In the five years since it was launched, Abu Dhabi's Etihad Airways has expanded at an eye watering pace. Chief executive James Hogan explains where the carrier's confidence comes from, and why he believes Etihad will achieve its huge ambitions
Abu Dhabi's got money to spend and a strong desire to put itself firmly on the map. Just ask any fan of the UK's Manchester City Football Club, which in early September was bought through Abu Dhabi United Group by Sheikh Mansour bin Zayed Al Nahyan, a member of the Emirate's royal family. At the time Dr Sulaiman Al-Fahim, the public face of ADUG, said he aimed to turn Manchester City into the best football club in the world.
This boundless confidence and ambition to be the best is also very much in evidence at Abu Dhabi's national airline, Etihad Airways. Since its launch in November 2003, Etihad has grown at a staggering rate, adding service to 45 destinations and stunning the 2008 Farnborough Air Show with firm orders for 55 Airbus aircraft, including 25 A350XWBs and 10 A380s, as well as an order for up to 95 Boeing 787s and 777s. But where does this confidence come from, at a time when most airlines are struggling with high fuel prices and a slowing global economy? And why does Etihad believe it can succeed when so many others are failing?
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Chief executive James Hogan seems to be ready and waiting for such questions as we begin our interview at Etihad's brand new training centre. The interview did not take place in the carrier's new headquarters next door because like much of the surrounding desert-like area, the building was still under construction and due to open in days. "All we can talk about is our results to date - we're on track and we're confident that we'll meet and exceed the targets that have been set for us by the board, based on people, based on service, based on sound operational and financial management," says Hogan.
"Etihad is working already. Given the goals that we've been given and the fact that we're achieving them, the aircraft order reflected that the board had a sound strategy for growth. You have to be able to demonstrate where the traffic is coming from, how you're going to utilise the aircraft, how you're going to achieve the funding, and you have to reflect on where we are - in this part of the world that's opening up."
The location of Abu Dhabi, which Hogan describes repeatedly as "the crossroad to the world", is a key reason why he believes Etihad has such a promising future, and also why he has no doubt that there is room in the market for so many rapidly expanding Gulf carriers. "Whether it's ourselves, whether it's Dubai, Doha or Bahrain, we have the advantage that we can fly with new technology to most parts of the world," he explains.
And what about the competition next door, which comes in the form of longer-established and also rapidly-expanding Emirates of Dubai? Is there really room for these two titans to battle it out and compete to bring traffic to their respective hubs, which are less than 100mi (160km) apart and which both have massive expansion plans of their own (see page 31)? It is a question Hogan is often asked. "You could say the same about Cathay Pacific, Singapore Airlines and Thai," he says. "Probably what commentators don't focus on enough about the geographic region we cover is that the economies are moving fast - they have young people who wish to travel. As the markets open up and liberalise, there will be opportunities for all three of us [Etihad, Emirates and Qatar Airways] to continue to develop."
Hogan is obviously very conscious of the fact that rival Emirates is launching a low-cost subsidiary, FlyDubai, but says that Etihad does not plan to venture down a similar path. "Because we already operate Airbus A320s, we already serve that market," he says. "We will continue to add more narrowbodies but we have no plans to offer a low-cost, all-economy service." However, he adds as an aside: "But that doesn't mean you stop modelling for every scenario."
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"We are new so we're not bound by years of 'this is the way you have to do it'. We have a very entrepreneurial spirit"James Hogan |
But will there be a gimmick to match the on-board showers? "It's too early to say quite frankly. It's not about gimmicks. At the end of the day that's real estate on the aircraft and it's very important to utilise the space effectively to get the yield for the respective cabins."
Much of Etihad's long-term strategy is built on the assumption that markets in its principal catchment area will eventually liberalise and open up. "In joining the company in September of 2006, I was very focused on how you build a network plan over 30 years. To do that we had to work on what are the available bilaterals and what bilaterals we believe will become available in the future," says Hogan.
