The Etihad chief executive James Hogan explains the airline's bold global expansion strategy.
Etihad Airways expansion plans soar ever higher
Etihad Airways launched a direct route to Los Angeles last week, marking the fourth destination in the United States for the Abu Dhabi carrier as it continues to aggressively expand its network into the country.
At an event to celebrate the launch of the route, the Etihad president and chief executive James Hogan talked about his strategy.
Why has Etihad opened a new route to LA?
I guess there are a lot of reasons as to why LA. The US has over 1,000 companies in Abu Dhabi, over 60,000 American nationals and the trade between the US and the UAE is very strong. And certainly if you consider aerospace it’s a very important part of the that trade mix.
Why has Abu Dhabi opened a pre-clearance facility for flying to the USA?
For us I know there are a lot of people who go why should it be in Abu Dhabi? It’s a government to government issue. As a businessman for Etihad Airways and for Abu Dhabi I think it’s a fantastic advantage. There has been some criticism from the American airlines sector. Like everyone in life they are more than happy to have their view. I think it’s a game-changer for Etihad; to clear customs in Abu Dhabi and then arrive in America after a 15-17 hour flight and walk through as a domestic customer is a major benefit. There’s also a lot of apprehension regarding people who come out of the Middle East — whether it be Pakistan, Bangladesh. And if there’s going to be an issue with their documentation, it’s probably better to have it in Abu Dhabi than to have them fly all the way to a US point of entry then turned back. We have an agreement with the federal government of the UAE, whereby 85 per cent of the costs are borne by the UAE Government. It’s only been in operation since January, so we are still working through the costs.
Do you have a target for how many US destinations you will have in five years’ time?
I would expect in another five years we would have at least three more cities — that’s on the drawing board — on top of Dallas. As you know we’re caught within the Canadian bilaterals. We’re maxed out [on] access into Toronto and I would expect to see greater access into South America. But this is a long road.
Are you planning to fly to other US destinations?
Dallas will be the last city for a couple of years. We’ll just consolidate our American operation.
How are you ensuring Abu Dhabi International Airport can accommodate Etihad’s growth?
We’re working very closely with Tony [Douglas, Abu Dhabi Airports (Adac) CEO] at the airport on how we bridge to 2017 [when the new airport is completed]. It’s tough but I think you’re going to see a new business class lounge opening in the next 30 days that will take 500 people. We continue to work with Adac on making sure that we can grow.
How can you improve passenger experience after US customs?
We are planning to build a premium lounge post pre-clearance. We’re just waiting for the appropriate approvals. I would expect it in the next three months. We’re also opening up an arrivals lounge too in Abu Dhabi airport. If you’re an economy passenger we’ll work with the airport to try and put in as much as we can. But that’s US territory as you go downstairs. So you have to work within the US requirements to process passengers, and as they come upstairs usually people are going straight on board the aircraft.
What’s Etihad’s strategy with regards to making airberlin (in which it owns a 29.2 per cent stake) profitable?
I think people forget that Germany is a huge outbound market. Thirty-five million people a year travel on airberlin so it’s the sixth-largest airline in Europe. We’ve just announced with airberlin that they will fly from Vienna to Abu Dhabi at the end of the year. And they are flying from Stuttgart to Abu Dhabi. And one other German city next year. In fact with airberlin, as we go into next year, we’ll have more flights out of Germany than any Gulf carrier. So the network is how we work with our partners. But they have an issue with regard to their structure. We’re restructuring at the moment with airberlin. Nothing is sacred. It’s all part of the mix. Because what is important is that we see the airline move back to profitability.
Could you increase your stake in airberlin?
No. We have no intention to increase our stake in airberlin.
Will your overall profitability be affected this year by airberlin losses?
Etihad Airways Group is on track to make a profit this year.
How much do your alliances add to your net profit?
What they add is in excess of 20 per cent to our top line revenues and they have a considerable impact on our costs because we source as one. So on a unit cost reduction they are considerable. But that’s all that we declare.
Are you looking at taking equity stakes in any other European carriers?
