Gulf Air CEO resigns, parliament replaces board; a challenging outlook faces the airline

As another Gulf Air CEO has come and gone, the Bahraini government again picks up the task of plotting a new path for the formerly multi-national airline.
The carrier’s board announced on 29-Nov-2012 that it had accepted the resignation of widely respected airline executive, Mr Samer Majali – which he submitted earlier this year – following theappointment of a new Gulf Air board in mid-Nov-2012. Mr Majali will remain in his position until the end of 2012.
And so the troubled and politically muddled airline stumbles onwards with continuing political meddling and no clear direction for its future. With Mr Majali's departure, the prospects for Gulf Air's recovery become even more slender.
In a parallel development, the Bahrain Parliament has also voted to replace the carrier’s entire board as well as wiping out two external consultancy contracts. A new board has been announced, led by the deputy premier and consisting of a mix of Bahraini parliamentarians, advisors to Bahrain’s royal court and representatives from the Bahrain Mumtalakat Holding Company, which has ownership of the carrier.

Politics and economics scupper Gulf Air turnaround

In 2009, Mr Majali arrived at Gulf Air fresh from success at Royal Jordanian with a three-year plan to turn the carrier around. When working at Royal Jordanian, it took him a little more than two years to turn the carrier into a commercially viable airline, spearheading a far-reaching restructuring effort.

Mr Majali eventually orchestrated Royal Jordanian’s entry into oneworld in 2007, making it the first Middle East carrier to join a global allilance. Unfortunately, the situation – commercial and political – facing Gulf Air meant that Mr Majali was not permitted the room to weave the same magic at the Bahraini carrier.

His position at the head of Gulf Air was an unenviable one, arriving as the carrier’s fourth CEO in just three years. The airline was already struggling in a fiercely competitive regional market, with rivals such as Emirates, Qatar Airways and Etihad Airways able to boast newer aircraft and superior networks and products.

It also faced ballooning fuel costs. At the time, the Mumtalakat Company CEO, Talal al-Zain, stated that the airline was an “unacceptable burden on the national economy” and existed only by the grace of government support.

Gulf Air CEOs treated as political footballs

Mr Majali also had to deal with Gulf Air’s status as a political football. The carrier is a major employer of Bahraini nationals and cutbacks at the carrier proved a prickly, almost untouchable, subject. When the carrier’s traffic dipped in 2011, a parliamentary “ad-hoc committee” was set up to investigate it and recommend strategies to ensure its survival.

The airline also faced accusations of mismanagement, fraud and organisational and financial corruption. In Apr-2012 Mr Majali fiercely defended the airline against these accusations.

Gulf Air is monitored by the National Audit Court, which prepares and reports to the King and from there to the Shura Council and Parliament.

As CEO, Mr Majali faced a delicate balancing act in his task of turning the airline into a commercially viable entity. While reshaping the airline in the face of harsh commercial realities of the Gulf’s furiously competitive aviation market, he also had to satisfy the popularly elected Bahraini parliamentarians, the royally appointed Shura Council, the demands of the Mumtalakat Company and the needs of Bahrain’s tourism industry.

Seismic shift underway for one of the Gulf’s oldest airlines

The resignation of the CEO and reformation of the board were an almost predictable next step in a dramatic series of shifts for the struggling Bahraini national carrier. Bahrain approved a BHD185 million (USD490 million) bail-out package for the carrier earlier in the year, following on from a BHD400 million (USD1.06 billion) package in 2010.

The latest bail-out was just one-third the size of the funds Gulf Air had been seeking, and it came with the condition of (another) major restructuring for the airline. The carrier will now be downsized further, as part of a plan to cut its losses from BHD95 million (USD252 million) in 2011 to BHD58 million (USD154 million) by 2017.

Long gone are the days of the carrier resolutely sticking to increasingly inaccurate break-even forecasts. The task ahead of the carrier’s new CEO will be somehow to slow the flow of money the carrier has been haemorrhaging.

Staunching the losses will involve the unpopular task of cutting jobs, routes and aircraft. Under a "radical and lasting" shake up, as much as half of the carrier’s existing fleet could be retired and the route network could be reduced to as few as 21 destinations.

Reducing Gulf Air’s workforce will be unpopular both politically and socially in Bahrain. Yet it is essential if realistic change is to occur at the airline. The workforce has already been cut from over 5,000 in 2009 when Mr Majali was appointed, to around 3,800 at present.

To dull the pain of the cuts, most of the proposed 1,800 job losses will come from expatriate staff, with the carrier set on achieving a ‘Bahrainisation’ level of close to 75%, up from 58% at the moment. By comparison Etihad Airways’ ‘Emiratisation’ level is 21%, Emirates’ level is under 15%, as local skills among the small populations are gradually developed.

