The Abu Dhabi carrier is buying stakes in airlines around the world to rapidly grow its international reach, but the strategy is not without risks. Published in MEED, 8 October 2013
In early August, Abu Dhabi carrier Etihad Airways put the final touches to its latest acquisition deal when it announced it was buying 49 per cent of Serbia’s national airline, Jat Airways. At first glance, it might appear a strange choice of partner. Trade ties between Serbia and the UAE are tiny and Jat itself has a fleet of just 10 planes. But the deal fits in neatly with a strategy that Etihad has been pursuing for the past two years.
Since December 2011, when the airline purchased 29 per cent of no-frills carrier Airberlin, it has bought stakes in Air Seychelles, Irish flag carrier Aer Lingus, Virgin Australia and India’s Jet Airways, the last of which is still subject to regulatory approval. It is a growth strategy that is markedly different from those of its two main rivals, Dubai’s Emirates airline and Qatar Airways, which have both generally preferred to operate alone.
Etihad’s immediate plans for Jat include rebranding it as Air Serbia and injecting $40m in cash, while promising up to $60m more in the future. It will also help the airline overhaul its fleet, retiring existing planes and replacing them with new narrow-body aircraft. In late October, Air Serbia will launch direct flights from Belgrade to Abu Dhabi, complementing an existing Etihad service on the route.
It is the last of these elements that lies at the heart of the strategy. As the last of the three big Gulf carriers to enter the market, Etihad has had to find novel ways to grow and ensure it is not left behind in the race for passengers and cargo. Simply ordering more aircraft and waiting for them to arrive is not an enticing option when its rivals are expanding so rapidly.
Etihad, which only began operating 10 years ago, has 78 planes and flies to 94 destinations. It is steadily adding more routes and says it expects to have 159 aircraft by 2020. Even so, the airline will still be trailing far behind Emirates and Qatar Airways, both of which already fly to more than 130 destinations. Emirates has the bigger fleet, with more than 200 planes against Qatar’s 128, but both also have 200 or more aircraft on order.
“Etihad is the youngest of the big three Gulf carriers and, to an extent, it wants to make up for arriving later on the scene,” says John Strickland, director of the US’ JLS Consulting. “With stakes in existing airlines, it gains access to different markets and existing traffic flows, rather than having to generate these by itself. The ideal is to grow organically, but if [Etihad] doesn’t feel it can do that quickly enough, there is a logic for buying these stakes.”
Even the bigger airlines have been looking for ways to augment their growth by linking up with other carriers, although they have avoided taking equity stakes. Emirates has a wide-ranging partnership with Australian carrier Qantas, involving codesharing as well as coordinated pricing and scheduling of flights. Qatar Airways has joined the Oneworld alliance, linking it to British Airways, American Airlines and 10 other carriers.
“There are similarities between the three big Gulf carriers in terms of promoting their hubs and promoting tourism, trade and transport, but they have different strategies,” says Sunil Malhotra, director for the aviation sector at UK consultancy firm EY. “Every airline, no matter how big and strong, needs partnerships because no carrier can cover the entire world on its own in a way that makes economic sense.”
Eithad’s growth strategy creates both opportunities and difficulties. On the plus side, it allows the firm to develop a wider international reach more quickly, using the partner airlines to funnel more passengers onto its own flights through its hub.
But there are also some costs. The financial outlay is something Etihad can easily bear, but the acquisitions also involve an investment of management time and effort. Many of the airlines that it has bought into have been struggling and it can take several years to turn them around.
“The equity stakes provide more defined and focused sales opportunities,” says Malhotra. “It also creates huge synergies in terms of scale and time to market. What would take years can now be shortened to months in terms of passenger and revenue growth. The most important risk is business failure. If the people, processes and costs are not managed successfully during mergers and acquisitions, these airlines might need more in terms of management time and cash. With any merger or acquisition, there are a lot of synergies that need to be created and if they are not managed properly, there’s a risk of creating diseconomies of scale.”
To date, the evidence suggests that Etihad has been able to manage any difficulties that have been thrown up. Airberlin is a good case in point, with the German carrier staging something of a recovery in recent years. In 2010, the year before Etihad got involved, Airberlin posted a pre-tax loss of E141.6m ($191.5m). Last year, the loss was a far healthier E3.2m.
“What [Etihad] has done over the past year or two with Airberlin is very impressive and somewhat unprecedented,” says Carter Stewart, managing director of the UK-based TWC Aviation Consulting. “It took some hard decisions and got [the German airline’s] cost base down. Part of the solution is getting out the chequebook and bringing in economies of scale, but more than anything, it is about going in and showing them where they can trim and giving them the financial support to make the trim and survive the labour strife. They can also use their weight to negotiate better airport contracts. They can then build the traffic numbers.”
Other, non-financial challenges may yet emerge, not least in terms of brand perception. Etihad is generally seen as a well-run airline and, like the other big Gulf carriers, it provides a service that is highly rated by passengers. That is not always the case with some of the airlines it is buying into, however, and that mismatch may yet cause problems.
It can also be difficult at times to see what Etihad hopes to gain from some of its recent purchases. Its stake of less than 3 per cent in Aer Lingus, for example, gives it little leverage and many of the major cities that the Irish airline flies to are already served by Etihad itself. However, a recent decision by the UK’s Competition Commission that Irish low-cost carrier Ryanair must reduce its 29.8 per cent holding in Aer Lingus to no more than 5 per cent means the Abu Dhabi airline could have an opportunity to increase its stake to a more meaningful level.
The deals with Air Seychelles and Jet Airways make more obvious sense. “What Etihad has quietly done is cornered the market in the Indian Ocean,” says Stewart. “Air Seychelles is in a near monopoly in the Indian Ocean. Air France and Virgin [Atlantic] are the only other really key players in that area.”
Etihad’s growth strategy is not just about buying equity stakes. The carrier has also been more active in signing codeshare agreements, with 46 deals signed to date, compared with 12 each by Emirates and Qatar Airways. Etihad also has majority ownership of Airberlin’s frequent flyer programme.
There are still some gaps in its route network, despite the flurry of equity deals and its own expansion. Etihad’s main strengths are connecting Europe, the Indian Ocean and Australia, as well as its home region of the Middle East. The most obvious areas to target in the future are North and South America, along with Africa, where its reach remains limited. The Far East could also benefit from more flights, particularly if air traffic grows as expected in markets that are currently relatively underdeveloped such as Indonesia, Vietnam and Burma.
Speaking at a travel industry conference in Germany on 24 September, Etihad’s chief executive officer James Hogan said the firm would consider more equity deals in the future. “Global reach is beyond the capacity of any single airline,” he said. “Progress must come through partnership; we will consider more strategic partnerships if they add value.”
Such deals may help Etihad reach into new markets more quickly than it would otherwise. But there may not always be many suitable targets and there is likely to be a natural limit to the number it can deal with in terms of management resources. Other airlines will watch with interest to see how it manages, but, even if it does enjoy long-term success with the strategy, it is unlikely that others will mimic Eithad’s approach. For one thing, there are not many carriers around the world that have spare cash to invest in such deals.