Etihad weighs Alitalia deal
Equity partnerships have helped deliver a wider network of 400 destinations
dubai — From Serbia to the Seychelles, Etihad Airways chief James Hogan is being greeted as a saviour for his willingness to bail out cashstrapped carriers.
Since 2011 the Australian has acquired stakes in seven companies spanning Aer Lingus on Europe’s western fringe to Virgin Australia Holdings Ltd on the shores of the Pacific, feeding more traffic via Abu Dhabi, Etihad’s hub. His next move may be the boldest yet: Alitalia, a carrier dogged by bloated payrolls, state meddling and chronic losses.
Founded in 2003, 18 years after Emirates and nine after Qatar Airways, Etihad needed something more than organic growth to gain global scale, according to Hogan, 57.
His first move was to take a 2.99 per cent holding in Air Berlin in 2011, lifting it to 29 per cent months later. He has since added stakes in Air Seychelles Ltd, Aer Lingus Group, Virgin Australia, Air Serbia — formally Jat Airways — and Jet Airways India Ltd, and is seeking regulatory approval to invest in Swiss regional carrier Darwin Airline.
Hogan said this week that Etihad is in the process of negotiating the “next stage” of its deal with Air Berlin after the German carrier said it needs to improve liquidity. The CEO has sought to drive a tough bargain, securing five-year managements contract in Serbia and the Seychelles.
Investing in perennially unprofitable Alitalia, where losses have exceeded €1.1 billion ($1.5 billion) in five years, may be a tougher challenge.
Abu Dhabi is “very supportive” of Etihad’s vision, Hamad Abdullah Al Mass, executive director for international economic relations at the Department of Economic Development, said in an interview in Hanover, Germany, so much so that the emirate is funding a 30 million-passenger terminal to permit its expansion.
Hogan’s strategy is partly a re- sponse to legal curbs that generally limit full airline mergers to intranational and regional deals such as those that saw the emergence of three main network carriers in the US and Air France-KLM Group and IAG, owner of British Airways and Spain’s Iberia, in Europe.
Etihad aside, top carriers have largely spurned the minority holdings available beyond their home markets in favour of boosting connections and traffic via global alliances such as the BA-led Oneworld, which Qatar Airways joined last year. They have also begun to embrace joint venture deals, which need antitrust immunity and let allies operate as one entity in key markets such as the trans-Atlantic and trans-Pacific, sharing revenue and costs and combining timetables.
Hogan says he opted for a unique course after the three global groups — Star, SkyTeam and Oneworld — proved resistant to upstart Gulf carriers muscling in on the most lucrative travel flows with their mega-hubs and huge wide-body fleets.
“The alliances didn’t want to talk to us,” he said in a telephone interview on March 3. “We felt that knocking on the door was a waste of our time.”
For Etihad, which has 103 routes, the so-called “equity partnerships” have helped deliver a wider network of 400 destinations. Hogan says that’s “smarter” than buying 200 more planes to add to the 95 already in the fleet and 200 on order. Of the eight carriers in which Etihad has invested or is pursuing a bid, only two, Aer Lingus and Air Seychelles, make money. The former had net income of €34.1 million in 2013, while the Indian Ocean airline earned $1 million in fiscal 2012.
While Hogan has said Air Serbia and Darwin should become profitable this year, that leaves Air Berlin, Jet Airways and Virgin Australia — the three biggest carriers in which Etihad has stakes by passenger numbers — still losing cash.
John Strickland, director of London-based JLS Consulting Ltd, said that while Hogan’s overarching aim of redirecting passengers via Abu Dhabi has a sound logic, his diverse investments require a tough-to-deliver homogeneity in management, product and financial approach.
“No other airline is doing what they’re doing to this scale,” he said. “That’s because of the risks attached.”
Hogan is meanwhile working on commercial terms with Alitalia after weeks of scrutiny that dragged a deal beyond the April 30 deadline set in February. Air France’s plan to boost an existing stake foundered at the same stage over job cuts.
“He’s trying to prove the unproven,” said Alex Cruz, CEO of Vueling Airlines, the discount unit of IAG that’s adding routes in Italy. “This will be truly James Hogan’s big challenge, both from a management and a cultural perspective.”