As the curtain came down, unveiling the first of the Etihad Regional-branded planes, so too was launched a new strategy in the UAE flag-carrier’s rapid global expansion.
But for an airline that has sent tidal waves through the global airline industry thanks to a flurry of equity and codeshare partnerships — seven and 48, respectively, to date — in the past few years, this deal was different.
It is the first time Etihad has put its name to one of the airlines it has a stake in, with the 33.3 percent buy-in of Swiss carrier Darwin Airline in November now morphing into the airline’s rebranding to Etihad Regional.
Under the deal, the airline will continue to be operated day-to-day by the Darwin Airline team from its existing headquarters in Lugano, Switzerland. However, Etihad’s mark is clear.
The fleet of 10 Saab 2000 turboprop aircraft will fly under the Etihad Regional name and, in a sign of the Gulf carrier’s financial muscle, its network will be expanded from 15 to 34 destinations by mid-2014. It will link in to seven gateways served by Etihad Airways such as Berlin and — from June — Zurich, while it will also link to the existing networks of airberlin and Air Serbia — two more of Etihad’s seven equity airline partners.
As Etihad CEO James Hogan explains, the two airlines will share resources, codeshare agreements — starting with 16 routes in phase one — and Etihad’s rewards programme, in a deal that Hogan argues gives travellers more choice.
“What it achieves for Darwin Airlines is global connectivity, for Etihad Regional, regional access throughout Europe and for us at Etihad Airways the opportunity to launch a new brand,” he told the world’s aviation press at the launch at Zurich Airport last month.
“It does deepen the partnership strategy, because it takes us into secondary markets where you will not see an Etihad Airways widebody aircraft operating throughout Europe.”
While Etihad, which is expected to become a $7bn airline in 2014, has been pursuing its expansion strategy for a number of years, the Centre for Asia Pacific Aviation (CAPA) says the Etihad Regional deal is significant for several reasons, including the fact that it allows Etihad to “connect the dots” in Europe for itself and its partners, linking hubs but also tertiary cities such as Zurich and Amsterdam that have largely been overlooked by Gulf carriers.
“Etihad Regional is not a move on its own. It’s a continuation of an acquisitive process that the carrier is engaged in to secure access to more markets and complement and accelerate its own growth,” CAPA senior analyst Middle East & Africa, Simon Elsegood, says.
However, it does reflect the large degree of scale that Etihad has achieved in Europe: there are now enough points and partners to start looking at synergies between them. Hogan himself even refers to Etihad’s partnerships as “forming our own alliance”, with each airline’s key hubs providing “the ability to build a strong network in our right and with our partners”.
Etihad bought a 29 percent stake in airberlin, Germany’s second-largest airline, in 2011, and last month officially acquired a 49 percent stake in Air Serbia. It also has stakes in Aer Lingus (3 percent), Virgin Australia (19.9 percent), India’s Jet Airways (24 percent) and Air Seychelles (40 percent).
Interestingly, CAPA notes that many of the cities that form the new Etihad Regional network such as Poznan and Wroclaw in Poland, as well as Berlin, are served by German aviation powerhouse the Lufthansa Group in what is being interpreted as a strike at the heart of Europe’s legacy carriers.
Hogan dismisses the suggestion that Etihad Regional is a declaration of war against Lufthansa, which considers Zurich a key hub, but acknowledges the relationship with airberlin, which has a strong presence in Zurich, is fundamental.
“The model is all about right shape, right size for our business and I have no doubt that we’ll be successful in Switzerland and [Lufthansa will] continue to be successful in Switzerland. What we’re giving it more choice to the customer,” he says.
However, the shift from Etihad’s virtual partnerships via its codeshare agreements to branded operations is nevertheless significant.
“What you’ll see moving forward is all the networks will connect,” Hogan continues. “The benefits of equity, and equity is a minority investment… it gives us the ability to work together on existing networks, facilities and to integrate our customer bases.
“It’s about sharing resources, knowledge and best-practice. It’s about reducing unit cost to improve the performance of the respective airlines and it has a whole range of other opportunities that one could argue were only available through full merger or takeover.”
Despite its fleet of 89 aircraft with 220 more on order, Hogan positions Etihad as a “mid-sized airline” and says he still can’t match the order books of Gulf rivals Emirates and Qatar nor does he have the base or timeline to do so.
