By NICOLA CLARK
Published: October 4, 2013
(dal New York Times)
PARIS — Just a few years ago, James Hogan, the chief executive of Etihad Airways, probably would have had trouble scoring a meeting with one of his European counterparts. These days, however, it seems he’s never been so popular.
They also argued that Etihad and its peers, backed by deep-pocketed governments and not burdened with outdated terminals, airport taxes and rigid wage schemes, enjoyed an unfair advantage that European airlines could never match.
That attitude changed as Europe’s protracted economic crisis erased billions in airline profits and wiped out thousands of jobs. Some of the region’s weakest carriers are now reaching out for a financial lifeline, which reduced the industry’s protectionist impulses.
These days, instead of being viewed as a predator, Mr. Hogan increasingly finds himself welcomed as a partner — even as a potential savior.
Central to this change of heart, analysts say, has been a dawning appreciation of Mr. Hogan’s unique strategy for expanding the global reach of Etihad, which is wholly owned by the government of Abu Dhabi, the capital of the oil-rich United Arab Emirates.
Flush with Abu Dhabi’s wealth, over the last two years Etihad has spent more than $1 billion buying equity stakes and lending cash to half a dozen struggling airlines on three continents, building what Mr. Hogan calls an “equity alliance” to complement Etihad’s existing network of shared-ticketing agreements with more than 40 carriers.
In terms of its overall passenger carrying capacity, Etihad is still dwarfed by both of its gulf rivals, as well as most major airlines in the United States, Europe and Asia. But Etihad’s emerging status as a go-to financier has helped raise its global profile.
“There have been various cross-border acquisitions in the airline industry over time, but nothing like this,” Craig Jenks, an independent airline consultant in New York, said of Etihad’s strategy. “It is quite distinctive and a radically new way for an airline to position itself in the global marketplace.”
Etihad embarked on its equity-investment strategy in Europe at the peak of the euro crisis in late 2011, sweeping in to buy a 29 percent stake in Air Berlin, an unprofitable German carrier that was more than $600 million in debt. One month later came the purchase of a 40 percent stake in Air Seychelles, a struggling state-owned airline serving the remote island in the Indian Ocean.
That was followed last year by a 3 percent stake in Aer Lingus of Ireland and a modest investment in Virgin Australia that has since grown to 17.4 percent.
This spring, Etihad announced a $600 million deal with Jet Airways of India for a 24 percent stake and access to Jet’s coveted takeoff and landing slots at Heathrow Airport in London.
In August, it snapped up a 49 percent stake in Serbia’s national carrier, Jat, joining forces with Belgrade to inject $100 million into the unprofitable airline that it plans to re-brand as Air Serbia in November.
Mr. Hogan has hinted that Etihad has an appetite for still more. “We don’t have a shopping list,” Mr. Hogan said in a recent interview in Paris. But “we invest where we feel we can achieve a strong commercial agreement and work together on cost synergies.”
During a late-September trip through Europe, Mr. Hogan found himself besieged with questions over his next move. Media reports speculated that Etihad was considering an investment in Alitalia, the troubled Italian flag carrier. (For now, Etihad’s code-sharing partner, Air France-KLM, which already owns 25 percent of Alitalia, is the only airline that has expressed any willingness to consider such a deal.)
Others suggested that Mr. Hogan had his eye on Poland’s state-owned carrier, LOT, which last year resorted to a 100 million euro ($136 million) government bailout in a bid to avert bankruptcy. And with Ryanair facing a regulatory mandate to reduce its large minority stake in Aer Lingus, might Etihad be interested in raising its holding?
Mr. Hogan seems bemused by such speculation. “We don’t invest for the sake of it’s the nice thing to do,” he said. “Unless we believe we can make it work long term, we’re not going to step in.”
A broad-shouldered, former Australian rules football player from Melbourne, Mr. Hogan, 56, joined Etihad in 2006 after more than three decades in the travel industry.
His career has spanned three continents and included stints at the airline Ansett Australia, now defunct; British Midland International, which is now part of British Airways; the American car rental group Hertz; the Forte hotel chain; and the Bahrain-based airline Gulf Air.
He was brought in to run Etihad by Abu Dhabi’s governing Al-Nahyan family, which had ambitions of turning its young regional airline into a global powerhouse and was impressed by his success in restoring Gulf Air, which had been a perennial money-loser, to profit in just four years.
