Etihad Airways:From Good to Great
James Hogan's 10-Year-Old Airline Just Keeps Getting Better
It’s Monday afternoon and James Hogan, president and chief executive officer of Etihad Airways, is holding a scorecard meeting with his senior leaders. Etihad’s corporate culture is built around measuring and refining the business with numerous balanced scorecards that measure the airline’s most important key performance indicators (KPIs).
The numbers have been good throughout the year; however, some of the latest monthly KPIs are showing lower growth than previous months, and Hogan wants an explanation.
“Success is not about just this year,” he tells his team. “I want to know that we are set up correctly to be successful next year, the year after that and every year after that.”
During its first 10 years of service, Etihad has grown to a fleet of more than 80 aircraft, carrying more than 11.8 million passengers, making it the fastest-growing national airline in history.
The business leaders are prepared for his questions, and they provide details about performance that, for other carriers, would be considered extremely good, but they are not to the standard that Hogan expects. He asks for “recovery plans” for KPIs that are showing double-digit year-over-year growth that, frankly, most airlines would envy. This is a key ingredient of Etihad’s success. The senior leadership embodies their management theme for 2013 of moving “From Good to Great!”
It is a momentous year for Etihad Airways. It marks the 10th anniversary of its founding. In that decade of operation, and especially since Hogan became the president and CEO seven years ago, Etihad Airways has demonstrated phenomenal growth.
During that short period, Etihad has grown to a fleet of more than 80 aircraft, carrying more than 11.8 million passengers, making it the fastest-growing national airline in history. The airline currently serves 94 destinations in 55 countries.
In 2008, Etihad made the largest single order for aircraft when it penned a deal for up to 205 aircraft, including 100 firm orders, 55 options and 50 purchase rights. By any measure — commercial, financial and operational — Etihad has demonstrated phenomenal growth. The story of this airline is not about top-line growth, however. It is one of bottom-line focus and consistent commercial success.
When James Hogan took the reigns as president and CEO, he received some direction from his new employer.
First, the board of directors advised him to make Etihad Airways the best airline in the world. As such, Etihad has won the World Travel Award’s “World’s Leading Airline” for the past four years. It has also earned the “Best First Class” from SkyTrax and many other awards since 2009.
Second, Etihad Airways had to contribute to the economic development of its home base in Abu Dhabi, capital of the United Arab Emirates. The last five years have seen Abu Dhabi deliver strong economic growth and diversification every year, with the national carrier playing a major role in attracting trade and tourism, as well as its own direct contribution. Etihad’s impact is now measured at US$10.7 billion, more than 10 percent of the Emirate’s non-oil gross domestic product.
Finally, and the board knew that this was the hardest task they set for their new president and CEO; Etihad had to deliver the first two while working to a strictly commercial mandate. It had to deliver a return.
Midfield Terminal Complex
Etihad Airways anxiously awaits the opening of the new Midfield Terminal, scheduled for completion in 2017. The new state-of-the-art facility will include a full terminal building, passenger and cargo facilities, and duty-free shops and restaurants for a total capacity of 27 million to 40 million people a year.
Profit is elusive within the airline industry — for all carriers. Profit is especially elusive for airlines that are growing capacity at a high rate since new capacity is usually added ahead of passenger acquisition.
Then, of course, throughout the period of Etihad’s high growth — which has not abated in the seven years since Hogan has been at the helm — there was a global financial crisis that cratered several economies and curtailed international travel. Added to this revenue-limiting mix is the rapid growth of regional competitors Emirates Airlines and Qatar Airways, both of which have been in operation far longer and have more aircraft than Etihad.
Yet despite these enormous challenges, Etihad Airways reached net profitability in 2011, ahead of schedule, and it tripled that profit in 2012. Now, it appears to be well on its way to another successful year in which it celebrates a decade of providing service.
Most airlines are still small by their tenth anniversary, and generally unprofitable, but Etihad Airways has become a force in global aviation during that short period while maintaining a rigorous focus on profitability. There is a formula for success at Etihad Airways, and Hogan expects his entire team to embrace that formula.
Characteristics Of Success
Airlines are successful because they have strong business plans that consider the many complexities of the business. They have a good view of the big picture but then drills down to every smallest detail. So, there is no “one secret of success” for Etihad Airways. However, if a single ingredient among many contributing factors could be determined as the “secret sauce,” for Etihad, it is partnerships.
Etihad has always taken a collaborative approach to building business. From the first day of Hogan’s stewardship, codesharing has been identified as a way to build the network. Today, the airline has codeshares with 47 airlines, covering hundreds of flights per week and providing service to millions of passengers worldwide. These codeshares mean Etihad now offers more destinations than any Gulf carrier does.
Approximately 20 percent of Etihad’s revenues are generated through partnerships, with the airline operating as either a marketing carrier or the operating carrier. Despite not being a member of a global alliance, Etihad has built an admirable business from bilateral partnerships with individual carriers.
Hogan believes that non-membership within a global alliance is part of the secret of Etihad’s success.
“We can codeshare with any airline that makes financial sense — not just the members of a particular alliance,” he said. “For example, this allows us to have a strong partnership with airberlin, a member of oneworld, as well as Air France/KLM, a member of SkyTeam, within the same region.”