“It’s smarter for me to invest, from where I sit, in these airlines, because what I do overcome is some of the barriers of entry into the European market or into the Indian market or into the Australian market,” he points out. “What I am able to do is plug in straight away with an established organisation.”
Saj Ahmad, chief analyst at UK-based StrategicAeroResearch.com, says Etihad Regional is a smart move and one that Etihad could even bring to the GCC to compete with the likes of Saudi Arabia’s flynas, the UAE’s flydubai and Air Arabia, and Kuwait’s Jazeera Airways.
“With Etihad Regional, the airline is tapping into feeder traffic that usually has a lot of high-yield traffic as well as passenger numbers — and ultimately it bolsters Etihad’s overall passenger carriage figures too,” he says. “The real gambit, aside from traffic grabbing, is to make it profitable.”
While financial details from Darwin are limited, and the value of Etihad’s buy-in remains undisclosed, Hogan says with the airline’s “strength in the restructure business” it hopes to bring Darwin Airline back to profitability by the end of 2014.
It achieved the feat with airberlin within two years and at Air Seychelles, which posted a net profit of $1m in 2013 after a restructure following three years of losses. The woman who helped with that turnaround, Shelley Cole, has been seconded to Etihad Regional to no doubt do the same there.
“Etihad is being sensible in that it’s moving to acquire partial stakes in distressed carriers, sometimes government-owned, sometimes wholly private, and then actively engaging to turn their businesses around, bringing in management resources, streamlining their processes, fleet programmes,” Elsegood says.
For its part, Darwin, which was founded by a group of aviation colleagues and investors in 2003, is well aware of the advantages of teaming up with the world’s fastest-growing airline. As well as an expanded network, Hogan confirms it is reviewing a tender for additional planes.
“This important equity partnership means [a] stronger financial base and well-resourced growth,” Maurizio Merlo, CEO of Darwin Airline, says.
The union with airberlin and Air Serbia was also unique and further bolstered its network capability, he says.
“We do believe in the importance of creating alliances between regional and international airlines, owing to create synergies and to better solidify our guests’ needs to travel offering them now worldwide destinations.
“The Etihad Airways partnership will enable Darwin to enjoy significant growth by providing a larger network to our customers between Europe and also by offering them great worldwide access.”
From this month, Etihad Regional will fly non-stop to Stuttgart, and from April it will add Dusseldorf, London City, Berlin, Poznan, Wroclaw, Zurich, Toulouse, Tirana and Zagreb. From May, Belgrade and Turin will join the carrier’s network. By the end of June, it will also fly to Bordeaux, Marseille, Nantes, Linz, Graz, Lyon and Verona.
Only a few of these destinations are already served by the Gulf carriers. As CAPA explains, the small size of the cities means Gulf carriers are unlikely to pursue intercontinental routes in the foreseeable future, meaning Etihad’s play is not about circumnavigating bilateral restrictions but rather serving cities Etihad is unlikely to do with its own metal.
“Etihad will look to funnel long-haul traffic on Etihad Regional while also providing regional connectivity links amongst its partners, allowing Etihad to connect the dots more directly than anything the carriers could do independently, especially since their regional operations are limited whereas Etihad can coordinate Etihad Regional,” it observes.
“And with liberalisation in the EU, Swiss-based Darwin Airline, under the Etihad Regional banner, can shuttle between whichever European cities it so chooses.”
Aside from the new livery, Etihad’s mark is all over the new brand. Its ten aircraft will by mid-2014 all have been refurbished with plush new leather seats and the crew will wear a uniform similar to that of Etihad Airways, ensuring commonality between the two partners.
However, Hogan pours cold water on earlier suggestions that the Darwin Airline partnership was the first of a bigger plan for Etihad Regional amid talk that airberlin, which recently unveiled a joint livery aircraft with Etihad, or Aer Lingus could come under the Etihad Regional banner.
“At the moment, this is the opportunity we’re looking at for Etihad Regional, we’re very focused, we need to set this up over the next 12 months, get the airline back to a very strong foundation. But in none of the airlines in the current portfolio do we have any plans to change the brand,” he says.
Ahmad says there is no need to rebrand airlines like airberlin, which are popular and instantly recognisable. There is also the issue of an EU market potentially reacting negatively to “Arabisation of what is essentially a European airline”, he says.
