Etihad Airways: carves out a distinct identity November 2013

Though Etihad Airways only started operations in November 2003, just 10 years later the flag carrier of the Abu Dhabi is one of the “Big Three” airlines in the Gulf states — and it is differentiating from its rivals through a series of minority equity investments in airlines around the globe made over the last two years.

For the first three years of its existence Etihad’s growth was steady, if unspectacular, but the pace picked up from September 2006 when James Hogan was appointed chief executive and president. His strategy included what he calls a “forensic approach to cost control” alongside new aircraft orders for long-term growth and the creation of essentially a virtual global alliance through codeshares and minority equity stakes.

The results have been promising. Etihad recorded its first-ever full year profit in 2011, and in 2012 the airline posted revenue of $4.8bn, 17% up on 2011, with EBIT of $170m (a 24% increase on 2011) and a net profit of $42m (compared with a $14m net profit in 2011). Etihad carried 10.2m passengers in 2012, 23% up year-on-year.

In the first nine months of 2013 Etihad recorded revenue of $3.8bn, 9.3% up on January-September 2012, based on a 13% rise in passengers carried to 8.6m. (No profit figures are released in its quarterly reports). Cargo accounted for more than 17% of total revenue for Etihad in Q1-Q3 2013, with cargo tonnage handled rising by 30% year-on-year in the period. Etihad Cargo now handles around 90% of all air cargo coming to and from Abu Dhabi, and the Etihad freighter fleet comprises three A330-200Fs, three 777-200Fs and three 747Fs.

Etihad currently employs 16,258, with 12,614 of those in the passenger airline, of which 1,531 are pilots and 3,776 are flight attendants. The other 3,914 are employed in Etihad Airport Services, comprising Ground, Cargo and Catering positions.

Unsurprisingly aviation is a “critical cluster industry” in the Abu Dhabi Plan 2030 — the Emirate’s long-term plan for growth and economic diversification. Etihad is already a key contributor to the Abu Dhabi economy — its analysis shows that it contributed $10.7bn to Abu Dhabi’s GDP directly and indirectly in 2012, representing 10.5% of the non-oil GDP of the Emirate. Interestingly only around 20% of the 7,000 Etihad employees based in the Emirate are actually UAE nationals, which shows just how “international” the airline is. This year Etihad opened a new headquarters for the whole of Europe in Berlin, which followed the opening of its fourth global contact centre in 2012, in Manchester, which serves customers in 19 markets 24/7 with a staff of around 200. And as part of its efforts to target the AIT market, this year Etihad Holidays launched its first operation outside of the Middle East — in the UK, offering holidays in Abu Dhabi city, Saadiyat Island and Yas Island.

Today Etihad operates to 96 destinations directly (see chart left), in 62 countries across all continents in the world. In the first three-quarters of 2013 new routes were launched to Washington DC, Amsterdam, Sao Paolo, Belgrade, Sana’a (Yemen) and Ho Chi Minh City, with a route to Los Angeles set to launch in June 2014.

Fleet growth

Underpinning the organic growth in the network has been a huge aircraft order announced in July 2008 at Farnborough, when orders and options were made for more than 200 aircraft worth $43bn at list prices (100 firm orders, 55 options and 50 “purchase rights”).

At the end of the third quarter 2013 Etihad’s fleet stood at 83 aircraft — 50 of which are Airbus models and 33 Boeing aircraft (see table above) — and with an average age of 5.5 years. At the same date more than 80 aircraft were on firm order, including 41 787s, 15 A320 family aircraft, 12 A350s and 10 A380s. The A380s and 787s are scheduled for delivery from the end of 2014, and all those 80 aircraft are to be delivered by 2020, by when the fleet will have risen to at least 159 aircraft.

In October this year Etihad also signed a deal to buy five 777-200LRs from Air India for a price reported to be between $300m to $350m. The aircraft (of which less than 60 were manufactured) have an average age of six years and will be delivered to Etihad from the start of 2014, and after a refit to Etihad’s standard three class cabin configuration the first aircraft will enter service in April 2014.

