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Etihad Airways' all-economy service another move in addressing low yield markets

11-Aug-2010
Etihad Airways CEO, James Hogan
Etihad Airways CEO, James Hogan

Etihad Airways this month announced plans to introduce its first "all economy" class aircraft to its fleet in Oct-2010. This carrier will be the only non-LCC in the Middle East operating such a configuration, although the product bears some similarity to to the ‘Gulf Traveller’ product that CEO, James Hogan, introduced while heading Gulf Air. The purpose is mainly to tap into the high volume but low yielding markets more effectively. This segment is being addressed aggressively by neighbouring flydubai, based in Dubai and, a few kilometres further along the road in the UAE, the highly successful Sharjah-based Air Arabia. Other low cost airlines from outside the UAE are also targeting the UAE markets. Full service airlines around the world have long struggled with the decision whether to adopt a LCC subsidiary or to segment their operation in this way. In each case different considerations apply. Etihad, in treading the middle path, may have got it right in this market.

162-seat A320s to be utilised; to be one of the highest-density A320 configurations in the Middle East  

Etihad’s two A320s will be configured with 162 economy-class seats (with 32-inch pitch), an increase of 42 from the current economy capacity, meaning it will operate one of the highest-density A320 configurations in the region (with only a few seats fewer than LCC, Jazeera’s, A320 configuration,  five seats fewer than nasair’s all-economy configuration, and the same number of seats as Bahrain Air's two-class A320 configuration).

Middle East carriers’ A320 seating configurations

Airline

Base

Premium

Economy

Total seats

Premium seating %

Jazeera Airways

Kuwait

36*

129

165

21.8%

Wataniya Airways

Kuwait

26

96

122

21.3%

Kuwait Airways

Kuwait

20

116

130

15.4%

Etihad

Abu Dhabi

20

120

140

14.3%

0

162

162

0%

Gulf Air

Bahrain

16

120

136

11.8%

Royal Jordanian

Amman

16

120

136

11.8%

12

132

144

8.3%

Egypt Air 

Cairo

16

123

139

11.5%

10

135

145

6.9%

Qatar Airways

Doha

12

132

144

8.3%

Bahrain Air

Bahrain

12

150

162

7.4%

Air Arabia

Sharjah

-

157

157

0%

nasair

Saudi Arabia

-

167

167

0%

To operate on high-demand economy/low premium demand traffic routes

The all-economy Etihad aircraft will operate to short-haul destinations which have high demand for economy traffic and low demand for premium traffic. Initially these will be Alexandria, Calicut, Colombo, Damascus, Doha and Thiruvananthapuram.

Plans are in place to expand the all-economy fleet to ten A320 aircraft, with the carrier stating this would enable the carrier to “launch new short haul destinations which have low demand for premium travel and also to existing Etihad destinations”. Etihad is currently only the tenth largest carrier operating between the Middle East and India, so this all economy product is likely to form part of the carrier’s efforts to build its presence in this market.

Middle East-India weekly capacity (seats) by carrier: Aug-2010

Carrier

Number of Seats

Percentage

Emirates

51,560

23.02%

Air India Express

25,521

11.39%

Jet Airways

23,940

10.69%

Air India

19,506

8.71%

Indian Airlines

17,543

7.83%

Air Arabia

16,848

7.52%

Qatar Airways

14,237

6.36%

Saudi Arabian Airlines

13,134

5.86%

Oman Air

12,024

5.37%

Etihad Airways

6,964

3.11%

Gulf Air

6,538

2.92%

Kuwait Airways

4,300

1.92%

Kingfisher Airlines

2,986

1.33%

Bahrain Air

2,268

1.01%

Mahan Air

1,730

0.77%

Royal Jordanian

1,056

0.47%

Nas Air

1,050

0.47%

Yemenia

616

0.28%

Iran Air

592

0.26%

El Al

573

0.26%

flydubai

540

0.24%

GMG Airlines

450

0.20%

All economy aircraft to enable Etihad to “offer more competitive product”: CEO

Announcing the new product, Etihad CEO, James Hogan, commented: “Etihad has grown at a remarkable pace during the past six and a half years. We have built a strong brand and a robust business, and it is the right time to challenge the way we serve our various markets and segments”.

