 10 A330s and four A340s.

Gulf Air also has 20 A330s and 16 Boeing 787s on order. Orders for the 787s were cut back from 24 to 16 aircraft in Jun-2011. In Aug-2011, the carrier confirmed it was in discussions with Airbus and Boeing over its widebody orders, as part of a strategy to be more “regionally focused”.

Gulf Air is scheduled to take delivery of two A330s this year and up to six p/a after that. 787 deliveries are due to commence in 2018. Deferral of the widebody aircraft, conversion to narrowbodies, or outright cancellation is likely.

A political point

As a state-owned carrier, a major local employer and significant contributor to Bahrain’s economy, the health and future of Gulf Air is a political topic in the Gulf kingdom. Both the cabinet and the parliament have been involved in this latest round of restructuring, as they have been with previous changes in strategy and management.

Various sub-committees have been set up to study the issues dogging the carrier to ultimately end short-term losses and in the long-term create a sustainable way forward. Gulf Air’s aim is to achieve financial breakeven and a stage of development where it does not require any government financial support.

Other political issues have dogged the carrier. The Bahraini Foreign Ministry announced earlier this year that nationals from 27 EU countries, Australia, Canada, the US, Japan and other nations will no longer be able to obtain visas on arrival. The measure, taken because of the security situation in the country, is expected to hurt both tourism and business traffic.

On top of this, Bahrain’s Foreign Minister, Sheikh Khalid bin Ahmed Al Khalifa, recently banned ministerial staff from using the airline, reportedly due to a personal matter. The ban runs counter to a government edict requiring all government employees to select Gulf Air for travel, when available.

Finding a new place in the hierarchy

The gap in funding and size between Gulf Air and the larger carriers of the Gulf region is increasingly apparent, as is the difference in financial performance. In terms of fleet size, Gulf Air is half the size of Etihad Airways, a third the size of Qatar Airways and a fifth the size of Emirates.

The gap will grow, but Gulf Air has already decided it will not match its larger rivals and their significant long-haul route networks but instead focus on the regional market.

Gulf Air is being cut off from further support until it can produce evidence of a turnaround. The parliamentary sub-committee formed to look at Gulf Air’s situation has announced that the carrier will not receive additional government funds unless there are major reforms.

Gulf Air has already sought sources of funding outside of the Government. Earlier this month, the carrier announced a BHD30 million (USD80 million) financial facility agreement with Mashreq Bahrain, although how long this can sustain the carrier at its present rate of loss is uncertain.

Ultimately, the Bahrain Government needs to examine if profitability is a likely outcome in short-term, as Mr Majali expected before the start of unrest a year ago. Stabilising the tiny country is of course critical, but prior to that the Government can review the punitive visa and route restrictions. Mr Majali continues to make strides, but he must be met half-way.