Friday, February 10, 2012

Economists debate Gulf Air revamp plan

ECONOMISTS have expressed mixed views over which of the four government-suggested proposals for Gulf Air would be the best solution for the struggling carrier.

According to the proposals, the state-owned airline may be dissolved altogether, sold off and a new national carrier launched, downsized or allowed to continue in its current form with government support.

A joint parliament and Shura Council committee has now been tasked to study the options.

However, economists are warning against dissolving Gulf Air altogether and have come up with their own suggestions for moving forward.

Economist and businessman Dr Yousef Mashal said he expected job losses regardless of what happens.

However, he argued the best solution would be to privatise about 80 per cent of the carrier.

He said for this to be successful the government would have to restructure the company and offer shares at a rate that reflected the state of the airline.

"The government should not have a majority ownership, I would suggest 20pc or less," said Dr Mashal, who is Mashal Group chairman.

"When a government-owned entity goes private it is always a good investment for the private sector.

"There have been rumours of a merger between Gulf Air and Bahrain Air and, in this scenario, Bahrain Air could become a shareholder and then decide to merge or not.

"But to merge now is not advisable because both airlines will become sick."

Dr Mashal blamed Gulf Air's board for failing to come up with solutions for the airline and the Bahrain Mumtalakat Holding Company, the government agency responsible for the carrier, for allowing the current situation to develop.

"Who is the government official responsible for Gulf Air who can be questioned by parliament?" he asked.

"There isn't anyone, so this proves this company has no proper management.

"This board is no longer capable or qualified to run a company like this.

"They only criticise the chief executive, but we have seen chief executives leave Gulf Air and go on to be hugely successful in other companies."

Economist and former Al Wefaq MP Dr Jasim Husain, who previously served on parliament's financial and economic affairs committee, said it would be a mistake to scrap the Gulf Air brand.

He believed that selling off Gulf Air, merging it with Bahrain Air or severely downsizing it would spell the end for the national carrier.

"It has been a brand for so many years and this must also be taken into consideration," he said.

Dr Husain said the best solution for Gulf Air is to restructure the carrier with government support.

He pointed out that most GCC countries had stepped in to support their national carriers and said Bahrain must follow suit.

"It's a mistake to look at Gulf Air only in terms of its financial losses and not look at the revenues that it brings into the economy," said Dr Husain.

"It brings to the economy BD400 million per year, but we could really lose that option if we make it into a budget airline and if it becomes a budget airline it might be difficult to compete with other budget airlines.

"We need to consider the indirect and direct revenue the airline brings to the economy."

Dr Husain said Gulf Air had suffered by suspending flights to Iran and Iraq and recommended an urgent rethink.

He said four carriers in the region were now operating profitable flights to Iraq while Gulf Air missed out.

"Gulf Air's problem is more political than economic, it was reducing losses in 2009 and 2010," said Dr Husain.

"We should keep Gulf Air as it's a major contributor to the economy.

"Restructuring is OK, but we shouldn't go into a merger and do away with Gulf Air's name.

"If we go for a merger then we must have a public debate.

"But I strongly believe the economy can afford to support Gulf Air."

Bahrain Economic Society president Dr Ahmed Al Youshaa agreed that Gulf Air should be retained as the national carrier, even if it sought new partnerships or joint ventures.

However, he said if the airline was to enter into a joint venture agreement the government must remain the majority stakeholder.

He warned that complete privatisation of state-owned companies had not proved to be beneficial in other countries, such as the US and the UK.

Dr Al Youshaa also said he believed Gulf Air could become profitable again, but was in a bad shape due to factors beyond its control.

"They did a great job at restructuring Gulf Air and in my opinion the problem is not Gulf Air per se," he said.

"We had two shocks to the economy, which has nothing to do with the management of Gulf Air.

"There was the political upheaval in the Arab world and many profitable stations went down - some were new such as Iran and Iraq, but very profitable.

"But due to political and security reasons, Gulf Air had no option but to stop flying there.

"This imposed a huge financial burden on Gulf Air.

"Then oil prices last year increased and averaged from $85 (BD32) to $100 (BD37.8) per barrel, this was an almost 20pc increase and this was an important element of the operating cost.

"It was a massive shock for a company that was going through restructuring."

On December 21, Gulf Air was given a month to come up with a new recovery strategy after admitting it would no longer be able to break even by its January 2013 target.

After the one-month deadline passed Bahrain's Cabinet agreed on January 22 to restructure the airline in line with operational requirements and reduce the size of its "challenges, commitments and costs" while maintaining the national workforce.

Two days later MPs voted in favour of making it obligatory for a Bahraini to hold the position of Gulf Air's chief executive officer.

The position is currently held by Samer Majali, the former head of Royal Jordanian and the son of former Jordanian prime minister Abdelsalam Majali.

He took over the reins of Gulf Air from its former president and chief executive Bjšrn NŠf on August 1, 2009.

Mr Al Majali has been overseeing attempts to steer the airline back into profit, but has blamed regional political turmoil for derailing its recovery plans, particularly anti-government protests in Bahrain.

He also said the suspension of flights to Iran and Iraq compounded the problem, since they were major money-spinners for the carrier.

In August 2010, a more optimistic Mr Majali announced that cost-cutting - including the shedding of just under 1,000 jobs over the previous year - had led to significant savings as Gulf Air strove to reduce financial losses.

However, Gulf Air needed a BD400m loan last year to cover the costs of fuel, space at Bahrain International Airport, purchases of new aircraft and pay off outstanding debts, among other things.

Based on figures previously presented to parliament, an MP predicted that Gulf Air would post losses of $500m (BD189m) for 2009 alone - the equivalent of $1.36m (BD518,000) a day.

The airline has declined to disclose exactly how much money it has lost.

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