Only a few years ago, the business case behind Abu Dhabi-based Etihad Airways was murky at best. The carrier was only recognised as the smallest of the “Middle East Big Three” (MEB3), a group that includes Emirates, Qatar Airways and Etihad Airways – the hub-and-spoke giants which have been successful in taking away passengers on long-haul sectors from legacy carriers around the world.
The convenient geographical location at the crossroads of Europe, Africa and Asia, along with prosperous oil-rich economies, inexpensive workforce and governments that are conducive to the growth of aviation instead of burdening it with excessive taxes or limitations such as curfews and the inability to invest in infrastructure, have benefited each of the MEB3 airlines.
It is not a surprise, therefore, that legacy carriers with long-haul divisions all around the world fear the entrance of MEB3s in their markets. These airlines offer products and services that are above those offered by other legacy carriers, while keeping their prices reasonable and offering highly competitive schedules and routings.
So while the term “MEB3” is indisputably relevant since the two Emirati carriers and one Qatari have much in common, some clear differences have started to crystallise between the three.
What Etihad lacks in size…
At Emirates, the world’s largest international carrier, size is the name of the game. In its last annual report, the Dubai-based giant has indicated transporting 39.4 million passengers after flying 237 billion available seat kilometres (ASKs). Even when combined, Qatar Airways and Etihad failed to come close to the size of Emirates. Qatar Airways transported around 18 million passengers in its FY2012/13, while Etihad achieved 10.2 million passengers on 61 billion ASKs in 2012.
Emirates is also the world’s largest operator of the world’s largest commercial aircraft, the Airbus A380. From its initial order of 90 A380s, Emirates now operates more than 30 and still has aspirations to purchase at least 30 more. The carrier’s chief executive Tim Clark has also indicated interest in an stretched version of the A380 dubbed the -900, but Airbus is unlikely to begin the development given that sales of the baseline model remain less-than-ideal.
Ironically, the only issue constraining its continued expansion of Emirates is the capacity of its own hub. For this reason, the current Dubai International Airport is undergoing an expansion project to accommodate 90 million passengers annually within 5 years. It will soon be aided by Dubai World Central, whose doors are supposed to open in October this year. But the greenfield project will only ease some of the pressure off Emirates and Dubai International, as the carrier intends to remain at its current hub and move to the new one somewhere in the 2020s – in one go, as it smartly avoids the challenges of a dual-hub operation.
Doha-based Qatar Airways is also overseeing the opening of a brand new airport this year. Similarly to Dubai World Central, Hamad International will initially serve as a relief for old facilities, before Qatar Airways decides to move its operation there. Abu Dhabi, on the other hand, remains content with its airport and is currently undergoing gradual expansions and openings of new terminals instead of completely new gateways.
Evidently, Etihad has last year carried only 26% of the total number of passengers transported by Emirates. Interestingly, last year’s growth figures do not stack up in Emirates’ favour, with the Dubai-based carrier transporting almost 16% more passengers in 2012 than 2011 when it carried 33.9 million, while Etihad saw an increase of 23% from 8.3 million in 2011. However, such differences mainly stem from Etihad’s smaller size and it is possible that the percentage growth will slow down in the coming years. Etihad is far behind Emirates, and any attempt at racking-up capacity in an effort to even come close to the figures of its main rival would be destined for a complete failure.
In this regard, Emirates has benefited from a first-mover advantage. In 2004, the first full year since Etihad’s launch, Emirates was already carrying 12.5 million passengers annually, a figure which Etihad could only replicate this year if it repeats passenger growth rate of 23% year-over-year.
Clearly, the doubt behind Etihad’s business case was anything but unfounded. And while it could be argued that the market is big enough for each of the MEB3s to continue to prosper even without major differentiation of business models, the fact is that it cannot be said with absolute certainty. The world had never seen such mega hubs before, and given that their carriers continue to expand at a double-digit rate each year, an airline similar to Etihad risks losing out from its larger competitors.
Qatar Airways achieves some differentiation by operating narrowbodies in addition to widebodies. The airline’s fleet consists of 116 passenger aircraft, 46 of which, or 40%, are Airbus A320 family aircraft. This allows Qatar Airways to tap into the markets too small for Emirates, which remains a widebody-only operator. Etihad has also followed Qatar’s concept, as it has 19 A320 family aircraft, or 28%, in the fleet of 69 passenger aircraft.
