Etihad Airways plans to intensify its strategy of growing passenger numbers via tie-ups with other carriers, bucking the go-it-alone stance of Gulf rival Emirates, Chief Executive Officer James Hogan said in an interview.
The third-largest Middle Eastern airline views signing deals and taking stakes in smaller operators serving key markets as a vital complement to spending money on planes as it builds Abu Dhabi into a hub for inter-continental travel, Hogan said.
Emirates, the largest international airline, has nine codeshare accords and no foreign holdings, while Etihad has 35 partners and is spending $400 million to build stakes in Air Berlin Plc (AB1) and Air Seychelles Ltd. The difference arises because Emirates and Qatar Airways Ltd., with 11 allies, are 26 and 18 years old, respectively, and have had time to grow, whereas Etihad was founded in 2003 and needs feeder traffic, Hogan said.
“I don’t have a mandate to be the biggest airline in the world, but I do have a mandate to be smart,” Hogan, aged 55 and CEO at Etihad since 2006, said in London. “They’ve got their strategies. My strategy from day one was to build strong bilateral relationships with codeshares and stretch my network.”
Etihad, which carried 8.3 million passengers in 2011, up 17 percent, compared with 31 million at Emirates in the 12 months through March 31 and 16 million at regional No. 2 Qatar Air over the same period, has also looked at Ireland’s Aer Lingus Group Plc (AERL) and will explore other options to tap key markets where airline managements are amenable to a tie-up, he said.
“We’re not just collecting brands,” Hogan said. “It’s got to be something which is the right fit, brings in incremental revenue and, through restructuring, allows us to take out cost and achieve scale. What we won’t do is just put money in and say ‘see you later,’ which other airlines have done.”
As at Emirates and Qatar, the focus of Etihad’s strategy is to exploit the location of the Gulf on flyways between North America, Europe, Africa and Asia to build a transfer hub in competition with Air France-KLM Group, British Airways and Deutsche Lufthansa AG and their European bases.
Hogan, who was born in Melbourne, cites Virgin Australia Holdings Ltd., with which he has said he’d “seriously consider” deeper ties, as illustrating the benefits of bilateral deals. China Eastern Airlines Corp. said on its website that it and Etihad have signed a agreement for closer cooperation in code- sharing and areas such as ground-handling services.
Scope for investments may increase as stumbling European economies and high fuel costs weigh on margins, something that has already led to the collapse of Hungary’s Malev Zrt., Hogan said, forcing smaller airlines to accept that they cannot hope to replicate the overheads of larger, full-service carriers.
Etihad took a major stake in Air Berlin to overcome the constraints of Abu Dhabi’s air-services treaty with Germany, Europe’s largest aviation market, which stop it serving locations such as Berlin, Hogan said. Even then, it “stalked” the discount carrier for four years before making the move.
In “open skies” markets including the U.K. there are no such restrictions, and Etihad will be free to serve London and “one or two more cities” such as Manchester with Airbus SAS A380 superjumbos planes due for delivery from 2014, said the CEO, in London to discuss fleet financing requirements with bankers.
Equity investment of 105 million euros in Air Berlin will be repaid in extra revenue in two years, Hogan said, making the deal “smarter than buying 10 more aircraft to crack the German market.” The European company is also a hybrid airline rather than a pure discount carrier, with long-haul routes and a strong position in corporate travel, which the CEO said he aims to tap.
The tie-up will save money through joint purchasing of fuel and insurance, and the carriers will cooperate on adding Boeing Co. 787 Dreamliner jets, Hogan said. Air Berlin, which has 14 of the jets on order, will send pilots to Abu Dhabi for simulator training and fit the same seats as Etihad, which is buying 41.
Etihad, which posted its first annual profit last year with net income of $14 million, will take delivery of six planes this year and eight next before aircraft from 100 ordered at the 2008 Farnborough Air Show spur growth in 2014. By 2017 the fleet should number more than 160 jets compared with less than 70 now.
Aer Lingus Interest
Aer Lingus remains an investment prospect should Ireland firm up plans to sell its 25 percent holding, Hogan said, with assessments so far restricted to the likely sales contribution.
“All I’ve said is that if they were to open their books then we’d have a look at it,” he said, adding that the Dublin- based company has a “pension issue” that would have to be evaluated. There has been “strong interest” in the stake and all approaches will be considered if there’s a sale, the government said Feb. 9.
Hogan said that there’s enough long-haul transfer traffic to support multiple hubs in the Gulf, and the region effectively has a local catchment area of almost 1 billion people within three flying hours, taking in much of the Indian subcontinent.
Still, the CEO said he’s cautious about taking a stake in a carrier in India, where Kingfisher Airlines Ltd. (KAIR) may be seeking an investor, even after a ministerial panel recommended dropping a ban on foreign airline holdings in favor of a 49 percent cap.
“We’d be very wary due to the regulation of the Indian market,” he said. “You’ve just got to make sure that the rules of business in any market you enter allow you to win. If we don’t think it will work we’re not going to waste our time because the margins in our business are so fine.”
Entry into one of the three global airline groupings is also unlikely, mainly because of concerns among older operators about the challenge presented by Middle East hubs, Hogan said.
“You never say never, but usually in each of the alliances there is somebody who is terrified of Gulf carriers,” he said.
To contact the editor responsible for this story: Chad Thomas at email@example.com