However Mr Majali does leave Gulf Air with some major achievements under his belt. The airline has tightened up its network and operations and he departs from a carrier that has a better product, improved on-time performance and reliability and lower underlying losses. In 2010, the carrier managed to pull more than BHD50 million (USD133 million) out of its cost base.

Unfortunately, the declared objective of hitting break-even by 2012 was rendered unachievable by the 2010/2011 Arab Spring, which was felt particularly heavily in Bahrain and saw Gulf Air barred from its profitable Iran and Iraq markets.

Mr Majali also recently presided over a major re-work of the carrier’s aircraft orders. The airline traded the 20 A330s it had on order for a combination of A320 and A320neo aircraft, and slashed its Boeing 787 orders from 24 to 12 aircraft. The order re-jig brings with it a reduction of the long-term financial liability of the airline by approximately 50%.

See related article: Gulf Air re-orders fleet acquisitions

Gulf Air faces a galling outlook

Where Gulf Air will head next is far from clear. A successor has yet to be announced, but deputy CEO Maher Salman Al Musallam is the logical successor, at least in the interim. A Bahraini national who has been at the carrier since mid-2010 – joining after 35 years in the Bahraini Air Force – he may also be acceptable in the longer term.

Gulf Air is one of the region’s oldest carriers, but it has become shrunken with age. It still has the "support" of the Bahrain government and the Bahrain Mumtalakat Holding Company, but both are desperate for the carrier to reduce the scale of losses.

Whoever succeeds Mr Majali as CEO faces extraordinary challenges in reducing organisational bloat, rightsizing its fleet and network and confronting the altered commercial reality of Gulf aviation.

Even if that can be achieved, carving out a niche strategy – and implementing it against a background of constant political intervention – will be arguably the biggest challenge. The world has changed so much in the past year alone that the prospects for profitable operation of a traditional flag carrier like Gulf Air are increasingly remote.

Forced out of Iran and Iraq, Gulf Air looks to Saudi market

24th January, 2012

Bahrain’s national carrier Gulf Air has extended its suspension of flights to Iran and Iraq, citing the “ongoing security situation” as prompting the decision. Gulf Air was forced to terminate services to Iran, Iraq and Lebanon in mid Mar-2011, due to security and political considerations relating to the Arab Spring uprising, which spread across much of North Africa and the Middle East over late 2010 and the first half of 2011.
The suspension for destinations in Iraq will continue to 31-Jan-2012 inclusive, while the suspension of services to Iran will stretch until and including 31-Mar-2012. At the time of the suspensions, Iran and Iraq were two of Gulf Air’s largest markets. The carrier operated four routes to Iran – Tehran,Mashad, Esfahan and Shiraz – and four to Iraq – Baghdad, Najaf, Erbil and Basra.

Gulf Air resumed operations to Iraq in 2009, with Erbil, Najaf and Baghdad services all launched over 2H2009. Gulf Air added Basra service on 03-Mar-2011, only two weeks prior to the enforced suspension.

Gulf Air has had three Iranian destinations since it added Mashhad service in 2003. Its fourth route to Isfahan was added only in Jan-2011. At the time of the launch, Gulf Air was the only foreign carrier to offer scheduled services to the airport.

Gulf Air Iraq and Iran operations pre-Arab Spring cancellations

Iraq		Iran
Destination	Frequency	Destination	Frequency
Baghdad	5 x weekly	Isfahan	3 x weekly
Basra	4 x weekly	Mashhad	4 x weekly
Erbil	6 x weekly	Shiraz	7 x weekly
Najaf	7 x weekly	Tehran	7 x weekly

Since the ban, Gulf Air has resumed flights to Beirut in Jun-2011, as leaders on both sides patched up the political relationship between Bahrain and Lebanon.

Gulf Air’s exit from Iran and Iraq paves way for competitors’ entrance

Gulf Air CEO Samar Majali told Gulf News that the loss of the routes into Iraq and Iran have hurt the carrier deeply and carriers have moved to take advantage of Gulf Air’s absence. While Gulf Air has been able to redeploy capacity to other sectors, these have not proven as profitable as the routes into Iran and Iraq, which are still underserved.

Gulf Air had invested heavily in developing its presence in Iran and Iraq. Iran in particular was a strong market for the carrier.

