Conflict of interest at Oman Air (page 2 of 2)

"Our present capital of 12 million rials is not enough to meet our future plans. Ideally, we would like to raise it to 50 million rials, with support coming from the private sector."

This proposal has apparently been cleared by the Omani government, which holds 34 percent in OASC; the other shareholders are key Omani institutions and a small group of private investors.

Oman Air - which has a fleet of 10 Boeing aircraft - desperately needs cash to expand fleet size to meet its route expansion program. Raising its capital base, however, should not pose much of a problem, given that the government could easily persuade leading financial institutions and wealthy individuals in the sultanate to cough up a few million rials.

There is also the fact that Oman's recent privatizations of a few of its public-sector industries generated an overwhelming response. The issue, then, for Oman Air is not about raising fresh capital, but what any new investor can bring to the table.

"If it is serious about Oman Air, the Omani government should only consider taking on shareholders who can add value to the operations at the management level and be an active player in any future turnaround," said a top industry analyst with one of the banks associated with Oman Air. "The perfect choice would be to get an international airline or management company to come in."

Until the latest announcement by Al Busaidy, the OASC had denied any move by the government to sell its holdings. But unless the proposed increase in the capital base is financed through a rights issue, it stands to reason that the government will have to think of reducing its stake.

"Oman has been in the forefront among Gulf states' on privatization," said the Muscat banker. "It should seriously consider bringing about a radical change of strategy within Oman Air, including handing over management to a strategic investor."

Others suggest that even that would not be enough. For them, nothing less than a full Omani withdrawal from Gulf Air will do. A pullout had been widely anticipated in the immediate period after Qatar took the politically volatile step last year.

Recently, though, such speculation has subsided as Oman has signed up as a full-scale partner in the Gulf Air revival plan.

"How could any investor be interested when the Omani government is pumping millions into restoring the viability of Gulf Air and, at the same time, talking about roping in fresh capital for Oman Air from the outside?" asks former high-ranking official at Oman Air. "This would be hilarious if it did not have such serious implications for Oman Air.

"Just look at the way Qatar Airways has benefited from Qatar's decision to pull out [of Gulf Air]. Almost immediately," says the former Oman Air employee, "the global airline industry's perception is that Qatar Airways can be a serious player."

Those comments are right on target. After Emirates, Qatar Airways has been the most aggressive regional player in the recent past. Its fleet expansion program has been carefully calibrated, and is already paying off in sectors such as Britain, where Emirates has had an almost free run until now.

Oman Air desperately needs to get its act together, especially since an ambush awaits it from the new budget airlines - including Air Arabia and menaJet - that will come to market in the next few months. These no-frills carriers will be concentrating heavily on the Gulf sectors, and there are indicators are that Gulf Traveller is already eroding Oman Air's share on some routes.

For the Omani government, and the OASC, the time to take hard decisions is now. Further dawdling will only place Oman Air's future in further jeopardy. What needs to be done first? Qatar has already provided the answer.