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Interview: Bahrain Air CEO Richard Nuttall

Why the aviation executive is open to discuss a merger with Gulf Air.
NEWS, Aviation

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Last month, an estimated 100,000 demonstrators took to the streets in the small island state of Bahrain. It was the biggest protest since the start of the political upheaval that began on 14th February last year, highlighting the widespread desire for change in the country. For most companies in Bahrain, the months of unrest which saw 40 protesters killed in a series of violent clashes with government forces have been a non-stop nightmare, and many are looking forward to a resolution. From retailers and real estate firms to airlines and banks, scores of organisations have been severely damaged by the instability.

The country’s second flag carrier, Bahrain Air, was one of the firms caught up in the troubles. Only three years old, the company was in the midst of its early loss-making period, hoping to turn a profit in the near future after growing its reputation and network of routes. Now, following the unrest, the firm is one year behind target. The chief executive of Bahrain Air, Richard Nuttall, doesn’t sidestep the truth. “Last year was spectacularly uninteresting in terms of growth,” Nuttall says. “Obviously we had the troubles in Bahrain and the whole region, so while we lost traffic on existing routes, we also had to stop flying to a number of destinations.”

The circumstances were particularly tough for Bahrain Air, he says, given the firm’s privately held status. “For us, we’re a private company, so we have to make money. If you look at what’s happened in Bahrain in the last 12 months and if you look at the price of fuel, [you can see] it’s very difficult to make money.”

At the height of the demonstrations, some of Bahrain Air’s main losses came when it was forced to abandon services to Iran, Iraq and Lebanon, as instructed by the government due to security issues. An additional decline in revenue was also seen when the carrier ceased its flights to revolution-hit Egypt, one of its key markets for Gulf tourists, due to ailing demand for holidays to the country. “We finished up flying a lot less because of the troubles and sort of downsizing a little bit and trying to conserve cash. It meant taking an aircraft out of service because you don’t get enough hours out of it, so we then actually cancelled a long flight to Dhaka [Bangladesh],” says Nuttall. “Lebanon was allowed back from about the middle of June [last year] in time for the summer holidays, as there was a lot of work done between the governments of Lebanon and Bahrain. As for Iran and Iraq, there were a couple times when we thought it was going to happen but then there would be a bomb in Iraq or something [so it didn’t].”

By the end of 2011, revenues for Bahrain Air were down by a worrying 30 percent, and the total number of aircraft in its fleet had decreased from six to four. According to Nuttall, a full recovery could still be some way off, given the state of the global economy and the ongoing regional political turbulence. “Our view at the moment is that the markets haven’t quite come back fast enough. We are seeing traffic coming back but the yields that people are paying have not quite come back. So ultimately we will fly the same number of hours in 2012 as we did in 2010 but with one less aircraft. This gives us high utilisation and more efficiency, but it means we can’t fly everywhere this summer that we flew in the summer of 2010.”

However, Nuttall does believe revenues could hit their 2010 levels this year as the airline launches additional routes and destinations. It will, of course, be vital to focus on saving cash during the period, he says, and to boost short-haul services to key markets. “Last year put us back, so it’s really now about conserving cash until we see the markets pick up. The advantage we have is that because we fly narrow-bodied aircraft, A319-A320s, and the whole global economy is a little bit down at the moment, if we want to get an aircraft we can get one at quite short notice. If the world was booming, that wouldn’t be the case.”

So far this year, the company has also launched flights to Trivandrum in Kerala, which Nuttall believes was a major milestone given the high number of Keralite residents in Bahrain. He adds that the airline only recently acquired the rights to India given their monopoly by Bahrain’s state-backed flag carrier, Gulf Air. “In practice, most of the traffic rights which are held by Bahrain to other countries are held by Gulf Air, so if we want to go and get extra traffic rights there is no incentive for the people at the other end. Historically, the [India] rights belonged to Gulf Air, but Gulf Air was not using them, so the Bahrain government reassigned them to ourselves.”

The airline currently flies to four Indian cities, but Nuttall says the country will be a particularly important market for Bahrain Air in the future. It is currently eyeing a codeshare agreement with an Indian carrier in a bid to boost its number of services to secondary Indian cities. It has so far been in talks with five Indian airlines on the possibility of a deal. “I think [a codeshare agreement] might make sense for us, particularly to India,” Nuttall says. “We have had meetings with at least five different Indian carriers who have individually advised that they would be open to some level of cooperation and to feeding traffic into each others’ networks, and a tie-up could open up many more cities [for us]. Equally, the Indian carrier could sell from all his cities to anywhere on the Bahrain Air network.” However, at the present, the firm’s reservation system does not communicate with the reservation systems of other carriers, and needs to be upgraded before a deal can be signed. “Once we do that we’re then in a position to start doing interline agreements very quickly. That should take six to nine months,” he says.

As for other new routes and destinations, Nuttall says the carrier has also gone back to Kuwait this year, and announced plans to fly direct from Dammam in Saudi Arabia to Sudan and the Lebanese capital, Beirut, from mid-June. Both of these routes will be opened in the hopes of attracting a large number of customers travelling direct from Saudi Arabia, as opposed to Bahrain, and should increase revenues. “We will also go back to another destination in the summer, but we are just making up our mind which one it will be,” he adds. “It will be Egypt or Bangladesh. But I think we will be back in Bangladesh by the end of the year.”

The million-dollar question, of course, is whether the airline is open to a merger with government-owned Gulf Air. The struggling national carrier, which was once the main airline for the entire GCC, has long been in a rather volatile position, with Bahraini ministers calling for billions of dollars in aid in a bid to keep the airline afloat. According to media reports, many officials believe the carrier to be a backbone of the national economy for its ability to tie Bahrain to other hubs and create jobs, rendering its survival essential for the protest-hit country. As well as calls for aid, there have been talks of tapping Bahrain’s sovereign wealth fund Mumtalakat, which is a stakeholder, and a possible restructuring. Last month, the state-backed carrier secured an $80m loan from a unit of Dubai lender Mashreq, but the funding doesn’t appear to be enough. Nuttall says he would be more than happy to partner with the company. “We are very open to merging with Gulf Air, and can see a number of synergies. It’s no secret that Gulf Air, Bahrain Air and most airlines in the region are hurting. If we come together we can rationalise and be that much more efficient with less cost. It is certainly an option we would be interested to pursue,” he says. “Also, in Bahrain with the limited traffic rights that we’ve got, it is difficult to build a network. While we have a game-plan going forward, at the same time we are open to talking to other carriers about formal mergers which might allow the two airlines to have a bigger network.”

Hefty fuel costs are also a “big problem” for smaller, lone companies, he says. As it stands, most are hoping the prices will fall in the year ahead, but should they remain high, Nuttall is concerned some carriers may fall by the wayside. “We’re just hoping they’re going to go down. It’s a big problem. If fuel stays at its current price for the next 10 years, which is unsustainable for a lot of airlines, some of the airlines will disappear, and the passengers will end up paying more for their ticket,” he says. “You can hedge... [but] for us, who are not cash-rich at the moment, if we want to hedge typically we have to give big bank guarantees in advance because effectively we’re buying the fuel in advance, and we’re just not really in a position to do that.”

Staying positive, he says the general industry sentiment is that prices will come down, and if they do, this could help many struggling airlines. For Bahrain Air, the plan is to remain optimistic, keep saving cash, and hire staff as and when they boost their aircraft numbers. Here’s hoping.

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