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Saturday, October 10, 2009

Oman Air is expanding

By Sean Davidson on Sunday, October 11, 2009

Oman Air will not lease aircraft after November 22, when the last Airbus A330 leased from Jet Airways is returned. The airline took delivery of its third A330 this week and will add four more to its fleet by March 2011 thereby removing the need for leasing, CEO Peter Hill told Emirates Business.

Having reached capacity on all its Indian routes, Oman Air will enter talks with the Indian Government to grow its network in its strongest market, he said.

The airline expects available seat kilometres in 2009 to grow by 27 per cent on last year and will launch flights to Tanzania and Kenya.

However, the airline’s next major announcement will come at Dubai Air Show, which starts on November 15.

What are your financial needs for 2009-2010? How are you raising finance in a credit-starved environment?

Over the next two years, starting this month, we will be financing purchase of seven A330s for a total value of $700 million (Dh2.5 billion). We will raise funds from international banks and the same will be supported by ECA (Export Credit Agency of Europe). Oman Air will also raise cash for certain infrastructural requirements for which amounts cannot be quantified at this stage. We raise our finances from commercial banks and have a whole portfolio. The A330 we received last week was a financial release from Citibank. We are still talking to banks to decide who we are going to raise the funds from on the fourth aircraft.

We have had no problems with financing probably because we are government-owned. So they are pretty confident we are not going to default. In fact, there is a queue of lenders, which is nice.

What is the total investment Oman Air requires over the next five years?

We are government-backed and the government will definitely increase financing as we go forward. So whatever the needs are, the government will initially provide repayable loans to cover it. The totals are not finalised. There could be some other things happening over the next few weeks or months. Come to Dubai Air Show, I am sure we will have an announcement there.

Boeing has delayed delivery of six Dreamliner/787 orders by two years, to 2014. What kind of compensation will you be seeking?

Like any airline we have a contract. Our deal is through a third party. We have leased the aircraft through Kuwaiti finance house Alafco. They are the purchaser of the aircraft from Boeing, so they will obviously be seeking compensation from them. I cannot confirm or tell you its nature because it is too early, but they will be passing that compensation on to us.

Given the delay, will you look at reviewing your order for six Dreamliners?

We will take all these decisions, as to whether we are going to stay with the order or increase or decrease it, once the aircraft has flown. I want to see the aeroplane fly. I want to start seeing what the performance is versus the guarantees we or Alafco have got. And then I want to weigh up how suitable it is for us to take up in 2014.

I do not know if there will be a gap [between performance and guarantees]. I am not an engineer. But it is two years late. I have had another presentation from them. They are confident it will fly in December and demonstrate the proof of concept. So I am not prepared to comment until I have seen it. I want to make a statement on facts.

Which is your strongest growth market?

The market that does well for us is definitely the Subcontinent. When you look at growth, increase of a small base is something like the United Kingdom, which is really going very well. But we were carrying tiny numbers before.

We have always done well on India. The whole airline was built around the Subcontinent. We service 10 routes to India and our passenger load to India is in the 70s all year round, so you see it is the rice bowl, the money chest.

We have slowly increased our frequencies into India this year, so we are up to capacity. I cannot put another flight on anywhere because I do not have any more bilaterals. We will obviously be talking to the Indian Government in the months and years to come. I don’t think this is a very good time to talk to them at the moment. They have already knocked back a few carriers so we will manage with what we have today. But in the future, yes, of course.

Oman Air is not like all the other carriers. We have never gone asking for more than we want. In India, we are primarily focusing on Muscat-India traffic. It is a different kind of passengers, which is why I have a different product. But I am going to improve the business-class cabin in the Boeing 737 to India and maybe put some more space in the economy cabin, probably by taking out a row of seats.

What kind of load factor and capacity rise do you expect in 2010 over 2009?

Ten per cent is the increase in available seat kilometres that we’re putting in, maybe more than that. If we can achieve around the 70 per cent seat factor year on year, I will be very happy. It is not that at the moment, I’ll be very frank. It is in the low 60s.

The exact percentage of increase in seat kilometres for 2010 will be known in November/December 2009 when we have finalised the operating plan. We expect available seat kilometres in 2009 to be higher by about 27 per cent compared to 2008.