It is undeniable that this strategic approach has added hundreds of millions of dollars in revenue to the airline. In fact, Etihad has codeshares with carriers in each of the three global alliances and with many unaligned carriers. On some of its trunk routes, the carrier has more than 10 codeshare partners. The preponderance of codeshare partners means that Etihad provides convenient connections for passengers travelling in thousands of markets worldwide while adding revenues to its coffers. Many of these passengers travel through Etihad’s Abu Dhabi hub, adding to the success of the airline as well as the Emirates.
Economic Boost For Abu Dhabi
When James Hogan became Etihad Airways’ president and CEO, the airline’s board of directors tasked him with making the airline a contributor to the development and economy of Abu Dhabi, its home base. In only a few years, the United Arab Emirates capital has grown in recognition and stature to its neighboring rival Emirate of Dubai.
However, Etihad Airways has gone further, with a unique new strategy of taking financial stakes in some of its closest partners. Etihad has acquired significant equity stakes in carriers as diverse as airberlin, Jet Airways, Virgin Australia, Aer Lingus, Air Serbia (formerly Jat Airways) and Air Seychelles.
Hogan believes that equity investment in these airlines brings substantial synergies that are not possible from bilateral codeshares and even global alliance participation.
“Equity investment allows the partners to achieve a scale that has cost benefits, not just revenue benefits,” Hogan maintains. “We use the additional buying power to strike agreements with suppliers that are better than any of the partners could obtain acting alone.”
This financial investment has undoubtedly helped the partners as well as Etihad. Both airberlin and Air Seychelles were profitable within 12 months of partnership with Etihad.
“We look for investments in airlines where we believe that the management team has a strong plan for the future and where the carriers share our vision of success,” he said.
Technology As An Enabler
One of the key partnerships that Etihad sought and has concluded is with Sabre Holdings®. In 2011, Etihad tendered for a reservations system provider that would also offer additional partnership opportunities. Etihad’s published tender was clear about the three criteria for success. The tender required that the successful bidder would clearly demonstrate that:
- Its product is superior to its competition,
- Its commercial offer is compelling,
- It demonstrates tangible benefits for Etihad Airways from the partnership.
“Sabre [Holdings] ticked all of the boxes,” Hogan said. “We are almost a complete ‘Sabre shop’ because its portfolio is second to none. It provided a strong commercial offer — after a long negotiation. Finally, Sabre [Holdings] is a trusted partner of Etihad.”
The scope of the relationship between Etihad Airways and Sabre Holdings is broad. Etihad has every component of the SabreSonic® Customer Sales & Service suite, nearly all of the Sabre® AirVision™ Marketing & Planning suite and is currently implementing key components of the Sabre® AirCentre™ Enterprise Operations suite.
In addition, business consultants and operations researchers from Sabre Airline Solutions® provide value-added consulting services that drive financial and operational improvements for Etihad. The airline has a strong working relationship with GetThere®, and it enjoys a compelling agreement with Sabre Travel Network® for global distribution.
After selecting Sabre Holdings, Hogan was an active driver of implementation.
New Etihad Headquarters And Training Center
In 2007, Etihad Airways spent 183.6 UAE dirhams (US$50 million) to have its new head office and training center built in Abu Dhabi.
“We were at a unique place in our development as a business,” he explained. “We did not have any substantial legacy systems that would prohibit our movement, but we lacked the ability to manage growth. Technology is an important enabler of our business. As we grow, we will have less ability to make fundamental changes to our technology infrastructure. So we had to make this decision correctly.”
Every month during, and even after the cutover to SabreSonic CSS, Hogan held frequent update meetings, which included balanced scorecards, to review the implementation and ensure its success. Last February, Etihad cut over to SabreSonic CSS, and Hogan is happy with the results.
“There were people in our organization that questioned the selection of Sabre Holdings, but those doubts are now over,” he said. “We will continue to drive our technology partner to deliver, but it is our long-term partner.”
That partnership also extends to Etihad’s equity partners. Etihad negotiated the ability to include its partners in Sabre Holdings with favorable commercial terms. Several of its equity partners have increased their relationship with Sabre Holdings as a result. Most recently, airberlin has concluded a partnership agreement with Sabre Airline Solutions.
What The Future Holds
Hogan provides few details about the future plans of Etihad Airways. He has stated publicly that the airline will continue to grow organically by adding more destinations, more aircraft and new facilities to its network. He is especially excited about the new Midfield Terminal Complex at the airline’s Abu Dhabi International Airport hub, which will significantly boost capacity.
“The Midfield Terminal will be a state-of-the-art facility, providing the highest level of service to our guests,” he said. (Hogan is passionate that everyone in his airline considers passengers to be “guests.” This emphasis on hospitality is one of the core tenants of the airline.)
In addition to organic growth, Hogan continues to examine further possible equity investments.
“Our owners have been clear that we should look for opportunities to invest in like-minded airlines,” he said. “We will continue to look.”
So, on the airline’s 10th anniversary, Hogan has much of which to be proud. Most importantly, he has a successful business that is poised for future growth and prosperity.