New destination: Shifting focus to maintain competitiveness and support expansion

The Gulf’s aviation sector had its start in Bahrain, and its national carrier, Gulf Air, still maintains the largest network in the region. However, the pace of the Middle Eastern aviation market’s expansion in recent years has brought unprecedented competition to the sector, and Bahrain’s airport, airlines and aviation services companies are being pressed to make important changes to remain competitive.

To secure a profitable niche among its well-funded competitors throughout the Gulf, the Kingdom is eyeing a continued regional focus at its national airline and has ambitious plans for the expansion of the transport sector to boost growth in the medium and long term.

HOME TIES: The biggest story in aviation through 2011 has been the future of Gulf Air, the Kingdom’s flagship carrier. The fortunes of Bahrain’s air transport industry, and, by extension, the country’s longterm fate as a centre for financial services and tourism, will be closely intertwined with that of Gulf Air, which is owned by Mumtalakat, the Kingdom’s sovereign wealth fund.

The airline has faced a tremendous increase in competition over the past decade, as its original national partners withdrew their ownership stakes to concentrate on their own national carriers. Emirates, Etihad and Qatar Airways have since established well-regarded international networks in the field where Gulf Air historically drew its greatest revenue: long-haul connections. With a fleet size much smaller than that of its regional rivals and less financial support from its government, Gulf Air became increasingly unprofitable in the late 2000s.

STRATEGY CHANGE: A new capital injection in 2009 was accompanied by a change in strategy, as the carrier focused on servicing the Middle East, South Asia and Africa with new and expanded routes. The airline also reduced its workforce by one-fifth in a bid to cut costs. This strategy seemed to be going quite well, as the carrier picked up lucrative routes to Iraq and established itself as the airline with the most routes to the broader Middle East and North Africa (MENA) region.

By late 2010, the goal of breaking even by 2013 seemed within sight. Social unrest in the Kingdom in early 2011, however, has made reaching this objective increasingly difficult. Gulf Air’s traffic declined by around 25% in the first five months of 2011, as wary travellers sought alternative routes and destinations. This was compounded by the decision to ban flights to Iran and Iraq due to security concerns, eliminating some of the airline’s most lucrative routes. These factors, combined with rising prices for fuel, have pushed the carrier’s bid for profitability further into the future.

FINANCIAL MOVES: For the moment, though, the carrier is turning to non-governmental sources to maintain operating capital. In February 2012 the carrier raised BD30m ($78.56m) from Dubai’s Mashreq Bank to cover medium-term operating expenses. Gulf Air has also made moves to recoup the $310m it claims the Omani state owes it, following the Sultanate’s withdrawal of its ownership stake in the carrier in 2007.

In late January 2012, Samer Majali, the CEO of Gulf Air, announced that the Bahraini government had voted to restructure the airline in a bid to restore profitability, most likely through a combination of route cuts, plane sales and reviews of staffing. Gulf Air followed this up by announcing the suspension of loss-leading routes to Entebbe, Geneva, Damascus, Athens, Milan and Kuala Lumpur.

It is hoped that these cuts will allow the carrier to double-down on its profitable regional focus. Gulf Air opened three new routes to Saudi Arabia in the first quarter of 2012 and has increased flight frequency to Jeddah and Riyadh. The carrier has also expressed interest in obtaining a Saudi Arabian operating licence as its neighbour begins to open up its domestic market to foreign bidders. Once the security situation stabilises, the ban on travel to Iraq and Iran will likely be lifted and the more stringent visa rules for Western travellers imposed in February 2012 will be loosened as well. These moves would certainly improve the Kingdom’s long-standing advantages as a regional business centre and meetings, incentives, conferences and exhibitions destination, ideally situated to service Saudi Arabia.

AIRPORT EXPANSION: Gulf Air’s shift to a more regional focus is in line with developments at Bahrain International Airport (BIA). BIA currently plays host to both Gulf Air and privately owned carrier Bahrain Air, a smaller, budget airline that was opened in 2007 and services 18 destinations. Together, the two airlines make up around 55% of the airport’s overall traffic. Medium-term plans are focused on maintaining its reputation as a convenient and efficient point of entry for visitors to the Kingdom, as well as a gateway for passengers and cargo destined for the northern Gulf, Saudi Arabia and the wider GCC.

Initial designs for the airport’s expansion were delivered in September 2011, and the BIA’s operator, Bahrain Airport Company (BAC), expects the first phases of the work to be finished in late 2014. The expansion is envisioned to add 40,000 sq metres of space, including retail facilities, additional contact gates and more check-in counters. Overall, planners estimate that the improvements would allow BIA to handle 4.5m more passengers per year, raising the total capacity to 13.5m passengers annually.

KEEPING PACE: These expansions will be necessary as BIA looks to remain a good value proposition, but the airport must strike a balance to maintain its reputation for efficiency. Because of its compact size, BIA has traditionally had one of the quickest landing-to-kerb turnaround times, with BAC claiming it can take as little as 15 minutes to travel from the landing gate to the airport exit. This speedy turnaround has made the airport an attractive point of service for business travellers, which make up a good portion of BIA’s clientele.

The 2011 decline in traffic has given the airport some breathing space, as it was beginning to face capacity issues. The airport, built over 25 years ago, was originally designed to handle 5m passengers annually, but has operated well in excess of that capacity for the last six years, peaking at 9m passengers in 2009. Corporate trade has traditionally been quite resilient, and BAC has retained its low costs – its rates are in the bottom quartile worldwide. Officials at BAC expect overall traffic at BIA to return to 2009-era levels by the end of 2012.

CARGO TRAFFIC: Cargo, which makes up 15% of the airport’s traffic, is another central piece of BAC’s plans to keep the BIA a competitive player in air transport. Due to its location near Khalifa Bin Salman Port, the airport serves as a convenient port of transshipment for goods heading to and from Saudi Arabia and the wider Gulf area. The airport only saw a slight decline in cargo traffic in 2011, shipping 310,119 tonnes of freight for nine major carriers.

DHL, one of the largest logistics providers in the market, has committed to operating out of Bahrain for the next eight years. It cited positive relations with the government, the BAC and a good regulatory environment as reasons it resisted incentives offered by Dubai to relocate. Meanwhile, local player Gulf Air rolled out its Falcon Cargo freight business in November 2011, hoping to attract time-sensitive cargo business at BIA’s efficient cargo facilities.

Bahrain has distinguished itself in the past for taking a long-term approach to economic planning, such as investing in the infrastructure developments that make best use of the country’s regulatory and geographic advantages.

As Gordon Dewar, the CEO of BAC, told OBG, “The economy is suffering, of course, because of the security situation and bad press. However, people seem to forget that this is the Middle East, and it has to be admitted that this region has experienced many crises over the last 30 years and always recovered. The current downturn is just a temporary blip, and overall the Kingdom has strong fundamentals.”