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Etihad Airways, what went wrong?


  • Why is Jet Airways sustenance crucial for Etihad Airways?
  • What went wrong with Etihad’s strategy?
  • Etihad’s restructuring plan

 

Jet Airways, a full-service carrier accounting for 14% of the market share in India, is yet another airline in the eye of the storm for its financial woes. While the collapse of Jet Airways will benefit other airlines in India, it will definitely dent Etihad Airways which owns a 24% stake in the airline. Etihad Airways is Abu Dhabi’s state-owned carrier. The airline initially saw staggering growth and flew 59 destinations with an operational fleet of 42 aircraft within just two years of the commencement of its operation in November 2003. However, a slew of bad investments and inefficient operations saw the airline post mounting losses on its book.

Regionally, Etihad’s initial goal was to compete with Emirates and Qatar Airways. In order to achieve this Etihad went on an equity-acquisition spree and took significant ownership stakes in partner airlines. This included a 29.2% stake in Air Berlin, 49.8% in Niki, 49% in Air Serbia, 40% in Air Seychelles, 49% in Alitalia, 24% in Jet Airways and 21.8% in Virgin Australia. Quite simply, the equity alliance strategy would have allowed Etihad to invest in struggling airlines operating in strategic markets and thus, enhance its global outreach. It was expected that investing in these partner airlines, it would generate synergies along with feeder traffic for its Abu Dhabi hub and help ward off competition from Emirates and Qatar Airways. This strategy sounded well in theory and allowed Etihad to make inroads in hostile nations with neither having to deal with political opposition nor requiring to start operations from scratch in a foreign land. In fact, some of these investments paid off well, while Air Serbia brought in feeder traffic for the Etihad network, Virgin Australia is successfully competing against Qantas. On the contrary, the investments in Air Berlin and Alitalia failed miserably with both the airlines filing for bankruptcy in 2017. This compelled Etihad to write off US$ 808 Mn from its book and in a way accepted that the investments were a failure. Etihad’s woes are now further worsened with the insolvency administrator of Air Berlin, which sued Etihad for €2 Bn, with the former claiming that Etihad failed to fulfil its financial obligations after it withdrew its funding. The Abu Dhabi based carrier registered losses to the tune of $1.9 Bn and $1.5 Bn in 2016 and 2017, respectively. The staggering losses saw then airlines CEO, James Hogan, bid farewell to Etihad.

Although the airline has not yet posted its annual report for the last year (2018), the airlines memo indicates another significant loss with the outlook for 2019 continuing to be negative. The new CEO, Tony Douglas, took up the reins in 2018 and announced a major restructuring that saw job cuts apart from cutting down the operating costs by 7-10% across its network. As per the restructuring plan, the airline was organised under seven key divisions, namely; operations, commercial, transformation, maintenance, repair and overhaul, finance, human resources and support services. In fact, the airline offered its pilots to take unpaid leaves ranging from a week to 18 months and offered Emirates (facing a pilot crunch) to absorb some of their surplus pilots on a temporary basis. Furthermore, as per the latest memo of the airline in January 2019, it planned to lay off another 50 of its pilots (c. 2.5% of its pilot strength) by the end of the said month. This was in addition to three rounds of job losses that saw more than 4,000 employees depart the company in the 18-month period. Moreover, while shaving off multiple destinations that were unprofitable to somewhat containing losses, the airline is now focussing more on point-to-point routes serving the Abu Dhabi base. Etihad has also reportedly reduced its extravagant offerings on passenger amenities and onboard services. It has almost done away with complimentary chauffeur services to most customers and has closed its ‘Style & Shave’ salons. Another big step recently undertaken was to cut back on its orders amounting to $21.4 Bn for Airbus SE jetliners and Boeing Co. in line with reducing excess capacity, unprofitable routes and containment of employee strength.

Fitch reported in August 2018 that the airline would continue to post losses through 2022. The credit rating company has attached a ‘high execution risk’ to the restructuring plan of Etihad airlines while confirming its long-term A rating with a stable outlook backed by the government support. While the airline seems to be experiencing a tough condition owing to its failed investment strategy, the next one to two-year time period will be crucial for a turnaround of the airlines financial and operational performance in line with the restructuring plan executed by the current CEO.
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