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Interview: Oman Air CEO on why his airline is on the up

Posted 26 August 2015 · Add Comment

In the deteriorating war of words between America and the Gulf countries over bilateral traffic rights, it is easy to forget that European capitals have long imposed ceilings on the number of flights that Emirates, Etihad and Qatar Airways can operate to their airports.

The restrictions are not solely targeted at the ‘big three’ Gulf carriers. Even mid-sized operators such as Oman Air – which no-one seriously accuses of capacity dumping – have had their wings clipped on the continent.
Oman’s flag-carrier currently serves Paris Charles de Gaulle Airport four times weekly from its home base of Muscat. Repeated attempts to make the route a daily service have been rebuffed on the French side, prompting chief executive Paul Gregorowitsch to say he feels “discriminated against” by closed-skies policies.
Europe, he argues, has adopted a misguided approach to civil aviation that rewards legacy incumbents while handicapping emerging players from the Gulf.
“Yes, I admit we are getting state support but it is because we are developing our infrastructure. Our airline is still young,” Gregorowitsch said during an interview at the International Air Transport Association (IATA) annual meeting in Miami. “I think that some other governments, for instance in Europe, should look at how the combined efforts made in the Middle East are strengthening and supporting national carriers.
“If you look at how Qatar, how Emirates, how Oman are developing their infrastructure, how they are putting their hands together and investing in new airports, taking care of customers instead of enforcing fines on them – these things could actually make European competition more fair too.”
Protectionism has become a recurring theme for the airline’s network planners. They also face heavy restrictions in India – a key market for Oman, located on the other side of the Arabian Sea and home to the nearly half-a-million Indians who work in the sultanate.
Oman Air today operates more than 100 flights per week to 11 destinations in India: Bengaluru, Chennai, Delhi, Goa, Hyderabad, Jaipur, Kochi, Kozhikode, Lucknow, Mumbai and Thiruvananthapuram. Load factors above 95% mean that Gregorowitsch is understandably keen to add capacity. But the existing bilateral air services agreement between India and Oman ties his hands, limiting the airline’s operations by aircraft type and the number of weekly seats it can offer.
Negotiations have duly been launched with India’s new government and the chief executive said he is “optimistic” that a “more liberal regime” can be agreed.
“With Prime Minister Modi there is absolutely the understanding that this [planned expansion by Oman Air] is not affecting the Indian economy negatively, but it can stimulate further growth and bring more prosperity,” he stressed.
“We put a lot of money in the [Indian] economy. Oman is planning huge further construction work, so we are employing a lot of Indians. The moment that the restrictions are lifted, we can deploy [larger Boeing] 737-900s and Airbus 330s to our destinations, carrying more Indian labour workers.”
As well as up-gauging aircraft and boosting frequencies, Gregorowitsch said Oman Air would consider launching new routes to Kolkata and several Tier II or Tier III cities. India has unveiled plans to build up to 200 airports in secondary cities over the next two decades, easing congestion at existing hubs and propelling the growth of new economic centres in the country.
Continued expansion in India is, indeed, a key driver of Oman Air’s mid-term strategy, which envisages the 48-point route network rising to 75 destinations by 2020. Its fleet of 39 aircraft is forecast to reach 70 units over the same timeframe.
But, while the business model partly mirrors that of the ‘big three’ Gulf carriers – linking east and west over a central hub – it has two unique features.
First, the network model is pursued on a much smaller scale than market-leader Emirates, whose 234-strong fleet aims to connect every major city on the planet. Whereas 70 million passengers last year passed through Dubai’s mega-hub, Muscat Airport processed a modest but respectable nine million people.
Second, Oman has an enviable advantage over its neighbours. Unlike the UAE and Qatar, the sultanate boasts a relatively large land mass – equivalent in size to Poland – that is rich with cultural and ecological splendour. Alongside the pristine beaches and desert safaris that you find elsewhere in the Gulf, visitors to Oman can trek across the Al Hajar mountain range, go turtle spotting on the east coast, or visit one of four United Nations Educational, Scientific and Cultural Organization (UNESCO) world heritage sites.
