Since 2011 the Australian has acquired stakes in seven companies spanning Aer Lingus on Europe’s western fringe to Virgin Australia Holdings Ltd. on the shores of the Pacific, feeding more traffic via Abu Dhabi, Etihad’s desert hub with a population of less than 1 million. His next move may be the boldest yet: Alitalia SpA, a carrier dogged by bloated payrolls, state meddling and chronic losses.
Hogan’s investment in a clutch of ailing airlines over which he has limited control comes a decade after a similar strategy led to the collapse of Swissair and as top industry players eschew partial holdings in favor of global alliances. What sets Etihad apart is support from an oil-rich state eager to match the growth of Qatar Airways Ltd. and Emirates, the No. 1 international carrier based less than 100 miles away in Dubai.
“This is a long-term play,” Hogan, who became chief executive officer in 2006 after running Bahrain-based Gulf Air, said in one of a series of interviews with Bloomberg. “This isn’t for 12 months, this is for the next 20, 30, 40 years.”
The executive reckons investments in carriers that serve minor markets or play second fiddle to major operators in bigger ones will lift Etihad’s passenger tally and secure the economies of scale needed to make his empire profitable.
Founded in 2003, 18 years after Emirates and nine after Qatar Airways, Etihad needed something more than organic growth to gain global scale, according to Hogan, 57.
His first move was to take a 2.99 percent holding in Air Berlin Plc (AB1) in 2011, lifting it to 29 percent months later. He has since added stakes in Air Seychelles Ltd., Aer Lingus (AERL) Group Plc, Virgin Australia, Air Serbia -- formally Jat Airways -- and Jet Airways India (JETIN) Ltd., and is seeking regulatory approval to invest in Swiss regional carrier Darwin Airline.
Hogan said this week that Etihad is in the process of negotiating the “next stage” of its deal with Air Berlin after the German carrier said it needs to improve liquidity. The CEO has sought to drive a tough bargain, securing five-year managements contract in Serbia and the Seychelles.
Investing in perennially unprofitable Alitalia, where losses have exceeded 1.1 billion euros ($1.5 billion) in five years, may be a tougher challenge. While the Rome-based carrier ranks No. 1 in Europe’s third-largest outbound travel market, it’s under siege from a pack of low-cost carriers led by Ryanair Holdings Plc (RYA) and EasyJet Plc (EZJ) on short-haul routes.
Hogan’s critics draw comparisons with Swissair’s hotchpotch collection of stakes in carriers such as 49.5 percent-owned Sabena SA of Belgium, which contributed to its collapse with debts of almost 17 billion francs ($19 billion) in October 2001.
At Qatar Air, CEO Akbar Al Baker said in a March 25 interview that he doesn’t favor investments “in bits and pieces,” having turned down “umpteen airlines” -- including Alitalia, which was made available “several times,” and recent Etihad purchases Air Seychelles and Air Serbia.
Asked if Etihad might lift its holding in Aer Lingus, Ryanair CEO Michael O’Leary said the Gulf carrier had “bought a lot of rubbish, and increasing their stake in Aer Lingus is consistent with that.” Ryanair is seeking a full takeover of the smaller Irish airline, saying it will collapse without a change of direction. Aer Lingus declined to comment.
Deutsche Lufthansa AG, facing a long-haul squeeze from Gulf hubs and competing with Air Berlin in its own backyard, is more circumspect, with Chief Financial Officer Simone Menne saying there’s a crucial contrast between an investment spree backed by Gulf oil wealth and the failed experiment at Swissair.
“Swiss, back in the day, also acquired a lot of ailing carriers,” Menne said at an event in Frankfurt last October. “But Etihad has much deeper pockets.”
Abu Dhabi is “very supportive” of Etihad’s vision, Hamad Abdullah Al Mass, executive director for international economic relations at the Department of Economic Development, said in an interview in Hanover, Germany, so much so that the sheikdom is funding a 30 million-passenger terminal to permit its expansion.
Etihad has financed its expansion and investments via a mix of cash from operations together with funding arrangements with more than 70 global institutions drawing on short-term and revolving credit, bridging facilities, Islamic debt, lease financing, export credit and capital markets.