After all, as CAPA analysts point out, European airlines may have so far tolerated name-stamping activities such as sponsoring football clubs, placing a giant model outside Heathrow’s entrance and branding a cable car in London “but placing a foreign name on a local airline could bring Etihad into new territory”. “While re-branding Darwin as Etihad Regional raises its profile, it also stimulates greater attention from competitors,” CAPA says.
Hogan says the 140 nationalities that comprise Etihad’s 17,000 employees helps with that commonality, as does its presence on six continents.
The advantage, also, is that Etihad has gone into the Etihad Regional deal with the advantage of knowing how other, similar buy-ups have been tried and tested.
While some aviation analysts have pointed to Swissair, which bought into several European airlines in the 1990s before collapsing and eventually falling into liquidation in 2001, as well as tepid European expansions by British Airways and Scandinavia’s SAS as examples of how the same strategy has gone wrong, Hogan has previously dismissed the comparison, telling the Wall Street Journal in December that it was investing in airlines with strong management. “We expect them to run their own business model and we will achieve the top-line and bottom-line benefits,” he said.
“Etihad is biting chunks out of several airlines so its exposure is spread through diversity," says Ahmad. "Any strategy employs risk. Etihad is combining the Emirates-like organic growth model with stakes in other carriers to grow inorganically at its Abu Dhabi hub.”
Figures released by Etihad show a 16 percent jump in passenger numbers to almost 12 million for 2013. Of this, 1.8 million passengers were delivered via its codeshare and equity partnerships — a 38 percent jump on the previous year — and accounted for 20 percent of Etihad’s revenue, which at in the third quarter of 2013 topped $1bn for the first time.
However, Ahmad says while traffic has been growing, there will be pressure on the carrier to demonstrate its asset investments actually yield dividends.
“It has helped to turn around airberlin and Air Seychelles, so, on paper, it’s a ‘doable’ policy,” he says.
Hogan says he is always reviewing Etihad’s routes and is not afraid to back out of destinations it believes are not viable. Likewise, if Etihad felt it was “walking into a swamp” in any of its equity transactions, it would walk away.
So, what next for the carrier? It now has 100 destinations in its total network. Hogan says it continues its “due diligence” on a possible buy-in to Italy’s troubled Alitalia — an airline the aviation industry roundly believes is mired in political and corporate red tape — but insists he doesn’t “have a shopping list” of equity opportunities.
He says what the airline does look at is the network opportunities and whether it will complement its other equity partners as well as cost synergies, revenue improvement and the benefits of a strong management team.
However, when asked by Arabian Business whether such a deal was needed to quicken its expansion in the US, the one significant gap in its existing network map, Hogan turns to its codeshare agreements.
Etihad has partnerships with American Airlines and Air Canada, as well as a new codeshare arrangement with low-cost carrier JetBlue.
However, its joint request with Air Serbia to codeshare on services to the country has been rejected following intense lobbying by US airlines. That mirrors hostility against Gulf carriers by sections of the US aviation industry, which have been publicly protesting against Emirates’ move to add direct flights between Milan and New York, and pushing into the transatlantic market.
“If you’ve got the code, you’ve got the reach, that’s why we have such a good relationship with Air France-KLM, we’ve got a good relationship with American Airlines,” Hogan says.
However, Etihad’s $335m acquisition of a 24 percent stake in India’s Jet Airways, another loss-making carrier, and the opening last month of a US visa processing facility at Abu Dhabi is no doubt also helping the relationship as it brings in passengers from the lucrative Indian market.
Ahmad says America is no doubt a big market for the Gulf carriers, but given the angst over the DP World deal (which was cancelled after objections from US lawmakers) a few years ago, he doesn’t see Etihad “rushing to buy a stake in a US airline”.
“Let’s face it, why would they?” Ahmad continues. “Apart from Southwest Airlines and JetBlue, US airlines are outdated dinosaurs that provide next to no value at present. Etihad will be taking delivery of its first 787-9 this year, it has more fuel efficient 777-300ERs in service than all US airlines combined — they can use that strength to ply their trade without buying a stake.
“Their most recent deal with JetBlue shows that it is correctly going after the domestic network in the United States with a low cost, not legacy airline. That in itself speaks volumes.”
Elsegood says Etihad is being sensible in its approach, adding that inorganic growth doesn’t have to have an end game.
“Etihad’s strategy is about sustainability, growth and access,” he says. “My belief is that it will continue to be opportunistic in its acquisitions and partnership strategy, filling in blank spots in its global coverage and building its behind-gate secondary market coverage.”For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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