No. At the moment no. I think we now operate 100 aircraft. We have another 220 aircraft to come now. So our strategy is in three parts; organic growth, codeshare and equity stakes. Organically we continue to grow in passenger and cargo. With codeshare we have 47 airlines that we are partnering with and some of those are becoming much stronger, so you’ll see in the next few weeks we’ll sign stronger strategic partnerships with some airlines. I can’t tell you which ones. It’s not equity but we get much more involved in cost and in looking at other synergies. Then there’s the equity and the equity is about how we stretch our network and how we take considerable cost out of the airlines over time. You see most airlines today duplicate their overhead. And what we’re looking at is centres of excellence in terms of training, reservations, in revenue accounting. And then what you’re seeing is we start to integrate. It’s about knitting the network so consumers can travel.
How does Etihad’s potential purchase of a stake of up to 49 per cent in Italian carrier Alitalia come into that strategy?
Italy is a major market in its own right. It’s a destination. Already our Rome flight which we launch next month is growing at the pre-loads of around 70-80 per cent. So if you look at us serving Italy there are huge traffic flows coming out of the Philippines, huge traffic flows coming out of Australasia. So you’ve got big Italian communities in Australia. You’ve got the Philippines as a Catholic country, pilgrimage traffic to Italy, the tour groups coming out of China and the Gulf. India is a huge market into Italy so the actual traffic flows are strong. Within Italy itself the Italians travel — whether it’s down to the Seychelles or down to Melbourne or east to India. So we start to mesh the network again. In Italy some of the biggest ethnic communities are Filipino. So when you start looking at segmentation, ethnic traffic flows and how we build the airberlin, the Alitalia network together, how we work with Air France-KLM, we will have with Etihad, Alitalia, Aerlingus, Air France-KLM, airberlin, there’s nothing stronger coming east over Abu Dhabi. There’s no stronger grouping of airlines. We just did that strategically and looked five or 10 years out, strategically it’s game-changing.
Will you require 2,200 job losses at Alitalia as reported?
I’ve said nothing. I’ve submitted a letter to the Italian stakeholders with our criteria to invest. I wrote to them last week. And I’m awaiting their response. We’re restructuring an airline. We restructured Air Serbia. We restructured Air Seychelles. And staff came out of both those airlines. So this is about restructuring and moving a business to a sustainable profitability. And if you don’t restructure you won’t survive, so within that letter that I sent there were a number of criteria that we were seeking as investors moving forward, and one of them was obviously the manpower sizing.
Do you have the management capacity to support the legacy carriers you are buying stake in?
What’s important with every investment we look at. The first criteria — is there a network fit? Second criteria — can we take out costs together? The third criteria — is there a good management team because it’s the management’s job to run the airline. We’re investors. What we do have is commercial strategies where we agree to work together.
Do you have any regrets at all about your strategy to buy equity stakes so aggressively?
Not at all, because we couldn’t have achieved the access to these markets that we have in India, in Germany and in Italy moving forward. You may not look at the situation today which obviously we do but I’m looking five, 10, 15 years from now. And access to these markets, traffic flows, how we integrate the brands. I’ll have a situation four or five years from now where interiors will be common, seats will be common. So over the horizon it’s game-changing. That’s probably why other airlines are a bit nervous about the strategy.
The powerhouse that Jet Airways and Etihad are going to be in India will be considerable. The powerhouse in Germany, the powerhouse we’ll be in Italy. And if you consider all these equity investments equal the price of two A380s, OK so we will probably argue that it’s a wise investment. If we had to get that reach operationally we’d need many more than two aircraft.
Who pays for your sponsorship? What do you say regarding leaked documents in the media that Etihad had access to a US$3 billion government loan which runs until 2027 at zero per cent interest?
Those documents were misappropriated. They were documents that would never have seen the light of day. The loan has always been there. It’s not a subsidy, it’s a loan that will be paid back. In fact the loan structure has changed from what was reported. Think of it this way — [we] set up an airline from scratch. So the guy that runs Lufthansa, he didn’t start Lufthansa from scratch. Seventy years ago someone set up Lufthansa, gave them all these planes and airports and built it up. And then 20 years ago they privatised the whole lot. They were given that airline for $1. So I think it’s a bit rich from the Europeans to throw rocks at us. Of course we’ve got to have seed money to set up the airline, but since then I’ve raised over $9bn in loans through banks to finance aircraft. So think what we’ve created. We had to have some start-up money. It’s the way you look at it.
Follow us on Twitter @Ind_Insights