Aviation in Iran suffers heavily from long-running sanctions put in place by the US, banning the sale of aircraft or spare parts with US-manufactured content to the country, effectively preventing Iran from replacing the country’s ageing commercial aircraft fleet and raising safety concerns. The sanctions not only apply to Boeing, but Airbus, Bombardier and Embraer as well, as their aircraft feature a high proportion of content developed or manufactured in the US. The sanctions have recently been expanded in scope to include specific measures targeting private Iranian carriers such as Mahan Air.

The sanctions have also made operations to Europe more difficult. Airport refuelling companies with ties to the US have reportedly refused to refuel Iranian aircraft at a number of European airports. In return, the Iranian Government in late 2011 stopped providing fuel to European airlines. The European Commission also placed restrictions on Iran Air, banning more than half its fleet from European airspace due to safety concerns.

The largest foreign carrier into Iran is presently Emirates, which operates to Tehran 24 times per week. Turkish Airlines also has a strong presence in the Iranian market, with services to Mashhad, Tehran, Tabriz and Shiraz. Qatar Airways and Lufthansa also have strong operations into Iran, although Lufthansa’s operations have been somewhat affected by the refuelling ban, with the carrier forced to carry enough fuel for both Frankfurt to Tehran and Tehran to Frankfurt legs.

International capacity (seats) to/from Iran: Week commencing 09-Jan-2012

Qatar Airways in particular has looked to exploit the underserved Iranian market since Gulf Air’s departure. Qatar added service to Shiraz in Jun-2011 and announced in late Oct-2011 that it would conduct a massive increase of capacity across its network in Iran, including the launch of daily scheduled flights to Isfahan, its fourth destination in the country.

The carrier expanded service to Shiraz from twice weekly to daily on 01-Dec-2011 and will add another three weekly frequencies from Mar-2012. Mashhad service will increase from five to 14 times weekly while Tehran service will increase from 14 to 21 times weekly.

The capacity expansion will continue through to Mar-2012, ultimately expanding Qatar Airway’s operations into Iran 52 weekly frequencies, an increase in its overall frequency into the country by 150%.

Qatar Airways has also reportedly signed a codeshare agreement with Iran Air, which will allow the carrier to operate domestic services within Iran. The Iranian Road and Urban Development Ministry confirmed an agreement has been signed, but more details have not been forthcoming. The deal provides domestic services in the face of sanctions.

Iraq opening up to European and Middle East carriers

Middle Eastern and European carriers have also expanded their operations into Iraq, taking advantage of a slightly more stable environment and the weakness of the local aviation sector, as national carrier Iraqi Airways undergoes a rebuilding process.

The carrier is slowly expanding its network, focussing primarily on regional routes with only limited operations into Europe. It is integrating CRJ900 regional jets into its fleet, with deliveries of new Boeing 737-800s to start this year. However, progress is threatened by an ongoing dispute with Kuwait Airways, which is claiming approximately USD1.2 billion in damages related to the 1990 Iraqi invasion of Kuwait and is pursuing legal action and asset freezes.

Iraqi Airways in Apr-2009 attempted to restore links to London but greeting the arrival of the first flight was a lawyer for Kuwait Airways who had an Iraqi Airways’ executive’s passport seized by the UK Government owing to the asset dispute. The lawyer also tried to have Iraqi Airways’ aircraft confiscated, but could not since the aircraft was owned by a leasing company and not Iraqi Airways. Iraq subsequently said it would dissolve the carrier to end the dispute, although Kuwait said it would pursue the Iraqi Government for funds owned.

Despite a clear direction from its national carrier, Iraq will also be linked with European carriers, many of whom have launched new routes or expanded their operations into Iraq over the past six months. Turkish Airlines is the largest foreign carrier into the country, having received permission in late 2010 to operate from Istanbul to Baghdad, Erbil, Sulaimaniyah, Basra, Mosul and Najaf, with a combined total of up to 36 weekly frequencies. Pegasus Airlines, Viking Hellas, Austrian Airlines and Lufthansa have also added capacity and/or new routes into Iraq.

Of Gulf Air’s regional rivals, UAE airlines in particular have expanded in Iraq, exploiting Gulf Air’s forced exit. Emirates added Baghdad service in Nov-2011, complementing its existing service to Basra. Flydubai doubled its route network to Iraq from two to four routes over Nov-2011 and Etihad Airways has deployed additional passenger and freight capacity in the market.

Concentrating on the Saudi market to make up for the elsewhere

The Saudi market is now the cornerstone of Gulf Air’s Middle East regional network. The airline operates to four destinations in the country – Dammam, Jeddah, Medina, Riyadh – making Saudi Arabia its largest regional market by destinations and second largest by seat volume, after the UAE. Mr Majali, speaking to Gulf News at the beginning of this year, said that Saudi Arabia “remains the only major market available to us in our region until the suspension of the other markets is lifted”.