Qatar Airways is also on its way to becoming the first MEB3 carrier to be part of a global alliance. The airline accepted oneworld invitation in October 2012. The assimilation and implementation programme is expected to take Qatar Airways between 12 and 18 months, after which the airline will be welcomed as a new member, possibly in late 2013.
But its Dubai-based counterpart Emirates remains disinterested in global alliances, recognising the potential negative impact on its brand and business. Emirates chief executive Tim Clark often emphasised that alliance membership made little sense for the airline, which manages to attract vast amounts of traffic alone thanks to its strong hub. The airline does need outside partners to provide some boost to its own sales, but it much prefers hand-picking select airlines from around the world rather than entering a more constrained structure of an airline alliance, such as Australian flag carrier Qantas that provides instant access to secondary destinations in an important market.
“Qantas is a perfect fit but there’s nothing else like that on offer,” outgoing Emirates Airline vice president (VP) Maurice Flanagan quipped.
Still, the Qatar Airways development was major news in the industry, signalling the changing attitude among legacy carriers towards the MEB3. Make no mistake, Qatar Airways chief executive Akbar al Baker was right when he pointed out the true nature behind the change at the oneworld membership announcement ceremony in New York, saying “if you can’t beat them, join them.”
Such change in the mindset came after heated disputes between the MEB3 and legacy carriers worldwide, during which the MEB3 carriers were accused of benefitting from significantly discounted fuel prices and governmental subsidies, none of which was truly proven. Legacy carriers were lobbying their respective governments to slow the expansion of the MEB3, which did result in some measures being taken in several occasions.
In 2011, for example, Germany decided against expanding the bilateral agreements with the United Arab Emirates, capping the maximum number of destinations airlines from UAE can access in Germany to four. This is why Emirates still only serves Munich, Frankfurt, Dusseldorf and Hamburg, despite expressing interest in launching flights to the likes of Stuttgart and Berlin.
However, such measures failed to produce too much of a negative impact on the MEB3. In fact, the world’s legacy carriers are now beginning to turn towards partnerships instead of competition with the MEB3. Oneworld alliance may have been the leader in this, as it not only invited Qatar Airways, but has also seen its Australian member Qantas join forces with Emirates on routes to the United Kingdom (UK) and Europe.
This was a no-brainer for Qantas, as it allowed the carrier to route Europe-bound passengers via Dubai instead of Singapore, eliminating the need for one additional connection in the crowded London Heathrow or Frankfurt when flying to other European destinations. For this reason, the long-standing joint venture with British Airways is now being dismantled. And despite being a very logical step for Qantas, the fact that oneworld and British Airways allowed this deal to happen is a major step forward in terms of relations with the MEB3.
Etihad is not behind these trends either, having in October 2012 secured a wide-ranging codeshare deal with Air France-KLM, once a clear opponent to the growth of the MEB3. This year, it signed a memorandum of understanding (MoU) with Air Canada – another formerly strong opponent of the MEB3 – which will result in codeshare by the end of the year.
…it makes up for in partnerships
The aforementioned codeshare arrangement with Air France-KLM was 40th such link-up for Etihad, which presently has codeshare agreements with around 45 airlines worldwide. Having acknowledged that his airline, no matter how successful, will “never be Emirates,” Etihad chief executive James Hogan decided to build-up one of the largest virtual networks, allowing for hub-feeding to take place even with less capital-intensive deployment of own capacity.
A similar network strategy is being pursued by Virgin Australia, whose international virtual network allows it to challenge Qantas’ dominance on domestic services. Together with its move to go up-market with recent investments in Tigerair Australia and Skywest Airlines which creates a group similar to the Qantas setup, this has allowed Virgin Australia to seriously begin attacking Qantas’ desired “line in the sand” home market share of 65%.
Clearly, a virtual network is a smart way for aspiring but market share-limited carriers to achieve solid growth rates without eroding profitability. This is quite evident in Etihad’s case. In 2012, Etihad confirmed its profitability, leaving only Qatar Airways as a loss-maker among the MEB3.
