By Anil Bhoyrul
Despite the global financial crisis Etihad announced a 2011 profit. Just how did they do it
He did it. I didn’t think he would, to be honest. In fact, if I’m really honest, it would have been a far better news story if James Hogan last Thursday reported that Etihad Airways, the airline he leads, had failed to break even. Nobody, nobody, expected Hogan to announce that the eight-year-old airline had actually made a net profit of $14m in 2011.
This is incredible, almost absurd. Let’s put some context here: we are in the midst of a global financial crisis, the worst in living memory. Oil prices last year were exceptionally high, there was huge regional instability and no shortage of natural disasters such as the Japanese earthquake and tsunami. Since Etihad Airways first came into business, seventeen major airlines have filed for bankruptcy, with massive players such as Mexicana, American Airlines, Japan Airlines, Delta Airlines and Northwest Airlines falling into financial disarray.
Only last October, the International Air Transport Association (IATA) predicted that total industry profits will fall from $6.9bn to $4.9bn over the next twelve months. Even Emirates Airline suffered a 76 percent dive in profits to just $225m in the six months to September 30 2011.
So, I have to admit, James Hogan’s rather bold prediction five years ago that 2011 would be the year that the company would become profitable, was starting to look rather hopeful.
When he announced last December that Etihad was taking a stake in the struggling airberlin, the cynics amongst us figured this was the prelude to the announcement of a new strategy: growth by acquisition, which would result in some financial pain at first. Profits would come later, maybe 2013.
The figures tell a different story. Revenues have shot up 36 percent to $4.1bn, and last year the airline carried 8.3 million passengers — that’s seventeen percent more than the year before. Average seat factors are still strong at 75.8 percent, a rise of two percent on the previous year.
But the real secret of Etihad’s success has been to operate in many ways as a low-cost airline, or at least to mimic the financial culture of a low-cost operation. When you look at the details, Etihad managed to cut the costs per available seat kilometre by 4.6 percent last year, and 16.6 percent over the past two years.
That equates to annual savings of more than $187m. Etihad may now be a global giant with over 9,000 staff, but it has aggressively pursued cost savings in every single aspect of the business, targeting huge operational efficiencies.
Most of all, its policy of fuel hedging has been hugely successful, with 80 percent of fuel costs hedged in 2011, protecting the company from the volatility of oil prices. This means that Etihad paid a fixed rate of $80 a barrel for 75 percent of its fuel.
Years ago I interviewed Michael Bloomberg, during the time when he ran his own company before going into politics. I asked him what he actually did every day. He replied: “I look at our costs. That’s the one thing I can control. Every single thing we do, every single thing we spend, I ask my staff, did we really need to do that? Can we do without it? Usually, the answer is yes.”
I suspect James Hogan has been doing a lot of this in the last twelve months, and last week’s results are proof that a well-run operation, no matter how bad the conditions outside, can still be profitable. I spoke to him last week shortly after the figures were announced, and asked him what the single biggest reason for the success was.
He told me: “You remember when the low-cost carriers first arrived on the market? They came with a clean sheet of paper, and challenged the legacy airlines. That’s what we did — we started with a clean sheet of paper. And we did things smarter.”
He couldn’t be more right.
Anil Bhoyrul is the Editorial Director of Arabian Business.
Way to go!