Is the Global Alliance Model “Fractured”? Etihad Thinks So
Colleen Wood September 23, 2014
Etihad Airways president and CEO James Hogan called the model of international carrier alliances “fractured.” Rather than partake in global alliances, Etihad prefers to establish codeshare agreements and equity investments with other airlines, a model that has proven successful for the UAE airline.
The president of Abu Dhabi’s Etihad Airways recently criticized the model of international carrier alliances.
“The model of alliances is fractured. See what happened to Qantas, Emirates and British Airways,” said Etihad’s president and chief executive officer James Hogan at the International Air Transport Association (IATA) world financial symposium in Abu Dhabi last weekend.
Qantas and British Airways are members of the Oneworld Alliance, one of the largest in the world, but Qantas also maintained a revenue-sharing agreement with Emirates Airline. Shereen El Gazzar, writing for The National, observed, “The multiple affinities created a conflict over revenue-sharing, which ultimately led to BA severing its codesharing agreement with Qantas in February last year.” Qantas reported record losses in the months following this breakup.
This series of events is proof to Hogan that the global airline alliance model is showing strain. Etihad has in the past spoken of its inability to join alliances, but now the airline talks about the advantages of avoiding the alliance model.
Hogan praised flexibility and creativity in a business model for airlines, saying, “There is no ideal business model based on a rule book in the airline industry.” With this in mind, Etihad has pursued global expansion through an alternative model – partnerships over alliances.
“We believe partnerships are better, strong codeshare relationships and equity investments,” Hogan said. Codeshare agreements involve cooperation between airlines on individual flights, with each airline publicizing and marketing the flight through its designator. While each airline uses its own flight number in its published schedule, only one carrier actually operates the flight.
Etihad currently maintains 47 code-sharing agreements with global airlines. By establishing code-sharing partnerships, Etihad is able to add depth to existing markets while simultaneously expand into new markets.
In addition to code-sharing agreements, Etihad has set out on an air carrier shopping spree, buying equity in airlines across the world from Air Serbia to Air Seychelles.
One recent partnership has sparked a bit of controversy for Etihad. In April 2014, Etihad purchased 49 percent of Alitalia, Italy’s fiscally challenged, state-owned airline. EU law dictates that at least 50 percent of any European carrier must be owned by an EU country. “There were concerns about our move,” according to Hogan. “But it is not about control, it is about growing together and bringing our partner airlines back to profitability.”
Hogan mentioned that Air Serbia and Air Seychelles would be profitable within a year, and Etihad announced that it would bring Alitalia back into profitability by 2017. These points prove that Etihad’s partial ownership is beneficial.
Etihad itself enjoys sizable profits, bringing in $6.1 billion in 2013 and potentially generating $7.3 billion in 2014. These earnings appear massive compared to the losses of European airlines, but Etihad has relied on government support to become a major global brand. In May 2014, Etihad reportedly received an interest-free $3 billion loan from the ruling family in Abu Dhabi.
With these levels of state support, it may remain to be seen whether Etihad’s partnership model is in fact a better alternative to the global alliances approach.
[Photo: iStock]
I absolutely agree with sdsearch. I stick with *A because their elite benefits are pretty good and fairly uniform across the alliance. Though I quite frequently see Etihad, Emirates, and Qatar offering prices on routes I fly quite a bit less than I pay to fly *A, I don't want to give up these benefits and privileges. In the case of Etihad, they are sort of developing their own alliance with all of these partial ownership bids, in several cases they are giving reciprocal benefits to the elite members of the other programs. If that continues then they are going to end up with their own pseudo-alliance anyway... unfortunately though at least so far they are not buying many carriers I actually care to fly.
Etihad is not really partnership with other airlines, but investing in other airlines. They are rich enough to take advantage of weaker airlines at moments of weakness and buy significant shares off of them. Alitalia is a fine example. Then they have a strong say in routes and assignments and rotations that favors them, not necessarily the partner airlines themselves. When Etihad "helps" other "partner" airlines "go back to making profits", it is usually done with route reductions, consolidations of work forces (i.e. firing people), and infusion of cash from Etihad. So the real story is Etihad's strategy is making other airlines sub-vessels in their own airline empire.
I do not travel with Etihad or Emirates precisely due to what Sdsearch described above: lack of access to member airline's lounges and priority checkin/boarding benefits even as an elite.
Qantas is not sitting on the brink of bankruptcy. They have recorded a loss and had their investment rating downgraded so it is now in line with virtually every other carrier in the world. (I think South West is the only airline which still has an investment rating). It also used this financial year to write off a large chunk of money which gave the atrocious financial year end report. Do I think that Alan Joyce is doing a good job at the helm? Absolutely not, and I will probably celebrate the day he goes, that said let's get some fact straight before coming out with alarmist statements. As for global alliances, well since I have QF status, I will tend to have OW blinkers on whenever I fly overseas. This is simply because I know if I am to fly AA or CX for example I'll get better treatment than had I simply pick ABC airlines. If there wasn't an alliance there then I'd probably have some idea of QF's partners, however apart from EK, I could not reliably tell you whom else QF had agreements with off the top of my head. The alliance branding if nothing else provides a nice simple way to quickly identify partner airlines.
I'd argue that Qantas' decision to form a partnership with Emirates outside the OneWorld alliance might have had something to do with desperation rather than prudence or sound business decision making. Qantas' is teetering on the edge of bankruptcy, after all. Emirates was chosen not because it is a better airline but because OneWorld has no member that can offer Qantas a more geographically suitable partner for the important Australia-Europe market--which involves enormous distance. BA and Qantas are geographically not as well situated, and OneWorld has no alternatives in Europe that Qantas can consider. It is the weakness of OneWorld for that purpose that created Qantas' perceived need to ally itself with Emirates. Just because Etihad has avoided any of the 3 global alliances does not a pattern make! Emirates, Etihad, and Virgin Atlantic are the only 3 major airlines that are not members of the global alliances. Etihad has its own partnership with Air France/KLM; Emirates has its partnership with Qantas; and Virgin Atlantic now has its partnership with Virgin. Who can say whether or not any of those partnerships dissolve over time (as many partnerships do) or whether or not they might eventually push Etihad, Emirates, or Virgin into one of the alliances.