In 2012, Etihad Airways achieved a net profit of US$42 million, which represented a significant 200% improvement from the 2011’s result of US$14 million, the profit growth of which is likely to be replicated this year as net profit margin still remained below 1%. Earnings before interest and tax (EBIT) grew 24% last financial year to US$170 million, together with earnings before interest, tax, depreciation, amortisation and rentals (EBITDAR) which rose 16% to US$753 million equating to an impressive 16% EBITDAR margin. Overall, revenues rose 17% to US$4.8 billion. Etihad managed to reduce non-fuel cost per available seat kilometre (CASK) by 5% during 2012.
Etihad introduced seven more aircraft and six new destinations during the year. More importantly, strong traffic patterns allowed the carrier to reinforce some of its routes with additional frequencies. This, coupled with Etihad’s “young” network compared to its two larger and older competitors, meant that the airline can serve 73% of destinations with a daily or higher frequency.
Despite the 23% year-over-year growth of passenger numbers, Etihad managed to keep its strong traffic growth higher than capacity growth. ASKs grew 20% to 61 billion with revenue passenger kilometres (RPKs) seeing a 23% growth to 48 billion, producing a satisfactory load factor of 78.7%.
Numbers are on the rise for the first half of 2013 as well when compared to the same period in 2012. Passenger revenue rose 13% to US$1.8 billion with a 14% rise in total revenue to US$2.5 billion. A 15% rise in RPKs to 26.1 billion continued to outpace a 12% growth of ASKs at 33.1 billion for a 2% better load factor of 78.9%.
During 2012, Etihad established 12 more codeshare partnerships. And in its latest annual financial report, Etihad claimed that 1.2 million passengers it received last year, or 11.8% of its total number of carried passengers, were contributed by its partner airlines. The airline also emphasised that partnership with Air Berlin alone resulted in 300,000 passengers. All these additional passengers represented an even higher share of total passenger revenues, 19% or US$629 million.
Evidently, Etihad’s vast virtual network is crucial to its success, but the carrier went even a step further. In the span of less than two years, Etihad invested in a number of other carriers – usually those that required a strategic partner even if their outlooks were not the brightest – which became an important element of the carrier’s business model.
A similar activity was pursued by Lufthansa as it invested in Austrian Airlines, Brussels Airlines and Swiss during the late 2000s. The German flag carrier was seeking to increase size and reinforce Lufthansa Group with the addition of smaller carriers. This was ultimately achieved, as Lufthansa Group is the largest European airline group today, but such endeavours required years of absorbing losses and costly restructuring. And while Swiss ended up as a great investment considering its exemplar profitability, Brussels Airlines and Austrian Airlines still have yet to level-off at losses.
The difference for Etihad is that it invests exclusively for a minority shareholding, often due to regulatory restrictions on cross-border investments. The carrier then swiftly sets up an extensive codeshare arrangement and connects the partner’s hubs with Abu Dhabi. It is also ready to financially and administratively support its new partner, as well as provide some more creative solutions.
Etihad was so far quite successful with its equity partnership model. In fact, it allows Etihad to create a sort of alliance of its own, as it also strives to gain synergies from these deals within the domains of aircraft acquisition, procurement, administration and support. Together with established traffic flows to Abu Dhabi, which come from both codeshare and equity partnerships, the latter of which allows Etihad to develop an organisation that is easily more beneficial to Etihad than a conventional alliance does.
Furthermore, although Etihad remains the biggest and the most influential shareholder among its associates, the carriers’ partners do not hesitate to enter commercial partnerships between each other and truly replicate an alliance climate.
All of this means that Etihad is an unlikely member of global alliances. While the airline would probably have enough influence to eliminate at least some of the alliance constraints and keep its business model largely unchanged, it may run into issues while pursuing new codeshare or equity partnerships which are members of competing alliances. Moreover, Etihad chief executive James Hogan appears to have a similar view of airline alliances similar Tim Clark, as shown in this year’s interview for Gulf Business:
“This strategy has enabled Etihad Airways to create its own alliance and therefore it doesn’t intend to join one of the traditional, legacy alliances. The legacy alliances have evolved into slow-to-respond, bureaucratic organisations which struggle to deliver added value to their member airlines, many of which are no longer compatible with each other.
“It is easier, faster, and far more cost effective for Etihad Airways 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.”
