Etihad Airways was widely expected to make the largest aircraft order at the 2008 Farnborough International Airshow in July. While other airlines around the world were struggling with soaring fuel costs, which have forced more than 20 carriers to shut down since late last year, the Abu Dhabi-based airline was stoking anticipation of an order for between 50 and 100 planes.
In fact, Etihad exceeded even those expec-tations. The airline unveiled deals with Airbus and Boeing for about 200 new aircraft to be delivered over the next decade, at a total cost of $43bn. The deals include Airbus A380s and A350s, and Boeing 787 Dreamliners - all wide-bodied, long-haul aircraft.
James Hogan, the airline’s Australian chief executive officer (CEO), reflects confidently on the deal, which has catapulted his company into the major league of airlines.
“We have been in discussions on this fleet order since January last year and the guys worked very hard on the deal,” he says. “It gives us the ability to grow from 2011 to 2020. When I joined the airline, the task was to build the business from the platform that had been established, and we immediately looked at a scenario for the next 30 years. We took 2020 as the first point in time to gauge what type of fleet we needed.”
It is a mark of the acceleration in Etihad’s growth that the 12 wide-bodied aircraft purchased at the Paris Airshow in 2007 only satisfy the company’s needs up to 2010. The newly ordered A320s and 777s will arrive from 2011, the A380s the following year. In 2014, deliveries of the Dreamliners will begin, with the A350s arriving from 2017.
This growth has been planned meticulously with the Abu Dhabi government. Since joining, from Gulf Air in October 2006, Hogan has married the airline’s development to that of the emirate itself. Together with chairman Sheikh Ahmed bin Saif al-Nahyan, he has plotted a step-by-step expansion of the fleet to try to meet the anticipated rise in passenger traffic through the city.
Etihad’s growth also needs to dovetail with the strategy of Abu Dhabi’s state-owned investment and development arm, Mubadala, and its aviation services subsidiary, Abu Dhabi Aircraft Technologies.
“It has been Mubadala’s plan to expand into aerospace for some time,” says Hogan. “This is not going to happen overnight. It is a long-term plan but we work with it to develop Abu Dhabi’s capability in aerospace across the board.”
Mubadala struck deals of its own at Farnborough with UK jet engine maker Rolls-Royce and the European Aeronautic Defence & Space Company (Eads). With Abu Dhabi Aircraft Technologies building a world-class maintenance, repair and overhaul (MRO) facility in the emirate, Hogan and his team worked closely with the government when selecting its new planes.
“In doing any deal we talk to the shareholder,” he says. “The Abu Dhabi government is very ambitious in developing aerospace so we held discussions with Abu Dhabi Aircraft Technologies about MRO and engine choices, and about how they could give the greatest advantage to Abu Dhabi.”
At least part of this ambition relates to Abu Dhabi’s rivalry with Dubai, home to Emirates airline. Its northern neighbour may have
stolen a march on the UAE capital and marketed itself brilliantly over the past two decades, but Abu Dhabi is set to emerge from its shadow in the coming years, with events like the Abu Dhabi Grand Prix and the opening of the Louvre and Guggenheim museums on Saadiyat island. About $200bn will be spent by 2020 in a massive expansion of Abu Dhabi’s infrastructure.
The contest to be the region’s pre-eminent business, travel and tourism hub is hotting up, and Etihad will lead Abu Dhabi’s challenge. The airline has been spending heavily on building up its brand as part of this, attaching its name to a series of high-profile clients, including the Ferrari Formula 1 team and Chelsea Football Club.
Hogan habitually emphasises Etihad’s youth relative to its regional and global competitors. But after massive orders in 2007 by Emirates and Qatar Airways, Etihad’s Farnborough deals have narrowed the gap between it and its two local peers.
For Etihad and Emirates in particular, there is mutual respect to match their intense rivalry. In 2007, MEED reported plans for greater co-operation between the UAE’s two long-haul carriers, prompting feverish speculation about a possible merger.
Weary of fielding endless questions on the subject, the management of both airlines are now cautious of discussing closer ties. Both acknowledge that at a time of soaring fuel costs, opportunities to cut overheads without conceding any competitive advantage are worth pursuing.
However, Hogan is keen to assert Etihad’s strategic independence and pre-empt another round of speculation, keeping talk of collaboration at arm’s length. “We talk about common issues - airspace management and safety issues - and we look at ways to improve these and tackle them together,” he says. “We worked with [Dubai-based recruitment firm] Tejari on our aircraft procurement; they do as well. And we have co-operated on fuel purchasing and insurance, as we do with other Gulf carriers. But they are 20 years old and we are brand new.
