News that Etihad's partner Air Berlin has followed stablemate Alitalia into a formal restructuring process – on top of the Gulf carrier's own exit from holdings in Darwin Airline and, before that, Aer Lingus – leaves its European investment strategy in a state of disarray.
Etihad's move to add Aer Lingus into the equity-alliance group of partners was never completed. The Abu-Dhabi carrier acquired an Aer Lingus stake – which ultimately reached 4.1% – in 2012, but then sold its shares as part of the deal under which the Irish flag carrier joined IAG.
Its investment in Darwin – which it rebranded as Etihad Regional – has also come to an end. Etihad acquired a 33% stake in the Swiss carrier in November 2013. But in July this year Slovenian carrier Adria Airways acquired 99% of Darwin – including the Etihad stake – via a Swiss subsidiary. Darwin will now operate under its own name.
Etihad also holds a stake in the airline formerly known as Jat Airways – now rebranded as Air Serbia, and which disclosed a small profit in 2016. It also planned to acquire Air Berlin's 49% stake in Austrian leisure carrier Niki earlier this year as part of an abortive plan to spin it into a joint leisure operation with TUI. Air Berlin confirms Niki remains a wholly-owned subsidiary.
But it is Etihad's investments in the much bigger European carriers Air Berlin and Alitalia that have dominated headlines and proved a financial drain on Abu Dhabi coffers.
Both airlines were cash-strapped and loss-making before Etihad invested. And despite significant investment and product overhauls, both have continued to lose money every year – bar one in which the one-off sale of a frequent-flyer programme to the Gulf carrier took Air Berlin into the black.
Alitalia filed for extraordinary administration earlier this year when a proposed recapitalisation, including Etihad, collapsed after unions rejected cost-saving measures. Administrators have since embarked on a sale process to secure fresh investment for the Italian carrier.
Now, Air Berlin – which was already implementing a major restructuring that had sharply reduced the size of the airline – has filed for insolvency at a court in the German capital.
That came after it was notified by Etihad "that it no longer intends to provide Air Berlin with financial support", says the German carrier. Etihad owns 29% of Air Berlin and has provided financial support since becoming a shareholder in 2011.
Germany's federal government has stepped in with a bridging loan in order to maintain flight operations "for the long term", Air Berlin says. "All flights operated by Air Berlin and [Austrian subsidiary] Niki will continue as planned," it stresses.
INVESTMENT STRATEGY
Etihad's European investments formed part of a wider strategy which has also involved acquisition of holdings in India's Jet Airways and Virgin Australia. These were aimed at building its presence in key markets and feeding traffic through its Abu Dhabi hub.
"We believe it is a smarter way of growth than buying another 100 aircraft," James Hogan, the Gulf carrier's chief during its era of investments, said in 2012. "This isn't the old Swissair model of acquiring brands. This is about how do we use this scale to improve the bottom line; to use our investments to get the best possible costs."
Under the strategy from which Hogan distanced his own carrier, Swissair/SAirGroup took stakes in a series of struggling European carriers before its collapse in 2001.
However, Etihad's appetite for investments has been on the wane. After a frenzy of acquisitions, Etihad has not bought an airline stake since it took 49% of Alitalia three years ago.
The airline had during the second half of 2016 been flagging the need for Alitalia and Air Berlin to review their businesses, amid intense competition from low-cost rivals that smelt blood. In January, in announcing that long-serving chief Hogan would leave the carrier in the summer, the airline also acknowledged that its investments were under scrutiny.
"We must progress and adjust our airline equity partnerships even as we remain committed to the strategy," said its chairman Mohamad Mubarak Dadhel Fadhel Al Mazrouei.
Its subsequent willingness to support Alitalia's recapitalisation – conditional on union acceptance of cost cuts – supported the view that Etihad was prepared to pull its financial weight at the Italian carrier.
Likewise, Etihad today highlighted its provision of €250 million ($290 million) in additional funding to Air Berlin in April to enable the German carrier to explore strategic options for the business.
But in both cases the challenges have proved too much. Unions failed to provide the necessary savings to enable a recapitalisation at Alitalia, while Etihad says Air Berlin's business has "deteriorated at an unprecedented pace", preventing it from implementing alternative strategic solutions.
"Under these circumstances, as a minority shareholder, Etihad cannot offer funding that would further increase our financial exposure," the Abu Dhabi says of Air Berlin in its statement today, adding that it "remains open to helping find a commercially viable solution for all parties".
One of the challenges for Etihad has been that because of foreign-ownership rules, it holds only minority stakes in these carriers. This has restricted its control and ability to fund – if so minded – the restructuring of these carriers.
Likewise, the drag of these investments on its own financial performance has added pressure. Carriers in the Middle East have faced a challenging climate. Etihad in July disclosed a net loss of $1.87 billion in 2016, after a profit of $103 million the previous year. While there were several factors behind the scale of the loss, the roughly $800 million charge on "certain assets and financial exposures to equity partners, mainly related to Alitalia and Air Berlin" is significant.
Etihad's long-term intentions for its involvement at Air Berlin and Alitalia remain unclear, further complicated by it not yet having appointed a permanent successor to Hogan – who left in the summer. The Abu Dhabi group may have hoped the carriers' respective perilous positions would not have required such drastic action so quickly.
It is, in any case, among the companies reported to have shown preliminary interest in the sale process of Alitalia, for which administrators have now set a deadline of 15 September for submissions of firm interest.
Likewise, Etihad has been developing a partnership with Lufthansa. This spawned a deal for the German carrier to wet-lease 38 Airbus A320-family jets from Air Berlin and lessors – predominantly for its Eurowings operation. Lufthansa has today confirmed it is already in negotiations to take over unspecified parts of the Air Berlin group.
While from a financial perspective its holdings in Air Berlin and Alitalia racked up heavy losses - the German carrier alone posting cumulative net losses of more than $2 billion in the last four years - they have played a role in supporting increased traffic flow through Abu Dhabi. Etihad passenger numbers reached 18.5 million in 2016, of which it attributes around 30% to airline and codeshare partnerships.
"Germany is an important market for Etihad and Abu Dhabi, and we remain committed to providing comprehensive air links as a key enabler of trade and tourism," it reiterates in its statement today.
Etihad's mandate to develop the Abu Dhabi hub means that the rationale for its equity investment has always been wider than just the performance of the airline asset itself. But limited by what a minority stakeholder can achieve, and with these carriers facing intense competition and significant challenges, the extent to which Etihad will remain financially involved in these carriers is uncertain at best.
Article updated on 17 August to show Niki remains a wholly-owned Air Berlin subsidiary
Source: Cirium Dashboard