With 41 codeshare partnerships, Etihad presently shares its network with more airlines than many members of the conventional alliances. Etihad is also the leader among MEB3 in this regard. Qatar Airways had 13 codeshare agreements as of July and even Emirates had only 12 such agreements.
Equity tie-ups – an unconventional alliance
Etihad developed its first equity partnership in December 2011, when it announced an increase of its 2.99% stake in German hybrid carrier Air Berlin to 29.2%. The transaction was valued at close to US$100 million and came at a time when Air Berlin was already struggling with finances. Etihad became the largest shareholder in Air Berlin with two board of directors seats, and in principle committed to keeping this stake for two years without additional increases or public take-over offers.
An extensive codeshare agreement was put in place between the two airlines in January 2012 covering the two networks on both sides. Air Berlin provided its metal for the Berlin-Abu Dhabi route which it previously served Dubai to connect the two networks’ main hubs, but Etihad only needed to put its code on the route, deploying equipment where it was more necessary. Air Berlin’s other centres of operation in Dusseldorf, Frankfurt and Munich are also part of the link-up and have also connected with Abu Dhabi.
In addition to the commercial partnership which mutually benefits both carriers, Etihad agreed to provide a loan for the loss-making German carrier to the tune of US$225 million, supporting the oneworld member’s restructuring efforts. The loan was to be paid back through 2016 under commercial terms.
Air Berlin mentions the areas of fleet procurement and operations, ground operations, maintenance, repair and overhaul (MRO) and purchasing as the main pillars of the two airlines’ partnership leading to synergies. Additionally, Air Berlin refreshed part of its business class product by retrofitting the cabin with the same lie flat seats used by Etihad, as well as embarking on other harmonisation initiatives.
The two airlines integrated their frequent flier programmes (FFPs) for reciprocity, albeit Air Berlin also transferred its own FFP “topbonus” to a stand-alone company, 70% of which was then acquired by Etihad in December 2012. At around €200 million, the sale was hardly a bargain, but Etihad plans to utilise it for the creation of its own global “house of brands” loyalty management company.
As one of the more creative measures, Etihad co-oeprated with Air Berlin on both carriers’ Boeing 787 Dreamliner orders, which leads to savings on MRO, spares provisioning and training. Etihad also agreed to recruit more than 50 Air Berlin flight crew members, as Air Berlin aims to reduce workforce while Etihad looks for more personnel for growth.
Etihad’s vast involvement in Air Berlin has undoubtedly contributed to the German carrier’s rejuvenation, as shown by predictions from the management of Air Berlin in breaking even on an earnings before interest and tax (EBIT) basis with no further financial support from Etihad.
Air Berlin’s results, however, remain mixed. In 2012, the airline entered profitability on an EBIT basis with €70.2 million, reversed from a loss of €247 million in the prior year. A net profit of €6.8 million was achieved compared to a loss of €420.4 million in 2011.
Yet the first quarter of 2013 was a step backwards as operating loss on an EBIT basis climbed to €188.4 million compared to €49.3 million in the same period last year. Deterioration in EBITDAR was even more pronounced in the first quarter as Air Berlin saw last year period’s small €7.2 million profit fall to a €31.5 million loss. Net debt was slightly smaller on 31 March 2013 than on 31 December 2012, but shareholders’ equity slipped to a -€53.1 million compared to €130.2 million on the respective dates.
But the German carrier remains optimistic that the Turbine 2013 restructuring plan, along with Shape & Size and Lean & Smart initiatives, will generate the much anticipated savings and improve efficiency. In such context, the management reassures that 2012 was the true transformation year during which restructuring costs were apparent, but these will be smaller in the coming years with the results of restructuring measures becoming more noticeable.
The Shape & Size programme is said to have generated €250 million of annual savings during the last financial year, while Turbine, whose implementation will only be fully completed after 2014, is expected to generate savings of €400 million.
Part of the restructuring included cutbacks as Air Berlin shrunk its fleet to 155 aircraft in 2012 compared to 170 in 2011. During the same year, capacity measured in available seat kilometres (ASKs) declined by 2.8% to 60.4 billion whereas passenger traffic measured in revenue passenger kilometres (RPKs) slid by 6.6% to 48.7 billion. The load factor of 79.8% was the airline’s record. A notable improvement was an increase in average stage length of 5% to 1,445 kilometres along with increases in several metrics related to average revenue per passenger.
