Way forward for Gulf airlines

Regional carriers have long pursued organic growth. However, Qatar Airways and Etihad are focusing on partnerships and acquisitions to expand Etihad Airway\'s surprise announcement of a deal to increase its shares in airberlin to 29.21 per cent might be overlooked by many as a mere extension of code-share arrangement or at best the acquisition of non-controlling stake in Germany\'s second biggest airline. However, it is far more significant than what it seems. The deal is nothing short of \"a corporate coup\". The two carry a combined total of more than 40 million passengers a year, operate 233 aircraft, and employ 18,000 people. Together, the companies generate more than $9 billion (Dh33.03 billion) in revenues. The deal more than triples the eight-year-old Etihad Airways\' network from 84 to 269 destinations either directly or with partner airlines. This means the Abu Dhabi-based carrier now offers passengers a route network with 80 destinations more than that offered by any other Gulf carrier. Article continues below This gives Eihad a strong foothold in the European market, that most European airlines have been trying to protect from increasing influence of the three Gulf airlines — Emirates, Etihad and Qatar Airways. With this deal, Etihad no longer remains a ‘Gulf carrier\'. It has emerged as a global force to be reckoned with. All just for $95 million. James Hogan, Etihad Airways Chief Executive Officer, refers to the move as \"a game-changer\". \"For us, this is a game-changing move and will help us to strengthen our global presence,\" Hogan told Gulf News in a telephone interview from Berlin. \"Our strategy is to forge stronger partnerships to strengthen our growing network. For us, partnerships and bilaterals are key to our growth.\" Etihad\'s latest deal comes six months after Qatar Airways stuck a deal to acquire a 35 per cent stake in Cargolux. Mainstream European airlines have been putting pressure on their respective governments to deny further traffic rights to the Gulf airlines. Emirates has been trying to secure traffic rights to Berlin for quite some time. While the state government and city administration have been supportive, Lufthansa has allegedly stood in the way. Debt crisis However, the European debt crisis has paved the way for a different method of penetrating these markets. The cash-trapped European airlines such as Aer Lingus, Alitalia, Olympia and airberlin have now become takeover targets for airlines with deep pockets. Although Etihad doesn\'t have deep pockets, it \"has pulled off what can only be described as a corporate coup\", says Saj Ahmad, Chief Analyst at UK-based Strategic Aero Research. \"Etihad\'s landmark deal with airberlin gives them a wonderful, if not unique springboard right in Lufthansa\'s backyard and a major presence in the EU — all without the headache of applying for extra slots and access rights. In terms of strategy, yes it\'s risky, but there are huge rewards. \"For me, the concern is that European airlines will be quick to croak about Arab carriers gaining access to Europe through subterfuge methods and circumventing traditional applications for more access to certain airports. We\'ve already seen France and Germany be cautious about what they award UAE airlines.\" There could be any number of factors behind Etihad\'s decision to move on airberlin. Most important it that this is a very fast way to expand operations to reach a wider customer base. The present Eurozone crisis offers a greater opportunity for airlines looking at the European market dominated by carriers struggling to make ends meet. \"The biggest risk facing airline profitability over the next year is the econ-omic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion — the largest since the 2008 financial crisis,\" said Tony Tyler, Director General and CEO of the International Air Transport Association (IATA), the global aviation watchdog. The Eurozone crisis puts severe downside risk on the 2012 outlook as illustrated by the recently published OECD economic outlook. \"Far from a predatory move, Etihad has seen that the EU is in utter disarray over the currency crises, that EU banks are not lending money and that airberlin is one of the biggest non-flag carrier status airlines in the region that needed a big capital infusion to continue its own path to recovery in the wake of cost and other economic pressures,\" Ahmad says. Organic vs acquisition IATA recently revised its industry outlook. For 2011, profitability remains weak but unchanged at $6.9 billion for a net margin of 1.2 per cent. Looking ahead to 2012, IATA downgraded its central forecast for airline profits from $4.9 billion to $3.5 billion for a net margin of 0.6 per cent. \"European carriers are by far in the most challenging position. Higher passenger taxes and weak home market economies have limited profitability in Europe,\" said the latest Iata report. \"Low profitability has been despite Europe being one of the fastest growing regions in terms of traffic this year. Yields have suffered and the base of strong demand grows more fragile as the sovereign debt crisis escalates.