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Aiming for the sky

With the government fully backing the expansion plans, the sultanate’s flag carrier is ready to spread its wings
Mayank Singh

Will they, won't they? The speculation about Oman pulling out of Gulf Air kept building up from March this year. Officials in the know fuelled the rumour mills with off-the-record comments like, "You can put two and two together”, or "read between the lines". Finally, in May this year, H E Ahmed bin Abdulnabi Macki, Minister of National Economy and Deputy Chairman of Financial Affairs and Energy Resources Council announced that Oman would withdraw as a shareholder from Gulf Air giving Bahrain 100 per cent ownership of the carrier. Says Ziad al Haremi, CEO, Oman Air, "Reports appearing in the media gave us a sense about something impending, but the exact timing of the move was something that we were not aware of."

The withdrawal has been greeted with enthusiasm by the travel industry. "It was a long-awaited move. When Abu Dhabi withdrew from Gulf Air in 2003 we were surprised with the government’s decision to continue as a stakeholder in the airline," says M Mehmood, general manager, Al Hashar Tourism and Travel.

Head to head

While one would not like to be a party pooper, a quick comparison with some of the other regional airlines surely acts as a dampener. Emirates services 88 destinations with a fleet size of 101 aircraft. Qatar Airways flies to 75 destinations and has 54 aircraft in service. Even Etihad, which started operations in late 2003, now boasts of 35 destinations with 21 wide-bodied aircraft. Looking at these statistics, Oman Air, with 16 destinations and a seven-unit fleet, comes across as a minnow. Haremi is quick to defend his turf, "We do not look at regional airlines as a direct challenge. Our job is to promote tourism to Oman and it does not require us to get into direct competition."

While the CEO may wish to look the other way, the fact is that the airline cannot wish away competition in an open-sky environment. A report by the Centre for Asia Pacific Aviation (CAPA) states, “With a very crowded long-haul sector emanating from the Gulf region, where it will have by far the smallest operation, late-mover Oman Air could find the going tough.”

Sitting on decisions

If being a late mover in going alone was not bad enough, the airline also seems to have missed the bus in acquiring aircraft. The airline will get its first new aircraft, an Airbus A330, two years from now in 2009. This has left the carrier with no choice but to lease aircraft to meet its short-term needs. Two A330s join the fleet in November, followed by two A310s in February 2008. Says Raji Demonte, division manager, United Travels, "They should have picked up aircraft three years back when there were scores of them ready for lease."

The travel industry worldwide has recovered from the post 9/11 phase and is growing at 15 per cent per annum. This has created a sudden demand for aircraft. Emirates is acquiring 101 new aircraft by 2012. Qatar Airways has plans of getting 120 by 2017 and Etihad is looking at inducting 20 new aircraft by 2013. Add to these a fast-growing aviation industry on the Indian subcontinent and low-cost carriers like Al Jazeera and Air Arabia and the equation gets worse. The two-year delay of the Airbus A380, the world's biggest aircraft has played havoc with the manufacturer’s delivery schedules, compounding the problem.

The delay in acquiring aircraft is impacting Oman Air in other ways too. It has limited the carrier's choice in acquiring aircraft. Says Haremi, "We went in for A330s for their sheer availability. It is the only aircraft which is available as early as 2009. In comparison the first available Boeing 787 is as far away as 2014 while the first available A350, in 2017."

Oman's decision to withdraw from Gulf Air, saw the latter rerouting a number of its flights through Bahrain, its new hub, in May and June. The sudden withdrawal exposed a few chinks in the Oman Air's armour.

"Schedules got disrupted and passengers were put through a lot of inconvenience. We had to make alternative arrangements for a number of passengers," says Mehmood. Oman Air argues that with a number of airlines operating flights to the sultanate it was business as usual. "The only hitch being that most of these transit from somewhere and are not non-stop flights," says an official.

Judging Oman Air by its past record may be a bit unfair as the airline is working on reinventing itself. If one looks at the state of affairs at Gulf Air, Oman Air comes across as a paragon of efficiency and good management. Its erstwhile partner is losing US$1mn a day, is under investigation by audit firm Kroll for financial irregularities and its CEOs seem to be in a hurry to desert the ship.

