Conflict of interest at Oman Air

After several turbulent years, these are suddenly the best of times for Gulf Air. The carrier's new CEO, James Hogan, has overseen the rejuvenation of the airline that is owned by the Abu Dhabi, Manama and Muscat governments.

Gulf Air, under Hogan's direction, has performed strongly over the past several months, since an injection of capital earlier this year. Everything is now going right for Gulf Air, and that's at least part of the reason why everthing is now going wrong for Oman Air.

For several obvious reasons, Oman Air's fate is closely linked to that of Gulf Air. Both airlines are second-tier operators in a small region that already has an oversupply of capacity.

Both are targeting the same consumers and both have very similar routes - with the Indian subcontinent and the Middle East region accounting for the largest share of their businesses. And of perhaps greatest importance, both airlines share a major stakeholder: the government of Oman.

With its recent recapitalization, Gulf Air now looks set for a brighter future. Oman Air's great weakness is that its owner's attention is divided between Gulf Air and Oman Air. As a result, the latter carrier's future now looks very dark. Until it pulled out of Gulf Air, the Qatar government faced a dilemma like that faced by Oman.

Now that Doha has decided to focus exclusively on building its national carrier, Oman stands as the only government in the world that holds a stake in two competing and underperforming airlines. With the government's attention diverted elsewhere, Oman Air has been unable to make any headway during the last several years.

The airline desperately needs an injection of capital - to buy new aircraft and expand capacity, to hire better-trained personnel and a fresh management team. But with the Muscat government focused on Gulf Air, Oman Air has not been able to make progress towards making the changes it so urgently needs.

The Oman Aviation Services Co. (OASC) - Oman Air's holding company - has announced its results for the first six months of 2003. The numbers are staggering. Losses have widened to 1.58 million Omani rials ($4.1 million) from 780,000 rials during the same period last year.

Oman Air's losses are magnified in the context of Gulf Air's vastly improved performance during the same period, capped by it recording its highest passenger numbers in its 53-year history in August. During this period, Gulf Air also managed to launch an economy airline, Gulf Traveller. Judging by the strong initial response, the low-cost carrier may well confound the skeptics who greeted the announcement of the project with barely concealed derision.

Most painful to Oman Air has to be the star turn by Qatar Airways, which in the last two quarters has widened its network with the addition of more flights to Britain and the launch of new services to Moscow. And early this month Emirates airline is likely to publish the best half-yearly results since its inception. (The carrier's financial year begins in April.)

The results from Emirates, Qatar Airways and Gulf Air are all the more impressive considering the terrible performance of sector worldwide, and the impact of the sars crisis and the war in Iraq. This shows that despite Oman Air's claims, the carrier's flaws run deeper than those brought on by sars and Saddam.

At a recent press conference, the chief executive of OASC, Abdulrahman Al Busaidy, said that the carrier required an urgent cash infusion to meet medium-term expansion plans. '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.