Analysis: Etihad post strong results; government fears over Jetihad overblown

by Vinay Bhaskara

Abu Dhabi based full service carrier Etihad Airways announced yesterday that it had achieved record revenue growth for the second quarter and first half of 2013. For Q2 2013, passenger revenues grew a robust 8% to $921 million, while passenger revenues for the first half of 2013 hit $1.8 billion, up 13% from $1.6 billion in 2012.

Revenue generated by its code share and equity alliance partners leapt 25% to $184 million in Q2 and was responsible for 20% of Etihad’s revenue for the first half. Passenger traffic as measured in revenue passenger miles (RPMs) and capacity as measured by available seat miles (ASMs) each grew 13% year over year in Q2; the figures were 15% and 12% respectively for the first half of 2013. Etihad added 11 new aircraft to the fleet over the preceding 12 month period (bringing its fleet up to 78 frames), and added new services to Amsterdam, Belgrade, Sao Paulo, and Washington DC (added at the end of March) in Q2.

Clearly, Etihad has achieved a strong pattern of growth in the shadow of its behemoth rivals of the MEB3 +1 (Middle East Big 3 plus One) carriers; Dubai based Emirates Airlines, Doha based Qatar Airways, and Istanbul based Turkish Airlines. A key component of this growth is driven by Etihad’s equity investments.

In addition to Etihad’s proposed 24% investment into Jet Airways creating the so-called Jetihad partnership, Etihad holds a 29% share of airberlin, 40% of Air Seychelles, 10% of Virgin Australia, and 3% of Aer Lingus. Etihad recently secured Australian regulatory approval to increase its equity stake in Virgin Australia from 10% to 19%.  It also announced that it had signed an Initial Memorandum of Understanding (MoU) with the Serbian government to discuss potentially investing in Serbian national carrier JatAirways.

As per the Etihad press release, CEO James Hogan:

…said a significant achievement in Q2 was the improved contribution of the Etihad Airways equity alliance partners, in particular Germany’s airberlin, which has become the largest code share contributor. This reflects increased connectivity between the integrated networks of the two airlines.

And the Etihad results illustrate the case that can be made for the Jetihad partnership. In recent weeks, the Jetihad deal has hit a series of setbacks due to government reticence over allowing control over Jet Airways’ strategy to fall into foreign hands. A report from CNN IBN stated that

Jet’s plan to relocate operations and core functions to Abu Dhabi has raised eyebrows as the proposed plan is not consistent with Indian norms, sources said. The co-operative board of the company will have control with 19 foreign nationals nominated by Etihad, sources added, and the government fears losing operation control of the domestic airline Jet.

Civil Aviation Minister Ajit Singh is reportedly sending a note to the Prime Minister’s Office asking Jet and Etihad to rework their deal to allay government concerns that the recent seat sharing agreement in the re-worked Abu Dhabi – India bilateral air service agreement (ASA).

Clearly the Jetihad partnership will benefit Etihad extensively, giving it a solid grip on westbound international traffic from India. And the seat sharing deal indeed does favor Jetihad over other full service carriers serving Abu Dhabi. But the ASA with Dubai is similarly tilted in favor of Emirates Airlines, and Jetihad will only serve to create a strong competitor to Emirates, who has increasingly monopolized westbound international traffic from India.

As to the question of whether Indian norms are being flouted by the addition of foreign nationals… maybe. But is that all together a bad thing? Operating under Indian norms, Jet Airways had fallen into a rut of sustained financial losses and network stagnation. In contrast, Etihad has created robust partnerships with its equity partners and helped re-vitalize them; Aer Lingus is reporting excellent financial results despite recession in Europe and residual demand weakness in its home country of Ireland.

Foreign blood may very well be just what Jet Airways needs to return it to profitability and stability domestically – the expertise of Etihad in running a profitable airline will be invaluable for Jet given the latter’s inconsistent result. And from a practical perspective, Etihad will likely do little to change Jet’s domestic strategy given its lack of expertise in the market. There is even room for some organic international expansion under the umbrella of Etihad; for example Aer Lingus recently announced an intercontinental expansion from its hub in Dublin to San Francisco and Toronto for 2014. Similar opportunities may present themselves for Jet Airways heading eastbound from the new integrated terminal at Mumbai.

I would like to remind readers, this is my view. Your comments, as usual, are requested and welcome.

About Vinay Bhaskara

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