Lufthansa and Etihad Inch Toward Closer Ties

In a TV-worthy press conference of a scale not seen since… well, since Trump’s reality show Supreme Court nominee reveal the evening before, Etihad and Lufthansa announced that they’re increasing cooperation. That increase, however, is a whole lot less than what had been rumored. For now.

For years, Etihad and Lufthansa have been enemies. Lufthansa was one of the airlines leading the charge in Europe to keep the Middle East carriers out, similar to the later efforts that American, Delta, and United started in the US. At some point, however, Lufthansa followed the American Airlines plan: keep complaining but take full advantage of any commercial opportunities at the same time.

The first real thawing came recently through a third party, Air Berlin. Air Berlin had performed poorly for years when Etihad decided to dive right in with an equity investment. Things only got worse and Air Berlin begged Uncle Etihad for money time and time again. In this last go-around, Etihad had effectively run out of options, so it split the airline up. Air Berlin’s leisure business spun out into a joint venture with TUI. The business-focused hub-and-spoke operation stayed as Air Berlin, and then a bunch of a excess A320s were leased out to Lufthansa Group to fly under the flag of Eurowings (33 airplanes) and Austrian (5 airplanes).

Why would Lufthansa do that? Well, it could either keep that capacity flying or it could let Air Berlin die. The latter sounds appealing, until you think it through. That would create a vacuum that would be filled by far stronger airlines. (Yes, Ryanair, I’m looking at you.) This was a blocking move, and not one that’s going to result in long term success.

But the discussion with Etihad over the Air Berlin deal apparently opened the door to greater collaboration. In the Air Berlin deal itself, the airlines opened up an oddly-specific minor codesharing agreement that has the Lufthansa code going on flights between Abu Dhabi and both Frankfurt and Munich. The Etihad code will go on Lufthansa’s flights from Frankfurt to both Bogota and Rio (pending government approval). Now they’re going to get even closer.

You can get more coverage of the splashy press conference from Live and Let’s Fly, but much of that is fluff. Here’s what’s been announced in a nutshell.

• LSG Sky Chefs (Lufthansa-owned caterer) will provide catering to Etihad in 16 cities in Europe, Asia, and American.
• Etihad and Lufthansa Technik have a memorandum of understanding that they’re going to work more closely together, whatever that means.
• Etihad will move into Terminal 1 in Frankfurt and Terminal 2 in Munich to be co-located with Lufthansa.
• “Etihad Airways and Lufthansa are also exploring further cooperation in a number of areas, including freight operations, procurement and passenger services to improve their competitive offering globally and in the European market.”

Right, so… not much has actually been announced. But as outgoing Etihad CEO James Hogan said in the press release:

This partnership is the platform for a much wider strategic collaboration between our two organisations. It demonstrates the commitment of the Etihad Aviation Group Board and Abu Dhabi to our European growth strategy.

So I guess we can think of this as a pre-announcement. There is more to come. Even though there isn’t much substance this time around, it’s still important.

For Lufthansa, this is certainly an about-face but it shouldn’t be surprising. As the Middle East carriers continue to grow, it’s going to be harder and harder to ignore the traffic they can feed into Europe. Might as well have it feed Lufthansa instead of a competitor. Etihad and Air France/KLM had been dancing around deeper cooperation as well, so this not only helps Lufthansa but probably undermines a direct competitor. With Qatar and IAG (British Airways, Iberia, etc) thick as thieves, this leaves Air France/KLM with Emirates as likely its only option.

For Etihad, this is a big change in partner strategy. Previously, Etihad’s primary focus has been on acquiring stakes in failing airlines and trying to use them to pump traffic into the Etihad network no matter the cost. That was an incredibly expensive strategy, but that didn’t used to matter. With demand weakening and growth softening, Abu Dhabi is doing its light version of belt-tightening.

Instead, Etihad can focus its efforts on tying up with a major, successful global airline to feed traffic. This strategy makes more sense commercially. I imagine Etihad had to wait for management at one of these global airlines to be receptive to further partering (since the only one previously interested, IAG, was snapped up quickly). Lufthansa is finally getting there.

It’s hard to know where this is going to end up. Rumors had flown around everything from Etihad joining Star Alliance to a full-blown merger with Lufthansa. Those rumors were premature… but not necessarily false. (Ok, a lot would have to change for Etihad to enter Star Alliance, and a full blown merger is pretty unlikely, but there’s a whole lot in between that would make sense.)

This is the proverbial tip of the iceberg in what could be a tipping point for massive changes in how Middle East carriers are viewed by other airlines. Or it could be more of the same old stuff – benefit from the Middle East carriers while continuing to denounce them.