Jet-Etihad deal: How James Hogan’s strategy worked for the UAE carrier
In an industry known for alliances, James Hogan’s counter-intuitive strategy to buy minority stakes has worked like a charm.
James Hogan had spent over three decades working with airlines like Ansett and Gulf Air, hotel and restaurant chain Forte and car rental firm Hertz before he joined Abu Dhabi-based Etihad Airways in October 2006. But the Australian will be remembered more for what he unleashed at the UAE national carrier, where he is president and CEO, than for any of his achievements in all those years. In 2008, he placed a $43-billion order for 205 aircraft. That was just the start.
Three years later, Hogan turned industry conventions on their head by kicking off what Etihad calls ‘equity alliances’. Instead of joining an airline alliance like Star Alliance or OneWorld, Etihad bought just under 3% in Air Berlin, and later raised it to nearly 30%. Etihad also lent the ailing German airline $255 million.
Etihad has since picked up equity stakes in four other airlines, the most recent and largest being 24% in Jet Airways for $379 million earlier this week. (It has invested another $220 million in Jet, including $150 million in its frequent-flyer programme and $70 million to buy its three slots at Heathrow airport.) Etihad, with these acquisitions — all minority ones — has now strengthened its presence in Asia, Australia, Europe and Africa.
Kapil Kaul, CEO (South Asia) of aviation consultancy Capa, says airline alliances have not worked as well as originally thought: “There is usually one dominant airline in any alliance and its influence is huge. When you think of Star Alliance, Lufthansa comes to mind.” That’s why he thinks Etihad was smart enough to go in for alliances with minority stakes.
Saj Ahmad, chief analyst at StrategicAero Research.com, concurs. “What Etihad is doing with minority stakes is mitigating risks in those areas of the world where it wants to expand and is using its organic growth to leverage deals that make Abu Dhabi a more attractive hub for partner airlines as well,” he says.
Etihad’s equity alliance is also seen as a strategy to get a leg-up on its bigger and older rival Emirates Airline. Questions emailed to Etihad remained unanswered at the time of writing.
Hogan, 56, has to be credited with bringing Etihad, founded in 2003, into the black, with the airline posting its first ever annual profit of $14 million in 2011 on revenues of $4.1 billion. The following year, net profit trebled to $42 million on revenues of $ 4.8 billion.
It’s not just Etihad that has benefited from Hogan’s strategy, even its partner airlines had something to smile about in 2012. Air Berlin and Air Seychelles returned to profitability for the first time since 2007. An Air Berlin spokesperson says the airline has been able to fashion a global route network over the past year. “We have extended the number of code-share routes to 100 connections and fly together to 239 destinations in 77 countries,” she adds.
Craig Jenks, president of New Yorkbased consultancy Airline/Aircraft Projects Inc, says Etihad was prudent enough to make its acquisitions in a downturn. According to International Air Transport Association estimates, airlines are expected to post $6.7 billion in profits in 2012, down from $8.8 billion in 2011.
On Etihad’s strategy of picking up minority stakes, Jenks says, “The main reason is because rules in all these countries do not permit majority stakes.” For instance, in India the foreign direct investment limit in aviation is 49%. Ahmad believes Etihad will make more piecemeal buys of Jet in the coming months.
Hogan has gone beyond just investing in airlines. Last year, Etihad bought 70% of Air Berlin’s frequentflyer programme for $243 million to aid the airline turn profitable. He has also worked on making Etihad a bigger global brand. In July 2011, the airline signed a 10-year, $480-million sponsorship deal with English football club Manchester City.
Hogan’s unconventional strategy has certainly changed the way Etihad is perceived. Ahmad says Etihad is not just a horse in the three-airline race for growth alongside Emirates and Qatar Airways. He adds: “Etihad is looking at airlines worth saving and investing in, then striking deals to gain access to those markets without having to use their own assets or airplanes.”