Etihad Announces Details Of Their Radical Restructuring

Etihad has been performing horribly financially, and posted a 1.5 billion USD loss for 2017. The airline has been cost cutting in many ways, including cutting routes, reducing their onboard service, and considering canceling aircraft orders.

The airline has more or less given up on their “Etihad Airways Partners” strategy. Previously the airline was trying to form a global alliance, though that hasn’t worked out quite as they hoped. A couple of weeks back I shared my thoughts on the sad decline of Etihad, and I think that sums up my overall feelings on the situation.

While Etihad was on a path towards unsustainable growth under the previous leadership of James Hogan, the company’s new CEO is focused on making the airline more sustainable, and that includes making a lot of tough decisions.

The airline has now announced a much more concrete plan for how they want to become profitable. Specifically, Etihad plans to shrink their way to profitability, not unlike what we’ve seen with Malaysia Airlines.

So, what’s included as part of this transformation?

Management changes are coming to Etihad

For one, Etihad will be reorganized into seven business divisions — operations, commercial, maintenance, repair & overhaul, human resources, finance, support services, and transformation

The Etihad Airways Group CEO will continue to be Tony Douglas, who was appointed to the role several months ago.

Peter Baumgartner has been the CEO of Etihad Airways (the airline, rather than Etihad Airways Group) since 2016, and he will become Douglas’ Senior Strategic Advisor, and will advise on global partnerships and innovations. That’s a pretty significant move, as I’ll cover in more detail below.

Etihad will become less of a global carrier, and instead focus on Abu Dhabi

Historically the main business of Gulf carriers has been transporting passengers traveling between different regions of the world, using their hubs primarily as transit points. This strategy has worked brilliantly for Emirates, and also for Qatar Airways (though to a lesser extent).

Etihad realizes they can’t compete in that arena, so Etihad plans to focus more on serving Abu Dhabi, rather than simply passengers traveling between other points around the globe. This will allow them to cancel plane orders, lay off more staff, and cut unprofitable routes.

Etihad has spent so much money trying to close the gap between them and Emirates and Qatar Airways, and that’s something they’ll no longer do.

That’s a pretty radical thing for them to acknowledge, and it sure seems to me like they’re serious about their turnaround given that they’re admitting this.

However, I do question how much of a market there really is for serving Abu Dhabi, given that Dubai (and Emirates’ huge global network) is just an hour drive away.

Etihad’s future will depend heavily on new partnerships

This is perhaps the most significant aspect to their transformation. Generally speaking when an airline isn’t doing well, the best strategy is to shrink the airline so they only operate profitable routes, and rely more heavily on partnerships to carry passengers around the globe.

That’s exactly what Etihad plans to do. Etihad’s CEO becoming the Senior Strategic Advisor focused on alliances should tell you a lot about Etihad’s goals.

According to The National, Etihad was previously prevented from partnering with Star Alliance airlines, but that’s changing:

The move follows the “delisting” of the Etihad by the Star Alliance – one of the world’s largest airline alliances – during the International Air Transport Association’s annual conference in Sydney last month, allowing 40 members of the alliance to engage with Etihad on codeshare deals, according to Mr Douglas

“In the past, the Etihad Group was identified as being an alliance itself and, consequently, under the rules of Star Alliance, its members were not allowed to engage in collaboration with us on codeshares,” Mr Douglas told The National on Tuesday.

“The fact we’ve now been identified in their eyes as a more rational airline not just going for ‘growth for growth’s sake’ but looking for sustainable growth, means they’ve deregulated us and [we] will be able to go around the Star partners to build connectivity with their networks through codeshares wherever both parties agree to do so.”

Now:

  • I’m not sure the above is completely true, since Etihad and Lufthansa have been partnering together for a while, though with a limited scope.
  • Can you imagine the amount of pride that Etihad is having to swallow here? They’ve gone from trying to basically create the fourth global alliance and failing, to now being reliant on other airlines to turn their business around.
  • There’s no way Etihad will be joining one of the big three alliances. Generally the US carriers have veto power with the alliances (since they’re founding members), and there’s no way they’d let Etihad in.

