Thursday, April 4, 2013

Etihad Airways CEO: “Legacy airline alliances have outlived their usefulness”


Etihad CEO James Hogan at the International Aviation Club of Washington, D.C.
James Hogan delivering his keynote speech in Washington
Etihad Airways has been making a splash in Washington, D.C. this week. A couple of days ago, I posted a blog article about the UAE national carrier’s inaugural flight to Washington Dulles International Airport (including photos – click here to view them).

Soon afterwards, there was a special gala dinner to celebrate the new service, which attracted more than 450 distinguished guests at the prestigious Andrew W. Mellon Auditorium, in the heart of the city.

As a follow-up, Etihad Airways CEO James Hogan has delivered a keynote speech at the International Aviation Club in Washington, D.C. yesterday, where he stated that legacy airline alliances have outlived their usefulness.

“The traditional airline alliances have evolved into slow-to-respond, bureaucratic organisations which struggle to deliver added value to their member airlines, many of which are no longer compatible with each other,” stated Mr Hogan.

“If we look at the consolidation currently occurring throughout the airline industry, we are also seeing more fragmentation within the alliances. This is going to continue as members seek ways to operate profitably in a very competitive environment with high fuel costs and generally slower global economic growth,” he added.



Etihad's gala dinner at Washington's Andrew W. Mellon Auditorium
Etihad Airways' gala dinner in Washington, D.C.
Mr Hogan stated that Etihad Airways’ unique business model, which is a combination of organic growth, codeshares and minority equity investments, was proving very effective in building passenger numbers, revenue and profit for all its partners.

“This month we will report our strongest ever first quarter results. Our codeshare and equity partners have made a major contribution to that financial success.”

Etihad Airways owns 29 per cent of airberlin, 40 per cent of Air Seychelles, 9 per cent of Virgin Australia and just under three per cent of Aer Lingus. It has 42 code share relationships around the world.

The airline posted a profit of US$42 million in 2012 and saw two of its equity partners – airberlin and Air Seychelles – return to profitability, meaning that all five airlines are now in the black.


Mr Hogan said that Etihad Airways’ equity alliance of minority shareholdings, enabled the airline to enter markets within local foreign investment limits and, therefore, without the complexities, approvals or expense attached to mergers or larger investments.

“It is easier, faster and far more cost effective to grow through one-on-one partnerships with established, respected carriers than it is to rely totally on our own resources, and to start from scratch in every market we serve,” he commented.

“We have hand-picked like-minded partners with whom we can work collaboratively to build revenue across a broader network and reduce operating costs. We focus on our partners’ profitability as much as our own, because we are not dealing with competing interests.  When the five CEOs sit down to make decisions, we have a shared commitment to make things happen.”


Mr Hogan said that because Etihad Airways had skin in the game it could go so much further than legacy alliances in thinking innovatively and building relationships that delivered ongoing value.

“An example of innovation is the way we are now working with our equity alliance partners to develop ‘centres of excellence’ in which operational and commercial expertise is pooled to deliver best practice across the group,” he said.

“Cooperation includes fleet and engine acquisition, maintenance, recruitment and training. This is real value-add for our equity alliance and I am confident it is the way forward.”

11 comments :

  1. No mention of impending partnership with Jet?

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  2. That is not totally true Etihad indirectly gets benefits from these alliances through the airlines where they hold an equity share or through the code share.

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    1. I would fully agree with Oussama. Though one can count the pros & cons for & against Airlines' alliances; yet the benefits out number negative aspects.

      The biggest being Cost Reduction, in many ways. In fact the researches show that pretty soon there would only be a handful of mega airlines; who would basically have resulted from initial alliances.

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  3. Spot on, I could not agree more....cross border partnerships for example equity investments will 'outsense' global branded alliances especially with the involvement of gulf carriers who being important in the equation yet unwilling to sign up for either of the big 3.

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  4. I completely disagree with James Hogan. At a gala dinner with hundreds of thousands of dollars being spent it was an unfortunate place to compare performance with older carriers. In the very near future Etihad will be considered a legacy airline and have to strongly defend itself against innovating airlines.

    Those legacy airlines which still survive in a free market should be examined. How and why did they survive ? They have learned many lessons that young companies may not have met. The Middle East has been a great place to do business while the western world was in recession. It will continue to grow but it cannot ever consider itself to be the best business model. Someone will always innovate and excel. You just have to look at the impressive growth of Turkish airlines which combines great service and low costs. More will follow. Wizz are one of the first to operate from the new Dubai airport. Basic service but great reliability and very low fares.

    The airline business is constantly fascinating to consumers and professionals. Long may it continue.

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  5. He does have a point. Not all alliance members appear compatible. But many stand-alone carriers have also become “slow-to-respond, bureaucratic organisations which struggle to deliver added value" to their customers. They have not achieved much from interline agreements outside offering competitive fares sometimes. Whenever there's a break in service, customers rather than carriers suffer. This is true of most airlines.

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  6. Without wanting to rain on the parade too much, I don't think that Hogan can be expected to say anything else. And so I don't think that it means much.

    We don't have balance sheets for the first eight years and so it is hard to know how much money it took to stand Etihad on its feet at the end of its first ten years. Do we know that their way of operating in the industry is better? I don't think so.

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    1. I agree with Walter Palmer, it's easier to play with other peoples money. In the Gulf Area (apart from Gulf Air whom has no money) it is easier to enact change as there is cash on hand, less layers of unions to deal with and therefore easier to move forward.

      Legacy carriers are not the animals they used to be, they are changing fast, still have work to do (such as the integration of Iberia into IAG and KLM/Air France high cost structure), but it is happening. Even LOT is now up for sale. Traditional airlines can only work as fast as the revenue and legal structure will allow, but have made prolific changes in the past 5 years.

      I am not even sure the term Legacy really exists in it's traditional meaning. Maybe we should call them "transformational airlines" such as Delta, United and the newly formed American. More to follow !

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  7. Sean FitzpatrickApril 9, 2013 at 9:45 PM

    Well, he raises some valid points along with Adwowa and Kibuti. Technology and regulatory changes now enables a lot of the connectivity that was not so easily switched on when the alliances were started. Alliances have done a credible job on the revenue side but have been far less successful on cost reduction synergies and creating a consistent travel experience across their networks.

    However, a lot of the mechanisms that enable things like cross border partnerships would never have come into being without the alliances. I think you will see carriers whose organizations are capable of true partnership entering into "coalitions of the willing" within alliances to better exploit synergies. For example, given the generally decrepit state of facilities in US airports driven by the insane funding and ownership structures combining forces to create better facilities would enable efficient capital spending that would drive improved customer experience and operational metrics. But it won't be easy.

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  8. The current trend of ALLIANCES is growing. Etihad best pay attention.

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  9. I strongly agree - mostly coming from the government-owned world and needed to shift to a new world. They have too much employees and the innovation factor is quite low due to the fact the employees tend to stay in the company for a long time and shift within the company blocking the positions where you need new fresh people from outside.

    It's like having a tunnel view - they simply don't see needed improvements. The same applies for alliances - they seem a relict from old times. Through all the m&a, going broke and buyings of airlines, the world changes so fast sometimes too fast for the alliances. The process of checking an airline for an alliance takes ages.

    They should dissolve the alliances and go for agreements (like they have for their staff). The bonus cards can still exist (as you see the bonus cards work pretty well for the customer when you fly Southwest Airlines, Emirates and Etihad w/out alliances).

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