Mindful of the need to diversify its economy beyond the energy sector, Oman is, thus, targeting rapid growth in tourism. One major research body expects a 3% spike in visitor numbers to 1.14 million this year, but the government has a grander target of five million tourists by 2030.
It hopes that several infrastructure projects will help turn this vision into reality. As well as lifting Muscat Airport’s annual capacity to 12 million by 2017, new airports have been opened in Sohar, Duqm and Salalah over the past 12 months.
This balancing act between sixth-freedom connecting flows and high-value origin-and-destination traffic is reflected in Oman Air’s route development strategy.
To the west, the European network comprises six hub destinations that, themselves, hoover up traffic from across the continent: Frankfurt, London, Milan, Munich, Paris and Zurich. To the east, the Indian network is complemented by seven points in the wider subcontinent (Islamabad, Karachi and Lahore in Pakistan; Kathmandu in Nepal; Chittagong in Bangladesh; Colombo in Sri Lanka; and Male in the Maldives) plus five points in southeast Asia. They are Bangkok in Thailand; Jakarta in Indonesia; Kuala Lumpur in Malaysia; Manila in the Philippines; and Singapore.
Flights to the Bangladeshi capital Dhaka will begin in August, potentially being followed by Shanghai, China in winter and Seoul, South Korea next year. Bali, Indonesia is also being evaluated as a potential extension of the Singapore route. At this stage, however, Gregorowitsch is unwilling to confirm any launch dates beyond Dhaka.
“We cannot do everything at the same time,” he stressed. “The moment we get more frequencies to France or to India, I have to fine-tune the aircraft supply again.”
With Asian points being selectively introduced and European frequencies hopefully nudging up, there is little room to pursue long-haul growth elsewhere. Oman Air’s sub-Saharan presence – comprising Dar es Salaam and Zanzibar in Tanzania – is not currently earmarked for expansion. The Americas and Australia will remain absent from the network, given the high fixed costs of serving those lengthy sectors.
But one market closer to home is crying out for growth. Oman and Iran have long enjoyed close ties, thanks to their geographical proximity and the sultanate’s neutral religious demographics. Most Omanis adhere to the Ibadi school of Islam – distinct from both Sunni and Shia Islam – which has allowed Muscat to stay on the sidelines whenever sectarian conflict engulfs the wider region.
Yet, despite warm diplomatic and economic relations between the neighbours, Oman Air operates just one daily service to the Iranian capital Tehran. That is a conspicuously low presence for a country and trading partner of 77 million people.
Gregorowitsch said the modest size of the Iranian network reflects yet another balancing act the flag-carrier must tread. “Oman is, in its political position, an ally of more or less all neighbouring countries, but also the United States of America,” he noted. With the flag-carrier already deploying US-built aircraft on flights to Tehran, any further expansion in the country risks antagonising Washington.
That would be particularly unwelcome given Muscat’s pivotal role in facilitating – and at times even hosting – nuclear talks aimed at ending international sanctions on Iran.
“Everything is taken in a considerate way step-by-step. We should not pre-empt a larger process, where His Majesty [Sultan Qaboos bin Said] has been very instrumental in bringing the US and Iran together,” the chief executive affirmed. “We do not want to disturb that [process] as long as sanctions are still there… The moment that that [sanctions regime] is lifted, it will be an open market.”
While Oman Air plays second fiddle to the sultanate’s broader geopolitical agenda, there are ample expansion opportunities on the flag-carrier’s doorstep.
Along with Tehran and three domestic points (Khasab, Salalah and Sohar), Oman Air flies to 12 destinations in the Middle East and north Africa. They are Amman in Jordan; Bahrain; Beirut in Lebanon; Cairo in Egypt; Doha in Qatar; Dubai and Abu Dhabi in the UAE; Jeddah, Riyadh, Dammam and Medina in Saudi Arabia; and Kuwait. Rising east-to-west traffic over the Muscat hub should foster a gradual uptick in regional connectivity, initially in the form of higher frequencies.
