ANALYSIS: Are Etihad’s ‘equity alliances’ redefining the industry?

It seems that not a month goes by without Etihad Airways adding a new partner to its mushrooming alliance grouping.

And an increasing number of these associations are much more than just codeshares, with the Abu Dhabi carrier now holding, or in the process of securing, shareholdings in six airlines. During the past few years, Etihad has built an impressive partnership constellation spanning the globe. At last count, it comprised 45 codeshare partners serving a virtual network of more than 350 destinations.

The airline, which has been profitable for the last two of its 10-year existence, kicked off its “equity alliance” strategy almost two years ago when it sailed to the rescue of loss-making Air Berlin by purchasing a 29% stake. At first, that deal raised a few eyebrows. But as further minority stakes were acquired in other airlines, the thinking behind the strategy became apparent.

Next up was Air Seychelles, in which Etihad took a 40% stake after Abu Dhabi was approached to help out. Etihad has subsequently taken smaller stakes in Virgin Australia and Aer Lingus, and is finalising deals with Serbia’s Jat Airways and India’s Jet Airways. The latter is headed by the inimitable Naresh Goyal. However, it is a strategy that certainly divides opinions. It was deemed a winning one by our esteemed panel of judges for this year’s Airline Strategy Awards. The panel, which comprises respected former airline chief executives, academics and analysts, named CEO James Hogan as the winner of the Executive Leadership category.

But others are not convinced. Some observers think that, backed by the wealth of Abu Dhabi, Etihad has gathered a hodgepodge of disparate airlines through some opportunistic equity deals in a mad dash to achieve scale, as its local rivals surge ahead organically. And Etihad’s limited financial transparency does little to help sway the sceptics. They also point out that history shows such strategies usually end in tears: “A lot of these equity bets are likely to go south on them,” says one doubter.

Hogan does not deny that the strategy was designed to provide a fast-track to growth. And he is also quick to dismiss comparisons with previous failed attempts to build brand constellations. “This isn’t the old Swissair model of acquiring brands. This is about how do we use this scale to improve the bottom line,” he says.

As outlined elsewhere, the Airline Strategy Awards judges felt that Etihad’s tactics were “shaking up the industry”.

One judge said that Etihad’s codeshares and bilaterals are undermining the global alliances: “It is putting out a marker for a different kind of airline industry where it’s less important which global alliance you’re in, and more important what deal you’ve made with individual members.”

Hogan is clear in his view that the sun is setting on the global-alliance era. He believes they have been “fractured” by the growing trend for tie-ups outside the groupings.

And Etihad is in the ­vanguard of that drive, riding roughshod over the three groupings as it casts its own alliance net wide. As one judge put it: “The airline is pioneering in that it’s going back to where we were 25 years ago – it’s breaking the mould of the alliances.”

But the refreshing thing for supporters and doubters alike is that circumstances dictate Etihad is having to do something different to Emirates and Qatar Airways. “It’s 18 years behind Emirates and has to apply a different strategy to gain market access,” said a judge. “And James Hogan has the advantage of being able to invest and cement the relationships.”

That Etihad has a strategy was never in doubt. And it is one that not only differs from its peers but is also bold, innovative and mould-breaking. Whether it will ultimately be successful will be hotly debated for some time to come. But with the might of Abu Dhabi behind it, failure is an unlikely option.

Comment from the August 2013 edition of Airline Business

Aer Lingus long haul expansion including new services to San Francisco and Toronto

Aer Lingus today announced significant expansion to its transatlantic route offering for 2014. In addition to its existing services to Boston, Chicago, New York and Orlando, the airline will commence year round direct service between Dublin and San Francisco from April, 2014 with five services per week being operated by Airbus A330 wide-body aircraft

Aer Lingus will also commence direct year-round service to Canada from April 2014. A daily direct Boeing B757 service between Dublin and Toronto will operate during the summer season, with up to four weekly services operating during the winter. Two Boeing B757 aircraft will be based in Shannon and will be used to deliver increased frequency on existing services to Boston and New York. Year-round connections from Shannon to the east-coast will be introduced. This expansion will directly support more than 200 new jobs.

