For a nine year old, Etihad Airways has grown up fast. Just under a year after it was established with two Airbus A330-200s and launched its first international route to Beirut in 2003, the airline had already placed an $8 billion order for 29 new aircraft. By the end of 2004, Etihad was operating to 16 destinations including some it had pioneered. Just eight years on, Etihad now has a fleet of 67 aircraft, operates to 86 destinations and is to receive 100 new aircraft, including the A380 and Boeing 787 Dreamliner, in the coming years.
Now the frenetic pace of growth has entered a new phase, with Etihad establishing a range of codeshares and partnerships to extend its reach into new markets and destinations. However, unlike most national airlines, Etihad has decided not to go down the traditional path of joining one of the big alliances and codesharing with its members. Instead, it has established its own web of new links courtesy of nearly 40 codeshare agreements that cut across business models, alliance groups and ownership patterns.
Etihad has also gone on something of a shopping spree, acquiring strategic stakes in airberlin, Virgin Australia, Aer Lingus, and Air Seychelles, and, according to James Hogan, CEO of Etihad, it is this flexibility that makes the Gulf-based airline so unique. “A key difference between Etihad Airways and other airlines is the partnerships we have made. Etihad Airways now has almost 40 codeshare partners in addition to the equity partneships with airberlin, Aer Lingus, Air Seychelles and Virgin Australia,” he said.
“By building on the success of the organic growth achieved in our first seven years of operation, these codeshares and equity acquisitions are intended to give us the scale to compete on a global playing field with added advantages of cost savings to be achieved through synergies and economies of scale,” Hogan explains.
These acquisitions are already bearing fruit. Working through commercial partnerships, Etihad has brought its partner airlines to its Abu Dhabi International Airport hub and feeding traffic into one another’s networks and sharing revenues. The partnerships with Aer Lingus, airberlin and Virgin Australia, for example, gives Etihad access to the other end of their markets in the US, Central Europe and Australia respectively. In the case of Air Seychelles, the input from Etihad in terms of investment, training, technical know-how and the lease of several aircraft, has allowed the carrier to streamline its business and focus on profitable routes, such as Johannesburg, Abu Dhabi and Mauritius.
“The equity acquisition strategy is designed to create a global footprint, extending our network and reaching new customer segments,” explains Hogan. “Our to-date 2012 results are an endorsement of our strategy, which has seen us widen and deepen our partnerships in addition to continued focus on our organic growth plan. In a period when many airlines have seen demand softening, we have been able to add more passengers than ever before with growth outstripping our capacity increases.
“This does continue to be a tough operating environment for all airlines. Our strategies allow us to drive quality revenue and we remain focused and on track to deliver profitability for the full year, for the second year running,” the Etihad boss adds. And, far from being content with its extended family, Hogan is clear the Gulf airline is open to new opportunities: “In terms of new acquisitions in the future Etihad Airways has stated on many occasions that we are happy to listen to other airlines with the same philosophy as us and that we can work with.”
While Etihad continues to pursue its strategy of developing close partnerships with other airlines, it is still very busy developing its own network. In 2011, the airline carried almost 8.3 million passengers, a 17% increase on the year before. Cargo also performed strongly last year and now represents 20% of the airline’s total revenue.
From its Abu Dhabi hub, Etihad will launch its first service to Washington DC in March next year, to Ho Chi Minh City, Vietnam in October, while in June, it will begin serving São Paulo, its first ever link to the continent of South America. Elsewhere, Etihad has been busy building up its network in Africa with the launch of services to Tripoli, Lagos, Addis Ababa, and Nairobi and continues to work to help Air Seychelles to re-orientate its long-haul network. There is even talk of opening up a new Beijing–Seychelles–Johannesburg route.
In 2011, Etihad became the first carrier in the Middle East to open up a route to a secondary city in China, with a service to Chengdu. The carrier now serves three destinations in China – Beijing, Chengdu and Shanghai – and in August it made further inroads into the market with a codeshare with China Eastern, China’s second largest airline by passenger numbers. The importance of the Chinese market was also underlined by the appointment of a new general manager for China in June.
