Gulf Air begins a painful process of restructuring and returning to profitability as Bahrain becomes the soleowner of the airline.
As he sat oozing with confidence, Bahrain’s Crown Prince Shaikh Salman Bin Hamad Al Khalifa had one clear message for the people sitting around the long table in Gulf Air’s meeting room: “Gulf Air will succeed under Bahrain’s sole ownership. It will not be easy, but it will be possible.” This statement and others by the Crown Prince, who was born 19 years after Gulf Air launched its first flight in the region, were meant as a first pragmatic move to bring the situation in Bahrain under steady control following a frenetic week of wild speculation, anxious concern and poignant appeals. Last month, Gulf Air’s newly-appointed president and chief executive officer Andre Dose told reporters that the Bahrain-based airliner, which was till then equally co-owned by Manama and Muscat, needed a serious restructuring to halt the nearly $1 million a day hemorrhage. “Since 2003, Gulf Air has constantly increased its losses,” said Dose as he painted a bleak picture of the situation. “Losses in 2006 were 130 million Bahraini dinars [$345 million] versus a budgeted profit of 26 million dinars. Accumulated losses and costs amounted to 254 million dinars [$675 million]. Currently operational losses are in excess of half a million dinars [$1 million] per day,” he said. It was the first time that someone spelled out so candidly the plight of Gulf Air, the aviation icon founded in 1950, and was for years equally owned by the governments of Bahrain, Oman, Qatar and Abu Dhabi. Qatar withdrew in 2002 and Abu Dhabi in 2005. Oman said this month that it ceased to be a shareholder, leaving Bahrain as the only owner. Adopting a new approach that sharply contrasted with previous ones, Dose explained why the company needed 310 million dinars ($825 million) and how it would work on securing the amount. Restructuring costs included network transition, the closure of some routes and the reduction of aircraft. Such fateful measures would help save or bring in 120 million dinars ($319 million). Investment costs, including fleet improvement, lounge investments and new facilities would amount to 190 million dinars ($505 million). Punctuality According to Dose closing the profitability gap of 156 million dinars ($414 million) can be achieved by reducing costs by 66 million dinars (fleet, personnel, fuel, commissions, other) and generating additional revenues of 90 million dinars through sales and network improvements. Another major source of problems at Gulf Air, according to Dose, is punctuality, which failed to match internal or industry standards. “Too many flights are cancelled, creating a negative domino effect on the rest of the fleet, and delay problems are often not communicated openly to passengers,” he said. “Customer service in case of problems, such as cancelled flights, is often inadequate.” Yet another serious problem plaguing the company, according to the new management, was that its organisation was too complex, with unclear, overlapping responsibilities and little cross-divisional teamwork. Overhead costs were high due to the complex and oversized organisational structure. But the new managerial team expressed confidence that it could successfully tackle the situation by focusing on four key performance indicators: safety, punctuality, profitability and customer service. “Progress will be monitored on a daily basis through the key performance indicators, and funds have already been put aside to reward progress.” The restructuring plan has been dubbed as the “Getting Well” programme. The first initiative is to implement a simpler and customer focused organisation, where all operations are concentrated in four division and responsibilities for each division and department are clearly defined. As for the fleet, it will be reduced from 34 to 28 as the Boeing 767s and Airbus A340s will be phased out and all planes will be Airbus. Meanwhile, realistic flight plan tables that reflect effective flight time will be implemented. The new plan will add connections to major destinations and, once Gulf Air is stable, will establish new connections to important economic centres. Gulf Air says that it has identified 11 major areas of restructuring, and that it had the ability to address them within two years. The restructuring programme seems to be running on a clear timetable. The new organisation to stabilise operations and improve productivity has already been implemented. May will be witnessing action to improve fleet management, punctuality, reduce the cost structure, downsize staff, improve customer service on the ground as well as the decommissioning of the 767s. Next month, the company will start the review and monitoring by independent safety experts, while the remodelled and customer-friendlier network will be operational in July. Improvements on ground (lounges) and in the air (cabins) and having an all-Airbus fleet will also start in July. Although Gulf Air was exceptionally open and honest in presenting the bitter reality, and despite the seemingly plausible plan announced by the management, several people in Bahrain remained edgy. The news that about 1,500 staff would be sacked as part of the restructuring plan triggered a wave of concerns that prompted trade unionists and Members of Parliament to