Etihad’s investments: trend or series of unfortunate events?
As airlines in the Middle East were established in the late-20th/early-21st century, they became the poster children of their respective countries. Such airlines as Emirates, Etihad and Qatar Airways were, and still are, a tool to market their respective home states to a very wide audience. The unparalleled luxury onboard Middle East-based airlines is recognized all over the world, with multiple awards given to the Big Three of the Middle East.
They do also serve the main purpose of an airline – to connect the dots all around the world, which indirectly leads to economic growth: whether through tourism or ease of doing business, no one can deny the benefits of having a flag carrier.
However, two Gulf airlines, most notably Etihad Airways and Qatar Airways, were also very prominent in buying and investing in foreign airlines. The long list of the duo’s investments also includes a sub-section, which indicates airlines that went bankrupt. While Qatar Airways was much more careful in picking their investments, apart from a collapsed Air Italy in early-2020, the Doha-based airline has played it safe with stakes in Cathay Pacific, China Southern Airlines (ZNH) , International Airlines Group (IAG) (IAG) and LATAM.
Etihad, meanwhile, saw a fair share of its investments collapse right in front of its eyes: Air Berlin (AB1) , Alitalia, Jet Airways and most recently, the airline that is still holding on by a straw, Virgin Australia. At first glance, the investments were risky: Alitalia had constant issues with its unions, resulting in high operating costs; Air Berlin (AB1) faced a behemoth in Germany, Lufthansa (LHAB) (LHA) , as well as low-cost carriers from Europe; while Jet Airways, much like Air India and Vistara, struggled to contain its low-cost competitors. The latest to fall, Virgin Australia, embarked on a Game Change program in 2010. But with only one profitable year, 2012, under its belt, the airline finally entered into voluntary administration on April 21, 2020.
However, were they actually risky?
Trouble in Berlin
The Abu Dhabi-based airline purchased a 29% stake in Air Berlin (AB1) in late-2011. The German airline met its newest investors with a mountain of debt of more than $652 million (€600 million). Etihad gave a hefty sum for the carrier: it paid $79 million (€73 million) for the stake and it would lend $213 million (€196 million) to Air Berlin (AB1) in order for it to stay afloat.
Air Berlin (AB1) had ambitious plans, including joining the oneworld airline alliance, which it did in 2012. But the ambitious plans did not help the carrier’s financial position. From 2009 until its eventual demise in 2017, Air Berlin (AB1) had only one profitable year.
The relationship between the two went sour in 2017, as Etihad promised to provide financial support for Air Berlin (AB1) so that it could continue flying. The support never came, according to a lawsuit initiated by the German carrier’s insolvency administrator.
The Italian job
Etihad Airways invested in Alitalia in the summer of 2014. At the time, the deal, worth $2.3 billion (€1.7 billion), was already questionable. The flag carrier of Italy ended 2013 with a loss of $605 million (€557 million) and with a negative net final liquidity of $171 million (€158 million). The airline was navigating troubled skies even before Etihad stepped in.
But the Abu Dhabi carrier was determined and hopeful. The Italian government made it clear that the airline, back then and much like now, has little time left. The then-transport minister of Italy Maurizio Lupi stated that either Alitalia improved or its only remaining option would be “abyss.” The daunting words, said in July 2014, did not sway Etihad.
“We believe in Alitalia. It is a great brand with enormous potential,” stated the then-president and chief executive of Etihad, James Hogan.
“With the right level of capitalization and a strong, strategic business plan, we have confidence the airline can be turned around and repositioned as a premium global airline once again.”
The main concern about the Italian airline was its employee costs. In 2013, Alitalia earned $3.4 billion (€3.2 billion) of revenue. Its labor costs? $713 million (€656 million). The concerns never went away: after struggling with losses, the company wanted to restructure in 2017. However, the unions rejected the plan. The airline was forced to go into administration.
In the end, Etihad was forced to disinvest as the Italian government renationalized Alitalia in March 2020.
Growing markets in India
Together with China, India is regarded as one of the most important aviation markets of the future due to its sheer size. Coupled with the growing middle class, India is seen as a hotspot for airlines, especially Gulf-based companies. Qatar Airways, for example, has eyed a stake or some form of partnership with IndiGo, the Indian low-cost carrier. It managed to nail a codeshare partnership in late-2019. The importance of maintaining connections with India is not only from the side of the carrier’s aim to hunt in growing markets, but also due to the fact that there is a huge diaspora of Indians that live in the Gulf States.
In 2013, Etihad shook hands with Jet Airways and signed a deal to purchase a 24% stake in the latter. The deal was not short of cheap – the stake alone cost $379 million, with $220 million more to purchase Jet Airways’ slots in London Heathrow Airport (LHR) and for a majority stake in its frequent flier program.
Yet again, debt was the name of the game. Jet Airways had as much as $2 billion debt at the time of the deal, which was completed in April 2013, reported Forbes. The Indian carrier gained much-needed capital and a strong partner that had a strong global network from Abu Dhabi International Airport (AUH). Yet again, the losses piled on, despite two profitable years in FY2016 and FY2017.
While the middle class in India was growing, it was not growing fast enough for the market to sustain three full-service airlines: Air India, Jet Airways and Vistara. They were competing with numerous low-cost carriers that had a total market share of 70% by the end of FY2019. On the international front, Jet Airways also had to compete with the illustrious Gulf carriers, including airlines with very strong global brand names.
Etihad Airways agreed to up its investment in the Indian carrier, but the deal fell through after Goyal refused to give up control of the airline, reported BBC. At Jet Airways’ last breaths, Goyal held 52% of the company.
The conundrum in the land of the down under
Etihad purchased its stake in Virgin Australia in 2012 with an initial investment to acquire 3.9% of the Australian carrier’s shares, steadily increasing it to 10% and, finally, to 20%. Virgin Australia looked like a hopeful investment: in 2011, the airline relaunched its brand from Virgin Blue to its current name. It looked to take down the Goliath in Australia – Qantas. The plan seemed to work, as already a year later, the airline achieved a profit of 14.5 million (AUD22.8 million).
The profitability of the company was nothing out of the norm: Virgin (VAH) was a profitable company in Australia’s skies, apart from a few dips into losses in 2011 and 2009, the airline stood on stable ground. However, the plan to take on Qantas’ positions in the market might have spelled the end of Virgin Australia as we know it.
“The new brand is designed to appeal to business and leisure travelers, supporting Virgin Australia’s strategy to become Australia’s domestic airline of choice,” noted the airline’s financial report. The airline introduced business class seats on its 737s, the second wide-body aircraft type to its fleet, namely the Airbus A330, and made changes to its network in the same vein to its re-brand and re-design of the Virgin Australia product.
Yet the changes, seemingly, backfired. Since 2012, the airline has failed to post a profit. The ease of making changes to operations could have been made worse since three airlines held stakes in Virgin Australia: the hero of our story, Singapore Airlines (SIA1) (SINGY) and HNA Group, which also owns China-based Hainan Airlines and the ailing Hong Kong Airlines.
So far, the only “safe” investments made by Etihad were in Air Serbia, Air Seychelles and a small stake in Aer Lingus, a subsidiary of International Airlines Group (IAG) (IAG). The airline itself has seen its losses bubble up over the past years, as it failed to deliver a profitable year since 2016. Despite its own sea of red in the financial reports, Etihad Airways embarked on a new adventure together with Air Arabia to launch a low-cost carrier based in Abu Dhabi, called Air Arabia Abu Dhabi.
The low-cost carrier is set to start flights in Q2 2020.
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