“The growth of China is of strategic importance to Etihad and the development of partner alliances will be a key part of our continued expansion plans, along with continued growth of our existing services into Beijing, Shanghai and Chengdu,” explains Hogan.
Elsewhere, Australia is a big focus for the Gulf carrier with the relationship with Virgin Australia a key part of its growth in this market. In August 2010, Etihad Airways and the Australia-based carrier agreed a commercial partnership, enabling Etihad customers to access 44 new destinations in Australia, New Zealand, the Pacific Islands, Asia and on to Los Angeles. In early 2011 Virgin Australia landed in Abu Dhabi and most recently Etihad Airways increased its stake in its partner to 10%.
This relationship will no doubt become even more important now with the signing of a new landmark partnership agreement between Emirates and Qantas, which will see the Australian flag carrier hub its Kangaroo routes through Dubai rather than Singapore. “The Australian market is one of the most significant and diverse in the Etihad Airways network and is strategically important,” says Hogan.
“Etihad Airways and Virgin Australia have developed a highly successful, multi-tiered partnership that includes codesharing on flights, joint marketing initiatives and reciprocal earn-and-burn on their respective frequent flier programmes. So we have already created a major transit point for Europe-Australia services, with 24 flights per week into Abu Dhabi from Australia between us. We believe there is still opportunity for further growth of those,” he adds.
While Etihad has predominantly operated Airbus aircraft, such as the A319/320 and A330 on its short and medium-haul network, its wide body fleet has been split between Airbus and Boeing. This trend is set to continue with the airline having ordered 10 A380s and a whopping 41 787s, the largest order to date, to spearhead its network expansion from 2014 and Hogan is clear that these present new opportunities for added routes and destinations.
“The first B787 will be delivered in Q4 of 2014 and the Airbus A380 will also be delivered in Q4 2014. They will be utilised on core trunk routes where there is passenger and premium traffic demand across the network especially destinations in Asia, the US, Europe and Australia,” he says.
Overall, Etihad has 100 aircraft on order, as well as 55 options in place. Over the next two years, the Emirati airline will also take delivery of four new cargo freighters – two A330-200Fs and two B777–200LFRs and while these will be utilised on cargo-specific destinations, they will also be linked to the passenger core network to maximise passenger revenue and belly hold capacity.
While Etihad has managed to expand into a number of markets through codeshares and partnerships, like all airlines it still faces restrictions on where it can operate. Hogan explains that the party line from Etihad is that it favours bilateralism over isolationism and that it continues to push for regulatory constraints to be lifted wherever possible. Elsewhere, the evolution of the global aviation market is being driven by the shifting base of economic development from first world, developed economies to emergent Asian powerhouses and the fast growing BRIC countries, says Hogan, and it is here that opportunities but also challenges lie for the airline.
“By sheer scale of its population, Asia will be the focus of growth for the airline industry. Airlines based in the Middle East, which can take advantage of their strategic geographic location, huge investment in aviation infrastructure and modern aircraft technology, are well placed to benefit from the changes in the global market,” he muses.
So what about the future? While Hogan welcomes the nearly $100 billion in investment in the airport sector taking place in the Middle East, he argues investment on the ground needs to be matched with investment in air traffic management, if Etihad and its partners are going to be able to expand efficiently. And Hogan’s other concerns centre around factors that could inhibit the airline’s continued meteoric expansion.
“There are, of course, the challenging economic conditions that remain across the globe which include lower growth and stagnating passenger and cargo traffic in European markets. It is therefore important to manage our costs. Fuel is our largest variable cost with prices tracking 31% higher than 2011. Yields, particularly in premium classes, remain a major challenge,” he explains.
“And there are also the ‘unknown unknowns’. Every year, we face challenges that could not be predicted in any business plan – Icelandic volcanoes, frozen runways at Heathrow, the redshirts in Bangkok, the tsunami in Japan – that impact our customers and our business. Our challenge is to respond to those quickly and efficiently,” he adds.
“That said, there are still many opportunities the airline is looking to build on. “These include our equity partnerships, and that, we aren’t a legacy carrier and don’t feel the strains that other carriers around the world have,” says Hogan. “Etihad Airways has a great location, ideally placed between the east and west, and a world-class service philosophy and product. We will continue to build on this as our fleet and network expands.”
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