May 2006

Gulf Air plays to its strengths

While other airlines in the region are expanding rapidly – even recklessly – Gulf Air has decided on a more steady course. As Peter Conway reports, that includes focusing on its regional network, and taking a step by step approach to getting back into the freighter business.

Once the undisputed master of Middle Eastern aviation, Gulf Air has seen a series of vigorous rivals - Emirates, Qatar Airways, Etihad – rise up around it in the past fifteen years, and to many outside observers it has seemed to have little answer to the new competition.

	Des Vertannes

But since March 2003, under its Australian CEO James Hogan, the carrier has been bouncing back, returning to some of its former international destinations and once more vigorously promoting its brand.

Now its cargo team also has a head from outside the organisation, in the shape of Des Vertannes, former managing director of handler Menzies World Cargo and UK-based wholesaler AMI. Can he now reinvigorate the Gulf Air Cargo?

Vertannes’ credentials for the role are excellent. As well as his time at Menzies, he was based in Bahrain as Gulf cargo sales manager for British Airways in the early 1980s, and in the early 1990s held the post of general manager Europe, Africa and Middle East for Air Canada.

“I am an airline man first and foremost, but my experience at AMI gave me an insight into what smaller forwarders want, in contrast to the larger players who I tended to deal with in my Air Canada and British Airways days,” he says. He is now relishing the chance to take one of the famous names of the airline industry and put it back at the heart of the cargo market.

Gulf Air is not going to imitate Etihad or Emirates in adding aircraft by the dozen, however. Though in mid February the airline’s board announced $900m in investment for aircraft renewal and product upgrades, this is relatively small compared to the billions its rivals seem prepared to invest at the drop of a hat.

Hogan also seems to have pulled back from plans he announced back in 2003 to double Gulf Air’s fleet by 2010, and now is only planning to increase it from 34 to 45 aircraft in the next ten years. Much of the investment will go on replacing existing aircraft, in particular the A330s and 767s in Gulf Air’s fleet (its other aircraft are A320s and A340s).

“The board is absolutely determined to reduce the number of aircraft types in the fleet from four to two,” Vertannes says.

That also means that there is not going to be a rapid ramp up of long-haul routes. Indeed, after returning to several former destinations in 2004, things quietened down for Gulf Air in 2005, and only two routes were launched – Dublin and Johannesburg, both three times a week, in December 2005. Meanwhile in March 2005, flights to Colombo and Morocco were dropped.

In February 2006, a direct flight from Kuala Lumpur was started, replacing a former indirect service via Bangkok, and Vertannes says it is still a definite intention of the airline to serve China. But for the most part, Gulf Air Cargo is going to have to make do with the network it has.

That includes flights to Hong Kong, Jakarta, Manila, Bangkok and Kuala Lumpur in Asia, along with five stations in India – Mumbai, Delhi, Trivandrum, Chennai and Bangalore – and Karachi, Lahore, Islamabad and Dhaka. To Europe, the carrier flies to London, Paris and Frankfurt, as well as the new Dublin flight.

Though many of the Indian Subcontinent flights are operated in an economy-only “Gulf Traveller” mode that limits cargo capacity, that still gives Gulf Air Cargo more cargo out of the East than it can accommodate on its flights to Europe.

“All the export traffic out of Asia is funnelling into our hubs and then everyone is fighting for space to Europe,” is how Vertannes describes this bottleneck.

To resolve it, Gulf Air Cargo is looking for main-deck lift, but again, unlike its rivals, it is not for the moment looking at getting into freighter operations on a major scale. What it is aiming to do instead is source westbound capacity from Bahrain to Europe only: given the relatively weaker loads and lower rates out of Europe, Vertannes is in no rush to operate round trip freighters.

One possibility emerged in September 2005, when Hogan signed a memorandum of understanding with Evergreen International to look at joint freighter operations. This was based on the fact that the carrier was flying out to the Gulf with its B747-200Fs in support of US forces in the region, and was looking for ways of filling the return leg.

However, Vertannes reveals that one reason discussions have not so far got any further is that the two flights a week – 200 tonnes of capacity – is more than Gulf Air feels it can comfortably fill.

“They have presented their costs and we have looked at yields and tonnages, but the conclusion we came to is that it would take a very high utilisation for the flights to break even,” he says. “Since our flights out of Asia are already full, there is the question of where we would find that extra cargo.”