start building up pressure to ensure that Bahraini families would not be affected. Workforce Claims of generous compensation packages failed to allay growing concerns, and the inability of the new management to provide exact figures of the total number of workers who would be sacked during the restructuring has not helped either. During his visit to Gulf Air headquarters in the vicinity of the airport, one week after Bahrain announced that it had become the sole owner of the iconic company, Shaikh Salman brought much-needed clarity to the information needed to paint a fuller picture of what lies ahead for the thousands of its staff. He first sought to calm down growing concerns that hundreds of Bahrainis would lose their jobs. “I don’t want any Bahraini to pay the price of wrong policies,” he said. However, he clearly resented self-complacency, reminding everyone that performance was the magic word. “I am sure that the officials will look into this matter and try to set up measures so everyone is clear on the requirements of working and being promoted in this company. I have requested this from the company’s board of directors. Regardless of the employees’ nationality, we should not discriminate between one nationality and another. But we can distinguish between a good and a bad performance.” About 60 nationalities are on the payroll of the company which employs about 6,000 people, with non-Bahrainis making up 70 per cent of the total force. Competition For Shaikh Salman, the company is regarded by GCC nationals as the most salient symbol of the Gulf unity, which has reached this deplorable stage mainly because of its faulty decision-making process and its inability to compete with other airliners. But the crown prince, who, almost single-handedly succeeded in bringing Formula One to the Middle East and building an award-winning race track in the middle of the desert, believes that there must be a new policy on the role of Gulf Air. “Now that Bahrain has complete ownership of the company, previous shortcomings in terms of decision-making, policies, or balancing four centres in a small environment, should no longer apply. We must realise one thing: Bahrain’s economy will not grow without an airline … The question we should be asking is what type of company it is going to be. Currently we are supporting Gulf Air based on its requirements so it does not affect the economy, [and ensure that] not many jobs are lost by Bahrainis and a smooth restructuring process is carried out,” he added. “We will try our best to ensure that the company’s philosophy is in line with Bahrain’s economy and this requires time, a year or two, until the picture is clear.” For Shaikh Salman, the historic ownership by Bahrain of the airline leaves no room for emotions. He resisted calls to change its name to Bahrain Air or Royal Bahrain as was suggested by some Bahrainis enthralled by Bahrain’s becoming the sole owner. “We will preserve the name and will not change it. It is a powerful icon of tradition and heritage and we are keen on preserving it,” he said. Now that Bahrain owned the airline outright, the infusion of confidence-boosting measures and the amelioration of lacklustre performance seem to be almost as significant as the injection of cash to meet the new economic costs. “What we must do is define our own niche. We are providing a service that no one else can because we are the national carrier for Bahrain,” Shaikh Salman said. “Am I worried? No! Am I stimulated by the challenge? Yes!” Losses Since 2003, Gulf Air constantly increased its losses. Losses of 2006: 130 million Bahraini dinars ($345 million), versus budgeted profit of 26 million dinars Accumulated losses and costs amount to 254 million dinars ($675 million) Currently operational losses are in excess of 0.5 million dinars ($1 million) per day To reach profitability again, restructuring and investments are needed Total costs of the “Getting Well” programme amount to 310 million dinars ($825 million) Passengers Gulf Air served 7.1 millionpassengers in 2006 (-4%) Seat Load Factor (SLT) in 2006 was 72.1% (+0.4%) The network includes loss making destinations Aircraft utilisation is low due to an inefficient network Current network causes longconnection times for passengers The History The company was established on March 24, 1950 and started operations on July 5, 1950 under the name of Gulf Aviation. It initially provided regional services between Bahrain, Doha and Dhahran and contract work for oil exploration companies. British Overseas Airways Corporation (BOAC) was a major initial shareholder until the governments of Abu Dhabi, Bahrain, Oman and Qatar purchased BOAC’s shares in 1973. Gulf Aviation became the national carrier of the four states and was renamed Gulf Air when the Foundation Treaty was concluded on January 1, 1974. The government of Qatar withdrew from the airline in December 2002. On September 13, 2005, Abu Dhabi also withdrew from Gulf Air. Oman withdrew in May 2007 leaving Bahrain as the sole owner of Gulf Air. Contribution to Bahrain’s national economy Direct impact: $246m annually Indirect impact: $153m annually Total: $400m annually Gulf Air employs: 5,917 people directly Helps to create 3,600 jobs indirectly Total: More than 8,000 additional jobs in local market Gulf Air accounts for 70% of Bahrain International Airport’s traffic Source: Gulf Air