"What do we define as our catchment area? The Gulf, the Middle East, the Indian subcontinent and North Africa. Markets like India and Pakistan are still regulated, so again we have to take the view five, 10, 15 years from now that markets will be more liberal, and that's reflected in our fleet order. In acquiring these aircraft we've built a network out to 2030. We're very clear on what we expect between now and 2020. We're obviously taking the view in doing this that markets like India will open up."
Aside from India, the markets Etihad is hoping will eventually open up further include Egypt, Canada and North Asia. "We've just about fully utilised our Australian bilaterals so we'll be asking for more," says Hogan. "And then there are the markets of North Asia that we haven't even entered yet such as Japan and Korea."
However, if markets do not open up as quickly as Etihad would like them to, Hogan insists the carrier's business plan contains enough flexibility to cope with this: "If markets don't open up we've also got the flexibility to improve our frequencies. Looking between now and 2010 is a long time in business: we're flexible to adjust."
Etihad aims for half of its eventual traffic to have Abu Dhabi as its final destination, and Hogan is confident that the huge amount of investment that's being funnelled into the Emirate will make this possible. At present, 30% of Etihad's traffic is destination Abu Dhabi, and the remaining 70% is made up of transfer traffic.
"If you look at the strategy of the airline, we would seek to achieve at least 50% of our traffic as we go forward destination Abu Dhabi and 50% of traffic transiting over the hub," he says. "We believe the investment in the destination is going to make Abu Dhabi over the next three, five, seven, 10 years a place where people want to go, and the fleet order reflects that.
"Also if you consider a market like India, which has 300 million middle class within two-and-a-half hours of our doorstep, they can have access to hotels, impressive shopping malls and a range of attractions that you had to go to Europe or the Americas for before." The sheer amount of money being pumped into Abu Dhabi is nothing to be sniffed at. "If you reflect that over the next 10 years Abu Dhabi will invest $200 billion in infrastructure, from the new terminal at Abu Dhabi International Airport to the Grand Prix to approximately 75 hotels to Warner World Studios being built here - that creates a need for talent, it creates a need for people to travel in to the region," says Hogan.
When Etihad was established by the Abu Dhabi Government, it had a clear mandate to reach breakeven in 2010. "What's very important in everything we do is that we do breakeven in 2010 and stay in profitability beyond that," says Hogan. But is this target still achievable, given the current environment? "If fuel keeps on going down, you bet." And what if it doesn't? "If oil continues to move down, we're confident we can still meet our objectives. Our revenue and yield has far exceeded our business plan this yearrevenue this year will be over $2 billion.
"In the second half of the year we've seen fuel moving towards $100 a barrel. This is a cycle. I've been through cycles at different airlines, and the confidence is making sure that we can build this crossroad to the world first - Abu Dhabi. It's looking at what aircraft technology is available that means we can fly nonstop to all parts of the world."
Hogan refuses to give a figure to which the price of a barrel of oil would have to drop for Etihad's 2010 breakeven target to become a reality. But what he does say is: "If you look at all our key performance indicators, fuel is our main challenge. Let's see what happens over the coming weeks and months. At this stage we're comfortable with the way fuel is tracking because we've worked on a very aggressive hedging programme over the past 18 months."
Growing the airline at such a rapid pace has not been without its challenges for Etihad. Hogan says the first challenge is attracting the right people to staff the airline. "We've been very fortunate that we've been able to attract not only talent from here within the region but from all around the world. There are different criteria - there's obviously the operating side of the business: pilots, cabin crew and airport staff, and the majority of those staff are expatriates." The airline is building a cabin crew village in Abu Dhabi to cater for the needs of its expatriate staff, but the aim is to attract a mix of expatriate and local Emirati staff.
"If you look at the size of airline we're going to be between now and 2020, it's blending Emirati executives with expatriate executives to enable us to have a world class team to compete in the global aviation environment," says Hogan. To achieve this and to ensure that its fleet expansion plans are not hampered by the global pilot shortage, Etihad has launched its own in-house cadet pilot training programme (see box).
Infrastructure is also a big consideration - much of Abu Dhabi is still under construction - and Hogan admits that "getting facilities in place is a challenge". Another difficulty the airline has faced is the lack of time it has to gain an advertising foothold in its new markets because of the rate at which they are being added to its network.