Analysts agree that Mr. Hogan’s strategy has succeeded in feeding ever more passengers from its partners onto Etihad’s network. The airline’s annual traffic has grown by 42 percent over the last two years, to nearly 12 million passengers. Etihad says that a fifth of its revenue, which hit $4.8 billion last year, is now generated by its equity partners.
Etihad reported a net profit of $14 million in 2011 — its first year in the black. That nearly tripled to $42 million last year, despite an uncertain economic and geopolitical environment.
And while Etihad, an unlisted company, does not report quarterly results, it says it is on track for further profit gains this year.
Its network now encompasses 94 destinations in 45 countries. Alongside its gulf peers, Etihad, whose name means “union” in Arabic, has cultivated a reputation for luxury.
Its first-class and business-class services are consistently rated among the world’s best in passenger surveys, offering amenities like private suites with fully flat beds, Wi-Fi and meals prepared by onboard chefs.
This year, Etihad was ranked seventh out of 200 airlines in the Airline of the Year survey by Skytrax, a British air travel research company. (Emirates, followed by Qatar Airways, topped the list, which is based on an online satisfaction survey of 18 million passengers worldwide.)
Mr. Hogan insists that Etihad’s investments are not purely opportunistic. There is a coherence, he argued, in a strategy that takes advantage of having a hub in the Persian Gulf which, thanks to advances in aircraft technology, allows Etihad to fly nonstop to almost any point on the globe.
“When you sit where I do, at a crossroad to the world, I think the logic is pretty clear,” Mr. Hogan said.
“When you’re flowing traffic and moving passengers through our system as we are — from Virgin Australia over Abu Dhabi, over Frankfurt, over Munich, over Düsseldorf with Air Berlin — that’s a strong natural flow coming over the hub and distributing traffic accordingly.”
Mr. Hogan argues that being a shareholder in Etihad’s partner airlines gives the company access to confidential financial and marketing information from its partners and opportunities to shave costs by pooling functions like crew training and call centers.
There are also joint procurement deals. “We take advantage of scale,” Mr. Hogan said, by negotiating as a bloc for as much as possible — whether for in-flight entertainment systems, jet engines or even new aircraft orders from Boeing and Airbus.
He cited plans for Etihad and Air Berlin to share a common interior, with a new business-class cabin, on the 56 Boeing 787 Dreamliners that the two carriers have on order.
“In their own right, they couldn’t have afforded that,” Mr. Hogan said of Air Berlin, in which Etihad has invested $105 million for its stake and extended a further $225 million in loans. “But they’ve achieved a big cost reduction on the back of us.”
There is a risk, though, that even backed by Abu Dhabi wealth, Etihad could overextend itself.
“Some of the airlines they have got involved in face significant financial challenges,” said John Strickland, the director of JLS Consulting in London, citing Air Berlin, which barely broke even in 2012 after four years of losses, and Jet Airways, which remains unprofitable and struggling to service more than $2 billion in debt. “They are gaining market access, but in a way that creates enormous financial obligations.”
Mr. Strickland and others noted that, for at least one airline, expansion through acquisition ended in tears. Back in 2001, Swissair — once so flush with cash that it was called the “flying bank” — collapsed under the burden of losses and financial guarantees from minority stakes in several troubled European carriers, including Sabena, then the Belgian flag carrier. Swissair was eventually resurrected, but as a much smaller airline now owned by the German group Lufthansa.
Mr. Hogan rebuts such comparisons. “This isn’t the Swiss model,” he insisted. “We won’t step into other peoples’ problems. We only invest if we see network cooperation, the ability to take out costs collectively and a good management team.”
As for Etihad’s future investments, Mr. Hogan remains coy. For the next several months, he said, the focus will be on India. Last month, India and the United Arab Emirates signed an air services pact that will allow both Etihad and Emirates to triple their capacity on Indian routes for the next three years. Etihad’s investment in Jet Airways, which won approval from India’s cabinet on Thursday, is expected to take full advantage of that.
But Mr. Hogan concedes that he would like to expand his foothold in the United States, the world’s biggest passenger market, where Etihad so far has only limited service — to New York, Washington, Chicago and, soon, Los Angeles. Etihad is heavily reliant on its code-share partner, American Airlines.
But even Middle East oil money would go only so far in the sprawling, brawling airline market in the United States. The field of prospective targets is limited, Mr. Hogan said, by the high operating costs and financial liabilities of prospective partners.
“It would probably be difficult with a big U.S. airline,” he said.