In addition to direct access to San Francisco, Aer Lingus customers travelling from a number of UK and European cities via Dublin, will benefit from a wide choice of onwards connections to sixteen popular cities on the West Coast and beyond including Seattle, Los Angeles, Las Vegas and San Diego. The new San Francisco route also represents a business opportunity for Aer Lingus Cargo.

Aer Lingus customers travelling from over twenty UK and European cities via Dublin to Toronto, will also have the option to connect to eight key cities within Canada including Vancouver, Montreal and Calgary.

This growth plan will bring the Aer Lingus long haul schedule to 10 daily transatlantic services, connecting Ireland and Europe with cities throughout North America.

Christoph Mueller, Chief Executive, Aer Lingus, said: “Our transatlantic business goes from strength to strength. This expansion is extremely positive news for Aer Lingus and for the broader economy in terms of business, tourism and employment. Our transatlantic capacity will increase by 24% in 2014, following on from the 13% additional capacity in our 2013 transatlantic schedule. Our operation of the San Francisco route will strengthen Ireland’s ties with Silicon Valley and encourage Ireland’s development as a technology hub for Europe. San Francisco’s Silicon Valley is home to many of the world’s largest technology companies and several of these companies have European headquarters in Dublin.”

He continued: “Toronto is the sixth biggest North American market out of Ireland. In addition to being a great tourist destination, the city is home to a large Irish community and we look forward to welcoming them on board. We are confident that the increased number of flights from Shannon to New York and Boston will bring additional tourists to the Western region.

Commenting on the announcement, Leo Varadkar TD, Minister for Transport, Tourism and Sport, said: “This announcement of new services by Aer Lingus is fantastic news. This Government has always sought to improve air access to key tourism and business markets, such as the US and Canada. Canada is the world’s 11th largest economy and California is reckoned to be the world’s 12th largest. I know that the business and tourism sectors are delighted with this news. More than 40% of Ireland’s total foreign direct investment comes from Silicon Valley alone. The return of the direct air service to the US west coast is particularly important and I’m very happy to see the route being filled by an Irish airline.”

To support the operation of the new routes, Aer Lingus will wet lease three Boeing 757 aircraft from ASL Aviation Group. The aircraft will be configured with an economy and business class cabin. Business travellers will continue to enjoy the same great level of service; with gourmet meals, sleeper seats and an extensive in-flight entertainment selection.

ANA To Buy AirAsia Out Of Japanese Budget JV

ANA will buy AirAsia out of a Japanese budget airline joint venture for JPY¥2.45 billion (USD$25.11 million), the Malaysian low-cost carrier said, dissolving a loss-making alliance after less than two years.

The venture, based at Tokyo’s Narita airport, has failed to win over Japanese passengers since it was set up in August 2011. ANA, which owns 67 percent of the venture, has blamed the poor performance of AirAsia Japan on ineffective marketing and a non user friendly booking website.

Differences in opinion on issues ranging from cost management to where the business should be based contributed to the breakup, AirAsia said in a statement on Tuesday.

The split comes at a time when AirAsia is planning to expand overseas. The pullout from the venture, however, is consistent with AirAsia’s past decisions to drop loss-making routes.

“I remain positive on the Japanese market and believe there is tremendous opportunity for a low-cost carrier to succeed,” AirAsia Group chief executive Tony Fernandes said in the statement.

“We have not given up on the dream of changing air travel in Japan and look forward to returning to the market,” he added.

AirAsia Japan has been reporting losses since it began operations with flights to five local destinations and two in South Korea.

The venture cut ANA’s operating profit by about JPY¥3.5 billion in the year ended March, ANA’s senior vice president Shinzo Shimizu said on Tuesday.

“We judged it would be better to operate the carrier as a wholly owned unit,” Shimizu said at a press conference in Tokyo.

OPTIONS

ANA has another budget joint venture Peach based at Osaka’s Kansai airport.

Local rival Japan Airlines operates Jetstar Japan, a joint venture with Qantas Airways that has bases in both Narita and Kansai.

Shimizu said ANA will decide in July how to operate the former AirAsia venture and will choose a name for the unit.

A possible merger with Peach was one option being considered, he added.

The unit will use the AirAsia livery until November.