Air Berlin’s financial issues are often attributed to the fast growth pursued by the carrier up until recent years. Such growth was followed by a lack of focus, mainly related to the airline’s “identity crisis” or, in other words, changes implemented to its business model which have steered the former low-cost carrier (LCC) upmarket, to what is presently a hybrid model. The leisure nature of part of its network still prevents the carrier from being called a full service carrier, but all of the recent developments and management statements signal that Air Berlin is going in that direction.
Just one month after entering Air Berlin’s ownership structure, in January 2012, Etihad entered a second equity partnership, this time with a much smaller operator on the verge of bankruptcy. Abu Dhabi-based carrier took a 40% shareholding in Air Seychelles, a boutique flag carrier of the namesake island nation off the east coast of Africa.
Etihad invested US$20 million for the Air Seychelles stake and provided a shareholder’s loan of US$25 million. The Seychellois government agreed to provide another US$20 million. Apart from the standard codeshare agreements and frequent flyer programme (FFP) integration, Etihad also received a five-year management contract, allowing it to fully control the restructuring of Air Seychelles and choose the management team.
By the end of the first quarter of 2012, Air Seychelles ceased all long-haul services to Europe, namely London, Milan, Paris and Rome. These were the only long-haul destinations left after the discontinuation of Singapore in November 2011. Air Seychelles returned Boeing 767s which previously formed the backbone of its widebody fleet and cancelled orders for two Boeing 787s. The carrier had its fourth chief executive change in as many years.
This restructuring, initiated before Etihad’s entrance, included a rebranding which mainly centred on the refreshing of visual elements. The restructuring was imminent as the Seychellois government made clear that it was unwilling to continue supporting its airline financially. Etihad’s investments and efforts were key to survival of the airline.
The codeshrare with Etihad meant that Air Seychelles could offer a much wider range of destinations. Today, this involves a dozen of gateways in Europe, including those through codeshare with Air Berlin and Czech Airlines, along with a couple of destinations in the Middle East, Asia and Australia. On its own metal, Air Seychelles only serves Mauritius, Johannesburg through codeshare with South African Airways, Abu Dhabi and Hong Kong via Abu Dhabi which is a destination not served by Etihad.
In the 2012 financial year, Air Seychelles has already become profitable with a net profit of US$1 million, leaving behind years of losses. The airline did not hide satisfaction with the measures implemented by Etihad, despite some of them being tough and including job cuts. Cramer Ball, the Air Seychelles chief executive appointed by Etihad, claimed that the airline saw a strict restructuring across its operations:
“We introduced strict fiscal control in parallel with business process re-engineering to make our operation more efficient. We are a very different business today.”
Economics of scale provided by Etihad were invaluable in supporting the small operation. Etihad supported renegotiations of a number of contracts such as catering, ground handling and in-flight entertainment (IFE), and concluded joint contracts for fuel, uniforms and stationery supplies with Air Seychelles. Etihad provided Air Seychelles two Airbus A330-200s, possibly on a convenient sublease, plus one A320 on wet-lease used for flights to Mauritius. Domestic services continued with smaller turboprops.
Air Berlin and Air Seychelles are excellent examples of what effects Etihad can produce for airlines it invests in. Etihad has shown this on two different scales and with different shareholdings, but the result has been the same – apparent improvements with major synergies, optimisations and commercial link-ups. Most importantly, the success comes for both parties, which boosts the prospects for all troubled carriers industry-wide.
Whether Etihad will profit from such arrangements over the long-term has yet to be seen. Emirates remains uninterested in equity tie-ups, having seen its late 1990s investment in Sri Lankan Airlines backfire in 2010, resulting in Emirates taking a loss from the deal after the Sri Lankan government executed a buyback of the 43.6% stake held by the Dubai-based carrier, despite what Emirates described as a successful co-operation.
Qatar Airways, on the other hand, appears to have little reluctance in investing in other airlines and is often cited as a potential investor in various carriers. However, it has so far not been particularly active in such activities.
Other than Air Seychelles, Etihad invested in two more carriers in 2012. Both deals ended up not evolving a lot past the pure investment and commercial link-up, but there is no reason not to believe that Etihad is looking into ways of entering deeper links with the said airlines.