He continued: “Our all economy aircraft will allow us to offer a more competitive product in key point-to-point markets in Asia, the Middle East, North Africa and the Indian Subcontinent, while maintaining the high standards of service we have become known for.”

The service and product on the new ‘all economy’ aircraft will remain the same as in the carrier’s current narrowbody fleet, with IFE and F&B offerings to remain the same.  Etihad currently has 15 A320 aircraft within its fleet and 35 aircraft are on order from Airbus.

Some parallels with Gulf Traveller?

Before joining Etihad, Mr Hogan was CEO of Gulf Air. As part of that carrier’s restructuring and turnaround efforts, he founded Gulf Traveller, an all-economy full service subsidiary, on 01-Jun-2003, with services commencing on 15-Jun-2003. The decision was at least initially a commercial success, but was less successful politically.

The Gulf Traveller sub-brand was established out of the realisation that Gulf Air’s services to the labour-pools of the Subcontinent boasted impressive loads in the economy cabin, but were woefully undersubscribed in the premium classes. 

Describing the model, Mr Hogan, back in 2003, commented: "It's not a no-frills airline. It's just a realisation that more people on these routes prefer to fly economy, and the business and first-class seats generally go empty. So, we decided not to block space and lose revenue. The fares in Gulf Traveller are on a par with the fares in the general economy-class on the route”.

He added that the shift in strategy was aimed to help the airline achieve better margins and revenue from the Indian route, adding: "We are starting with a daily flight to Thiruvananthapuram with the Gulf Traveller and one flight on the Mumbai route... The seats are going choc-a-bloc on this class but it being peak time, we cannot gauge the response. Further additions or changes in route patterns will be made after seeing the response in the lean season”.

Separately, Mr Hogan has commented: “Gulf Traveller was born out of the belief that a single airline cannot prosper in a multi-segmented market. When we say economy we don’t mean budget, as our aim is to offer standard economy services at competitive rates, dictated by market demand.”  He added that large part of Gulf Traveller’s appeal was that it “offers everything traditionally associated with an economy service on a major international carrier” – including F&B, IFE, comfort items (such as blankets and pilots) and comparable seat pitch. 

He noted that, “at the end of the day Gulf Traveller provides us with the ability to effectively target brand, provide a tailored service style and to be more price competitive with competitors on the same routes. It utilises infrastructure where it makes economic sense such as maintenance, aircraft and a management team, yet facilitates break away when it is economically viable, such as the incentivisation of contracts.

Gulf Traveller operated to destinations in Bahrain, Bangladesh (Dhaka), India (Mumbai and Thiruvananthapuram), Indonesia (Jakarta), Jordan (Amman), Kenya (Nairobi), Nepal (Kathmandu), Oman (Muscat), Pakistan (Islamabad, Karachi, Lahore and Peshawar), Saudi Arabia (Dammam, Jeddah and Riyadh, Tanzania (Dar es Salaam and Zanzibar) and UAE (Abu Dhabi). The carrier had also signalled plans to expand the service to Europe, although this never eventuated. The economy services were also included in the carrier’s loyalty/frequency flyer programme.

The all-economy class B767 operation (comprised of six of the aircraft type) began operating out of Abu Dhabi, which was the end destination for most of the airline’s foreign worker traffic, in Jun-2003 (although the carrier was briefly relocated between Bahrain and Muscat Airports after Abu Dhabi withdrew from the Gulf Air consortium in 2005. In May-2007, Oman also pulled out of the group, leaving Bahrain as sole owner of Gulf Air. This was one of the major reasons behind the disbandment of the carrier).

