Etihad Airways chief says airline alliance model is ‘fractured’

James Hogan, the president and chief executive of Etihad Airways, says “partnerships are better, strong codeshare relationships and equity investments”. Mona Al Marzooqi / The National

The chief executive of Etihad Airways has branded the model of international carrier alliances as “fractured”.

The Abu Dhabi airline has avoided entering into global alliances favoured by global carriers such as Oneworld, SkyTeam and Star Alliance.

Qatar Airways has joined the Oneworld Alliance, while Emirates Airline has struck a codeshare partnership with Qantas.

"The model of alliances is fractured," said James Hogan, the president and chief executive of Etihad Airways. "See what happened to Qantas, Emirates and British Airways? We believe partnerships are better, strong codeshare relationships and equity investments."

While Qantas and BA are part of the Oneworld Alliance, the Australian carrier also has a revenue-sharing agreement with Emirates Airline, which is not part of the alliance. 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 announced record losses last month.

Etihad has expanded its global route network by forming “equity alliances”, where it invests in carriers in strategically important regions. It has formed eight such alliances with Aer Lingus, airberlin, Air Serbia, Air Seychelles, Virgin Australia, India’s Jet Airways and Switzerland’s Etihad Regional. Its latest investment last month was in Alitalia, the financially ailing Italian airline.

“Etihad’s clearly articulated position has made other airlines rethink their alliance approach, and given confidence to those that already wanted independence,” said Will Horton, an aviation analyst at the Centre for Asia-Pacific Aviation. “Etihad has spoken of its inability to join an alliance, but there is merit to finding the right partners and being close to them.”

Mr Hogan’s comments come amid turbulent times for the industry, which has been buffeted by industrial relations unrest in Europe and increasing conflict in the Middle East.

Competitive tension is also growing between European carriers and Arabian Gulf rivals as they extend their route network across the two regions.

“The Gulf airlines are an existential threat to the legacy carrier industry worldwide and not just the alliances,” said Joe Gill, the director of corporate broking at Dublin-based Goodbody Capital Markets.

“Better product, lower costs and enormous aircraft backlogs are a potent challenge to the established order,” he said.

A strike by Air France pilots grounded half of the airline’s flights this week over plans to shift much of its operations to a low-cost carrier.

Air France has said it needs to cut costs in the face of increasingly fierce competition from the Gulf carriers.

Lufthansa pilots had also threatened to strike this week but called off action after making progress in negotiations with management over a proposed early retirement programme.

Despite the mounting competitive pressures facing the industry, the world’s aviation body does not plan to revise its outlook for profitability this year.

“At the moment we don’t see any reason to change our global view,” said Brian Pearce, the chief economist at the International Air Transport Association (Iata).

“There were a number of shocks and a number of changes, but at the moment I haven’t seen these shocks affecting oil prices,” Mr Pearce added.

Jet fuel constitutes about 30 per cent of an airline’s costs, and the companies’ profits can rise or fall on the price of oil.

In March, Iata revised down its outlook for the industry in 2014 and forecast a fall in profit to US$18.7 billion from a previously forecast $19.7bn.

Its main reason behind the downward revision was higher oil prices, but it said that it expected the impact to be offset by an increase in demand, especially in cargo, which is supported by a stronger global economy. Iata warned at the time that “government policies” and “geopolitical risks” could affect the aviation industry this year.

Mr Pearce acknowledged that the European economy faced challenges.

“The European business environment is very difficult at the moment,” he said.

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