The first of the two investments came in May 2012, with Etihad taking a very small investment in Irish flag carrier Aer Lingus, a mere 2.987% stake. Another extensive codeshare agreement followed, in which Etihad had its codes placed on Aer Lingus’ services from Dublin, Manchester and London Heathrow to the United Kingdom, the Channel Islands, Portugal, The Netherlands and the Irish carrier’s transatlantic destinations such as Boston, Chicago and New York. Aer Lingus placed its codes on a number of routes beyond Abu Dhabi in Australia, Asia Pacific and the Middle East, along with Etihad’s Abu Dhabi-Dublin flights.
Other shareholders of Aer Lingus include Ryanair with close to a 30% stake and the Irish government with 25%. Ryanair attempted to take over its smaller rival three times, but it never managed to receive regulatory approval for such take-overs, even after extensive remedies in the most recent attempt in late 2012.
Ryanair could now see its stake reduced or completely eliminated by the UK’s Competition Commission, which is concerned about Ryanair making it harder for Aer Lingus to not only merge or see investments from other airlines, but also run its own business and make strategically important decisions.
To counter these concerns, Ryanair offered its stake for sale. However, the airline will only sell to a buyer that first acquires a minimum of 50.1% of Aer Lingus, making it unlikely that any investors will show up as the offer basically brings nothing new to the table.
Etihad is unable to participate, given that the European Union caps foreign investment in airlines at 49%. The Abu Dhabi-based carrier is unlikely to invest until the Ryanair-Aer Lingus saga comes to an end. The Irish government has been clear about its intentions to sell the Aer Lingus stake, and it would likely have nothing against Etihad becoming a new strategic partner.
Then in June 2012, Etihad took a stake in Virgin Australia. The initial stake was also a small one at only 3.96%, but has grown several times to reach its current level of 10.5%. The shareholding is likely about to grow further given that Etihad received Foreign Investment Review Board (FIRB) permission to increase the 10% stake to 19.9% (“The best is yet to come for Virgin Australia“, 6th May, 13).
Singapore Airline increased stake in Virgin Australia as well, from 10% to 19.9% earlier in the year, taking the new shares from Virgin Group founder Richard Branson whose stake in Virgin Australia is now down to 13%. Air New Zealand is another entity in Virgin Australia’s ownership structure, now holding 22.99% after several increases. Unless it pursues a take-over, Air New Zealand (ANZ) is allowed to increase its stake by a maximum of 3% every six months now that it owns more than 20% of Virgin Australia.
The situation at Virgin Australia is heating up with all three carriers that own the Australian airline’s shares showing interest in larger shareholdings. Etihad has been a strong partner of Virgin Australia, having forged a 10-year strategic partnership in August 2010 that includes frequent flyer programme (FFP) reciprocity, joint marketing and lounge access in addition to codeshare. The partnership introduces Australian domestic and trans-Tasman network to Etihad, while giving a vast international network via Abu Dhabi to Virgin Australia, a predominantly domestic carrier.
In addition to the aforementioned four airlines, the Abu Dhabi-based carrier is well on its way to take minority shareholdings in two more airlines: Indian privately-held Jet Airways and Serbian flag carrier Jat Airways.
The Jet Airways deal was speculated for months, with the two airlines seemingly coming close to realisation of the deal in the first two quarters of the year after details of the deal came in April. But careful regulatory investigation and bureaucratic hurdles slowed down the transaction, which is presently only about to happen in the coming weeks.
The deal would not have been possible at all until last September, when Indian government finally allowed foreign direct investment (FDI) in airlines of up to 49%. India was previously reluctant in allowing foreign investment in airlines as it feared that larger carriers from abroad would turn the home-grown airlines into marginalised regional operators. But with its local airlines continuing to struggle in tough market conditions characterised by high taxes and serious competition leading to losses, a change in FDI policy was recognised as a good chance for providing the much-needed lifelines and support to some carriers.
Etihad is about to become the first foreign entity taking advantage of the new FDI policy, although AirAsia is also working on establishing a start-up joint venture with Tata Group, which will be ready for launch by the end of the year (“AirAsia: Is love in the air?“, 19th Jul, 13). Of other Indian airlines, only the regional force SpiceJet continues to be part of the investment rumours, with many names being mentioned over time.
