Flip through the latest issue of Gulf Weekly.
Bahrain’s national carrier, Gulf Air, which plunged into a fresh crisis last week after its president and chief executive Andre Dose quit, plans a partial sell-off next year allowing private institutions, including Gulf companies, to buy its shares.
The airline management said it hoped to lead the company back to profitability with the government’s support. This means that the government would not want to give up a controlling stake in the airline even as it goes for partial privatisation.
Gulf Air had racked up losses of BD130 million ($345 million) in 2006 forcing it to hire Swiss veteran Andre Dose and adopt a ‘get well programme’ that included restructuring, fleet reduction and injecting more money.
Dose’s resignation, after his alleged disputes with the board over limits to his decision-making powers following the formation of two committees overseeing audit and accounting, could send the wrong signals to the financial institutions about the airlines’ prospects of turning around.
The resignation, the second in less than a year by the top executive of the airline, comes amid allegations of serious financial irregularities dating back several years and the recent arrest of a key member of the management team.
Dose assumed control of the airline six months after the resignation of his predecessor James Hogan in October 2006.
Within a few months, Dose and the board began to part ways over procedure and apparently reached a flashpoint over Kroll, the veteran corporate investigator who is believed to be conducting a review of the airline’s accounts “with a fine toothcomb”.
The investigation, apparently into suspected financial irregularities, led to the arrest and questioning of Michael Kent, Gulf Air’s in-flight services head, on July 12.
Kent was arrested at his office ahead of his pending departure for his native Australia.
Kent says he and his team were innocent of any wrong-doing. He has not been charged yet but has been banned from leaving the country, while inquiries continue. Meanwhile, police raided Kent’s flat and took away property including a computer, as part of investigation centering on investigations into in-flight supply contracts, such as catering.
Airline chairman Mahmood Al Kooheji says Dose left because he could not get used to the Bahraini way of doing business. He had wanted to work faster than Bahraini legislative constraints allow.
“In Bahrain we are very open about the fact that it is a modest operation. Maybe in business you need to take a lot of decisions very quickly and very promptly, but if you are a public company you have to adhere to a lot of rules and obligations, whether they are good or bad,” explains Mr Kooheji.
“We believe they are good, we believe they add transparency. It is a personal style of working. We have to work with parliament, we have other legislative people that we need to answer to and we need to accommodate.”
The Gulf Air management insists that the airline is on a ‘flight-path to success’, despite the resignation of Dose. The recovery plan Dose helped draw up is already paying off and the airline will continue with the programme and chief operating officer Bjorn Naf, a fellow Swiss, has already taken over as acting president and chief executive.
However, the crisis enveloping the airline is the worst in its 57-year history. Privatisation of an airline is not as easy as one may think. As money always goes in search of sectors that give the highest profits with the least risks, an airline would be the last choice for investors. It may be noted that in India the auctions for Air India and Indian Airlines had to be abandoned for want of bidders.
Investors are only too aware of the fact that the airline industry makes billions of dollars every year and still has a cumulative profit margin of less than one per cent.
Why so? The answer lies in the industry’s vast complexity. Airlines have many different problems they have to solve at once including high labour costs, varying seasonal demand, and vulnerability to weather conditions. Most industries have to deal with only one or two of these issues. Add to them the factors of constant bureaucratic interference and the frequent top-management shuffles, many investors wouldn’t even look at it, leave alone investing.
The experience in the Gulf shows that governments have been pumping in enormous subsidies to have their national flag-bearer in the sky. With the traditional business model, airlines have tried to be all things to all people. A better strategy is to pick a niche, such as budget travel, regional business travel, or global travel – and be the best airline in that niche.
Bahrain has decided to cut many unprofitable long-haul routes and instead focus on one unique service, catering to the regional customers. But, how long would the airline take to turn the corner before it goes in search of investors?
If it does not happen quickly enough investors may go in search of better options as there are other carriers in the region like the Kuwait and Saudi airlines already on the path to privatisation.
Rather than blindly take to privatisation one by one, a better option for the loss-making carriers in the Gulf could be to band together and launch a common-niche airline in a bid to cut costs, losses and stay in competition.
Talking Business
K S Sreekumar
sreekumar@tradearabia.net