The Gulf Air strategy was initially successful, with the carrier reporting profits in each of its first four months of operation. In the first year of operations, the carrier had average load factors “in excess of 70%”, averaging 75.8% across its 17-destination network in 2004 (compared to 71.4% at the mainstream, but higher yielding Gulf Air), in a year which saw the carrier return to profit with its best financial performance since 1997. However, Gulf Traveller was phased out in 2007, as part of the carrier’s two-year USD825 million ‘Get Well’ restructuring programme to return the carrier, which by this stage was losing at least USD1 million per day, to profitability.

The notion that Bahrain should be the base for Gulf Air’s prestigious, three-class services to the capitals of Europe, while Abu Dhabi would play host to the worker community shuttles to the Subcontinent did not play well in the image-conscious capital of the UAE.

It was partly the case that, as the multinational Gulf Air gradually disintegrated, the Jul-2003 formation of Etihad (which started operations in Nov-2003) was directly linked to this perceived need to project a more select image.

A marketing priority to avoid brand pollution

A key issue for Etihad is that the economy-only service should avoid polluting the mainstream carrier's quality branding, at a time when the carrier is working extremely hard to build and maintain its reputation as a world-leading premium airlines. (One cautionary lesson was delivered to Qantas when, advised not to create a separate LCC brand to compete with newly arrived low cost competition, it sought to segment the market, using single-class B767s on domestic tourist-oriented routes. When this was seen to be confusing premium passengers on those routes, Qantas soon dropped the idea and established its now-highly successful low cost subsidiary, Jetstar).

Another issue with the new product is that, apart from the reduced unit seat cost due to the higher density configuration, Etihad will not be able to extract the same cost efficiencies as competing LCCs in the region, such as Air Arabia and flydubai, with which the carrier will compete. This, in turn, affects the airline's ability to offer the service in a price-competitive fashion.

However, there would be considerable complexities also in operating a subsidiary LCC side by side with a full service carrier. It appears that this consideration may have weighed heavily in the decision making process.

However, the move by Etihad is at least definitive, leaving the likes of Qatar Airways still uncertain of exactly how they will respond to LCC competition in the region. It also implies that Etihad Airways is now less likely to entertain the idea of a fully-fledged LCC subsidiary.

UAE low-cost market can support Etihad: flydubai CEO

In contrast, Dubai's 2008 response to LCC competition was for Emirates Airlines Chairman, Ahmed bin Saeed Al Maktoum, to found flydubai, a self-standing Dubai-based LCC. While not part of the Emirates Group, the LCC has received support from Emirates, with which it operates codeshare services. Flydubai has carried over 1 million passenger since its launch, on almost 8,000 flights, and now operates fleet of nine B737-800NG aircraft to 22 destinations.

flydubai CEO, Ghaith Al Ghaith, has welcomed the new Etihad product, with the CEO, in an interview with Arabian Business, stating the market has enough potential traffic to support the increased competition.

He commented: “There is a tremendous opportunity in this region to grow the low cost market and I believe there is enough potential traffic here for all well run airlines to be successful”. He continued: “Increasing competition is good for everyone, especially the consumer. Etihad is a very good airline and is very important to the growth of aviation in this region. We wish them good luck with their new venture and are sure they will be successful”.

Other carriers operate economy-only services in Middle East-India and intra-Middle East market

Etihad appears to be leading the way in the all-economy product concept in the region, with the other carriers moving to either reconfigure some aircraft with reduced business-class seats for low-business demand routes or offering economy-only services through a subsidiary, rather than eliminating premium seats from aircraft altogether.

However, of the network carriers operating between the  Middle East and India, a number of the carriers, including Air India, GMG Airlines, Jet Airways, Kingfisher Airlines, Mahan Air, Oman Air, Royal Jordanian, Saudi Arabian Airlines and Yemenia, do  operate some  economy-only services, (based on OAG data for Aug-2010), although they do not have the single-class product concept that Etihad is introducing.