Apart from the route cancellations into Iran and Iraq, Gulf Air’s traffic was also affected by the temporary closure of the King Fahad Causeway during the Arab Spring. The causeway spans the strait between Bahrain and Saudi Arabia and provides easy access to/from eastern Saudi Arabia, handling more than 20 million vehicles p/a, some of which fly out of Bahrain.

Gulf Air largest Gulf region routes (seats): Week commencing 09-Jan-2012

To boost operations into Saudi Arabia further, Gulf Air plans to add three new destinations – Gassim, Taif and Yanbu – in the country over 1Q2012. This will increase its operations by 10 frequencies and add more than 2100 seats per week into its Saudi Arabian services.

Even with the additions, other Gulf-region rival carriers will have stronger market shares to/from Saudi Arabia, notably Emirates, Qatar Airways and Flydubai, not to mention Saudi Arabian Airlines’ dominant market position. Local Saudi LCC NAS air is concentrating on international expansion, although it has made no mention of adding a route to Bahrain.

International capacity (seats) to/from Saudi Arabia: Week commencing 09-Jan-2012

Gulf Air is looking to build its strength in the Saudi market to increase the number of destinations it seamlessly connects with the rest of the Middle East, thanks to its high-frequency operations from Bahrain. Gulf Air operates a mix of E170 and E190 regional jets and A319/A320 narrowbodies into Saudi Arabia and is aiming to provide convenient connection times for business and O&D traffic to feed into the rest of its regional network.

Gulf carriers Saudi Arabia operations (weekly frequency)

	Gulf Air	Qatar Airways	Emirates	Etihad Airways
Damman	23	28	7	13
Jeddah	17	16	14	13
Medina	4	7	4	13
Riyadh	16	17	14	-
Gassim*	4	-	-	-
Taif*	3	-	-	-
Yanbu*	3	-	-	-
Total	70	60	39	39

At present Gulf Air operates 60 weekly frequencies into Saudi Arabia, increasing to 70 once its three new routes are launched. Only Qatar Airways, which operates a mix of A320 narrowbody and A330 and 777 widebody equipment into the country, can match this level of frequency. Etihad Airways operates 39 frequencies – 13 times weekly to three destinations, also with a mix of widebody and narrowbody equipment. Emirates, in contrast, operates nothing but widebodies into Saudi Arabia, including 494-seat A380 operations twice daily on Dubai-Jeddah service, one of the few short-haul A380 services.

An element that further clouds the picture on the future of the Saudi market is how the Saudi Arabian General Civil Aviation Authority (GCAA) plans to proceed with the opening of the domestic market to foreign carriers, a move it formally announced in late Dec-2011. The GCAA has decided that Saudi Arabian Airlines and NAS air alone are not meeting the demands of the domestic market, and fresh licences will be opened to local and international investors and airlines. Tender details are due to be announced by the GCAA in late Jan-2012.

Arab Spring leaves major mark on Gulf Air balance sheet

The Arab Spring was disastrous for an already suffering Gulf Air and its effects are lingering more than 12 months on. Apart from the effect the local political and social turmoil had on its operations and the cancellation of Iraq, Iran and Lebanon services, the uprisings lead to a rolling series of temporary service disruptions across the carrier’s network for much of 2011.

The result of the local civil unrest and enforced route suspensions has been a major downturn in passenger traffic for Gulf Air. Bookings at the airline slumped nearly 30% over the first five months of 2011, and traffic has still not fully recovered, although it is gradually returning to normal.

Passenger numbers through Bahrain International Airport were down almost 1.1 million for the first 11 months of 2011. While traffic was most heavily affected between February and May, passenger numbers since Jun-2011 are still down 9.4% compared to the same period in 2010.

Bahrain International Airport passenger traffic: 2010 and 2011

The result is that Gulf Air’s three-year financial recovery strategy has been thrown into disarray. After combined losses of more than USD1 billion over the past three years, the carrier hoped 2011 would see decisive progress in reducing losses. It was expected that losses would be almost eliminated by the end of 2012, with profit returning from early 2013. Now breakeven is not anticipated until late 2013.

To help relieve its financial burdens, Gulf Air received a BHD400 million (USD1.1 billion) loan from the Bahrain Government in May-2011, allowing Gulf Air to settle outstanding debts, clear loan payments, make instalments on aircraft payments and invest in its restructuringplans. With the support of the Bahrain Government, 2012 will be another year of recovery for the carrier, putting 2011 behind it and getting back on track with its financial turn-around.

Contemporary Issues in Hospitality

Monday, 10 December 2012

Political influence on Airlines Industry and its consequences - Gulf Air as an example