The setting couldn’t be more spectacular. It is 7pm on June 10th and Etihad’s president and CEO James Hogan is checking his tie before walking onto a specially crafted stage in the gardens of the Beverly House. Situated three blocks from Sunset Boulevard, this six-acre site was once home to William Randolph Hearst, a honeymoon spot for John and Jackie Kennedy, and even a scene from The Godfather.
Hogan — here to officially launch the first Etihad Airways flight from Abu Dhabi to Los Angeles, has a tough gig: speaking after Danni Minogue and before Harry Connick Jr. The crowd wants a party, but Hogan needs to talk strategy.
Unfazed, he struts to the podium and begins. This is a company that has come from nowhere to become one of the fastest-growing airlines in aviation history, operating more than 220 flights a day and is on track to carry 14 million passengers this year. Last year its revenues reached $6.1bn, up 27 percent. And it is profitable. Little wonder it has options, orders and purchase rights for up to 300 more planes, to add to its fleet of 101 aircraft.
The audience, at first unsure, are quickly dazzled by the numbers. Buzz Aldrin, also in the crowd, looks startled. Twelve men have walked on the moon, but only one man can claim to run “The World’s Leading Airline” for five years on the trot. Hogan nails the speech, nails the crowd and nails Los Angeles. Harry can wait.
“I’m used to pressure,” he tells me as he comes off stage.
He can say that again. Two weeks later we meet again at Etihad’s Abu Dhabi headquarters. Hogan, as always, has a lot on his plate. The leaking of confidential four-year-old documents has raised questions over just how Etihad is financed, reviving claims that the airline is completely subsidised by the Abu Dhabi government.
There are question marks over his strategy of taking equity investments in largely underperforming carriers. Exactly how the airline has managed to turn in a profit for the past three years is under scrutiny. Its public service obligations, its Emiratisation programme (and who pays for it) and its sponsorships are also in the spotlight. The critics (mostly the European carriers led by Lufthansa) are crying foul, wondering whatever happened to the level playing field.
It takes 25,000 Guest Miles to go from Coral Economy to Pearl Business, but just a little splashing of smear and innuendo can upgrade fiction to fact. The Etihad story is a good story, his rivals will concede, but not before suggesting it may be too good to be true.
Hogan, for his part, has remained silent. Until now. “What we are seeing from some of our competitors is a campaign which I believe is to block greater choice for the consumer. And if you block Etihad, you block choice,” he says.
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At the crux of Etihad’s woes is its funding structure. Exactly where has the money come from, and more importantly, does it amount to a government hand out? If so that would derail its European expansion plans and its strategy of taking minority stakes in other carriers. Hogan says it is time to explode the myths.
“Our shareholder is the Abu Dhabi government, and as a shareholder, they have invested in their airline via equity and start-up loans. Let’s be clear. These are loans/seed capital. We have used that money to place fleet orders and build the infrastructure of the airline. And there is a repayment schedule for the loans. We have also raised $9bn from 68 financial institutions, all without sovereign guarantees.”
So there is no subsidy whatsoever from the UAE government? “We are not subsidised. This is not a subsidy, these are shareholder loans, and the shareholder loans will be paid back in time. It has a fixed repayment schedule,” he says.
Pressed on the claims in leaked documents that the money amounts to a multi-billion-dollar handout, and that the documents were part of an official internal presentation to the Crown Prince of Abu Dhabi, Hogan says: “In any business you continue to model different scenarios. You draft documents that are often never presented. And these documents were misappropriated, which has now been reported on. But yes, we were given start-up funds. Of course we were. But I say it again, these were loans, and over a period of time these loans will be paid back.”
Were the documents ever part of an official presentation? “Those documents, in fact, were never presented,” he says.
Hogan has also come under attack over Etihad’s ‘public service obligations (PSO)’ — which cover areas such as non-profitable routes that it has to fly for government reasons, as well as the level of funding it receives for its huge Emiratisation programme. Etihad first took the to the skies with a ceremonial flight to Al Ain on 5 November 2003, and a week later came its first ever commercial flight, to Beirut. By 2011, it had already turned in a profit of $14m, and last year recorded profits of $62m, a massive 48 percent leap on the previous year. No easy feat. But was there a helping hand from the government?
“We have 103 routes, and out of those, a total of just two, yes only two, are PSO routes. We had six to begin with but four of those routes have now moved into profitability. Within the next 24 months I would expect the other two to move out of PSO. Yes, we get a contribution towards the operation of those two routes, as do all major carriers that operate PSO routes. But again, let’s be clear here: this is for two routes out of 103,” Hogan says.
He also says that some of the company’s Emiratisation programmes “are government-funded schemes”, but adds “as soon as these people come off these schemes, they come onto our payroll and they are 100 percent employed and paid by us. The government has similar programmes in other industries to train young Emiratis.”
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He also makes clear that any suggestion the company has been adversely affected by the fluctuating price of Brent oil in recent years is again a myth: Etihad has always hedged the price of fuel on a “three-year rolling programme.”
“Today we have fuel hedges with 33 financial institutions,” he adds.
There have also been eyebrows raised over its sponsorships. Just who really pays for these? And are they supplemented by the Abu Dhabi government? “All our sponsorships are paid directly by Etihad Airways, coming out of my advertising and promotional fund,” Hogan says.
Given the airline is clearly not subsidised, and operates on a commercial basis — and has its accounts audited each year by KPMG — why all the fuss? Why the smear, the innuendo and the muckraking? To understand Etihad’s woes, it’s worth looking more closely at its business model, its success and the negative impact on its mostly European rivals. By the time James Hogan came on board as president and CEO, on 10 September 2006, it was already clear that Etihad was never going to be, and should never plan to be, as big as other Gulf carriers such as Emirates, or the mega European players.
