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Despite stalled growth in China, Brazil and Russia, a wave of newly middle-class travelers from the BRICs and beyond will start visiting international destinations in the coming decades — dwarfing the numbers we’ve seen thus far.
Etihad’s CEO explanation of its investment strategy in other carriers that leads to integrated business initiatives and meaningful, lucrative returns flies in the face of how alliances have been run in the past. And it’s paying off handsomely.
James Hogan is sitting pretty. Relaxing in a private room in the opulent surroundings of the Grosvenor House Hotel, he has spent the three hours before we meet in the company of 200 or so bankers, financiers and suppliers delivering Etihad’s financial results for 2012 and its outlook for the coming years.
With profit after tax of $42m (£28m) in the year to December 2012 on sales of $4.8bn – compared with a net profit of $14m in the same period a year earlier – the Australian-born airline chief appeared confident and assured as he set out the Abu Dhabi airline’s stall.
With the Middle East airline having grown from a start-up in 2003 to what he refers to as a “global brand” today, Hogan, who earned his wings in the industry at Ansett, BMI and Gulf Air, is pleased with the position the airline is now in six years after he became chief executive.
When he was asked to transform Etihad in late 2006 it was a shadow of what it is today. A year before he joined, the airline had nine aircraft, was running at 60pc capacity and had 1.5m passengers – or “guests” as he insists airline staff call them – a year. Last year, Etihad had 71 planes, was flying at 79pc capacity and had 10.3m passengers.
Wholly owned by Abu Dhabi’s ruling emirati – seven of whom form its board – the airline is perhaps better known in the UK as the football stadium sponsor of Manchester City than for its series of flights in and out of the UK from Heathrow, Gatwick and Manchester.
Although Hogan has ambitions in the UK, it is his global alliance with partner airlines of which he is most proud. The strategy has seen Etihad take equity stakes in four airlines around the world – 29.9 percent in Air Berlin, 3 percent in Aer Lingus, 10 percent in Virgin Australia and 40 percent in Air Seychelles.
Hogan refers to it as the airline world’s first “equity alliance”, and argues this is a far better model than simply joining one of the large airline alliances, such as oneworld , whose members include British Airways, Cathay Pacific and American Airlines.
“I think they’re fractured,” he says of the major alliances.
“The one thing we’ve been able to do is we move fast, we don’t have the bureaucracy of an alliance. Because we have ‘skin in the game’ of our equity partners, we’re as focused on their profitability as our own profitability. Whereas in the alliances, they’re all competing with one another.”
Hogan argues that alliance partners focus on one another’s revenue top line, while Etihad’s equity strategy allows it to have conversations on booking technology, engines, product discussions and the best ways of cutting costs.
This week, Hogan and the heads of the four investee airlines will visit Boeing to discuss their fleet needs for 2020 and beyond – the first time they will have approached a manufacturer in this way.
Hogan is also working on a combined loyalty programme – topbonus – which will merge Etihad’s existing scheme with that of Air Berlin and Air Seychelles in the first instance.
He cites the two partner airlines as prime examples of the equity strategy, pointing out that both are now profitable, having been loss-making before Etihad invested in them.
“People were surprised we’d invest in Air Berlin,” he says of the December 2011 deal which saw the Abu Dhabi airline pay €72.9m to raise its stake from 3pc to 29.9pc. “We saw Air Berlin had huge value with regard to brand and market place presence.
“But 12 months later, one could argue, it wasn’t a bad investment. The business has turned around, it’s profitable.”
The latest airline on his radar is India’s Jet Airways – part of Hogan’s strategy to tap into the air market in the fast growing region.
Having ended talks with rival Kingfisher last year, Hogan won’t be drawn on when, or if, Etihad will invest, but admits that he met the Indian prime minister and other government ministers four weeks ago to discuss the situation.
“When you’re doing any transaction you have to ensure you understand the laws of business,” he says.
“We’re one of the first airlines that’s looking to take advantage of the changes to the foreign direct investment (FDI) rules, to invest in Jet.
“We’re completing our review of the business and just want to ensure that in whatever stake we take, we’re complying with the regulations.”
Specific areas of concern in India include tax on fuel and “monopoly” airport charges. Etihad spent $70m last month buying Jet’s three slots at Heathrow in a sale-and-leaseback transaction designed to give the Indian carrier a cash injection.
“You’re right, acquiring the [Heathrow] slots means we’re interested to do something. But we have to do it on the right terms,” he says.
The right terms did not arrive with Virgin Atlantic. Hogan admits he spent time looking at buying the 49pc stake in Sir Richard Branson’s airline, which Singapore Airlines eventually sold to Delta last December: “We like the Virgin business, we like the Virgin holiday business, but we just couldn’t get to a point where we agreed and so they moved on.”
Another area where he doesn’t want to give too much away is around Etihad’s ongoing relationship with Aer Lingus, the Irish flag carrier.
“It’s an important stake. We fly in to Dublin 10 times a week and it’s a profitable route for us,” he says.
“We’re working very closely with Chris [Mueller, Aer Lingus’s chief executive] and his team on what we’re doing with the network moving forward.”
A third bid attempt from low budget rival, Ryanair, for the Irish airline was blocked last month by the European Commission. Hogan says he always thought the Ryanair bid would be unsuccessful: “Let’s see how things get bedded down. We’re watching it.”
Asked specifically if Etihad will buy a higher stake once the Ryanair bid has lapsed, he said: “We’ll wait until all this is out of the way.”
Hogan’s vision is to build a profitable, sustainable airline with connections around the world, connections that will increase Etihad’s passenger load factors and so increase profitability.
Although the airline has its roots in the Middle East, he is aware of the need to expand geographically, but says five investee airlines may be close to the maximum needed.
“If the national carrier [BA} decides its more efficient to operate their main long-haul hub out of Heathrow and Gatwick, and feed it via A320s and narrow bodies, then so be it, “ he says.
“Our strategy is to operate in primary and secondary cities. The north of England is a huge catchment area for us – it’s a big Indian-Pakistani community, but it’s also got a big British community going down to Australia.
“We take advantage of the market opportunity. Consumers would prefer to fly non-stop out of the north of England than fly to London and then fly on.”
Even if Heathrow were to be expanded with a third runway, Hogan is not overly enthusiastic about the prospect of a bigger London hub.
Etihad currently flies three times a day from Heathrow, but Hogan says even at maximum he would envisage five flights a day.
“The issue for London as a hub is how does it compete against Paris, Amsterdam, Frankfurt?
“A hub brings corporate traffic, brings leisure, and has a catalytic effect on the economy,” he says.
He admits he has had preliminary talks with Glasgow and Edinburgh airports about opening routes north of the border, but points to the fact that Etihad will begin regular flights to Washington DC, Amsterdam and Sao Paulo for the first time in the next three months.
And what does he think of Middle East rival Emirates, which is on track to become the world’s second largest airline this year?
“They’re a global brand and in a short time we’ve also become a global brand,” he says.
“The mandate [from the Abu Dhabi emirati] is about a successful airline that’s best in class, the right shape and size, and one that makes money. We don’t intend to be the biggest.”