\" Despite growing opportunities for acquisitions, Gulf airlines remained cautious in investing to build stakes. Emirates had helped to bail out Sri Lankan Airlines by buying a stake in the 1990s. However, it continues to grow organically now. Since its launch in 1985, Emirates has massively expanded its reach far beyond that of the Gulf and Asia and is an established airline with a huge customer base and inherent cost efficiencies. It has returned a profit in every year but one since it was launched. Emirates\' growth has been organic and it has used its Dubai hub to provide one-stop worldwide connections. \"That\'s not to say [an organic growth] can\'t or won\'t work for Etihad, but we have to remember that the competitive landscape for Emirates is different from the one the eight-year-old Etihad finds itself in today. To that end, this is a major foray by an Arab airline — buying up a non-controlling stake in another airline,\" Ahmad says. However, if a valuable carrier does come up for sale, it should be a pause for thought, not just a quick deal opportunity. The likes of Aer Lingus and Alitalia offer nothing but labour and cost headaches, as do others like TAP Portugal and Olympic. \"Not all that glitters is gold and I don\'t see any head-to-head competition between Etihad or Emirates to take a stake in a struggling carrier that will require countless millions to overhaul and turn around,\" he says. It may even be better to wait until some of these weaker players sell or drop slots, or perhaps fold altogether to get better EU access. \"After all, why pay for a bad airline when you can acquire their slots at a fraction of the price when they are on their last legs?\" Ahmad asked. Epicentre Has the epicentre of the global aviation industry shifted to the Gulf? \"I\'d be inclined to say that the nexus of aviation and the pattern for future growth shifted long ago to the GCC,\" Ahmad said. \"Why else have European airlines been so critical about the growth of Arab carriers? They have been ridiculously slow to overhaul their fleets and cost bases while the GCC flag carriers have been ordering hundreds of billions of dollars worth of Airbus and Boeing jets and dominate the market for new jet sales and will continue to do so as they expand their global reach.\" The world has also recognised that the GCC offers some of the best, modern and efficient airports and this has led to the wider acceptance of \"one stop\" connection travel through the region to onward destinations. The likes of Emirates, Etihad and Qatar Airways are light-years ahead of their critical and inefficient competitors — some of who have been around for longer than the big three Arab carriers combined have been in existence. A mere five to six hours flying time around any point in the GCC places some 2.5 billion people under the radar. That market is still developing and is nowhere near saturation, particularly when so many cities are in need of massive overhaul of their infrastructure and air space capacity management. All the GCC players have done is to exploit this void to their advantage. Hogan has everything to smile about James Hogan, the 55-year-old Australian-born chief executive officer of Etihad Airways, is always smiling, especially when he is in public. \"We do not have any interest in extending this [stake in airberlin] beyond the 29.21 per cent. We want to grow through bilaterals and partnerships,\" he said. He was responding to a question by a section of the German press that was suspicious of Etihad\'s move, hinting it might be aimed at a takeover. \"No, we are not interested in that. We want to grow with our partners,\" Hogan said on Monday. He added that the airberlin stake was funded from the company\'s own resources. \"It was from our own cashflow,\" he said. Hogan, a native of Victoria, started his career in 1975 at Ansett Airlines as a check-in agent at Melbourne\'s Tullamarine Airport. Then he went on to hold several jobs at Ansett. Profitability In 1984, he joined car rental company Hertz. Hogan spent 14 years at Hertz. In 1997, he returned to the aviation industry as service director for bmi British Midland. He left it the following year to join the Granada Group. In 1999, he was appointed Chief Operating Officer of bmi before being named CEO of Gulf Air in 2002, with a responsibility to bring the loss-making airline to profitability. In just three years, he succeeded. His success attracted one of the shareholders of Gulf Air — the Abu Dhabi Government — which had withdrawn from Gulf Air board to launch Etihad Airways in 2003. Following the completion of his three-year employment contract with Gulf Air, Hogan joined Etihad Airways in 2006, to bring it to profitability — something that is in progress. \"We have managed to break even this year and look forward to become profitable next year,\" Hogan said.