"As we're entering so many markets we don't have the capability to put the advertising spend that you would normally put into each new market," he explains. "Most established airlines open one or two new markets a year, but we opened nine last year and another nine will be opened this year."
But despite these challenges, Hogan is keen to point out the advantages of being a new and unencumbered airline. "We are new so we're not bound by years of 'this is the way you have to do it'. We have a very entrepreneurial spirit. We're very focused from the top down as we look at our brand, product and service - the most important person in that equation is the customer, the customer and the customer," he says.
It is this focus on the customer, particularly at the premium end of the market, that Hogan believes makes Etihad stand out from the crowd. "Our sales are outstanding and what we're seeing is that the investment in the product - for example, you're guaranteed a bed in first and business class, and we believe we have one of the best, if not the best, economy products in the world - means the customers like it," he explains. "We're building a brand based on a strong product. Our premium sales three months out track faster than our economy sales - it's usually the other way round."
One of the criticisms directed at Etihad is that it enjoys subsidies from the Abu Dhabi Government, which is renowned for its incredibly deep pockets. This is emphatically denied by Hogan: "We don't receive any guarantees at all. When we fund the aircraft we have to go out to the market and raise a debt, and the market has to be confident about our business plan. We're meeting the objectives with the funds available as any business would." In fact, the government "doesn't get involved in the day-to-day running of the airline at all". He adds that if you look at other projects the Abu Dhabi Government has invested in, "it's all about a return".
"Those same rules apply to every other Abu Dhabi domestic business. I don't have a brief to fly to every airport in the world, I have a brief to create one of the best service airlines in the world, to fly where we need to fly. The unique advantage we believe we have is our geographic location."
To further stress the emphasis that Etihad is placing on its strategic location, Hogan adds for good measure: "There's huge awareness that this place is moving fast. While there are challenges in other parts of the world, it's important to understand that gross domestic product over the next three years is forecast to grow at 8% per annum here. People are very excited about being part of this opportunity of building an international crossroads of the world."
In It To Win It
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"We want to be the best and we want to win," says Hogan, who likens running an airline to coaching a sports team. "This is about coaching a team - that's why I like sport. Sport is about coaching tactics, it's about winning and it can't be about the individual - it's about teamwork. It's like a Rugby Union team: all shapes and sizes. It's exactly the same in business: bringing different styles together."
Prior to joining Etihad, Hogan was chief executive of Gulf Air. His airline career includes stints at bmi, Qantas and Ansett, and he has also worked in both the hotel and car rental sectors.
But it is clear that he sees his present job as being the pinnacle of his career so far. "I believe that at this point in time there's no better job you can have than being CEO of Etihad Airways," he says.
Train To Gain
Etihad Airways employs just over 600 pilots, a figure it needs to double in the coming years under its ambitious fleet expansion plan. In order to make sure it can find enough pilots to operate its growing fleet, the carrier has embarked on its own national cadet pilot training programme for both local Emiratis and expatriates.
"We want to induct each year 100 Emirati pilots and 50 expats," explains Etihad chief executive James Hogan. "We're very keen to bring in people aged between 25 and 35 who see their career as being here in the Middle East, and not just as being three or four years on their CV."
Another advantage of having its own pilot training programme, says Hogan, is that Etihad can train its pilots up from scratch to fit its own mould. "If you think of the size we're going to be, having a cadet pilot programme means that from day one they're in our culture. They understand our operation, our standards and our performance from day one.
"We're very focused on what this airline is going to look like, the type of people we need, and we're addressing the challenges of accommodation and schooling to make sure that we have the right community environment so people feel comfortable.
"If you look at the pilot community, this is not only a career change but a lifestyle change. With pilots it's about seniority and for them it's ensuring they've got the opportunity to grow. If you're bringing a family here it's a big step and people have to feel comfortable."
The cadet pilot scheme began in March 2007 and is now on its third group of cadets.
James Hogan featured on our cover in March 2003 when he headed Gulf Air: flightglobal.com/hogan
Source: Airline Business