(Reuters)

Bankia Sells IAG Stake For EUR€675 Million

Spain has lost its direct influence in airline group IAG in the midst of its controversial restructuring, after lender Bankia sold its stake in the airline company for EUR€675 million (USD$877 million).

Bankia, bailed out to the tune of EUR€24 billion by the state last year, sold the 12 percent stake on Thursday as part of a recovery plan agreed with the government and the European Union.

International Airlines Group (IAG) was formed in 2011 by the merger of British Airways and Spain’s Iberia.

Losses at the Spanish airline, however, have led IAG to launch a restructuring at Iberia, which includes thousands of lay-offs and sparked strike action earlier this year, in a country where more than a quarter of the workforce are jobless.

“A forced sale like this one tends to have dangerous implications. The (Spanish) government should be able to have a say in its only national airline, which has a major role in the economy,” said Jose Maria Marin, a professor at the state-run National University of Distance Education (UNED).

As a result of the stake sale, the Spanish government – through Bankia – will lose a seat on IAG’s board. However, certain safeguards for Iberia’s business that were put in place at the time of the merger – such as the routes it can fly – remain in place until 2016.

“Spain’s influence in IAG is reducing,” said Cantor Fitzgerald analyst Robin Byde. “Iberia now accounts for around 26 percent of IAG’s capacity… maybe those who said the merger was more of a BA takeover were right.”

The buyers of Bankia’s stake are unknown, though financial sources told Reuters news agency that book-runner Merrill Lynch had sold the 224 million shares to a wide range of investors.

Bankia and IAG said in statements only that the shares had been placed with “institutional investors”.

Last year IAG chief executive Willie Walsh said there was no strategic value in having Bankia as a shareholder and that the group was open to another airline taking Bankia’s stake, though analysts doubted a rival would step in.

There had been speculation Qatar Airways may be interested in the stake but both Walsh and Qatar Air CEO Akbar Al Bakar dismissed the possibility.

MORE TO COME

Iberia has become unprofitable in all markets, including long haul, and its problems are critical, IAG said last week. The Spanish airline reported an operating loss of EUR€202 million in the first quarter.

Staff staged two five-day walkouts in February and March but halted industrial action after IAG reduced the number of lay-offs at the Spanish flag carrier to 3,141.

(Reuters)

AirAsia X Launches USD$370 Million IPO

Malaysian long-haul budget carrier AirAsia X launched an initial public offering on Monday with a value of up to USD$370 million, seeking funds for its fleet expansion as it targets buoyant travel demand in Asia-Pacific and looks to fend off regional rivals.

The carrier, which competes with Singapore Airlines’ Scoot and Qantas Airways’ Jetstar, has said it plans to add 13 Airbus A330 wide-bodied planes this year and next to take its fleet to 23 aircraft by 2014.

The expansion comes as passenger traffic in the Asia-Pacific region more than doubled between 1998 and 2012, putting air travel activity in the region on par with North America, according to figures from research firm Strategic Airport Planning, which were cited in AirAsia X’s preliminary IPO prospectus.

“The focus in on the sweet-spot flights of 4 to 8, or possibly 9 hours,” Tony Fernandes, AirAsia X’s founder, told reporters at the IPO launch. He added that AirAsia X plans to strengthen its position in its key markets in Australia and East Asia.

The company plans to use 33.3 percent of the proceeds to repay bank loans, with another 32.6 percent set for capital expenditure and 29.7 percent as general working capital.

AirAsia X’s chief executive, Azran Osman Rani, said the carrier’s expansion would come through more flights on existing routes as well as from new routes within some countries where it already operates.

The deal is scheduled to be priced on June 24, with the stock market debut set for July 10.

(Reuters)

Birmingham Airport unveils plan to take 70 million passengers in bold test to Heathrow’s air supremacy

Birmingham Airport is making a bid to become as big as London’s Heathrow and potentially the busiest aviation hub in the world. An audacious land-grab to overtake Heathrow – which currently handles 70 million passengers a year, more than any other airport in the world – is being made by a coalition of Midlands councils and business leaders.