So while talks continue with Evergreen, Vertannes is also looking at other options. “We would be far more happy to fill a mid-range freighter – a 767 or an A300: something with a 40-50 tonne payload,” he says.

One possible partner might be DHL, whose Middle East hub is in Bahrain, and which used to share a 757 freighter with Gulf Air. Now, however, DHL operates its own daily aircraft on the route, and Vertannes says most of the space not needed for express on that flight is tied up in long term contracts. “But yes, we are talking to them about the space that is left,” he says.

Gulf Air already uses DHL lift into Iraq and Afghanistan, and in general Vertannes says it sees the integrator as an opportunity, not a threat. “I would rather be here in Bahrain than in Dubai for that reason,” he says. “Because they are on our doorstep we can work in tandem.”

While Vertannes is looking to source main-deck lift from partners for now, however, that won’t necessarily be the case long term. He admits that if Gulf Air remains a pure belly carrier, particularly a belly carrier which is not dramatically growing its network, it will be harder to convince large forwarders that it is serious about cargo, and he says it remains an objective of the cargo department to get back into freighters in its own right.

“We have very loyal cargo customers, but if the freight industry as a whole is growing five to six percent annually, and our capacity is not, the danger is these customers will think we have no cargo ambition and place their business elsewhere,” he admits. “So the challenge for us is to improve our service integrity, improve our efficiency, make technology work for us, and yes, also supplement our existing capacity with freighters.”

Converted Gulf Air B767-300ERs could be ideal freighters if the aircraft would be phased out of passenger service.

As it happens, some ideal freighters will be presenting themselves shortly. Gulf Air has nine 767-300ERs that it is planning to phase out of passenger service as part of its fleet upgrade, and Vertannes has hopes of converting three of them into freighters.

That won’t happen until 2008 at the earliest, however. “The board is prepared to accept the business case, but we can’t just switch from being a belly cargo business to having three freighters,” he says. “We need time to get all the infrastructure and expertise in place to support freighter operations. So in the meantime, we will stick to capacity purchasing, or sub-leasing.”

Another plank in the Gulf Air Cargo strategy, in accordance with the overall “Smart Airline, Successful Business” strategy for the carrier unveiled by the main board in February, will be to emphasise Gulf’s Middle Eastern network.

“We don’t want to get into the same competitive fight that Etihad and Qatar Airways are getting into, spreading their wings to long-haul destinations,” says Vertannes. “We are dominant in the Gulf region, with a lot more regional flights than any of our rivals. People tend to forget this.”

By way of example, he points out that in numbers of flights Gulf Air has 36 percent of the regional market, compared to 10 percent for Emirates, fourteen percent for Qatar and two percent for Etihad. “This is one of our strengths and we have to play on it,” he insists.

But is it much of a strength for cargo, when regional flights are operated by narrow-bodies and regional trucking is increasing? Vertannes admits that Gulf uses trucks to feed cargo into Saudi Arabia that will not fit on the carrier’s narrow-bodies, but he also stresses that even the A320s have useful cargo capacity.

“If you are flying them eight or nine times a day on a route, which we are in some cases, that is quite a bit of space,” he says. “Remember also that our long-haul wide-body flights have to move between our hubs to reposition, and that means we have some big beasts flying on regional routes.”

Since 27 March, such wide-body regional flights have only been between Bahrain and Muscat, however; on that day, Gulf Air ceased hub operations in Abu Dhabi, following the decision of the emirates’ government to withdraw from its ownership of Gulf Air in favour of Etihad. Gulf Air still has 50 regional flights a week into Abu Dhabi, but all long-haul operations have been re-assigned to Bahrain and Muscat.

That is particularly good news for Muscat, which sees the number of Gulf Air flights rise by 50 percent as a result of the change, while Bahrain has seen them rise 30 percent. It is also, says Vertannes, good news for Gulf Air Cargo, which now only has to manage two hubs not three, and so can achieve economies of scale and efficiencies in its operation.

	With flights out of Asia full, Gulf Air Cargo is looking at a mid-range freighter such as the B767 or A300, which offer a 40-50 tonne payload.

The change will enable the carrier to give better connectivity to its Asian customers, he says. “Before, we might have had daily flights from a destination like Hong Kong or Bangkok, but three a week went to Abu Dhabi, three to Bahrain and two to Muscat: the same was true of onward connections to Europe. With just two hubs, the number of connection paths will be greatly increased.”