The biggest change at Oman Air has been the government's move to recapitalise the airline by injecting RO37mn. This has taken its stake in the airline from 33.8 per cent to 81 per cent. As a fallout, the company is no longer traded on the MSM, though the remaining publicly held shares (19 per cent) can still be traded by shareholders by mutual consent. "Being a closely held company, investor interest was always very low in an Oman Air stock. The business model that they are following now is the right one and there is a new energy in the airline," says a research analyst with a stockbroking firm.

The recapitalisation of the airline gives Oman Air the much-needed funds to pursue its expansion strategy. Though the airline has been making profit, these are nowhere near the numbers required for its new plans. In 2006 Oman Air made a profit of RO2.89mn while a single wide-bodied aircraft costs anywhere between US$120mn (RO46.51mn) and US$180mn (RO69.76mn). The national carrier has plans to have a fleet of 10 Boeing 737-800s and nine Airbus A330s by 2011.

Being a government-owned company brings in additional benefits. "It helps in negotiating traffic rights and better facilities," says Mehmood. There may be some truism in this as a number of regional airlines are either fully or majority owned by GCC states – Emirates by Dubai, Etihad by the UAE and Gulf Air by Bahrain. "Being a private company against this backdrop was creating an unequal playing field for us," says Haremi. There are indications that the government is open to the idea of privatising the airline once again in the future.

Trump card

relegated to servicing regional destinations while Gulf Air operated the intercontinental flights. This meant that Oman Air never bothered about upgrading its capabilities. Realising the mistake, the airline is eager to start long haul flights at the earliest. The CAPA report states, "A key driver of Oman's aviation sector will be the flag carrier's decision to move into long haul operations."

A daily service to London and Bangkok is expected to start by the end of 2007. New destinations like Milan and Frankfurt in Europe will be connected by 2008. The airline has recently introduced flights to Jaipur, Lucknow and Chittagong in India. "By the end of 2007 we will be servicing 18 destinations and by next year we will take this to over 20," says Haremi.

The airline is working on an extensive rebranding exercise. The idea is to come up with a theme which conveys the feel of flying to a great tourist destination. "A khanjar does not really convey the idea of hospitality or tourism. We are working on something that is neither overtly flamboyant nor too conservative," says Haremi. Work on the exercise has started in earnest and if things work to plan, the airline will fly its first new colours by March 2008.

The airline promises to set a new benchmark in service and comfort with its new aircraft. For example, the sleeper beds used by other airlines in their first class will be used by Oman Air in its business class. There will be in-flight entertainment with over 600 channels and sky phones and the works. "On time performance, Oman Air is exceptional. Its flights leave on time and their cancellations are negligible," says Demonte. With such a track record, the airline’s future claims need to be taken seriously.

The carrier's plans come at a cost. Oman Air has forecast losses for the next five years. This cannot be seen as a major concern as the capital expenditure on making an airline take off is huge. Most regional airlines like Etihad and Qatar Airways have forecast losses for years ahead. "Once we have the requisite aircraft and start servicing new destinations, we will become profitable once again," says Haremi.

Going back to the original question: With new aircraft, better connectivity and superior service, can Oman Air compete with its regional big brothers, those in the industry would rather wait and see.

"They will not catch up as the others would have raced ahead. But we need to wait and see as it has not flexed its muscles as yet," says Demonte. In an industry where low-cost airlines like Jet Blue and South West Airlines and legacy carriers like Jet Airways have rewritten the rules of the business, it would be interesting to see whether Oman Air can recreate the same magic.

Oman Air

Passenger traffic
2006 - 1.22mn
2005 - 1.13mn
2004 - 0.98mn

Revenue
2006 - RO85.91mn
2005 - RO76.33mn
2004 - RO65.71mn

Net profit
2006 - RO2.89mn
2005 - RO1.00mn
2004 - RO0.62mn

Flights handled at seeb airport
2006 - 23,545
2005 - 20,353
2004 - 20,244

Manpower strength
2006 - 3,125
2005 - 2,878
2004 - 2,584

Omanisation
2006 - 72 per cent
2005 - 75 per cent
2004 - 76 per cent

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