But overall this is exactly what Etihad should be doing if they want to reduce their losses. They need to cut routes and shrink their way into profitability, and becoming more reliant on partnerships is the way to do that. Like I said, I don’t think Etihad will join one of the global alliances, though I am excited to see what partnerships they come up with.

Bottom line

It’s always bittersweet to see an airline change like this. I’ve written about the sad decline of Etihad, and to me it really is sad how the airline has changed. However, the good news is that I think the airline is finally on a path to a proper restructuring, rather than just being an airline that makes impulse decisions.

I imagine it’s quite humbling for Etihad to acknowledge the failure of their alliance strategy, and to realize they can’t compete with Emirates and Qatar. I think it goes without saying we’ll see big cancelations of aircraft orders soon, and that they’re just trying to figure out the best approach to take.

I commend Etihad’s management team for finally having a strategy, and look forward to seeing how this plays out.

Comments

  1. Maybe United should swallow their non existent pride and let Etihad just join Star Alliance.

  2. What happens to the erstwhile Etihad Airways Partners though? Where does this leave Air Seychelles, Jet Airways and the others?

  3. I suspect it will not be successful. Cutting your way to profitability frequently does not work, and with airlines especially where size and connections often dominates revenue and profitability. It’s one of the reasons why despite Air France’s problems KLM’s leadership pointed out it would be unthinkable to part ways.

  4. Unrelated, but would love to see you review Philippines Air Business now that they are (apparently) starting a JFK-MNL direct routing.

  5. Etihad woes in some ways validates what conservatives say. When people find juicy tits for free they latch on, suck them dry and refuse to carry their own weight. Incompetent airline partners did it to Etihad.

  6. The argument about incompetent airline partners ignores that Etihad had a say in he running of these airlines. And they invested in Irlines that were already obligated to other partners and alliances. Why would you invest in a SkyTeam airline like Alitalia, which already had its own woes, and then essentially see them still tied to your main competition?

  7. What I don’t get is why there has always been such a distance between EK and EY. Like for example when the EK lounge at JFK was closed, why didn’t EK use EY’s lounge. Or why doesn’t EY use EK’s lounge at CMB or EK use EY’s lounge at IAD. They’re basically cousins, yet they tend to almost want to stay far, far apart. Aren’t they both interested in raising up the UAE and showcasing it to the world? I never understood why they stay far from each other. They’re not even FF partners which doesn’t make any sense to me at all.

    Ben, you are right they peaked in 2014 and we’re the talk of the town with their apartments, and it has been totally downhill since then. I flew the apartments JFK-AUH-SYD shortly after the apartments were released in April of 2015, and I was wowed. Etihad was definitely the number two airline to fly around the world after that trip. Then I flew EY again in this February with my cousin, and my feeling was “meh, this isn’t Emirates” even though nothing particularly bad happened. But all the cuts, the closing of the spa, advertising of buying itchy first class pajamas that aren’t good, the low morale of the staff, it just makes the F experience feel very watered down.

    Why don’t they work in concert with each other, and heck, why not maybe even let Etihad borrow Sir Tim Clark for a little bit to straighten them out?

    You have talked a lot about a merger between EY and EK and I don’t see why that’s a bad idea. Or at least more cooperation between the two carriers together.

  8. “Generally the US carriers have veto power with the alliances (since they’re founding members), and there’s no way they’d let Etihad in” – thought the US airlines were into a free and open market?

  9. @Abe you’re right, it’s a real shame these two can’t work together. However, the UAE probably has more internal political divide, that they may as well be different countries.

  10. @Sean S. you are right. No airline cutting its way to profitability has ever been the best experience. It just ends up being a crappy airline that nobody wants to fly, even if the airline eventually achieves it’s goal of becoming profitable again.

    Also someone made a negative conservative comparison for EY, but I think this is more of a left-wing, liberal situation. The other airlines (Air Berlin, Air Serbia, Alitalia, Air Seychelles) thought everything was free for the taking for their operations. Just like most socialist countries that fail, those airlines failed because eventually the bill came due, and they bit off more than they could swallow. The problem with socialism is eventually you run out of other people’s money. Or in this case, Etihad’s money.