They will be used on Etihad’s new route between Abu Dhabi and Los Angeles, announced this October and which launches in June 2014. Etihad currently flies to New York, Chicago, Washington DC and Toronto in North America (with load factors of more than 80% it is believed), and it is keen to add further services to the continent, with Hogan predicting another route to the US will start before the end of 2014. Etihad’s ambitions for the US are being helped by the US government’s agreement to launch “pre-clearance customs facility” in Abu Dhabi from this December. Elsewhere new routes to India, Europe and south-east Asia are expected to be launched through 2014, with a raft of new services inevitable once the new 787s and A380s start arriving.

For the period post 2020 Etihad (at the Dubai air show in November) announced two additional

orders: one for 30 787-10s, 17 777-9Xs, eight 777-8Xs and a single 777F, plus purchase rights for another 26 Boeing aircraft; and one for 50 A350 XWBs, 36 A320neos and one A330-200F. These orders for 143 new aircraft bring Etihad’s total order book to a staggering 224.

Etihad’s global operations are centred on its hub at Abu Dhabi (the capital of the UAE), which though it has to compete with Emirates’ hub at Dubai and Qatar’s at Doha is still a large facility by world standards. Abu Dhabi International Airport opened a second runway in 2008, followed by a new Terminal 3 in 2009, which is exclusively used by Etihad. These developments increased the airport’s capacity from five to 12m passengers a year, but further expansion is planned.

A “Midfield Terminal Complex” (so-called because it’s located between the two existing runways) will have around 1.4m square metres and is due to be completed in the third quarter of 2017 at a cost of $3bn, and which will increase the airport’s capacity to more than 30m passengers a year initially and up to 40m passengers in future years after further expansion.

Nevertheless, Etihad is clearly smaller (and younger) than its key Gulf rivals — Emirates carried 39.4m passengers in the 12 months to March 2013 and Qatar carried 18m in the same period, compared with Etihad’s 10.2m passengers in 2012.

Clear blue water

Yet Etihad is undaunted by its two larger Gulf rivals, and under Hogan Etihad is attempting to put some clear blue water between it and Emirates and Qatar strategically. There are already some key differences. Unlike Emirates’ entirely widebody fleet, almost a third of Etihad’s non-cargo aircraft are narrowbodies, which creates feed into long-haul routes out of Abu Dhabi — though the proportion of narrowbodies is not as high as at Qatar Airways (where 37% of its passenger aircraft are narrowbodies). However there are other differences between Etihad and Qatar — most notably being that unlike Qatar, which has just joined oneworld, Etihad is pursing global reach through a wide and expanding series of minority airline investments.

Since late 2011 Etihad has steadily built a portfolio of investments in others airlines, which include:

• A 29.2% stake in airberlin, bought in December 2011 for an initial investment of $105m. At a further cost of $200m in equity and debt financing Etihad also has a 70% share in a new joint venture that controls airberlin’s FFP scheme, called topbonus, with airberlin owning the other 30%.
• A 40% stake in Air Seychelles, acquired in January 2012 for $20m and shareholders’ loan of $25m, and accompanied by a five-year management contract.
• A 3% stake in Aer Lingus, bought in May 2012, which Etihad says is “with the intention of forging a commercial partnership with the Irish national carrier”.
• In August 2013 Etihad started a five-year management contract of Air Serbia (the former JAT Airways), as part of a deal with the Serbian government to acquire 49% of the airline in January 2014.
• In October this year Etihad increased its stake in Virgin Australia from 10.5% to 19.9%, which is the maximum allowed by Australia’s Foreign Investment Review Board that convened in June 2013. Etihad and Virgin Australia signed a 10-year strategic partnership in August which includes codesharing, joint sales and marketing FFP links. Currently Etihad (25) and Virgin Australia (3) operate 28 flights a week between Abu Dhabi and Australia.
• In November this year Etihad announced the acquisition of a 33% stake in Swiss regional airline Darwin Airline based in Lugano, which it said would be the first carrier to be re-branded as Etihad Regional, to be used to “join the dots” for it and its partners in Europe and to connect tertiary cities.

