Etihad strategy flies into difficulties

From the Seychelles to Serbia, Etihad Airways has been busy forging its own airline alliance by buying stakes in regional carriers.

But the Abu Dhabi-based company’s bold plan to fill its aircraft with partner airlines’ passengers is coming under threat in both Europe and the US, where rivals are complaining of unfair competition from fast-growing Gulf carriers.

The issue has become more acute as Etihad, Emirates Airline and Qatar Airways moved over the past decade from being fringe players in aviation to the most disruptive force in the industry, successfully wooing travellers who previously flew with longer established airlines based in Asia, Europe and the US.

Etihad, the youngest of the three Gulf carriers, has pursued a different strategy to its two larger peers, acquiring stakes in airlines and using code-sharing partnerships — in which companies sell seats on each other’s flights — to dramatically grow its network. Over the past four years, it had spent in excess of $1bn on stakes in seven airlines, including Air Seychelles, Air Serbia, India’s Jet Airways and Virgin Australia. But there are signs this strategy is running into significant problems. Some of the airlines that Etihad has invested in have required further cash injections and much management time. Etihad’s first deal — the purchase of a 29 per cent stake in Airberlin in 2011 — has developed into a legal battle with Germany’s transport ministry over the two airlines’ code-sharing agreement. “Their strategy of growth by acquisition buys numbers in terms of volumes,” says John Strickland, analyst at JLS Consulting. “But the kind of companies they have been investing in means they have also been acquiring complexity and the challenge of how much management time that takes.”

Last year, Etihad had to navigate through management upheaval at Alitalia, the lossmaking Italian flag carrier that it bought a 49 per cent stake in, and which has not reported a full-year profit since 2002.

But Etihad’s biggest headache in recent months has been Airberlin, the lossmaking German carrier. Hailed in 2011 as widening Etihad’s European network for less than the cost of a single long-range passenger jet, over four years later the investment has spiralled and caused more problems than the Gulf carrier ever anticipated.

The German transport ministry, having initially approved the code-sharing arrangement between Etihad and Airberlin, last year decided it was not allowed under an existing bilateral air services agreement with the United Arab Emirates.

The code-share is important to both companies. It provides Airberlin, which is undergoing a turnround, with important income, while Etihad supposedly gains more access to Germany’s top airports.
Etihad scored a victory in the legal battle last month, when a German appeals court supported its right jointly to sell tickets on 26 of the disputed 31 code-share routes with Airberlin until March 26. However, industry insiders believe the dispute is far from over.

A spokesman for the German transport ministry says it plans to “check the grounds for the court’s ruling and will then decide on our future actions”.

“In principle, the German government was and is open for talks with the UAE to find viable solutions for air traffic law issues,” he adds.

Any potential restriction to its code-share with Airberlin could have a big impact for Etihad. According to flight data from OAG, the aviation consultancy, as many as 92 per cent of Etihad’s worldwide flights this week will be operated on other airlines’ jets under a code-sharing agreement — compared with 74 per cent at Emirates and 65 per cent at Qatar. James Hogan, Etihad’s chief executive, has not been shy about pointing the finger at Lufthansa, Germany’s flag carrier, as the cause of its recent problems. “Our commitment continues to be undermined by the lobbying efforts and protectionist antics of Lufthansa,” he said in January. Over the past year, tensions between Gulf carriers and their counterparts in both Europe and the US have been growing. The big three US airlines — American Airlines, Delta and United — are urging Washington to review the Gulf carriers’ access to the US market. They claim that $42bn in subsidies the state-controlled carriers are alleged to have received over the past decade breach international open skies agreements. In Europe, there are signs the European Commission is listening to calls from certain airlines, notably Lufthansa, to take action. In December, the commission revealed plans to use aviation negotiations with Gulf countries as a way to address competition concerns.

However, some analysts question Lufthansa’s lobbying to restrict Etihad and Airberlin’s code-sharing in Germany, noting the possible negative knock-on effects if Airberlin collapsed.

“It’s in Lufthansa’s interest for Airberlin to exist, because if they didn’t it would attract stronger competitors like Ryanair and easyJet to expand even faster on short haul routes in Germany,” says Oliver Sleath, analyst at Barclays.

Etihad is confident regulators will recognise the benefits its equity alliance strategy offers to air travellers. “Unfortunately, we have seen an anti-competitive backlash from these mega-carriers, as they try to protect their dominant market positions against this new or improved competition,” said Mr Hogan.

Originally Published on Financial Times