Muscat, which is seeing 40 percent rise in cargo tonnage as a result of the change, is getting cargo managers reassigned to it from Abu Dhabi, and additional labour.

Vertannes says he is working with the ground handler in Muscat to see how processes in the freight terminal there can be improved to make better use of the existing capacity. “I believe the current facility is big enough to cope, but we do need to look at ways of getting better utilisation out of it,” he adds.

Gulf Air Cargo has also got permission from the Omani authorities to start a scheduled road feeder service from Abu Dhabi and Dubai to Muscat. “It is only four hours by truck, so we can continue to protect our UAE business,” Vertannes points out.

“Muscat is close to Dubai and part of the same landmass. It is not on an island and its potential as a cargo airport has perhaps so far been under-exploited.”

He also predicts that Oman will rise rapidly as a tourist destination in coming years, reinforcing Muscat’s status as an air hub.

In Bahrain, which gets an extra 20 percent cargo tonnage as a result of the move from Abu Dhabi, Vertannes is confident that the Bahrain Airport Services handling facility can cope. As for the future, he says the airport needs to take a long-term view of how it needs to develop as a cargo hub.

“If you look at successful airports that also work alongside seaports – for example, Hong Kong, Singapore or Dubai – they plan for the next 15 years, not the next one or two. I think Bahrain needs to do the same, and plans are certainly afoot, but I can’t say more about them now.”

	Gulf Air CEO, James Hogan (left) signed MoU with Evergreen International owner and founder, Delford Smith for joint freighter operations.

Talking of the future, what does Vertannes think of the prospect for road feeder services in the region? Now that customs barriers are coming down, does he think European or US-style trucking operations might become the norm for the region’s airlines?

His answer is a somewhat sceptical one: “There are still border issues to overcome, and I think it will be some years before trucking reaches the level of sophistication it has in Europe. Most truck routes are also unidirectional these days – you can operate a truck to Qatar, but what would you bring back?

"All the big international carriers tend to serve these airports anyway and so there is more than enough air capacity at each airport. So it is hard to see one carrier being able to draw cargo from another market using trucks.”

As well as finding some main-deck lift, and fine-tuning its new two hub system, Gulf Air Cargo’s other priority this year will be looking at a new IT system.

The carrier is one of a group of airlines advising Indian-based software house IBS on i-cargo, its next generation cargo system. But Vertannes suggests that it is by no means a foregone conclusion that Gulf Air will in fact purchase the system.

	Awaiting a full freighter, filling bellyholds remains the core business.

“If you help to design a system, it means it will incorporate the idiosyncrasies of your operation, so it is a worthwhile exercise, and IBS will certainly be at the front of the queue when we look at a new cargo system,” he says. “But we don’t know yet on what basis they will sell it, what rights we might get, and I haven’t even seen it working myself yet.”

He adds that: “No cargo system yet in existence has everything we need. I implemented Hermes at Menzies, and it was a hugely sophisticated system. But it is only for handling. There is also a question of what elements will be incorporated into the next generation SITA system, and so on.”

“One system that Gulf Air is already implementing is Sabre’s CargoMax revenue and pricing solution, which it will be using to optimise its space and capacity management. That might help Gulf Air get to the point where it can join one of the e-booking portals.

With CargoMax, we will be able to identify in real time just how much incremental capacity we have available, and then try and top it up on the web,” Vertannes says. “We are already in discussions with GF-X, but there is no point in joining until we have this kind of capability in place.”

He applies the same argument to Cargo 2000. While agreeing that service levels - as well as giving customers access to capacity, booking, tracking and proof of delivery information - is key to competing in today’s market, he says there is no point in Gulf Air signing up to such initiatives as Cargo 2000 unless it has the technology to deliver on its promises.

“I think we should be a member of Cargo 2000, but at the moment our existing system could not reach that standard,” he says. “I have a wish list and am doing my very best to get a funding for an upgrade. But it is a question of what the airline can and cannot afford.”

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Copyright for texts and pictures: Payload Asia, Singapore. This report is brought to you in partnership with Payload Asia, the air cargo/express magazine for the Asia-Pacific and Middle East regions. To learn more about Payload Asia, please visit their website.