Confirmation that James Hogan is to step down from the helm of Etihad Aviation Group in the second half of the year underlines the seriousness with which restructuring is being pursued at several of its airline investments.
While stressing its commitment to the strategy, the Abu Dhabi group also flagged the need to "progress and adjust" its airline partnerships. As the drastic reshaping of Air Berlin already illustrates, Abu Dhabi appears to be ratcheting up the pressure on those investments that are failing to deliver; crunch talks on Alitalia's future are ongoing. Given this context, the departure of the architect of the equity-alliance strategy indicates that patience is wearing thin in Abu Dhabi.
GROWTH STRATEGY
Hogan joined Etihad a decade ago, from Gulf Air – a carrier which had been eclipsed by the rapid growth of local rivals that were once its stakeholders. The new chief was charged with putting the Abu Dhabi-based carrier on the global map – and doing it quickly.
Though the carrier was just three years old and operated a fleet of around 20 aircraft at the time, Abu Dhabi's intentions for Etihad to take its place as a player on the global stage were already clear.
"While it is relatively young, Etihad has already established a reputation for energy and speed which are evident in its unprecedented growth and the development of its state-of-the-art fleet and product," said Hogan on taking the job in October 2006. "I believe that we can build on these strengths to position Etihad as a leader in the international and local markets."
Hogan quickly issued a statement of intent with major orders for Airbus and Boeing aircraft at the 2008 Farnborough air show. This has supported a growth strategy which has driven Etihad to launch services to every continent, expanding the airline's reach and pushing quality of product.
Flight Fleets Analyzer shows the airline operates 121 aircraft – with an average age of under seven years – including flagship types like Airbus A380s and Boeing 787s. A further next-generation widebody, the Airbus A350, is among more than 200 aircraft on order or optioned after the carrier's follow-up spending spree at the Dubai air show in 2013.
The airline carried around 18.5 million passengers in 2016 – compared with fewer than three million in 2006. While that still leaves Etihad outside the biggest 50 carriers in terms of passenger numbers, the large share of long-haul operations means it ranks among the 20 largest global carriers in terms of RPKs.
It is also knocking on the door of the 20 biggest operators in terms of revenue. In 2015, the last year for which figures are available and before Etihad established its group structure, mainline airline revenues of just over $9 billion placed it just outside the top 20 biggest airlines by that metric. Notably, this also put it in the same territory of another fast-growing Gulf carrier: Qatar Airways, which had revenues of just under $10 billion in 2015.
EQUITY PARTNERS
But Etihad's own growth tells only half the story. After all, rapid growth of the mainline airline to support a strategy of developing aerospace and tourism growth aspirations – with all the controversies such state-backed strategies engender – is a familiar path trodden by Emirates and Qatar.
What sets Etihad apart has been its use of an equity alliance strategy to accelerate its growth. The airline has invested in seven carriers across the globe – excluding its dalliance with Aer Lingus, in which it sold its minority stake when the Irish carrier was acquired by IAG.
Hogan, speaking at the Global Airfinance Conference in Dublin earlier this month, pointed to the 5.5 million passengers its codeshare and partnership strategy delivered the carrier in 2016 – getting on for a third of its total passengers.
"Our investments had an immediate impact on the revenue side, delivering hundreds of millions of dollars in additional revenues and allowing us to fill our onward connecting flights," said Hogan. "We also believed our minority investments would unlock an additional advantage that the global alliances were simply unable to use. We could work on joint procurement and other business synergies which would save us – and our partners – hundreds of millions of dollars."
He says this helped develop Etihad – which last year established the broader Etihad Aviation Group which Hogan now heads – into a diversified network which delivers revenues of more than $26 billion.
"We believe it is a smarter way of growth than buying another 100 aircraft," Hogan 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."
He was referring to the Swissair and SAirGroup strategy of acquiring stakes in a series of struggling European carriers. This ended in its collapse in 2001.
While Etihad's investments have supported the growth of the airline and Abu Dhabi, and some investments are now turning a profit, the acquisition of stakes in loss-making carriers has brought its share of pain.
Crucially, the confirmation that Hogan will leave the carrier also includes an acknowledgement that its investments are under scrutiny.
"We must progress and adjust our airline equity partnerships even as we remain committed to the strategy," states chairman Mohamad Mubarak Dadhel Fadhel Al Mazrouei.
That suggests no about-turn on the broader investment strategy, but underlines that Abu Dhabi is not prepared to maintain the status quo.
EUROPEAN CONCERNS
It is on Alitalia and Air Berlin that the focus of scrutiny appears to fall. Indian carrier Jet Airways has already returned to profit – and traffic flows between the Middle East and the Indian subcontinent make it a logical partnership. Another investment, Virgin Australia – while not without its capital challenges – also returned to underlying profit last year.
The relatively smaller investments in Air Seychelles and Air Serbia have yielded modest return, while the picture is unclear around European regional operator Darwin Airline – rebranded as Etihad Regional.
But Hogan acknowledges that work has been needed at Air Berlin – loss-making in virtually every year since Etihad acquired it – and Alitalia, which needs further work to meet its profit goals. "Both are operating in very tough competitive environments, and need to address long-standing issues facing their businesses," he said earlier this month.
The latest restructuring at Air Berlin has been radical. In focusing the carrier's operation around network operations at Berlin and Dusseldorf, the restructuring is roughly halving the size of the carrier – pushing some of its leisure operation and its Niki investment into a new leisure carrier being established with Tuifly, and effecting a deal to wet-lease more than 30 Air Berlin narrowbodies to Lufthansa. The co-operation with the Star Alliance carrier is particularly noteworthy given historically icy relations between the two.
This would indicate that similar-sized cuts are not out of the question at Alitalia – which in December announced with all its stakeholders its search of a "radical reduction in costs".
The change of tone from Etihad in recent months – further signalled by confirmation of Hogan's departure – provides a clear message to Alitalia stakeholders that it is serious about securing cost savings.
Hogan has always maintained Etihad is not a bank when it comes to its investments. "Let's be very clear: everything we touch has to make a return,” he said in January 2014 at the launch of the Etihad Regional brand. "I'm not a charity... I receive no subsidies, I receive no letters of comfort. I have to go to the market and finance the aircraft on the structure of my business plan."
That, it now appears, is being firmly tested. Etihad has itself reported relatively modest returns since reaching breakeven in 2011 – collective net profits of $320 million during the last five years – and in December announced its own "measured reduction" of headcount, citing an increasingly competitive landscape and weakened global economic conditions.
But only when Hogan's successor is in place will it become clear the extent to which the group will continue to embrace the equity-alliance strategy – or if it will in future have an appetite for airline investments.
Source: Cirium Dashboard
