Etihad is Building a Fourth Alliance


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 Equity Alliance

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.

Etihad Regional Darwin Airline

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.

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21 comments on “Etihad is Building a Fourth Alliance

  1. The Etihad alliance seems to be substantially about airports which are neither hubs nor have a good connection to a hub. Cambridge flown by Darwin is an example – it has flights to Amsterdam, Paris, Geneva and Milan with Darwin but no other carriers. The idea being that people fly out of Cambridge to Amsterdam, then onto Abu Dhabi and then to their desired destination. Problem is that you’re talking about 2 flights just to reach Etihad’s hub, along with the time lost changing planes and an indirect route.

    While this might be fine in empty rural areas like Montana, in most of Europe a couple of hours by train or car will get you to a much larger airport instead. Will people really choose to use very small and very local airports which has excellent service over their nearest major airport which has much greater choice / frequency ?

    1. Price is an important driving factor in Europe too and it certainly is possible to attract travelers by offering the lowest fare to a destination. Making a profit is harder if you have your passengers fly more segments.

      It would be a coup if an airline (alliance) could create a hub in a low-cost airport and give the savings back to the passengers in the form of lower fares.

    2. David – I think the convenience aspect will work with some people, but if a route is being flown solely to feed Etihad, I can’t imagine it will work. There has to be some local demand as well. The Darwin network is changing a lot, so we’ll see if it’ll work.

  2. EY stake in AB also enables them to circumvent the frequency restriction(s) in the UAE-Germany bilateral: where previouly EY&EK were only able to fly as often in Germany as LH&AB flew to the UAE, they can now ask AB to fly EY service level A332s from MUC/DUS/TXL to AUH ;)

  3. Must be nice to have money to do things like this.

    But what are they going to do with Darwin that they can’t do with AirBerlin? Why buy chucks of both carriers? AB may give lift to German and more access over the atlantic, but all Darwin can do is branch out around Europe from ZRH which is what AB can do from German also.

    1. David SF – Well with Darwin it has its own name on the aircraft and it has smaller airplanes to use in smaller cities. I get the feeling it has a lot more control regardless of the stake.

    1. Nick – Mmm, steak. Actually, it wouldn’t surprise me if they wanted to buy a stake in a US carrier, but somehow I imagine that it would get twisted into terrorists trying to take over our skies. Bleh.

        1. Exactly – in the same way that the US nixed the DP World deal to buy into US ports. There’s such a thing as economic terrorism too!

  4. I see on Wikipedia that Etihad signifies something like “union”, but I don’t see any indication of how to pronounce the word.

    1. Miles – I believe it means “United,” which is pretty funny. I’ve always pronounced it “eh-tee-hawd”

      1. Etihad always looks to me like it’s some other word spelled backward, but then so does “Dahite”.

  5. Aer Lingus – This may be great for Dublin, but realistically regional UK is dominated by KLM and EK.

    Air Berlin – If they can get the BER hub up and running with connecting banks this will be a huge win

    Air Serbia – I don’t understand the logic, but I guess more feed doesn’t hurt

    Aer Seychelles – Basically just more metal in AUH. You can bet that most of AUH-HKG is not coming from SEZ but rather from EY’s Africa/Europe network. At least this effort makes the people of Seychelles feel like they have a national airline

    Jet Airways – It’s all about the access to regional Indian destinations (even more than SQ has done) and the frequencies to major metros trying to feed several AUH banks and catch up to EK. Hopefully this opens up several new city pairs and puts badly needed capacity in the market.

    Getting airlines to feed AUH is brilliant (including several that moved from DXB like Garuda). All the best to EY in this effort.

  6. Actually, etihad means union (noun), whereas united (adjective) is muttahid. As in Al-Etihad Al-Sufiaati (Soviet Union), Al-Wilayaat Al-Muttahida (United States), Al-Emaraat Al-Arabiyya Al-Muttahida (United Arab Emirates).

    Speaking of the UAE, the post mentions that Etihad gets a lot of support from the government. How does this work out? Etihad was created as the UAE’s flag carrier, based in Abu Dhabi, at a time when Dubai-based Emirates was already very well established. Surely the government of Dubai can’t be happy with funneling too much federal money into Emirates’ competitor. So is it just Abu Dhabi supporting Etihad? And what about the smaller emirates? Sharjah has Air Arabia, Ras Al-Khaimah has tiny RAK Airways, and the remaining 3 emirates are yet to establish their own. Or am I missing someone?

    1. Ron – Thanks for the translation correction. As for the governmental support, I believe it is the individual emirates that provide support to their own carriers. There has long been speculation about Emirates and Etihad merging (it came to a fever pitch after Abu Dhabi had to bail out Dubai, I believe but others may correct me). It’s never come to fruition, but Emirates has always been the more successful carrier commercially.

  7. @Sanjeev M:

    The logic behind the Air Serbia acquisition is to mop up the Southeastern Europe market…Air Serbia (formerly Jat) is eligible for 5th freedom flights (although to my knowledge does not have any yet). If you look at neighbouring countries – Hungary had a fairly large airline (Malev) that failed and was not replaced by anything; Bosnia had two failed airlines – AirBosna and Air Srpska – the latter was just an extension of Jat, really, whereas the former failed and was replaced by B&H Airlines, a joint venture with Turkish – but after a year or two (if that much) Turkish pulled out and the airline is living on state support; Montenegro also has an airline also living on state support; in Slovenia and Croatia the national airlines (Adria Airways and Croatia Airlines) are also on life support and it’s just a matter of time before they are reduced to mere LH group FRA/MUC/VIE/ZRH feeders (they are mostly this already); in Macedonia the national airline (MAT) went bankrupt; and in Bulgaria there was a failure+replacement (Balkan Airlines -> Bulgaria Air).

    Belgrade is already a mini-hub for Montenegro (Podgorica, Tivat), Bosnia (Sarajevo, Banjaluka), and Macedonia (Skopje, Ohrid), and with Malev’s failure making the value of Budapest as a hub rather dubious, I think Etihad sees (quite rightly) a possibility to make Belgrade a regional hub, or a sub-hub feeding Abu Dhabi. If it wants to be global, it needs something to compete with the two Star Alliance hubs covering southeastern Europe – Vienna (Austrian/LH) and Istanbul (Turkish has been very aggressive in the region lately). Those two hubs are already “full”, and they are not dependent on that region exclusively (not by a long shot), so Belgrade seems like a good shot for a very regional oriented and dedicated (sub-)hub.

    The reason that the local airlines failed or are failing is not a lack of passengers, but rather poor, poor management, coupled with a general inability to effectively compete with the Star Alliance and low-cost carriers. Passengers there are, and it’s worth noting that the region has fairly large expat communities in other places of the world that are served by Etihad (Australia/NZ and North America). Plus, due to the large expat community in Western Europe, Air Serbia has a very solid European network. Piggyback transfers to Abu Dhabi on top of those regular expat travellers and you’ve got a winning combination, at least in Etihad’s mind.

    Whether it all works, it remains to be seen.

  8. One of the smartest moves Etihad made was to attract Kazakhstan’s Air Astana from Dubai to Abu Dhabi about 3 years ago with the of a full code share. Air Astana is a very sharp outfit, always profitable and about the same age as Etihad. Although its smaller than Etihad it completely dominates Central Asia and has access into more obscure parts of central and western China. It is rarely in the spotlight coming from quite an unknown part of the world but is definitely one to watch.

  9. Correct about Astana. A great airline in a rough neighbourhood but one that’s bound to grow given its resources and proximity to China. They have it to themselves pretty much and Etihad have done well to lock them in early.

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