Airline Weekly - August 1, 2011

Cover Story

Explosive Growth, No Profits: Etihad, the smallest of the Gulf’s Big Three, expanding like Emirates but not making money

When airlines in Europe, Canada, Australia and elsewhere complain about Emirates and the government support it allegedly receives, they sometimes fail to acknowledge the Gulf carrier’s undeniably profitable business model, built on numerous strengths and competitive advantages that have nothing to do with government support. But do the Gulf bashers have a more convincing case against the United Arab Emirates’ more junior airline Etihad?

Like Emirates, Etihad is expanding with blinding speed. But unlike Emirates, it hasn’t yet made a single dirham in profits.

Last year, Abu Dhabi’s government-owned airline grew revenues 29% y/y on 20% more ASK capacity, while hiring 800 new workers and adding seven new destinations: Alexandria, Baghdad, Colombo, Erbil, Nagoya, Seoul and Tokyo. That’s one year after adding eight new cities—Melbourne, Astana, Istanbul, Athens, Larnaca, Chicago, Cape Town and Hyderabad—and two years after adding six: Beijing, Minsk, Almaty, Kozhikode, Chennai and Moscow. No wonder Etihad is sometimes described as the fastest growing airline in global commercial aviation history.

Bullish growth continued during the first half of 2011, with revenues up another 28% y/y on a 14% increase in passenger counts, never mind the unrest crippling air travel throughout its home region. According to IATA, the industry as a whole managed to increase traffic by just 7% y/y from January to June.

But Etihad, although it doesn’t disclose financial results, admitted that it’s still losing money. It aims to break even for the first time ever this year and make money for the first time in 2012. Having launched operations in late 2003, Etihad has now chalked up seven straight years of losses. Most private sector startup airlines, it’s fair to say, wouldn’t survive that long without earning any profits.

Yes, Etihad is far less financially successful than Emirates, which says it started making money in 1988, just its third year of operations. But Etihad and Emirates do share a lot in common. Their Abu Dhabi and Dubai hubs, respectively, are both part of the politically stable U.A.E. and are located within driving distance of each other. That means Etihad also benefits from the area’s remarkably favorable geography for connecting travelers intercontinentally. It also means similar access to low-cost labor from the Indian subcontinent and elsewhere. It... (393 of 1,573 words)

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A parade of airline earnings announcements yielded a mixed outlook for the industry, with some carriers suffering from sky-high fuel prices and others managing rather well.

There’s even divergence within Europe’s Big Three, with BA/Iberia reporting solid results and Lufthansa doing almost as well, while Air France/KLM lost money. A lot of the variance, however, comes down to one simple factor: fuel hedges.

The fuel spike was even more severe for U.S. carriers, which didn’t enjoy exchange rate benefits like their European peers. But nor did they have as much exposure to the Middle East and North Africa. And in the U.S., the low-cost carrier space is far less unruly—the big players Southwest and JetBlue are raising fares just like everyone else while growing selectively. Europe’s Ryanair, easyJet, Norwegian, Vueling, Air Berlin and Wizz Air, by contrast, continue to make shorthaul life a trial for Europe’s Big Three. And that’s one reason why Delta, United and US Airways all outperformed them last quarter. This quarter could be good too thanks to a surprise FAA tax holiday.

Spirit Airlines, Virgin America and Allegiant are three exceptions to the rule about U.S. LCCs behaving in a subdued manner. All are still relatively small, yes, but Spirit for one made money last quarter (Allegiant reports today).

Several major East Asian carriers suffered last quarter from the Japan crisis, coupled with the fuel spike. And even in Latin America, which most carriers say is booming, LAN and Gol (if not Aeromexico) both had disappointing news for investors.

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