The runway extension due to be completed next year will give Birmingham a capacity of 27 million, which is more than a third runway at Heathrow could deliver in a decade. The longer-term vision for a “UK Central” international hub airport at Birmingham would see it overtake Heathrow as Britain’s biggest, able to handle as many as 70 million passengers a year and linked into the proposed HS2 fast rail network. When HS2 is completed, the capital’s main interchange station in West London would be just 31 minutes away from Birmingham.

Paul Kehoe, the chief executive of Birmingham Airport, claims the UK’s long-haul traffic cannot continue to be routed through one airport in West London. Mr Kehoe said: “In 20 years’ time, British air travel will double. We believe that the best option is to create a network of long-haul national airports, each supporting the comparative economic advantages of that region to boost trade, foreign investment and tourism.”

Such a plan could be undermined by the reluctance of major airlines to commit to long-haul routes starting and ending outside the London area. British Airways said last year: “British Airways does not believe that regional airports can ever be an alternative to provision of effective hub airport capacity serving London and the South East.” Virgin has also implied that it is not convinced by Birmingham as an alternative, saying Heathrow and Gatwick are “full at peak times because passengers want to fly from those airports”.

Alongside a larger Birmingham airport, the coalition’s project includes plans to expand capacity at Manchester and Edinburgh airports, which would help ease over-crowding at Heathrow and other airports in the South East. According to Birmingham’s analysis, better use of the six largest regional airports could add 116 million passengers to airport capacity by 2050.

independent.co.uk

Aer Lingus among biggest carriers in new £2.5bn Heathrow Terminal 2

Aer Lingus will be one of the biggest operators at Heathrow’s new Terminal 2 when the £2.5bn (€2.9bn) facility opens next year.

The terminal is due to open to the public next June, with construction being completed this November.

It will also mean an end to the tortuous circumnavigation currently required by Irish passengers at Heathrow’s existing Terminal 1. That terminal will be demolished in 2016 and rebuilt.

Terminal 2 is being built to handle about 20 million passengers a year. An extension will provide capacity for another 10 million.

Aer Lingus will move flights to Terminal 2 on July 9 next year, according to Heathrow’s schedule. It will be the ninth airline to commence operations from the new facility. United, Air Canada and Air China are among the first. A total of 26 airlines are planning to use it.

It’s estimated that Aer Lingus will account for about 10pc of the capacity usage at the new terminal, with the Lufthansa group and United among the biggest users. Aer Lingus will also fit out a new lounge, while check-in for Virgin’s domestic ‘Little Red’ service that Aer Lingus leases aircraft and crew to, will be based beside the Irish carrier’s desks.

Irish Independent

Vueling To Pass Iberia In Five Years

Spanish airline Vueling will be bigger than loss-making flag carrier Iberia within three to five years, IAG chief executive Willie Walsh was quoted on Wednesday as saying.

International Airlines Group, the parent company of British Airways and Iberia, took control of the latter’s low cost domestic competitor Vueling in April. It is in the process of laying off thousands of workers at Iberia, which has suffered because of a recession in Spain that has left 27 percent of the workforce out of work.

“In short and medium-haul routes it will definitely be in five years and possibly even before, in three years,” newspaper Expansion quoted Walsh as saying.

According to figures from Spain’s airport authority Aena, Vueling carried 5.7 million passengers in the first fourth months of the year, while Iberia and Iberia Express combined carried 5.6 million.

IATA Raises Airline Industry Profit Forecast

Global airlines should post an industry profit of USD$12.7 billion this year, an increase from a previous USD$10.6 billion forecast, as lower oil prices and belt-tightening offset difficult economic conditions, industry group IATA said on Monday.

However, the International Air Transport Association said margins remained weak amid Europe’s ongoing debt crisis.

“The day-to-day challenges of keeping revenues ahead of costs remain monumental,” IATA director general Tony Tyler said at a meeting of more than 200 airlines in Cape Town.

“On average, airlines will earn about USD$4 for every passenger, which is less than the cost of a sandwich in most places,” he told Reuters Television.

Addressing reporters later, Tyler said record passenger numbers and growth in “ancillary” revenues were the two key reasons driving improved profitability.