Middle East to India capacity and aircraft configuration by carrier: Aug-2010^

Carrier

Aircraft

Seats

First Class Seats

Business Class Seats

Economy  Class Seats

AIR ARABIA

A320

16,848

0

0

16,848

AIR INDIA

A310

3,838

0

418

3,420

AIR INDIA

A320

1,050

0

0

1,050

AIR INDIA

A321

2,112

0

0

2,112

AIR INDIA

A330-200

1,068

0

0

1,068

AIR INDIA

B747-400

8,883

252

546

8,085

AIR INDIA

B777-300ER

2,555

154

490

1,911

AIR INDIA EXPRESS

B737-800

25,521

0

0

25,521

BAHRAIN AIR

A320

2,268

0

168

2,100

EL AL ISRAEL AIRLINES

B767-200

573

0

72

501

EMIRATES

A330-200

27,492

1,392

4,872

21,228

EMIRATES

B777-200

13,148

0

1,596

11,552

EMIRATES

B777-300ER

8,372

276

966

7,130

EMIRATES

B777-300

2,548

84

294

2,170

ETIHAD AIRWAYS

A320

5,740

0

820

4,920

ETIHAD AIRWAYS

A330-200

262

0

22

240

ETIHAD AIRWAYS

A340-600

584

24

64

496

ETIHAD AIRWAYS

B777-300ER

378

0

28

350

FLYDUBAI

B737-800

540

0

0

540

GMG AIRLINES

MD-80

450

0

0

450

GULF AIR

A320

3,808

0

448

3,360

GULF AIR

A321

1,190

0

140

1,050

GULF AIR

A330

250

0

42

208

GULF AIR

A330-200

1,290

48

144

1,098

INDIAN AIRLINES

A319

3,045

0

0

3,045

INDIAN AIRLINES

A320

9,570

0

1,320

8,250

INDIAN AIRLINES

A321

4,928

0

0

4,928

IRAN AIR

B747SP

592

0

44

548

JET AIRWAYS

B737-800

23,940

0

0

23,940

KINGFISHER

A319

1,008

0

0

1,008

KINGFISHER

A320

1,072

0

160

912

KINGFISHER

A321

906

0

192

714

KUWAIT AIRWAYS

A300-600

1,392

108

108

1,176

KUWAIT AIRWAYS

A310

2,376

0

288

2,088

KUWAIT AIRWAYS

A320

260

0

40

220

KUWAIT AIRWAYS

A340

272

18

24

230

MAHAN AIR

A300-600

260

0

0

260

MAHAN AIR

A310-300

1,470

0

0

1,470

NAS AIR

A320

1,050

0

0

1,050

OMAN AIR

B737-800

8,424

0

648

7,776

OMAN AIR

B737-800

3,600

0

0

3,600

QATAR AIRWAYS

A319

330

0

24

306

QATAR AIRWAYS

A320

1,872

0

156

1,716

QATAR AIRWAYS

A321

7,257

0

492

6,765

QATAR AIRWAYS

A330-200

2,340

0

216

2,124

QATAR AIRWAYS

A330-300

1,525

0

150

1,375

QATAR AIRWAYS

A340-600

612

16

84

512

QATAR AIRWAYS

B777-200LR

301

16

58

227

ROYAL JORDANIAN

A310-300

808

72

0

736

ROYAL JORDANIAN

A319

248

0

0

248

SAUDI ARABIAN

A330-200

2,403

0

0

2,403

SAUDI ARABIAN

B747-300/100/200

3,537

324

342

2,871

SAUDI ARABIAN

B777-200

1,164

0

0

1,164

SAUDI ARABIAN

B777-300ER

2,190

132

420

1,638

SAUDI ARABIAN

B777-300

3,840

0

0

3,840

YEMENIA

B737-800

616

48

0

568

A similar story also applies in the intra-Middle East market, with several carriers operating both mixed and single class services.