  11. I just don’t see Etihad as a viable company. Aside from the disastrous investments made in Alitalia, Air Berlin, and other airlines, the company is still too big for what it does. Shrinking it, focusing on Abu Dhabi, etc…just makes it look more and more like Gulf Air. Hanging on, but not really a global carrier. Abu Dhabi and Dubai are inter-twined when it comes to finances. Abu Dhabi helped Dubai during its crisis a few years ago. I can see Etihad and Emirates eventually merging and rationalizing, with Emirates obviously being the dominant company.

  12. I guess I don’t understand.
    How on earth is a point-to-point strategy going to work with Abu Dhabi?

  13. So where are the details? All that was provided is the splitting into 7 divisions and two executive announcements, with statements on possible aircraft cancellations and possible Star Alliance partnerships. Is that it? Sounds like a politician announcing “details” of their economic plan while running for office, with the “details” amounting to something like “cut taxes, reduce spending, and grow the economy.”

  14. They’re talking about star alliance, but why not just work together with Emirates? Are the government’s of the the two Emiratis on such bad terms?

  15. I see Etihad is underperforming EK and QR financially, but what is it about their operating model that is so different from the other two? I thought QR would be the one having issues with the flight restrictions placed on them by neighboring countries.

  16. At the end of the day, the real issue is that the UAE doesn’t need two global airlines, but the pissing contest between the Emirs wasn’t ever going to let that happen.

    There’s certainly enough wealth in Abu Dhabi to support a fairly robust O&D market there, but their current fleet seems ill-suited to such an endeavor, given that the A380 would only make sense on slot constrained routes like LHR.

    Also curious is how at odds with a refocus on Abu Dhabi originating traffic to be cutting service, catering, lounges, etc on service to premium markets like Europe and North America. I can see the rationale in markets like South and Southeast Asia, where most traffic is service workers.

    And as for US carriers blocking their entry into an alliance, I don’t see that as something set in stone. Delta, especially, could have them in SkyTeam and simultaneously claim their “victory” vs the ME3 has led to this outcome and gain access to lift revenue to the middle-east and South Asia, where they’ve made it clear, they don’t see the ability to offer routes profitably.

  17. Except Abe that one of those airlines (Air Berlin) had always been private, two were flag carriers from countries that did not have the volume (particularly Air Seychelles), and the other one (Alitalia) had been eviscerated, ironically, by Gulf carriers. Furthermore, Niki, the Austrian low cost carrier, was also never a flag carrier. Clearly national ownership is not in and of itself a sign of failure, considering that Emirates is wholly owned, and that various other flag carriers have various equity stakes by their governments and operate in the black.

  18. I’m not sure if Star Alliance needs EY.
    In terms of swallowing pride, I agree it may be hard for EY but at the same time they did take those risks under the leadership of Hogan. I feel worse for MH given how 2 unlucky incidents occurred that had casualties that led them to more significant losses.
    I think EY can succeed again and hope they will.

  19. @Vidit Jet Airways is doing fine as they are owned by Delta and AF-KLM. They will survive because the Etihad Partnership only improved their position in aviation especially in Middle East and India that even most people who flew Etihad are now flying Jet more.

  20. I don’t understand the distinction between what they are doing now and “serving Abu Dhabi”. Obviously all their planes fly to and from Abu Dhabi so all flights “serve Abu Dhabi”. If they want to walk away from serving the world, they will need to drop flights and/or make intentional schedule changes to prevent people connecting easily in Abu Dhabi.

    The Indian routes, for example, “serve Abu Dhabi” because they carry workers. But they can better fill the planes by carrying connecting passengers. The gulf hubs are very nicely situated for hub-and-spoke between India and Europe, and USA works too. What changes will be made to stop serving transit passengers?

    The only thing I can imagine is, they’ll drop all their long-haul routes, starting with the US and Australia.

  21. I think Etihad needs to rebrand itself, specifically with a new name. Etihad, although a neat name, isn’t a great name for an airline.

  22. Etihad and Emirates in a security cooperation agreement.

    Etihad pilots flying for Emirates.

    Airports in Abu Dhabi and Dubai being constructed or expanded.

    I suppose one airport located between the 2 cities and a merger of the two airlines would be too logical for the vanity projects of the Emirs 🙂

  23. Jet Airways – shudder.

    But, Star Alliance should begging Etihad to join. Emirates’ biggest nightmare is Etihad becoming part of one of the big three alliances. If one is going to connect in UAE, all other things being equal (and increasingly economy is homogenised), a lot of people will take an alliance member over an independent airline. Sites like OMAAT exist precisely because people choose airlines based on miles.

