How to turn around airlines and make them profitable

Etihad’s three-way strategy for organic growth, codeshare and equity partnerships is delivering fast results, says Hogan

Image Credit: Abdul Rahman/ Gulf News
James Hogan, CEO of Etihad Airways, during an interview at Etihad headquarters in Abu Dhabi. As the airline enters its tenth year, it moves with confidence. Themanagement had earlier charted a 30-year roadmap. Accordingly, by 2017, it will have a fleet of 120 aircraft serving 130 cities.
Gulf News

Dubai: James Hogan, President and Chief Executive Officer of Etihad Airways – the man from Down Under – is right now on top of the world. And that is for a number of reasons.

First, he has successfully turned around two airlines – Gulf Air and Etihad Airways –one after the other and made them profitable during the last nine years. Hogan made his leadership mark in 2005 when he had brought Gulf Air to the black from being years in the red following a three-year turnaround period from 2002. He then led Etihad Airways from 2006 to make it profitable last year.

These were achieved at a time when the global aviation industry has been reeling from multiple challenges such as increased competition, high oil prices, dwindling profit margins and low yield.

Second, he changed the landscape of the aviation industry by forging codeshare partnership with 41 airlines and buying stakes in four international airlines – Airberlin, Aer Lingus, Air Seychelles and Virgin Australia – in quick succession, mostly during the last 11 months.

The Abu Dhabi-based national carrier of the UAE currently connects to 327 destinations – the largest by any Middle Eastern carrier – through 41 codeshare and four equity partnerships.

Third, with these deals, he has successfully demonstrated that one could turn foes into friends, without having to join any airline alliances. Those international airlines that once feared the rise of the Gulf carriers and had taken a defensive stand, are now embracing them.

And fourth, with these, Hogan is able to effectively utilise Etihad Airways to boost Abu Dhabi’s tourism industry, create employment and contribute to the growth of Abu Dhabi economy. According to a latest report by Oxford Business Group, Etihad’s contribution to Abu Dhabi economy rose to $8.05 billion (Dh30 billion) annually.

Etihad was established by an Emiri Decree in July 2003 by the Abu Dhabi Government and launched its first flight in November 2003. It grew operations at a supersonic speed, adding a destination a month for the first few years. It was outgrowing all other airlines at that time, without delivering profit, thus remaining an unsustainable business.

When Hogan took over the management of the airline in 2006, he slowed the pace of its growth and put a turnaround plan to the airline’s shareholders to make it profitable – while at the same time maintaining a healthy growth. In the meantime, it has secured financial independence and has been funding its own fleet and expansion, with the help of banks. The airline has a total debt exposure of $6 billion (Dh22 billion).

Etihad made a profit of $14 million (Dh51.38 million) last year. At the end of its ninth year this month, the airline currently serves 86 destinations directly in 56 countries with a fleet of 68 aircraft and 10,335 staff.

So, how does it feel? “Wonderful, great,” Hogan, 56, quips at his large, posh office close to the Abu Dhabi International Airport as he sips his favourite green tea.

“In less than 10 years, we have taken a blank sheet of paper and created a business with 10,000 employees, more than 130 nationalities; state-of-the-art infrastructure and facilities’ award-winning best-in-class service; serving more than 10 million passengers this year.”

In 2011, Etihad delivered $4.1 billion in revenues, up 37 per cent over 2010. “Despite our relative youth as a business, we delivered a profit,” he said.

Although Etihad was a relatively new player on the aviation scene, Hogan has been able to turn the tables in some fronts. In profitability, it is clearly in the black compared to most regional carriers. In terms of network reach – it has even outshined Emirates – with the help of its partners.

So, with the challenging phases of its formative years and growing pains behind, how does Etihad’s future look like?

“Excellent,” Hogan says. “We are going to deliver good profits to the shareholders. The operational synergies with equity partners are also helping them in strengthening the balance sheet.”

Etihad had invested $105 million in acquiring 29.21 per cent stake in Airberlin – which the airline has already recovered from this partnership within 11 months, Hogan said.

