Prevailing wisdom suggests that that airline industry should always do things in “threes.” We’ll soon have three big legacy carriers in the US that fit nicely into three big global alliances: Star Alliance, oneworld, and SkyTeam. But many have wondered whether the larger unaligned airlines would ever consider building a fourth alliance. The answer is yes. Though it’s not branded as such, Etihad is working hard on its effort to dominate the world. And its alliance is growing quickly.
Etihad has always seemed like Emirates’ dopey cousin. While Emirates has been the poster-child for fast, profitable growth, Etihad has always gone for growth regardless of profit potential. In the last couple of years, however, the airline has turned a profit (though I can’t vouch for the accuracy of the numbers). In 2012, it earned $42 million on revenues of $4.8 billion. That’s a miserable net margin of 0.87%, but well, it’s better than a loss. Of course, Etihad doesn’t need to be concerned with short term profitability, because it has all the money it could ever want from the United Arab Emirates. And it is spending like there’s no tomorrow.
The big three alliances are set up based on cooperation between separate entities with a joint venture or two thrown in, but Etihad, flush with all kinds of cash, has chosen a different tactic. It’s going with what has commonly been called an equity alliance. So far, Etihad has taken minority stakes in 7 different airlines.
Previous efforts at equity alliances have been disasters. Have you ever wondered why Swissair is no longer around, only to be replaced by Swiss as the national carrier? McKinsey convinced Swissair to buy stakes in a bunch of European airlines under The Qualiflyer Group branding. It put Swissair out of business. Why? Because when you have a minority stake in a bunch of airlines, you may have influence but you aren’t running them. Coordinating across several quasi-independent airlines can be insanely difficult, but Etihad thinks it can make it work. I guess with unlimited funds, you have breathing room if things go south.
As mentioned, Etihad has stakes in 7 different airlines today, so it’s worth talking about each one and then trying to understand why. Keep in mind that Etihad’s base is Abu Dhabi. Like Emirates in Dubai, Etihad wants to make Abu Dhabi a global crossroads. The service in Abu Dhabi far exceeds the demand, so it’s all about connectivity. And Etihad needs more and more people on either end connecting through to the other side in order to be able to keep that hub growing.
Aer Lingus – Etihad followed up a codeshare agreement with Aer Lingus by purchasing a 2.987 percent stake. (Not 2.988 – make sure you’re clear on that.) Etihad is now up to 10 weekly flights from Abu Dhabi to Dublin, and part of that capacity is filled up by having Aer Lingus feed people into Dublin who are going to the Middle East, Africa, Asia, and Australia. Aer Lingus can also feed Etihad in Manchester and London. But why buy the cow when you can get the milk for free? Etihad had a codesharing arrangement that didn’t require an equity stake. And a sub-3 percent equity stake is pretty tiny. But it does lock Aer Lingus in and give Etihad at least some say in what other partners Aer Lingus may decide to work with. Of course, it likely also has designs on a larger stake in the future.
airberlin – Etihad’s deepest dive in Europe so far has been with the purchase of 29 percent of Germany’s semi-low cost carrier airberlin. To be honest, airberlin doesn’t seem to know what it wants to do and its results haven’t been great. But it carries a lot of passengers and Etihad wants those people funneled through German cities and into Abu Dhabi. Etihad is also trying to spruce of airberlin’s offerings. If you fly in business class, airberlin is now installing the Etihad business class seat on its airplanes. And Etihad is planning on ordering airplanes for airberlin, along with other partners. That gives the combined airlines scale and bargaining power.
Air Serbia – You’ve probably never heard of Air Serbia. That’s because it used to be JAT, it was going bankrupt, and Etihad stepped in, changed the name, and bought 49 percent of the airline. Why? Well, you have Aer Lingus in the northwest of Europe, airberlin in the north central part of Europe, and now Air Serbia in the southeast part of Europe. Etihad is hoping that Air Serbia can provide regional feed, but it remains to be seen if that’s actually going to happen. For now, Etihad is focusing on bringing Air Serbia into the 21st century. Part of Etihad’s recent big order was 10 A320neos meant for Air Serbia.
Air Seychelles – Not sure where the Seychelles is? You aren’t alone. Seychelles lies about 1,000nm east of Tanzania in the Indian Ocean. Its population of around 85,000 is tiny, and the country relies a great deal on tourism. But Air Seychelles was failing as the gulf carriers started to bring the bulk of tourists into the islands. Etihad took a 40 percent stake, and Air Seychelles got out of the long haul game. In fact, Etihad flies A330s on behalf of Air Seychelles now. From Abu Dhabi, Etihad becomes the preferred carrier for Seychelles since it has a way to feed its network locally around the country. And it keeps those people away from flying its rivals in the gulf.
Darwin Airline – This recent acquisition is the most interesting to me. Etihad bought a third of Swiss-carrier Darwin and is rebranding it to be called Etihad Regional. Next year, Etihad will start flying to Zurich and will rely on
Etihad Regional to feed it there. This marks the fourth European member of the equity alliance and is the next step in Etihad’s desire to have its code and name in every city on earth. I’d imagine eventually it will try to rebrand airberlin and the other weaker partners if it can. Think Etihad Germany, Etihad Serbia, etc.
Jet Airways – Enough about Europe. Let’s look east. Etihad picked up 24 percent of Jet Airways in India. The plan here is the same. Etihad will increase its penetration into India and flow more traffic west through Abu Dhabi.
Virgin Australia – Last but not least, we can look toward Australia. Etihad now owns 19.9 percent of Virgin Australia. That’s less than Air New Zealand owns but more than Singapore Airlines does. This is kind of the plan B to the Qantas/Emirates tie-up. But it allows traffic to flow between the two networks and gives Etihad great access to Australia and New Zealand.
In addition to all this, Etihad has codeshare or frequent flyer partnerships with another 30-or-so airlines. This includes American, Air Canada, Air France/KLM, ANA, Kenya Airways, and more. The partnerships are all meant to drive traffic into the Etihad network. Look at airBaltic, for example. The two airlines announced a codeshare and then airBaltic announced it would begin 4 weekly flights from Riga to Abu Dhabi. All roads lead to Abu Dhabi.
But codesharing is one thing. This whole equity alliance is a lot riskier. We haven’t seen much effort in the Americas yet from Etihad, and that’s just a function of geography. But eventually, it may happen.
It is interesting to note that we have something like this already happening in the Americas at Delta. Delta owns a piece of Gol, Aeromexico, and Virgin Atlantic. Delta also has something in common with Etihad: Delta has a joint venture with Virgin Australia. (Delta’s partner Air France/KLM also has a codesharing relationship with Etihad.)
You can see how Etihad’s plan could really explode into a powerful global alliance if all the pieces come together. Then again, you could also see this be a spectacular failure. Of course, if you have deep pockets, maybe the risk of spectacular failure isn’t much of a concern.