Hogan’s strategy is partly a response to legal curbs that generally limit full airline mergers to intra-national and regional deals such as those that saw the emergence of three main network carriers in the U.S. and Air France-KLM Group (AF) and IAG SA (IAG), owner of British Airways and Spain’s Iberia, in Europe.
Etihad aside, top carriers have largely spurned the minority holdings available beyond their home markets in favor of boosting connections and traffic via global alliances such as the BA-led Oneworld, which Qatar Airways joined last year.
They have also begun to embrace joint venture deals, which need antitrust immunity and let allies operate as one entity in key markets such as the trans-Atlantic and trans-Pacific, sharing revenue and costs and combining timetables.
Emirates, which exited its main overseas investment, in SriLankan Airlines, in 2010, followed that trend through its bilateral pact with Australia’s Qantas Airways Ltd. (QAN) in 2012.
Hogan says he opted for a unique course after the three global groups -- Star, SkyTeam and Oneworld -- proved resistant to upstart Gulf carriers muscling in on the most lucrative travel flows with their mega-hubs and huge wide-body fleets.
“The alliances didn’t want to talk to us,” he said in a telephone interview on March 3. “We felt that knocking on the door was a waste of our time.”
Hogan has typically received a rapturous reception from carriers and governments grateful for Etihad’s cash, entering a Berlin briefing to rock-orchestral fanfare “Rise of a Hero,” and feted in Belgrade by Serb prime ministerial candidate Aleksandar Vucic after Jat failed to find a buyer for years.
For Etihad, which has 103 routes, the so-called “equity partnerships” have helped deliver a wider network of 400 destinations. Hogan says that’s “smarter” than buying 200 more planes to add to the 95 already in the fleet and 200 on order.
The impact on Etihad’s earnings is harder to quantify. The carrier said March 3 that net income surged 48 percent last year to $62 million, without revealing the minority contribution.
Hogan says the equity alliance would rank No. 8 in the world were it a single airline, and that it helped deliver $820 million of Etihad’s sales in 2013, or a fifth of the total. Yet that figure includes the impact of code-share deals with almost 50 other airlines, and not merely the minority holdings.
Of the eight carriers in which Etihad has invested or is pursuing a bid, only two, Aer Lingus and Air Seychelles, make money. The former had net income of 34.1 million euros in 2013, while the Indian Ocean airline earned $3 million, up from $1.1 million in 2012, according to a statement today, with 46 percent of international passengers funneled through Abu Dhabi.
While Hogan has said Air Serbia and Darwin should become profitable this year, that leaves Air Berlin, Jet Airways and Virgin Australia (VAH) -- the three biggest carriers in which Etihad has stakes by passenger numbers -- still losing cash.
India’s Jet lost $250 million in the nine months through December, while Virgin Australia had a loss of A$84 million ($78 million) in the six months to Dec. 31 as it battles Qantas.
Air Berlin ran up more than 600 million euros in net losses in the five years to 2012, Bloomberg data shows, and had a 175 million-euro loss in 2013, based on analyst estimates. Paid $350 million by Etihad for the equity stake and plane loans, plus 184.4 million euros for a frequent flier program, the carrier halted earnings releases twice last month, saying it’s exploring plans for a “recapitalization.”
John Strickland, director of London-based JLS Consulting Ltd., said that while Hogan’s overarching aim of redirecting passengers via Abu Dhabi has a sound logic, his diverse investments require a tough-to-deliver homogeneity in management, product and financial approach.
“No other airline is doing what they’re doing to this scale,” he said. “That’s because of the risks attached.”
Hogan is meanwhile working on commercial terms with Alitalia after weeks of scrutiny that dragged a deal beyond the April 30 deadline set in February. Air France’s plan to boost an existing stake foundered at the same stage over job cuts.
“He’s trying to prove the unproven,” said Alex Cruz, CEO of Vueling Airlines SA, the discount unit of IAG that’s adding routes in Italy. “This will be truly James Hogan’s big challenge, both from a management and a cultural perspective.”
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