Airlines are expected to fill 80.3 percent of seats and transport an unprecedented 3.13 billion passengers in 2013, up from 79.2 percent and 2.98 billion respectively last year, as operational changes and better capacity management filter through.

Tyler said ancillary revenues would rise to USD$36 billion, or 5 percent of total turnover, as airlines unbundle more services from base fares and charge for additional services such as meals, extra baggage and seats.

“These are significant factors that are driving performance,” Tyler said.

(Reuters)

The end of the free upgrade

A free move into business class could become a thing of a past as the major airlines look to raise extra revenue online

The economy passenger’s dream ticket – a free upgrade at the departure gate – now looks endangered.

Online upgrade auctions that allow travellers with cheap tickets to make blind bids for unfilled business class seats are on the rise, as airlines across the world catch on to the innovative new way of making extra cash.

Last week Austrian Airlines became the latest carrier to start taking bids-for-beds, following in the footsteps of Air New Zealand, El Al of Israel, Etihad of Abu Dhabi and Virgin Atlantic.

In future, passengers buying cheap tickets for long-haul flights via Vienna are invited to bid for an upgrade to the business class cabin, which boasts 2 metre-long flat beds. If successful, they also get fast-track security, access to business lounges and improved catering.

The technology behind the bidding services has been developed by American software developer, Plusgrade, which claims it is in talks with several other carriers about offering the facility. The firm’s chief executive, Ken Harris, told The Independent: “Everybody loves an upgrade. At this very moment there are many smiling passengers in the sky, criss-crossing the world”.

The airlines that have signed up are all aiming to fill seats that would otherwise fly empty. They want to squeeze more cash out of economy passengers, while attempting to ensure they don’t “cannibalise” earnings from existing full-fare business travellers. Therefore, the system uses even more smoke and mirrors than usual in the airline industry.

When a passenger buys a ticket on a flight that is predicted to have empty business class seats, he or she will be invited to bid for an upgrade. Airlines are coy about the average level of winning bids for fear of setting a “price list” that may persuade existing business-class passengers to switch. Karsten Benz, chief commercial officer of Austrian Airlines, said: “With a bit of luck a small additional charge is enough.”

Some airlines exclude passengers who buy the most heavily discounted tickets, while Air New Zealand insists that bids are placed at least a week before departure. The Air NZ auction, called “One Up”, uses a colour-coded on-screen meter to indicate how successful a bid is likely to be: a NZ$100 (£55) offer for a Heathrow-Auckland flight from economy to premium economy shows red, while a bid for 10 times as much gets a green.

Successful bidders are contacted at least three days ahead, while those who bid too low travel as originally planned; their credit card is not charged.

Air New Zealand tells disappointed bidders: “We can’t go into specifics about why requests are not successful.”

Aircraft are flying fuller than ever before. International Air Transport Association figures for 2012 show an average “load factor” – the proportion of seats filled – above 79 per cent, meaning that on a typical flight only one in five seats is empty.

Traditionally, average load factors have varied between 70 and 75 per cent. More tightly packed economy cabins means the attraction of business class increases. Yet the premium for, say, Virgin Atlantic’s Upper Class is astronomical. The cheapest Virgin ticket from Heathrow to New York, departing tomorrow and returning a week later, is £462 in economy but £5,400 in business – more than 11 times as much.

The airline now auctions Upper Class seats on “almost all routes”. A spokeswoman for Virgin Atlantic said: “Passenger acceptance has been good – with a good take up rate.”

British Airways has no plans “at the moment” to emulate its rival by introducing upgrade auctions, according to a spokesman. At present, BA passengers can pay a specified amount to upgrade existing bookings.

BA, in common with other full-service airlines, sometimes awards free upgrades. The Gatwick-Thessaloniki flight last Saturday was a typical case. Like many weekend flights, it was “oversold” in economy class – but BA correctly judged that there would be space in business class, and that passengers could be moved to the front of the plane.

The beneficiaries were not picked randomly, but by scanning the manifest for gold card holders, signifying a high-spending traveller on BA.

Some frequent flyers regard the occasional free upgrade as a well-deserved perk, and are alarmed that it might be eroded if the empty flat beds are all auctioned off to the highest bidders.

Independent.co.uk