Jet Airways said last week it is in talks with Oman Air to lease out two of its Boeing 777 aircraft. What is the progress on that front?

That’s news to me. They are not [talking to us about this]. We’re not interested. We have a very good working relationship with Jet. They have done an outstanding job for us on the two A330s we leased from them. We work with them very well and they have a good product.

But we told them very frankly that we do not need the A330 aircraft beyond the delivery dates of our third and fourth A330s. The first one goes back at the end of this month and the second one goes back on November 22. After that we will have no need for leasing aircraft from anybody.

How much business growth do you see for Oman Air once the new airport at Muscat is ready?

That will be 2012 or 2013. Our European routes will be pretty well established by then. We will have also expanded into East Africa and South East Asia. So I would forecast pretty healthy growth for us going forward.

Oman Air is negotiating a deal to outsource maintenance and repair operations, which is due to be finalised in six to 12 months’ time. What is the update on that?

We are looking at getting into a joint venture on maintenance and repair operations [MRO]. We are building a new hangar here [in Muscat], which is going to be capable of looking after our aircraft and third party groups. It will be a joint venture with one of the larger MROs, but I’m afraid we are not ready to talk about it in detail.

The facility is due for completion in 2012. It is part of the whole airport master plan.

There is a new terminal building, a new catering unit, new hangar workshop and a new cargo facility. All of those are projected to be completed by the end of 2012, maybe 2013, if it slips a little. It will be called Oman Air Engineering.

Do you see ticket prices dropping further in 2010? If so, by what percentage?

If the economy starts to grow again, which I think it is showing signs of, we could see projects that are on hold at the moment coming to life again. If that happens then workforce needs to increase. If workforces increase then we need to bring more people in from overseas.

So, in 2010, I would hope we would see some increase. As far as South Asia is concerned, we would probably be able to accommodate the Subcontinent on our existing network schedules.

What is your vision for the airline?

Oman is a very attractive destination and becoming more attractive as the years go by because unlike most other Gulf states it is less discovered and there are big differences between what you find here to what you find elsewhere.

So we have a real opportunity as Oman Air is feeding traffic into and out of Oman from overseas and developing local market as our main reason for being in business. Secondly, we will also feed the obvious hub that is going to be developing here for secondary traffic. There is also a growing interest in Yemen. And we are perfectly positioned to satisfy Oman and to help perhaps link with Yemen in the years to come.

What new destinations will you be adding on you network?

We already have Frankfurt and Munich on line. Paris will go on line this weekend and will fly four times a week. Sri Lanka and Maldives will be added at the end of the week. For next year, the finalisation of the programme is not yet complete, but you can expect to see us with more destinations in South Asia… Pakistan in particular. You can expect to see us back in East Africa in Tanzania and Kenya. In South East Asia Kuala Lampur will be added. That is what we will be introducing in next year.

When do you expect the airline to break even?

We have an airline, catering, ground handling, new engineering set up coming up and we just got into hotel business. So we are a group, not just an airline. I reckon we should have the group breaking even in five years. Our forecasts are that we will slowly return to maybe not the levels we were experiencing a year ago, but certainly more normalcy.

PROFILE: Peter Hill CEO, Oman Air

Hill began as a commercial trainee at BOAC, a forebear of British Airways in 1961.

In 1974, he joined Gulf Aviation in Bahrain and was part of the team that created Gulf Air.

Four years later, he joined Maurice Flanagan in Dnata and over the next few years it became one of the foremost travel organisations in the region. In late 1984, he was part of the small original team that put together the first business plan for Emirates airline. As its first Commercial Manager, he oversaw its network growth and route expansion.

He left Emirates in 1996 to pursue a private business venture in London, but two years later was persuaded by Emirates to return to manage its investment in Air Lanka.

Based in Colombo from 1998, for the next 10 years as CEO, he steered the rebranded SriLankan Airlines through a series of challenges and kept the group profitable for the most part.

A return to Dubai in the final days of 2007, following a fall out with the Sri Lankan Government, saw him assisting the CEO of flydubai with establishing the foundations for the airline. Following an approach from Oman, he took up the post of CEO and is now working on creating a world-class airline based in Muscat

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