Gulf Air is drawing up a new business strategy which will give the beleaguered carrier a sense of independence.
Gulf Air is used to facing turbulence and now with Abu Dhabi's pull out from the airline, it is drawing up a new business strategy - a strategy that will give it a sense of independence should Oman also pull out.
The airline is now mulling the option of raising finance through an initial public offering (IPO).
"Within two years, that's probably the time to invite people to participate with any form of offering," said James Hogan, Gulf Air's CEO in published remarks, late October.
As yet, it is not known how much capital it plans to raise or whether the airline has appointed advisors on the public offering. But experts believe it is a step in the right direction, a move that would boost investments in the carrier and make it stronger.
"Once there's some sort of privatisation on public shareholdings, the airline would be more independent and commercially more viable. An IPO would also boost investments in the airline," said Mohammed Al Asoumi, a Dubai-based Gulf economist.
"This is actually the right time to go to the market given the huge liquidity and thirst for public offerings. Moreover, the airline needs investments now and it cannot depend all the time on its owners for cash injections."
Jasem Ali, head of the economic research unit, University of Bahrain, believes that alternatives to maintaining government ownership include privatisation and a public share offering. Both choices could help secure Gulf Air's viability in the coming years. Both generate funds on a more sustainable basis and involving the private sector means the airline can make decisions based on purely commercial reasoning.
"Gulf Air cannot depend on unlimited, unending financial support. Possibly, the firm needs to consider allowing private sector involvement to streamline its operations. The airline needs to become efficient in order to compete with its rivals in the region. Gulf Air has a historic opportunity to make the company a truly competitive and world-class airline."
Corroborating the above, an Abu Dhabi-based aviation expert said the move would put Gulf Air on a sound financial footing and make it more independent.
"With capital raised from the market, Gulf Air needn't fear the pull out of Oman, which is quite likely given the fact that Oman has its own airline," he said. Qatar did it in 2002 and Abu Dhabi followed suit in September this year. Both Qatar and Abu Dhabi pulled out of Gulf Air to focus on their own airlines. However, he added that there are some issues that Gulf Air needs to sort out before embarking on an IPO.
"Firstly, Gulf Air needs to adapt itself to the two-hub scenario (Bahrain and Muscat) before going to the market. Secondly, it has to come clear on Gulf Traveller, its all-economy subsidiary whose hub is Abu Dhabi." Gulf Traveller is a vital part of Gulf Air, contributing a significant share of the airline's total revenues.
But while these issues are likely to be sorted out in the coming weeks, Hogan reiterated that the airline's business strategy would remain unchanged. "There will be no change to Gulf Air's core approach to business or to its ongoing business strategy as a result of the withdrawal of Abu Dhabi as a shareholder in the airline." He also emphasised that Gulf Air would focus more on a
two-hub strategy.
Over the next three months, the task force that has been set up to map out a forward strategic plan, will deliver an enhance strategic plan having fully reviewed the company's organisational structure and route network.
"A two-hub strategy gives us the opportunity to review our network and bring in even greater business synergies in route planning and it also gives us the opportunity to review our business operations and our cost base."
Gulf Air's Project Falcon recovery plan launched three years ago and got some of the airline's business into sustainable commercial shape and this has been achieved to a certain degree. Gulf Air achieved profitability of $4 million on revenue of $1.3 billion in 2004, reversing a loss-making trend. The airline lost $53 million in 2003.
But Gulf Air, by its own admission, is still reeling under tremendous pressure due to high fuel prices. "Every $1 increase in the price of fuel is costing Gulf Air more than $6 million a year, and we have seen many price surges this year," said Ahmad Al Hammadi, Gulf Air's vice president of finance.
"We are not alone in facing pressure from fuel prices. IATA, the airline industry association, in September this year announced that its estimated total airline losses this year would reach more than $7 billion as a result of fuel price rises."
He said Gulf Air has applied fuel surcharges where the competitive environment has allowed it to do so, but on many routes, the airline has been unable to impose them. "That means the surcharges have covered only a small part of the extra costs from fuel."
Meanwhile, speculation is already rife about Oman's withdrawal from Gulf Air. "Let's face the facts. Oman has its own airline, Oman Air, which is doing well in the region. As it rolls out its own expansion plans, some of which are quite ambitious, it will want to focus on its own airline. It is a matter of time before Oman emulates Qatar and Abu Dhabi," says a Dubai-based aviation official.
"When Qatar pulled out, Abu Dhabi too expressed strong support and commitment. What has happened now? Unless Gulf Air really makes a great come-back, it is unlikely Oman will support it for long."
Founded in 1950, Bahrain headquartered Gulf Air flies to some 30 countries and has a fleet of 34 aircraft including Boeing 767s, A320s, A330s and A340s.
© Gulf Business 2005
