The battle for control of the Gulf's skies has claimed its first casualty. Gulf Air, the Bahrain-based carrier, has effectively given up its fight with Emirates, Etihad and Qatar Airways by changing its focus from long-haul to regional flights.

The problem for Gulf Air, which at 60 is the region's oldest airline, is that it has been up against rivals who are engaged in an aviation arms race.

Emirates, Etihad and Qatar have been growing rapidly, adding new planes, new routes and increasing passenger numbers by the millions.

The strategy that all these carriers have been following was pioneered locally by Emirates and then copied by everyone else.

The idea is to use the Gulf's geographic location as the crossroads between east and west, north and south to create a hub for transferring international passengers. Advances in aircraft design mean that passengers can connect from pretty much anywhere in the world to anywhere else via the Gulf with just one stop.

The trade in transfer passengers has meant that the Gulf's carriers have been able to grow rapidly despite the region's comparatively small population.

The changing patters of travel created by this trend has given established carriers in other parts of the world a major headache and they have resorted to various tactics to block the new entrants from the Gulf.

The latest has been a move in Germany to force Emirates to increase the price of flights from there to South Africa, via Dubai.

Tim Clark, Managing Director of Emirates, compared this to Mercedes demanding that Lexus increase the price of its cars to allow the Germans to compete better. As long as Emirates is not dumping – selling seats below cost to gain market share – this is clearly ridiculous.

Gulf Air should have been well placed to compete with Emirates given that it has been around even longer than Dubai's carrier.

However, Gulf Air has been beset with problems since it became a partnership between Bahrain, Oman, Qatar and Abu Dhabi in the 1970s. When the last three decided to quit and do their own thing earlier this decade, Gulf really began to struggle.

The airline made a brave attempt to keep up with its rivals and announced a $6 billion (Dh22bn) deal to buy Boeing 787 Dreamliners and at least another $4bn was committed to purchase Airbus A330s last year.

However, the global economic downturn has focussed minds at Gulf Air. The carrier is expected to make an operating loss of $510 million this year and Bahrain's small economy cannot afford to sustain that level of damage.

The writing was on the wall when Gulf Air dispensed with its former chief executive a couple of months ago and brought in Samer Al Majali, the former head of Royal Jordanian.

While at Royal Jordanian, Al Majali trimmed the carrier's expensive long-haul operations and concentrated on regional flights instead.

A similar strategy is being lined up for Gulf Air and the airline should find itself better tailored to the economic environment as a result. Gulf Air will now start renegotiating its plane orders with Boeing, Airbus and Rolls-Royce to replace the long-haul aircraft with shorthaul ones.

The 787 order will almost certainly be cancelled and Airbus will be unhappy about swapping high margin long-haul products for low margin A320s and A321s, but some orders are better than no orders.

Gulf Air will also abandon 15 long-haul routes to places such as Shanghai, Bangalore and Hyderabad as it seeks to save $2.6bn over the next five years.

Unfortunately, the only way to make a short-haul network profitable is to cut costs dramatically. Short-haul, full-service operators in Europe have taken the brunt of the downturn and I'm not sure that the Government of Bahrain fully realises the implications of going down the short-haul road. All those high-paying management, pilot and cabin crew jobs are going to have to go. I suspect, therefore, that the hurt is only just beginning for Gulf Air.


- The author is the Business Correspondent of Times of London

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