US embassy cable - 05MANAMA1570

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 001570 
 
SIPDIS 
 
NEA/ARPI, EB/TRA 
 
E.O. 12958: DECL: 10/23/2015 
TAGS: EAIR, ETRD, ECON, BEXP, BA 
SUBJECT: GULF AIR'S FUTURE IN WAKE OF UAE PULLOUT 
 
Classified By: Ambassador William T. Monroe, reasons 1.4 (b) and (d) 
 
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Summary 
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1. (C) Minister of Transportation Shaikh Ali bin Khalifa Al 
Khalifa discussed with the Ambassador Gulf Air's future in 
the wake of the UAE's withdrawal from ownership of the 
airline.  Shaikh Ali said the GOB would expect the UAE to 
honor its existing financial commitment to the carrier.  He 
fears that Oman may withdraw from the carrier too but pledges 
that Gulf Air will receive Bahrain's continuing support.  He 
supports Boeing over Airbus to replace the aircraft in Gulf 
Air's fleet, as does Gulf Air President and CEO James Hogan, 
although Hogan acknowledged that, given Gulf Air's current 
fleet composition, Boeing's bid would have to be more 
aggressive than Airbus' to win the deal.  He said that Gulf 
Air is facing a "moment of truth" as it deals with its latest 
restructuring and purchase of new aircraft.  Hogan is 
interested in offering service to Iraq and Afghanistan. 
Despite rising fuel prices, Gulf Air ended 2004 with its 
strongest year since 1997.  End Summary. 
 
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Transportation Minister Discusses Gulf Air's Future 
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2. (U) Deputy Prime Minister and Minister of Transportation 
Shaikh Ali bin Khalifa Al Khalifa October 12 discussed the 
future of national flag carrier Gulf Air with the Ambassador. 
 The meeting followed the September 13 UAE announcement that 
Abu Dhabi would pull out of Gulf Air in six month's time. 
The UAE's withdrawal leaves the carrier's ownership in the 
hands of the Bahraini and Omani governments. 
 
3. (C) Shaikh Ali said the Crown Prince had met with the Abu 
Dhabi leadership in the summer of 2004 and was assured that 
Abu Dhabi remained committed to Gulf Air.  The decision to 
drop out now caught the GOB by surprise, though he noted that 
with the UAE launch of Etihad Airlines, Bahraini officials 
had worried that this would happen. 
 
4. (C) He said that several months ago, the Gulf Air board, 
which consisted of members from all three country members, 
approved a cash infusion of BD 90 million ($235 million) for 
Gulf Air, with each country paying BD 30 million.   Bahrain 
paid up immediately.  Oman paid up just the day before 
(October 11).  He said Abu Dhabi has not paid its agreed 
share and asserted that Bahrain will insist that Abu Dhabi 
fulfill its commitment. 
 
5. (C) Shaikh Ali said the three countries have six months to 
work out the disassociation of Abu Dhabi from the airline, 
including division of routes and decisions on planes.  He 
said that Bahrain does not favor making Oman a co-hub.  The 
traffic has just not been high enough out of Oman.  He cited 
as an example that Oman has insisted that Gulf Air fly daily 
from Muscat to London, as it does from Abu Dhabi and Bahrain. 
 However, the Muscat flight is routinely undersold compared 
to the Bahrain and Abu Dhabi flights.  Also, despite 
assurances from the Government of Oman that it is committed 
to remain a part of Gulf Air, he confided that Bahrain is 
wary that sooner or later Oman will drop out, just as Doha 
did in May 2002 and Abu Dhabi has done now (despite regular 
prior assurances that they would remain as partners). 
 
6. (C) Shaikh Ali said Gulf Air is critical to the economy of 
Bahrain as a major employer and that Bahrain will not let 
Gulf Air fail.  It is considering privatization as an option 
-- getting the government out of the operation of Gulf Air. 
 
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Boeing Favored 
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7. (C) Regarding Gulf Air's planned purchase to update its 
fleet, Shaikh Ali expressed his strong support for Boeing 
over Airbus, but said Boeing still must bid aggressively in 
order to secure the deal. 
 
8. (C) Gulf Air President and CEO James Hogan told the 
Ambassador October 18 that the airline's engineering 
department also favored Boeing over Airbus.  He said funds 
had already been allocated and the carrier would need to 
place an order by year end to replace its entire 34-aircraft 
fleet, noting that current manufacturing backlogs meant the 
ordered planes would not go into production until 2010. 
Hogan said his current fleet consists of a 70/30 mix of 
Airbus and Boeing aircraft.  He said that Boeing had an 
excellent opportunity to become the dominant carrier at Gulf 
Air, but acknowledged that Boeing would have to be more 
aggressive than Airbus in its bid to win the contract because 
of the need to dispose of more Airbus aircraft if Boeing gets 
the deal. 
 
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Impact of UAE Withdrawal 
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9. (U) Hogan expressed optimism on Gulf Air's future in the 
wake of the UAE's departure.  In contrast to Shaikh Ali, 
Hogan was more optimistic about the possibility of keeping 
Oman as a second hub.  "Two hubs are easier than three," he 
said.  He noted that some bilateral aviation agreements would 
need to be updated, but said that Gulf Air would keep its 
current routes and airport slots. 
 
10. (SBU) He added that the Bahrain hub demonstrated greater 
strength in serving the Southeast Asian market, while Oman 
did comparatively better in the European market, despite 
Bahrain's better performance on the London route.  (Note: 
Gulf Air recently signed a frequent flyer agreement with 
India's Jet Airways and announced October 24 that it seeks to 
triple its flights to Manila.  End Note.) 
 
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Iraq/Afghanistan Gateways Eyed 
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11. (SBU) Hogan expressed interest in opening a gateway in 
Kabul if conditions were conducive and the Afghan Civil 
Aviation Authority (CAA) was supportive.  (Note: Following 
contact with Embassy Kabul, the Ambassador October 23 advised 
Hogan that, subject to the existence of a bilateral aviation 
agreement, the Afghan Ministry of Transport would likely view 
Gulf Air overtures favorably.  End Note.) 
 
12. (C) Hogan also inquired as to whether conditions in 
Basra, Baghdad and Kurdistan would presently support Gulf Air 
flights.  He said that Gulf Air has on the table a proposal 
to fly a Manama-Baghdad-New York route once conditions 
warrant it.  Following contact with Embassy Baghdad, 
Ambassador provided Hogan with contact information for the 
Iraqi CAA. 
 
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Performance 
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13. (SBU) Hogan said high oil prices would limit Gulf Air's 
ability to expand and noted that as early as 2002, he had 
recommended to the board of directors that Gulf Air purchase 
fuel oil hedge contracts.  To his chagrin, the board declined 
to implement his recommendation.  Gulf Air paid BD 30 million 
(approximately $80 million) in fuel costs in 2004. 
 
14. (U) Nevertheless, on October 23, the carrier announced a 
2004 net profit of BD 1.5 million ($4 million).  This marked 
the airline's strongest financial performance since 1997. 
Gulf Air's overall load factor for 2004 was 71.4 percent, an 
increase of 4.8 percent over the previous year.  Gulf Air's 
all-economy subsidiary, Gulf Traveler, logged an average load 
factor of 75.8 percent across its 17-gateway network last 
year. 
 
MONROE