Etihad is about to invest US$379 million for a 24% stake in Jet Airways and the transaction has finally been cleared by Indian Foreign Investment Promotion Board (FIPB) last week after several revisions of the shareholders agreement. The government is now responsible for the final go-ahead, after which the two airlines will be allowed to proceed, with end-August being a deadline for a regulatory approval.
So far, the regulators were mainly concerned with the amount of control Jet Airways would regain over its business following the deal, with most of the measures being taken to limit Etihad’s power. Jet Airways board will comprise 12 members, two of which will be appointed by Etihad instead of three as the airline previously envisioned. Jet Airways chairman Naresh Goyal will have the casting vote power on any matter.
Etihad plans to invest further in Jet Airways through an acquisition of the latter’s JetPrivilege frequent flyer programme (FFP) for US$150 million. Etihad is also taking three Jet Airways’ slot pairs at London Heathrow for US$70 million, but Jet Airways will continue to use them under a lease arrangement.
Etihad’s already fine coverage of the Indian market with a dozen of destinations will be utilised by Jet Airways for onward connections from Abu Dhabi if the deal between the two airlines goes through. Etihad, of course, would substantially reinforce its position in the growing Indian market. Elements from Etihad’s other partnerships may be used for synergies and economics of scale with Jet Airways as well.
Serbian flag carrier Jat Airways is another carrier about to benefit from Etihad’s involvement. In fact, Etihad’s involvement in Jat Airways may be one of the most extensive for the Abu Dhabi-based carrier, but also similar to the Air Seychelles tie-up, if not more.
Etihad and Serbia have agreed on the former taking a 49% stake in Jat Airways, Etihad’s largest stake in an airline so far. Similar to Air Seychelles, Etihad has been awarded a five-year management contract which began on August 1.
Jat Airways will see numerous changes to its business, including a rebranding to a more recognisable Air Serbia corporate identity together with a new livery. Another major move by Etihad will be a refleeting of Jat Airways, which will see Airbus A319 as one-to-one replacements for the airline’s ageing fleet of 10 Boeing 737-300s. Four ATR 72s will remain in Jat’s fleet for now, although their replacement was speculated.
New fleet will be gradually introduced, with first two aircraft coming on wet-lease from Etihad by the end of the month. Once Jat Airways crews are trained on Airbus, Etihad will proceed with deliveries of aircraft on dry lease, with Jat Airways having a new fleet by the end of the year.
Air Serbia aircraft will feature interiors identical to that of Etihad with economy and business class seating, including personal televisions in each seat, which would be something new in the entire region. Of course, synergies will extend beyond the interiors, with the likes of joint aircraft purchasing, procurement of supplies and services, maintenance, training and some administrative functions just to name a few.
Part of Etihad’s investment in Air Serbia will be a US$60 million loan, which will be turned into equity on January 1. The Republic of Serbia will, however, remain responsible for past debts and obligations of Jat Airways.
By the end of the year, Air Serbia will have launched 12 new routes, one of which will be to Abu Dhabi joining Etihad on the route. Air Serbia’s network will be aided by numerous codeshare destinations with Etihad and other partner carriers.
Etihad manages to accomplish own success while boosting business prospects of other airlines with mutually-beneficial alliances, some of which may not have been able to survive without Etihad’s intervention, or would have been entitled to a more marginal status if some other investors showed up.
Strong organic growth pursued by Etihad is aided by extensive commercial partnerships strengthening the carrier’s Abu Dhabi hub through a capital-light approach. On the other hand, the airline achieves strong efficiencies through equity tie-ups, truly making it act as a much larger entity, much a akin to an unconventional global alliance. Strong growth, therefore, does not come at the expense of profits. This strategy is not about to be changed, according to chief executive James Hogan:
“We delivered our second year of net profit, thanks to organic growth, our partnership and equity investment strategy, and our forensic approach to cost control.”
“We will consider further equity investments if it’s the right opportunity, with the right partner, in the right market and at the right price. In doing so our equity model will continue to be about growth, not control.”
On its way to celebrating the tenth anniversary later this year, Etihad is stronger than ever and currently not facing any obstacles that could slow it down, despite lagging in size compared to Emirates and Qatar Airways. More importantly, its worldwide partnerships have allowed the carrier to carve out a niche of its own, not just among the MEB3, but on a much broader, global scale.