But Hogan saw it as being much simpler than that: it is all about networks and connectivity. In an increasingly digital market, people simply want to know how they can get from one point to another. Initially, Etihad made a huge push for codeshares and with huge success. Right now it has codeshares with 47 different airlines, giving a virtual network of 420 destinations.
Ironically, Hogan reveals that in mid-2011, he came close to signing a codeshare agreement with his biggest present-day critic, Lufthansa. “Twice they shook hands with me and then they reneged. The former CEO of Lufthansa had agreed for Etihad to move into a codeshare. At a supervisory board level they decided not to support him and so they didn’t go forward. That’s what prompted us to work with Air Berlin,” he says.
Of course, codeshares are nothing new in the industry. Though by their very nature they are limited and can be cancelled at short notice, making it difficult to plan long term joint sales and marketing initiatives. Not an ideal strategy on which to compete with legacy carriers that have much larger networks and are part of global alliances.
By 2010, Hogan started looking for more commercial partnerships, and signed a ten-year deal with Virgin Australia to cover codeshares, joint sales and marketing, sharing frequent flyer programmes and adding new Virgin Australia flights to Abu Dhabi. The big guns suddenly had a big rival, and the consumer had more choice.
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Hogan had soon added a third pillar to the Etihad strategy (along with organic growth) — that of taking equity in other carriers. This has seen a 21.24 percent stake taken in Virgin Australia, with stakes also taken in Air Berlin (29.21 percent); Air Seychelles (40 percent); Aer Lingus (4.99 percent); Air Serbia (49 percent); Jet Airways (24 percent) and Darwin Airline (33.33 percent). Alitalia is next on the cards.
All this meant that by the time of the company’s tenth anniversary in 2013, Etihad could offer more destinations than any other carrier in the Gulf, and could give most European and Asian legacy carriers a run for their money. Etihad, you could argue, has sneaked in from the back door and not only gatecrashed the party but stormed the stage. Not everyone in the audience is cheering.
“Look, the legacy carriers have a different model, a different rule book, so why are they attacking the Etihad rule book when their rule book in the 50s, 60s and 70s gave them the ability to create these mega airlines?” says Hogan, adding: “They talk about a level playing field, but what is a level playing field? We built this airline from scratch. Most European airlines are legacy airlines in their fifth or sixth management team. Their infrastructure was built from the late 40s then it was privatised and handed over to the new management. The dominant position in their home markets is grandfathered. Their infrastructure is all grandfathered. We don’t argue about that.”
So they are muckraking? “That’s what they do. But I wouldn’t do that. We’ve always been very clear that in business you have to respect your competitors. We’re disappointed that these myths keep on being circulated. Our job is to deal with the appropriate stakeholders at government level in countries where we have investments, and continue to communicate our story and meet the regulations in those respective markets. We wouldn’t have been able to invest in these markets if we weren’t able to demonstrate that we are an investor first. Within that investment we first see if the network fits. Where they need support we provide support. What’s wrong with that? In business, what’s wrong with that?”
He adds: “All these things we have to deal with about cheap labour, no unions, subsidisation... yes I don’t have the unions, but I am still bound by the number of hours people can fly. And quite frankly people wouldn’t come and work for me if they weren’t paid under international standards. And our social costs with accommodation and medical costs are greater. There is no corporate taxation in the UAE for any company, but we pay taxes in every country we fly into. That’s our business model, it’s different. If you saw a pharmaceutical company investing in another pharmaceutical company you wouldn’t get the emotion that we are seeing today. But this is the airline industry. Sometimes we forget that this should be about the consumer.”
Unfortunately for Hogan and Etihad, things (from the viewpoint of his rivals) aren’t likely to change any time soon. Privately, many in the industry suggest that foreign legacy carriers are happy to use Etihad as a whipping boy in order to garner more support from their own governments. A single, supportive shareholder is every CEO’s wish, but something only Hogan commands.
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Beyond that, there is also the issue of cost savings that is likely to alarm the rivals. Top-line revenues on partnerships accounted for a hefty $820m of Etihad’s $6.1bn revenues last year (the Air Berlin investment has already been recouped from additional revenues), but it’s the bottom-line savings where the real story is emerging. From in-flight entertainment with Panasonic, to engines with Rolls-Royce and GE, and on aircraft deals with Airbus and Boeing, right across the group Etihad and its partners have been able to take out costs.
“We take out costs together. And one thing the alliances have never done is take out costs. You could argue that all airlines have their organic growth and their codeshare relationships. It’s the third pillar which we have brought in, equity, which has knitted all those partnership networks together,” he says.
So what next for Etihad? It is unlikely that the sniping, coming from the likes of Lufthansa and Swiss Air, will stop. Their businesses are under threat, and Etihad’s gains are often their losses. Hogan likes the words “consumer choice”, and more choice means more carriers — and often, fewer revenues to the legacy carriers.
Curiously, none of this should be any great surprise to the legacy carriers. Etihad’s plans have never been kept under wraps. Back in July 2008, Hogan signed off one the largest aircraft orders in history, for 205 planes worth $43bn at list prices. Two years earlier, he announced a strategic plan which targeted break even by 2011 — by which time Etihad was already in profit. Already in 2014, it has announced nine new destinations, and its launch of “The Residences” on the upper deck of its A380s (which come into service this December) has taken the industry by storm.
The rivals had privately hoped that lossmakers such as Air Berlin would quietly bite the dust. Now they have been revived by Etihad. Alitalia, which the likes of Lufthansa and Swiss may well have been hoping would run itself into financial oblivion, has been given an Etihad-backed lifeline. Didn’t everyone see this coming surely? Did none of the competitors take Etihad seriously before?
“You would have to ask them. They are certainly taking us seriously now.”
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