By running a three-way growth strategy including organic growth, codeshare and equity partnerships, Etihad has changed the rules of the game in the industry. It has demonstrated that this airline could serve a larger number of passengers by reaching a wider network of international destinations within a short span of time. How others change their tactics is to be seen in the coming years.

However, the competition is graduating to a new level, a new gear.

As competition gets intense, all the three major regional carriers race ahead in forging alliances. That might explains why Qatar Airways decided to join One World Alliance – that will give it larger foothold in the market.

So, changing landscape of the Gulf’s aviation industry looks interesting with the new realities where all the three players have raised stakes. This has been acknowledged by a latest report by the International Air Transport Association (IATA), the global aviation watchdog.

“The rise of the Gulf carriers is an amazing story. They are leading Middle East traffic growth that is still in double digits. The Gulf area has prospered from big thinking on aviation,” Tony Tyler, Director General and CEO of IATA, said at a meeting recently.

In the UAE, a study by Oxford Economics recently concluded that aviation supports some 15 per cent of GDP and 14 per cent of total employment. “Building on world-class infrastructure and business-friendly policies, the Gulf carriers are now extending their reach through alliances, equity stakes and innovative partnerships,” Tyler said.

The Middle East and North Africa (Mena) is a growing force in aviation. For example, over the last decade, the Middle East share of global international traffic has risen from about 5 per cent to about 11.5 per cent.

As the airline enters its tenth year, it moves with confidence. The airline’s management had earlier charted a 30-year roadmap. Accordingly, by 2017, it will have a fleet of 120 aircraft – a mix of Boeing and Airbus, serving 130 cities directly by a team of 18,000 professionals.

In 2008, just within two years into the helm of Etihad, Hogan stunned the aviation world by placing orders for 205 aircraft including 105 on firm orders – with a combined value at list price to the tune of $43 billion (Dh158 billion). The airline will receive 14 aircraft next year when it will add Washington DC, Vietnam and Brazil to its network.

Although size does matter, Hogan says, “We do not want to be the biggest airline – but the best in class, safe and profitable airline that will deliver good value to the shareholders and network partners. We have demonstrated that and we are looking towards an exciting future ahead of us.”

He was just back from a trip to Washington DC where he spoke at a business meeting ahead of Etihad’s planned launch of services to the US capital in March next year. “The global economic crisis has changed economies, it has changed industries and it has changed businesses. We have all felt its impact. We’ve all had to react to new economic realities,” Hogan told American businessmen.

The air travel industry has been no exception. Aviation is one of the most sensitive barometers to macroeconomics. In every major recession, it is airlines that feel it first and often it is airlines that feel it hardest, he said. “To put that in perspective: This is an industry that has lost more money than it has made in more than a hundred years of operation. One of the reasons that the industry is hit so hard is its structural inefficiency. Aviation is an industry that, across much of the world, is still governed by rules that date back to 1945.

“The result is an industry still facing the same, frustrating internal and external systemic constraints to growth and meaningful profitability. In the last few years, however, we have started to see new approaches.”

However, Hogan says, with the equity partnerships, he does not want to acquire controlling stake in other airlines. “Our equity stakes are not about seeking control; they are about cementing partnership – partnership that will deliver growth in a constrained and challenged global landscape. This year, those partnerships will deliver something in the region of 20 per cent of our total revenues.

“So, in our new model, we have taken what we believe is the smart approach to work around the limitations of the global aviation sector.

“Partnership allows us to work with airlines around the world, extending our reach and our network to become a truly global carrier. Partnership allows us to work on new product and service synergies to cut out the cost and inefficiencies that keep the aviation industry in the financial doldrums.

“It is apparent that other airlines are also starting to recognise the importance of such partnerships, with new long-term ventures and equity deals being discussed across the industry. So finally perhaps, the air travel industry is changing too. Perhaps it is realising there is a new way of doing things. Together,” he concludes.

For the time being, Hogan’s three-way growth strategy is delivering good results. How it shapes up in the future is to be seen.