ANALYSIS: Why Etihad has partnered a regional carrier

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“Let’s be very clear: everything we touch has to make a return,” says Etihad Airways president and chief executive James Hogan. “I’m not a charity... I receive no subsidies, I receive no letters of comfort. I have to go to the market and finance the aircraft on the structure of my business plan.”

Hogan was speaking at the 16 January launch, in Zurich, of the new “sub brand” Etihad Regional – operated by Darwin Airline, in which the Abu Dhabi carrier has taken a one-third stake. It’s a continuation of an “equity partnership” strategy whereby Etihad has taken minority shareholdings in Aer Lingus, Air Berlin, Air Serbia, Air Seychelles, Jet Airways and Virgin Australia. But why has Etihad added a regional carrier to the mix, when many airlines are getting out of the market?

Hogan suggests that the Swiss tie-up will “deepen the partnership strategy because it takes us into secondary markets where you will not see an Etihad Airways widebody aircraft operating”. Boosting brand awareness, Etihad Regional cabin crew will wear uniforms similar to Etihad’s, and all 10 of Darwin’s Saab 2000 turboprops will have been painted with a new livery by mid-year.

Etihad’s chief makes plain that connectivity is key to the Darwin project. He’s targeting “an effective competitive network that enables us to ensure that we can capture all markets where the traveller is available to us”. That a regional airline is seen as a contender for investment partly reflects consumer behaviour in the digital age. “The consumer is more informed and the behaviour will be people booking it and building their own connectivity, their own network,” says Hogan.

Central planks in the strategy for Etihad Regional are the forging of a network complementary of the equity partners – particularly Air Berlin and Air Serbia – as well as efforts to achieve costs synergies and “improve the quality of the revenue”.

Hogan stresses that Etihad will not be managing Darwin, and hails the incumbent executive team led by Maurizio Merlo. “They know how to lead, manage, operate a regional airline,” he says. “What we bring is the strength to enable them to restructure the business moving forward… Where they’ve had gaps, such as in the financial area, members of the Etihad team, for a period of time, will join their team to ensure our systems, our processes are able to be implemented and we move the airline back to profitability by the end of 2014.”

He adds: “We’re already in the process of sitting down with suppliers and renegotiating contracts. We’re able to bring in proper accounting and management information systems, real-time data which isn’t available today.”

A reason for Etihad choosing to flex its muscle lies in its rivalry with fellow Gulf carriers Emirates and Qatar Airways. “I can’t match their orderbooks,” says Hogan. “But instead of acquiring another 100 aircraft, and maybe taking my advance order from 220 to 300 aircraft, it’s smarter for me to invest, from where I sit, in airlines.” But he stresses that Etihad is “not on a shopping spree. This is a very clear business plan to build a strong airline travel and transportation group.”

This has the perceived advantages of spreading risk and insulating Etihad from shocks, be it the Arab Spring or European austerity programmes. Additionally, it helps Etihad take advantage of the range of diverse airline models in operation around the world. For example, “the model of Ryanair and EasyJet doesn’t exist in the Middle East,” notes Hogan. “Sometimes we look at low-costs, but the models vary from region to region. We continually, as you would expect with any business, look over the horizon, look at the shape of our competitors, look at our customer segmentation and look at our network development to ensure we achieve sustainable profitability and stay there.”

Hogan argues that the advantages offered by Etihad’s “equity alliance” – and he does use that phrase – are not available from a traditional airline alliance. “As we look at aviation five, 10, 15 years out, we see a move towards strong bilateral relationships. In our opinion we see a fracturing of the alliance model and CEOs instigating strategies that are right for their business,” he says.

“The focus we have on scale and collective cost reduction, we’ve achieved what no other alliance has to date. And that’s what we bring to regional. Will regional be here in the future? You bet.”