“We are both focused on our own expansions. Where we see areas [to co-operate] where it makes sense from a non-competitive point of view, we will explore them, but they are very limited.”
One area where both carriers are keen to lend their weight is to push for further deregulation of the Middle East’s airspace.
Emirates CEO Tim Clark has previously called for the airlines to use their collective influence to accelerate the development towards a regional ‘single sky’. Such a deal would allow them to fly where and when they want around the region.
“The single-sky issue is being led by the GCAA [the UAE’s General Civil Aviation Authority] and the GCC secretariat, but we, Emirates and [Sharjah-based] Air Arabia have encouraged the GCAA to look seriously at this and are providing whatever support they need from us to push that forward,” says Hogan.
“We want to make the air space management of the region more progressive. It will be more efficient, faster and will reduce costs.”
All three UAE carriers are frustrated at the slow pace of deregulation in some parts of the Middle East, and the two long-haul airlines also encounter protectionism elsewhere in the world, with national governments attempting to shield their flag carriers from the apparently remorseless growth of the Gulf airlines.
“Cairo is still constrained for us, and there are others markets in the Middle East we would like to see opened up,” says Hogan.
“India and certain parts of Pakistan are restrained. We fly three times a week to Canada and would love to fly daily. We have encouraged Air Canada to fly daily to Abu Dhabi and we are lobbying though the government for Canada to be more flexible in its allocation of traffic rights.”
With global aviation outside the Gulf in crisis as rising prices choke demand, the timing of Etihad’s order at Farnborough raised questions. While it is true that Gulf aviation has so far bucked the trend, and deliveries of the new planes are staggered over the next decade, observers have queried whether the move might be foolhardy with the market in flux.
“The $200bn investment in Abu Dhabi brings traffic in its own right: business, engineers, labour, tourism and services,” says Hogan, unsurprisingly full of confidence. “GDP [gross domestic product] growth is predicted to be 8 per cent a year for the next three years, and that will impact on us. Passenger growth in the Middle East was three times the global average last year, and that goes hand in hand with incredible airport expansion, including Abu Dhabi airport. There are exciting plans for Abu Dhabi and the order reinforces the confidence we have in our integral role as the national airline.”
But despite the confident predictions of long-term growth, there is still the issue of high fuel prices. Middle East aviation growth may far outstrip the global average but even here, profits and margins have slipped from last year’s high. Hogan realises that whatever their prospects, Gulf carriers are not immune from the threat this represents. Already, Etihad has followed its peers by adding a fuel surcharge to its ticket prices.
“Fuel is our largest and most volatile expense,” he says. “We will see what happens in the next six months and after the US [presidential] election, but for now we are pushing through the surcharge as other carriers are, operating lean and working through this cycle.
“The question for the industry is whether there is going to be weakening of advance sales coming out of summer, but so far we are not seeing markets soften. There are no groups falling away yet and we are still carrying strong business traffic.”
He maintains that Etihad is still on target to carry its predicted 6 million passengers this year, with a seat load factor of 75 per cent.
Looking ahead, the airline is set to break even by 2010, although Hogan steers away from enquiries about a future stock market listing for the company once the business is profitable. Such issues, he asserts, are for the board of directors and the chairman, not the management. Instead, he is targeting growth in new and existing markets.
Airlines in Europe and North America that are grounding planes, laying off staff and trimming their networks will look on enviously as Etihad and its regional peers plot the next stage of their expansion.
“We can take advantage of the liberalisation in India and the Middle East, which is still to come,” says Hogan. “India will have 70 airports in 10 years, we operate to less than 10 today [in India]. This is why we bought the A320s - so we can penetrate India as these secondary cities come on line, and get greater coverage in the Middle East to release our wide bodies.
“This order gives us the ability to improve frequency to key destinations, bring in new cities and to continue to open up new markets.”
1984-1997 Management roles at Hertz International, culminating in vice-president, marketing and sales for Europe, Middle East
and Africa 1997-1998 Service director at BMI British Midland
1998-1999 Worldwide sales director of Forte Hotels, appointed to the board of directors
1999-2002 Rejoins BMI as chief operating officer, with responsibility for cargo, commercial, engineering, handling, marketing, operations and sales departments
2002-2006 President and chief executive officer of Gulf Air
2006-present Chief executive officer of Etihad Airways
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