The flag-carrier may also begin basing aircraft at Salalah’s new airport – opened in June with an initial capacity of 1 million passengers annually – though only to strengthen the domestic trunk route to Muscat, which will be served eight times daily in the winter season.
Asked whether he would consider launching international routes from Salalah, Gregorowitsch said the cost of a dual-hub network and the complexity of re-negotiating international traffic rights are major hurdles. “It would be interesting to fly from Salalah to India,” he admitted, referring to the monopoly currently enjoyed by Air India Express. “But then you need the bilaterals to be changed.”
Either way, the abundance of network opportunities and the clear mandate from the government to continue growing has fuelled rapid fleet expansion.
The airline’s 39-strong fleet presently comprises 10 A330s, 23 737NGs (including four -900ERs), four Embraer E175s, and two ATR 42s.
Both of the regional types are being withdrawn from service but Gregorowitsch said new commitments have been signed for up to 20 next-generation 737 MAXs and up to 10 787 Dreamliners. Together with planned current-generation narrow-body leases, that should put Oman Air on-track to reach 70 aircraft by 2020.
Its Dreamliner order dates back to November 2011, when the flag-carrier signed for six 787-8s. Gregorowitsch modified the commitment in March 2015, initially saying he would take nine units of mostly 787-9s. The first two Dreamliners are due to arrive this year.
However, it is worth noting that the updated tally has not been confirmed by Boeing. According to the US manufacturer’s order book, Oman Air still has commitments for just six 787-8s and one 737-900ER – suggesting that negotiations are on-going.
While talks about the pace of growth continue, Gregorowitsch is pressing on with the flag-carrier’s ‘shape and size’ restructuring programme.
Launched in January, the plan aims to make Oman Air profitable by 2017. That is a herculean task for an airline that has lost $1.1 billion over the past four years, but Gregorowitsch said the combination of cost-cutting and improved scale will steadily feed through to the bottom line. He pointed to early savings from network optimisation, contract re-negotiations, fuel-burn reductions and on-demand catering.
Emphasising Oman Air’s broader socio-economic role, the chief executive quickly added that “short-sighted” savings would remain off-limits.
“I am striving [to go] from 61% Omanisation [of the workforce] to 70%, to employ promising, highly educated Omanis, to give them a chance in the airline,” he explained. “If I tried to save costs by cutting jobs and by preventing young Omanis from starting a career, the government would never support that.
“Everything in Oman is built for the longer-term. So, if that means [that the break-even target of] 2017 has to become 2018, there will be full understanding by the government. Nevertheless, I keep the target, and we are all working hard to get it done by 2017.”
Muscat’s focus on the long game was, indeed, re-affirmed in February, when it invited bids from low-cost carriers to establish a base of operations in the sultanate.
Full-service Oman Air will probably not take part in the tender and Gregorowitsch is downbeat on its prospects. “I do not think a low-cost initiative can be successful in Oman,” he warned. “The market is small. There are no open skies, except to the Gulf Cooperation Council countries. The country is not web-literate enough to easily book through websites. And the cost of fuel, aircraft and labour will be the same. So, all in all, where are the lower costs?”
The chief executive also drew a distinction between low-cost business models and low-price fares, arguing that the latter should be attainable through productivity gains alone. Oman Air’s domestic prices will inch down this winter, for example, as it transitions from regional aircraft to higher capacity 737s.
But, whatever happens with the low-cost tender, it is telling that Muscat has invited no-frills operators to enter the fray, even as it seeks to strengthen Oman Air.
Whereas other countries erect protectionist barriers around their flag-carriers, this sleepy sultanate is throwing its weight firmly behind the virtues of open competition. Though risky at first, the long-term benefits to efficiency and scale should reverberate across the local market – nowhere more so, Muscat hopes, than on the balance sheet of its national carrier.
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