INTERVIEW: ETIHAD CEO JAMES HOGAN

Etihad Airways has grown very fast. Is this growth rate sustainable?

We had to ramp up very fast to compete with Emirates and Qatar Airways. After only our seventh year of operation [2010], Etihad carried 7.1 million passengers. It took Qatar 13 years and Emirates 18 years to get to that point. Achieving that growth so quickly has put a lot of pressure on the business, but we successfully built a network that spans 84 destinations in 52 countries and we built a brand that is regarded as one of the best in the world. This year, we are expecting to carry 10 million passengers, around 19% up on our 2011 number.

It is not our goal or ambition to be the biggest, but we will continue expanding the business step by step. We have our 787s and A380s coming in from 2014. This will be the next major ramp-up of our operations and search for people. We employ some 9,000 people globally now and this is planned to grow to 27,000 by 2020.

It is easy to achieve such growth with a powerful and wealthy owner like the Abu Dhabi Emiri family?

There is no doubt whatsoever about our ownership, but our mandate is unambiguous: to create a profitable and financially sustainable business and to support the economic development and diversification of Abu Dhabi. It is a misconception to think that rich people want to spend money without return. I would argue that the opposite is true. Etihad has its own P&L and we are on track for profitability in 2012. Revenue reached the $4 billion mark last year, up from $2.95 billion in 2010 and from $700 million in 2006.

We have established the foundations to move from a start-up phase into maturity and profitability. Etihad started diversifying its activities further into airline partnerships, distribution, hub operations and air cargo. We now have codeshare agreements with 35 airlines, including a ground-breaking partnership with Virgin Australia which stretches our geographic footprint with 44 new destinations in Australia, New Zealand, the Pacific Islands, Asia and to Los Angeles.

Our cargo is doing extremely well. Etihad was the launch customer for the Airbus A330 Freighter and in December we placed an order for two additional 777 Freighters, which will bring our dedicated full freighter fleet to nine. We added five new widebody passenger aircraft—three A330-300s and two 777-300ERs—a Boeing 777 Freighter and an A320-220 this year.  We will add four 777-300ERs and two A320s next year.

The Association of European Airlines (AEA) and several of its members say that Etihad—as well as Emirates and Qatar Airways—represent a new kind of competitive threat.  Is there some sort of distortion of competition?

According to AEA we get everything for free. I can assure you and everybody that Etihad does not get anything for free here. The rules are very straightforward: we don’t get any form of subsidy, we get no letters of comfort or sovereign guarantees and we have to raise debt ourselves [to finance aircraft]. We go the market as Etihad Airways. Our accounts are transparent to our banks, to the European export agencies, and to the Export-Import Bank of the United States (Ex-Im Bank). We have 40 banks in our lending portfolio for the financing of our aircraft. We raised approximately $4 billion since 2006 on our balance sheet and we will continue to be in the market over the next ten year as new aircraft come in.

A number of western, mainly European, airlines launched this campaign accusing us [the “big three” Gulf carriers] of having a competitive advantage because supposedly we fund our expansion with export credits. First of all, only 15% of Etihad’s aircraft financing is sourced from export credit guarantees, with the remainder financed in the commercial, leasing and Islamic markets; secondly, we do not set the rules on export financing.

But you have a clear cost benefit when compared to European carriers?

We are not bound by legacy costs; we are a young airline, with a young fleet, and a motivated workforce who likes to work for Etihad. We have a “can do” attitude, we are silo busters. Indeed, we are not restricted by unions but we operate in a highly competitive environment, especially here in the Gulf region. It is vital to recruit, develop and retain the right level of suitably skilled staff to compete.

We have over 120 nationalities working for Etihad and the majority of our expatriate employees live at our home-base in Abu Dhabi; this comes with extensive costs for housing, education and medical care. And, such a wide cultural diversity comes with complexity. We invest vast sums in training and development.

Yet, Etihad frequently surfaces as being interested to acquiring a shareholding in a European airline, most recently Aer Lingus and British Midland. What’s the difference?

We are interested in every possible opportunity – but it has to make sense for the business. I really can’t get into the specifics of what would make one investment or acquisition different or better than another … at least not without a concrete deal on the table that would take it out of the realm of speculation.

Etihad has mapped out a network consisting of 100 destinations by 2017. Where will most of the expansion be?

 Our mandate is to support building Abu Dhabi and bringing people into and out of Abu Dhabi, and Abu Dhabi is becoming a destination in its own right. But there are clear growth opportunities in flow traffic. We are doing nothing different than other carriers based in small countries with a small population, like KLM and Singapore Airlines. We are improving our hub functionality exploiting Abu Dhabi’s strategic geographic location, using aircraft technology and a region that is opening up.

We plan to improve frequencies on existing routes and add more secondary cities in Europe, more flights to the US and to Canada depending the bilateral situation. We also see good opportunities in China, Africa and Southeast Asia. South America is an untapped market for us for now, but that could change.

Where will Etihad operate its Airbus A380s?

Initially to London Heathrow, Sydney and New York.

Will EY’s Dreamliners and A380 feature a total new cabin?

What I can say is that we will be setting the benchmark, but we don’t want to give our competitors too much of an idea of what’s coming so you’ll have to watch this space! Etihad has a customer-centric brand strategy, which is designed to ensure that every customer enjoys an inspirational experience from booking to arriving at their final destination. We have an established reputation in this area and we continuously invest in world-class products and services; we have an award-winning first–class product.

Equally, Etihad evaluates the cabin configuration of its aircraft to warrant that they are in line with prevailing market conditions. We retrofitted two Airbus A320s to have an all economy class configuration and we reconfigured eight three-class A330-200s into a two-class layout with an upgraded Pearl business class cabin. The A320s are deployed on three high density routes to India and Sri Lanka where is no premium demand and the A330-200s, which now have 62 more seats and thus a much reduced CASK, provide the optimal configuration for medium-haul routes that lack strong demand for first class. All these are initiatives to build a profitable and financially sustainable business.