New Etihad boss to rethink strategy post Alitalia setback

Dubai / Reuters

The naming of a new boss at Etihad Airways presents the Gulf carrier with an opportunity to rethink its expansion strategy after the failure of minority-owned Alitalia underlined the big barriers to global growth.
Ray Gammell was appointed interim CEO this week, days after Alitalia sought bankruptcy protection with $3.3 billion (£2.5 billion) of debt. He replaces veteran boss James Hogan.
Hogan’s strategy was to buy up minority stakes in myriad airlines but the struggles of that strategy, most recently with Alitalia, are emblematic of a quandary peculiar to the industry.
The path to growth for airlines often lies in gaining access to rivals’ routes. Yet in the European Union, which mainly operates as one nation in aviation, foreigners cannot majority-own an airline.
Since 2011, Abu Dhabi state-owned Etihad has spent billions of dollars buying minority stakes from Europe to Australia as it races to catch up with regional rivals Emirates and Qatar Airways.
Alitalia was Etihad’s eighth and most high-profile bet. But the 560-million-euro (£472.8 million) investment lies in tatters, placing Hogan’s wider strategy under the microscope, after staff overwhelmingly rejected its latest restructuring plans.
Now the future of Etihad’s other leading investment, in Air Berlin, is also in doubt as the Gulf carrier pursues a strategy review that began last year. Like Alitalia, the German carrier has made big losses and it said two weeks ago it was seeking a new partner, which could include a new investor.
An Etihad spokesman said its review was ongoing but declined to comment on how its strategy might change or the impact of Alitalia’s failure on its global plans.
But a senior source at the Gulf carrier said lessons would be learned from the Italian investment and they would play a role in shaping future strategy.
Etihad’s strategy has allowed it to cut costs by pooling items like airplane procurement, while offering a larger network; it says it brings together 600 destinations and over 700 aircraft.
Hogan’s “approach to partnerships did not pan out, but a few of his principles are still valid”, said Will Horton, senior analyst at Australian aviation consultancy CAPA.
Etihad’s efforts to grow through minority stakes have at times been compared to Swissair’s failed “Hunter” strategy of the 1990s. Swissair’s buying binge, often acquiring stakes in ailing airlines, contributed to huge losses which eventually saw it grounded in 2001 and sold to Germany’s Lufthansa in 2005. Hogan has always rejected the comparison, saying Etihad was doing things
differently to Swissair and had demonstrated it could control costs.
Etihad and its rivals have demonstrated spectacular growth but are increasingly pressured by a slowing Gulf economy due to relatively low oil prices. They have chosen different strategies to sidestep the regulatory dilemma governing foreign ownership and pursue global
expansion.
These give some access to other carriers’ traffic rights without breaking ownership rules, but allow only limited control over route-planning and costs. As the youngest of the three major Middle Eastern carriers, 14-year-old Etihad has looked to catch up, and followed a third path of buying into other airlines to expand its reach.
Without a majority stake, Etihad’s influence was limited despite being the largest single investor on 49 percent. And despite the lure of Italy’s important tourism market, it was forced to watch Alitalia’s efficient rivals mop up the benefits.
An Etihad spokesman said Alitalia had been in financial trouble for decades and that its investment was welcomed wholeheartedly in Italy. Etihad believed the new restructuring plan developed by Alitalia’s management would have addressed its problems, he added.

AIR BERLIN
In Germany too, Etihad had seen Air Berlin, its first investment in 2011, as the door to unrestricted access in a market where it has limited traffic rights with its own planes.
But that airline has seen losses widen to a record 782 million euros in 2016.
For now, Etihad continues to provide funding. Air Berlin says Etihad has granted another loan facility of 350 million euros and a letter of support for at least 18 months.
But industry sources say Etihad could exit Air Berlin by seeking a deal with German flag carrier Lufthansa, with which Etihad is keen to work.