From the ground up: Etihad scales the heights as world-class performer

James Hogan, the chief executive of the Etihad Aviation Group, takes a break from a whirlwind tour of the airline’s Abu Dhabi headquarters to tell how he helped to build the airline from the bottom up. “It’s been a great opportunity to build an airline from scratch. We operate a safe, best-in-class airline that has […]

James Hogan, the chief executive of the Etihad Aviation Group, takes a break from a whirlwind tour of the airline’s Abu Dhabi headquarters to tell how he helped to build the airline from the bottom up.

“It’s been a great opportunity to build an airline from scratch. We operate a safe, best-in-class airline that has a positive economic effect and sustained profitability.

“Our standards have been very high from the start, especially in technical and pilot areas, and we’ve stuck to that. Our retention of executive talent is strong and those executives bring with them a culture of safety, service and cost management,” he elaborates.

At the Abu Dhabi headquarters, the staff would seem to agree. There is a buzz of committed activity about the place, whether it be from the trainee cabin attendants focusing on eye make-up techniques down to the experts manning the airlines incident room, where potential crises are headed off.

During the past 10 years, first as head of the eponymous airline, now as chief executive of the enlarged aviation group that runs it and other operations, the 59-year-old Australian has been the leader of the team that has built Etihad into one of the most recognisable brands in world aviation.

The airline flew nearly 18 million passengers to 117 destinations last year, and made US$103 million in profits – its best ever financial performance.

In addition – and this is especially pleasing for Mr Hogan – the strategy he put in place of building an international alliance of airlines beneath the Etihad banner proved itself, big time. Etihad’s partners – in which it has an equity stake, or codeshare agreement, or both – accounted for $1.4 billion of the total $9bn annual revenue last year, and 5 million of the passengers, lifting the total number of destinations within the airlines’ reach to 600.

Mr Hogan takes those facts as vindication of a strategy that has sometimes been criticised as a costly distraction. “The cost of all our equity investments is the same as that for three Airbus A380s. What the alliances do is provide a ‘virtual network’ of airlines. We can offer combined pricing and sales teams, and a frequent-flyer programme,” he says. To put that into context, Etihad operates eight A380s with two more scheduled for delivery next year.

As proof of the tangible benefits of the strategy, for Etihad and for the partner airlines, he cites the fact that one of them, Air Serbia, is about to unveil a new service between Belgrade and New York.

“It couldn’t have done that on its own, it would have been cost- prohibitive. But with our help and as part of the Etihad Group, it has become the only Balkans country flying direct to New York,” he says.

The financial rationale of the partnership structure was illustrated recently when the Etihad group was able to raise a second tranche of debt in international markets, bringing the total to $1.2bn during the past nine months. Most of the proceeds will be available to the partner airlines, giving them access to funds they would not have had on their own.

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Flagship lounge

Inside Etihad Airways’ new First Class Lounge & Spa at Abu Dhabi airport – in pictures

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“The second part of the bond shows what the partnership structure is all about. The market understands that and likes the strategy,” Mr Hogan says.

The outlook is good for the other members of the Etihad partnership family. Alitalia, the Italian airline that has been making a loss for decades, forecasts a profit next year and just unveiled a new branding identity, a sign of its increasing self-confidence under Etihad’s influence. The Abu Dhabi airline took a 49 per cent stake two years ago.

“The airlines feed off each other. The deal with Virgin Australia gave Etihad a presence there; the [Air] Seychelles deal provided a big stimulus to European travellers that fed through into the Etihad route network. In India, with Jet Airways [the Indian carrier in which Etihad has a 24 per cent stake], our presence has grown significantly, and we’ve built an ‘air bridge’ into that very important market that’s bigger than most of our rivals,” he says.

One of the earliest and most significant investments of the “partner” strategy was the deal in 2011 where Etihad took a 29 per cent stake in airberlin, Germany’s second-biggest carrier. It won the UAE airline an important slice of the European market, but also brought problems in the shape of a series of legal challenges in German courts to its codeshare deals, and financial losses as airberlin struggled in the competitive European market.

That codeshare dispute has largely been resolved in Etihad’s favour, while the turnaround plan at airberlin is beginning to bear fruit after a recent upbeat statement on prospects for the German carrier. But some aviation industry experts believe further restructuring of airberlin is likely in the coming months.

“Airberlin is the sixth-largest airline in Europe and increasingly important for us on the route between northern Italy and Germany, a real growth market,” Mr Hogan says.