Combined, these six investments give Etihad stakes in airlines with 430 aircraft operating to 412 destinations and carrying more than 45m passengers a year.

Etihad also has 185 interline and 46 codeshare deals with airlines round the world (in the third quarter of 2013 codeshares were agreed with South African Airways, Air Canada, Belavia and Korean Air), which Etihad says provide access to more passenger and cargo destinations than any other airline in the Middle East.

Indian opportunity

Etihad has also agreed a deal to buy 24% of India’s Jet Airways for around $380m, though this is subject to regulatory approval from the Competition Commission of India. This tie-up initially appears more risky than anything Etihad has done before — Jet has made a loss for the last six years and reported a record net loss of $145m in the third quarter of 2013. Additionally the Indian aviation industry is going through a troubled period at the moment, with all four of its listed airlines reporting losses or (in the case of Kingfisher Airlines) suspending operations. Etihad is also reportedly investing another $150m in Jet’s FFP, $70m for a sale and leaseback deal for three pairs of Heathrow slots, and as much as $150m of loans to shore up the Jet balance sheet. And in order to turn Jet Airways around and make a significant contribution to Etihad’s bottom line the UAE carrier will have to devote considerable management time to its Indian investment — Indian sources say that Etihad has promised that four of its most senior executives will take positions at Jet, including Willy Boulter, VP commercial strategy and planning, and Rangesh Embar, VP finance.

However, it’s no coincidence that Qatar Airways is also reportedly in negotiations to buy a minority stake in SpiceJet, the Indian LCC, because an opportunity for Gulf airlines to become involved in the Indian market has appeared thanks to the Indian government’s decision to allow foreign airlines to acquire up to 49% stakes in its carriers combined with a new air services agreement between India and the UAE that was finally approved in September — a deal that increases seats between the two regions nearly four-fold to 50,000 a week over a period of time.

It’s an opportunity that Etihad and others are keen to exploit given the huge economic links between the regions. According to the Indian ministry for commerce and industry, bilateral trade between India and the UAE alone is estimated to be worth more than $75bn in 2013 — a staggering figure, and undoubtedly the factor behind a raft of new UAE investments in India, including property, port facilities, hospitals and — now — airlines.

Hogan says that Etihad’s equity partnership strategy is primarily driven by that effect it has on the bottom line: “Our equity partners provide significant contributions to our business and not just in terms of the revenues they deliver. The agreements provide us with greater economies of scale, increased purchasing power and the ability to leverage synergies. We have enjoyed cooperation on fleet orders, deliveries and management, as well as joint purchasing in areas ranging from fuel to insurance to in-flight catering and equipment. It’s about working smarter to deliver lower unit costs.”

The strategy appears to be working. In the third quarter of 2013 Etihad says that revenue from codeshare and equity alliance partners totalled $247m — 36% higher than July to September 2012 — and representing a substantial 23% of all passenger revenue at Etihad in the quarter.

Hogan adds that “it’s easier, faster, and far more cost effective for Etihad to grow through one-on-one partnerships with established, respected, carriers than to rely on its own resources and to start from scratch in every market”, and Etihad is clearly on the look-out for other equity investments, though Hogan insists the “equity model will continue to be about growth, not control”.

What is the real strategy?

The sceptical view is that the development of minority equity stake investments looks increasingly like the Swissair “Hunter” strategy of the late 1990s. Speaking at the GAD conference in Nice at the beginning of November, Hogan denied this, emphasising that the aim is to build a strategy to drive traffic over the hub in Abu Dhabi to give a network that is competitive with and differentiated from his neighbouring Gulf competitors. In addition, Etihad is not taking management control, even were it allowed, but adding management team expertise and board level representation hoping to strengthen the existing management’s ability to generate returns. Ultimately perhaps the decisions on investments reflect Etihad’s own shareholder’s interests, including a diversified long-term use of its oil revenues. clearpage