  24. @Markj Don’t forget that Kuwait Airways, Gulf Air and Oman Air are back with better planes and terminals. These airlines except Oman Air were the pride of Middle East in the past and are back to provide competition to ME3

  25. @Adil, they already have an airport in between the two (albeit in Dubai emirate) – Al Maktoum International Airport, said to be the next “SuperPort”.

  26. @Matt you would think QR would be the one to struggle the most since they are limited in their airspace.

    But the reason Etihad is failing is because they got cocky. They were doing so well they acquired all these other failing airlines to try and create and empire. It’s hard enough to make sure your airline is successful, let alone four struggling airlines. And now it’s coming back to bite them financially because they could not juggle all the failing airlines. Now they’ve lost most interest in all those Airlines they’re the ones that are failing.

  27. Turkish Airlines, Gulf Air and Oman Air will takeover where Etihad left off. Turkish Airlines will do the most, followed by Gulf Air and Oman Air mopping up the leftovers

  28. Just out ion curiosity, if the US3 are so against the ME3 joining their respective alliances, why did AA allow QR to join Oneworld?

  29. I can see United letting Etihad into Star, and even possibly a JV in conjunction with LH and AC.

    United has the fleet to take over a couple of the US-AUH routes and have pax connect on EY onward to the Indian cities they (UA-LH JV) don’t currently serve (e.g, Hyderbad, Kolkata, Kochi, Ahmedabad).

    If anyone’s going to try to veto Star membership it’d be more likeky Air India or Turkish.

  30. Previous incompetent boss James Hogan single handedly made EY go south. His strategic partnership decisions were like that of a 5 yr old buying the brightest candies in a candy shop. Buying into European Airlines like Air Berlin and Alitalia, that was essentially setup to fail was nothing short of lunacy.

    His egotistical Emirati bosses were too proud to say no.

    And so it must all come to an end…

  31. When might we get an idea of what routes will be cut? I have tickets ATL-DXB-SYD in November…

  32. @Lucky – the statement regarding US airlines having veto power and, by extension, United not letting Etihad join Star Alliance has a few problems:

    1. Where’s your data? With the “resolution” of the Open Skies issues brought to the fore by the US3, what other data points do you have to justify this point of view?
    2. Qatar Airways is a member of oneWorld and are a significantly larger operation than Etihad have ever been. Either American approved of them joining, they weren’t able to veto them joining or some agreement was come to for their admission.

    Without supporting, current data what you’ve stated here is speculation.

  33. As a Gold member of Etihad’s frequent flyer program, I waitlisted for an upgrade at the published mileage rate. I checked several times before the flight– no availability, and the rep informed me if availability opened up, I could upgrade at the airport. When I got to the airport, they looked at my account, and informed me the mileage requirement was higher–nearly all the miles in my account, and three times higher than the published rate. I asked if they saw notes regarding my earlier calls and notification that I could upgrade at the airport. They said that was impossible–the had no option to see a waitlist. If Etihad cheats its most loyal customers, they will leave for other airlines like Emirates that treat customers more fairly. I am not surprised Etihad is going bankrupt.

  34. To be a global airline, having a good hub helps but compared to DXB and DOH, AUH is a lousy airport. (Even KUL is better.) Ironically, AUH is undergoing a massive upgrade, including a new terminal, but it’s too little too late. By the time it’s complete (late 2019), EY’s network would have shrunk and I wonder if the new airport will get enough traffic and revenue.

  35. What we are doing here is to make sure that we continue to be that integral part of an Abu Dhabi masterplan, to be the flag-carrier that the strategy of economic diversification requires, what the capital of Abu Dhabi requires, in terms of air link to important and emerging economies, capital to capital connections, and so on. So, we do that in a way that it is very, very strategic, and, you know, on a sound commercial basis. So, this is a constant, you know, evaluation, that is not, you know, a one-time cut, and then you are done for the next ten years. So, this is-, this is a very agile business, in a very agile environment, and so that’s kind of business as usual.

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