Managing the equity and codeshare portfolio, and a set of other responsibilities apart from the core airline business, prompted a significant corporate restructuring last month, as a result of a rethink of the future size and shape of the Etihad organisation.

Mr Hogan moved on from being chief executive of the airline to the same position at the larger Etihad Aviation Group, which also oversees operations in engineering, cargo management and airport services, as well as passenger loyalty and tourism operations.

“We never had the ambition to be the same size as our competitors, but what we’ve done recently is to look at the shape of the business.

“Handling, catering, lifestyle, airport services, engineering have all been put under the same umbrella as the airline. There is also a team that handles our equity partnerships in the alliance airlines. It’s like a holding company structure that runs joint services, things like IT, HR, audit, treasury,” Mr Hogan says.

The other function tasked to the new group body is planning a succession, which Mr Hogan says is a “crucial” issue for Etihad and for all big companies.

“How many times have companies fallen into the trap of not having a smooth transition from one set of senior executives to another? I don’t mean just at my level but below that too,” he says.

Etihad is increasingly a complex and cosmopolitan organisation. About 140 nationalities make up the 27,000-strong workforce, with more than 3,000 Emiratis of whom 50 hold vice-president positions. Several Emirati women have made their way into top executive jobs – and there are also women pilots and engineers, Mr Hogan says.

That workforce is well equipped, he believes, to tackle the challenges facing Etihad and other carriers in the near future. In a rapid tour of the global economic horizon as it affects the aviation business, Mr Hogan says that the outlook is “mixed” – not an unfamiliar state of affairs for the airlines.

“We fly to six continents, so different regions are impacted differently. The challenge is that we often face factors outside our control – oil price, wars, pandemics, weather conditions. We cannot control any of these, we just have to ensure we have the capability to react appropriately,” he says.

Other challenges require longer-term solutions. The market in the UAE and the wider region has been affected by the fall in the price of oil and cutbacks of government spending implemented to deal with the resulting fall in revenue. National airlines, such as Etihad, are especially sensitive to such forces.

“In the home market, there is pressure because of the overall economic situation and a new focus on the cost of travel. There is also the effect of regional insecurity, in Iraq and Syria for example,” he says.

The oil price is one of the most important factors for the airline industry, especially in the Middle East. It is a major determinant of economic activity and therefore passenger demand, but is also the biggest item on the cost side of the equation. Etihad has not so far gained as much from falling oil prices as some of its competitors, but Mr Hogan says the benefits are yet to come.

“On oil, we’ve always hedged and done well out of volatility in the past, traditionally on a three-year cycle. We locked on to a higher price last time but now it’s coming down again and will be a positive thing for us,” he says.

But, oil price vagaries aside, he is optimistic about the future. “I’m bullish for Abu Dhabi over the next five years. The new Midfield terminal is going to be a major traffic driver for us and there are a lot of attractions coming on stream soon: Warner Brothers [theme park], the museums and all the other tourist attractions. I’ve been here [in the region] 14 years now and I know there is a strategy in place. It doesn’t grind to a halt just because of the oil price,” he says.

Outside the Middle East, the picture is again mixed. “South East Asia remains a strong market, and Australia is holding its own. Europe is not as strong as we’d like and fares have suffered. But with the A380 we are holding our own there. In India, the A380 is a very good thing for us and Jet,” he says.

There is unlikely to be a great surge in new destinations but rather “add-ons”, as Mr Hogan describes them. “We’re not going to go to too many more cities, but we will increase frequencies to places like Milan, London, Düsseldorf. In China, we’d like to do more. We fly to Beijing, Shanghai and Chengdu but would like more access. China and Africa are two key regions.”

In America, where Etihad flies to six destinations, the situation has been complicated by the dispute over open skies, with some airlines in the US. But following a determined campaign by Etihad and the two other Arabian Gulf airlines involved, Qatar Airways and Emirates, the matter has been handed over to US government bodies for deliberation. Few expect any ruling this year, before the election of a new president.

The policy of high-profile marketing in sports and leisure activities – like Manchester City football club, the Formula One Grand Prix in Abu Dhabi and the global fashion week events – is regarded as a success and will continue.

“They’re all winning brands, with international profiles that bring advertising awareness and recall,” Mr Hogan says.

“Our rate of growth has been phenomenal. We’ve matured and now see ourselves as a stable brand. That’s what I’ve been trying to explain to our American friends: you cannot build an airline from scratch in such a short space of time without capital investment,” he says.

Source: Business

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