Oman: Flying Higher |
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Despite last week's news that Abu Dhabi was to pull out of Gulf Air, Oman remains positive about its involvement with the troubled airline. In partnership with Bahrain, the sultanate will now own 50% of the carrier and looks likely to use this to its advantage, with Transport and Communications Minister Sheikh Mohammed bin Abdullah bin Issa al-Harthi explaining that the two countries are determined to support the activities of the company during the next phase.
Abu Dhabi's withdrawal from the airline comes two years after Qatar's strategic departure to concentrate on its own national carrier, Qatar Airways. Gulf Air was established out of operations by British Airways' forerunner in the region during the 1950s. Subsequently, Oman, Qatar, Bahrain and Abu Dhabi bought shares and the airline has developed considerably since, now flying to over 50 destinations worldwide However, this considerable growth has not necessarily translated into positive financial results. By the end of 2002, the company had $700m in debts - requiring a $238m rescue package from the owner states.
A three-year strategic recovery plan was instituted in 2003 in an attempt to turn things around. This has been directed by James Hogan, who took up the controls at Gulf Air in 2002 after stints as an airline CEO in both Britain and Australia. Last year was the first that the airline returned a profit since 1997.
However, it has long been the feeling of industry analysts that the emergence of the state owned carriers - Oman Air and Qatar Airways - has been responsible for the troubled financial position of Gulf Air.
In 2004, Abu Dhabi launched its own national carrier, Etihad, and it is this that has prompted the emirate to withdraw from Gulf Air. Bahrain is now the only partner in Gulf Air without a state carrier.
Meanwhile, the airline sector in the region has been growing rapidly, led by Dubai's Emirates Airlines, which the company claims will be receiving one new aircraft a month for the next seven years.
So amidst speculation of a global downturn, industry insiders here in Oman feel that this is a false concern, certainly for the Gulf.
Yet somewhat ironically, all the region's carriers maintain that despite their proximity to oil, profits will inevitably be metered by rising fuel costs. However, that does not seem to be worrying the likes of Emirates too much.
Not only has the region become a global hub, with Dubai once again leading, but the considerable numbers of expatriate workers travelling regularly between Asia and the Gulf provide a steady income base, and there is no imminent sign of this abating. Indeed, in the future India could become a much larger player in regional air travel with a growing number of new carriers emerging from the subcontinent.
The region's first low-cost airline was launched early in 2004 - the UAE's Air Arabia. The Gulf had resisted penetration from low cost carriers for quite some time, but this recent development is testimony to the volume of demand. The company has had good returns expanding the number of destinations it flies to, adding another dimension to this burgeoning market.
Gulf Air was created as a necessary partnership at a time when air travel was not so accessible or popular. State-owned carriers would not have survived as standalone outfits, hence a partnership such as the one that created Gulf Air came into existence. However, the current environment is very different.
Oman has high hopes for developing its tourist industry and as such must be in a position to move large numbers of passengers. Oman Air does not cover long-haul routes, concentrating on the Middle East, North Africa and nearby Asian cities. It is the top-end, long-haul customer that Oman is seeking to attract.
To this end, it has always been the intention for Gulf Air to corner the medium- and long-haul routes for the sultanate, and for Oman Air to operate on the regional level. The two carriers rationalised their routes last year and work very much in partnership, as opposed to direct competition, whilst maintaining their independence.
With Abu Dhabi leaving Oman and Bahrain as sole partners in Gulf Air, the sultanate will become a major hub for the airline. This is perhaps why the withdrawal of Abu Dhabi has not, at least publicly, ruffled too many feathers and is a demonstration of how dynamic travel as a sector is for the Gulf.
Gulf Air's main competition in Oman for the long-haul market comes from British Airways and Swissair, who both fly regularly from Europe. British Airways has particularly cornered the luxury and executive clientele. But of course, Emirates remains a serious presence with Dubai only a very short distance away.
The news that Oman will now have a 50% shareholding has largely been greeted with optimism here and puts the sultanate on a better competitive footing. The opportunities for developing the country's travel and tourism sector and internationalising its business have been considerably improved by the move, many in Muscat calculate.
However, this opportunity must be executed carefully, as whilst oil revenues continue to boost the economies of the Gulf states, should a downturn occur, there is the potential risk of massive and disastrous overcapacity in the industry.
It is precisely for this reason that those guiding Oman's investment in Gulf Air are acting shrewdly. If the airline's profits continue to grow under James Hogan, then the creation of a steady and established company suitable to Oman's future needs is a real possibility. By maintaining an albeit increased partnership and effectively two national carriers, the Omanis have mitigated some of the risk inherent in such a volatile industry.
© Oxford Business Group 2005
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