Intra-Middle East and aircraft configuration by carrier: Aug-2010^

Carrier

Aircraft

Seats

First Class

Business Class

Economy

ARKIA - ISRAELI AIRLINES

ATR 72

3,672

0

0

3,672

ARKIA - ISRAELI AIRLINES

B757-300

3,710

0

0

3,710

ARKIA - ISRAELI AIRLINES

E195

1,188

0

0

1,188

ATA AIRLINES

MD-83

15,000

0

0

15,000

BIMAN BANGLADESH

DC10-30/40

822

0

90

732

BMI

A330-200

3,462

0

288

3,174

CYPRUS AIRWAYS

A319

504

0

48

456

EL AL

B737-700

3,536

0

544

2,992

EL AL

B767-200

191

0

24

167

ERAM AIRLINES

B757

2,960

0

0

2,960

ERAM AIRLINES

Tu154

302

0

0

302

FELIX AIRWAYS

CRJ200

3,750

0

0

3,750

FELIX AIRWAYS

CRJ700

6,120

0

0

6,120

GARUDA INDONESIA

B747-400

2,568

0

252

2,316

GERMANIA

B737

488

0

0

488

IRAN AIR

A300-600

756

0

63

693

IRAN AIR

A300B2/B4

15,500

0

0

15,500

IRAN AIR

A300

6,600

0

0

6,600

IRAN AIR

A320

12,300

0

0

12,300

IRAN AIR

B727-200

7,650

0

0

7,650

IRAN AIR

B747

858

0

44

814

IRAN AIR

Fokker 100

48,204

0

0

48,204

IRAN AIR TOURS

Tu154

38,550

0

0

38,550

IRAN ASEMAN AIRLINES

ATR 72

9,570

0

0

9,570

IRAN ASEMAN AIRLINES

B727-200

12,324

0

0

12,324

IRAN ASEMAN AIRLINES

Fokker 100

52,538

0

0

52,538

IRAQI AIRWAYS

B737

5,124

0

0

5,124

IRAQI AIRWAYS

CRJ900

430

0

0

430

ISRAIR

A320

2,400

0

0

2,400

ISRAIR

ATR42-300/320

4,950

0

0

4,950

KISH AIR

MD-82

19,680

0

0

19,680

KISH AIR

Fokker 100

2,060

0

0

2,060

KISH AIR

Fokker 50

1,900

0

0

1,900

KISH AIR

Tu154

4,000

0

0

4,000

MAHAN AIR

A300-600

11,180

0

0

11,180

MAHAN AIR

A300

7,750

0

0

7,750

MAHAN AIR

A310-300

47,040

0

0

47,040

MAHAN AIR

BAE146-300

3,600

0

0

3,600

NAS AIR

A320

11,100

0

0

11,100

NAS AIR -

E190

11,662

0

0

11,662

OMAN AIR

ATR42/ATR72

644

0

0

644

OMAN AIR

B737-700

912

0

96

816

OMAN AIR

B737-900

15,688

0

0

15,688

ROYAL JORDANIAN

E175

1,716

0

0

1,716

ROYAL JORDANIAN

E195

665

77

0

588

SAMA

B737-300

7,400

0

0

7,400

SAUDI ARABIAN AIRLINES

A320

50,400

0

0

50,400

SAUDI ARABIAN AIRLINES

A330-200

1,869

0

0

1,869

SAUDI ARABIAN AIRLINES

A330-300

10,184

0

0

10,184

SAUDI ARABIAN AIRLINES

B747-300/100/200

17,685

1,620

1,710

14,355

SAUDI ARABIAN AIRLINES

B747-400

2,430

0

0

2,430

SAUDI ARABIAN AIRLINES

B747-400

3,580

360

320

2,900

SAUDI ARABIAN AIRLINES

B757-200

16,554

0

1,860

14,694

SAUDI ARABIAN AIRLINES

B777-200LR

14,749

784

2,842

11,123

SAUDI ARABIAN AIRLINES

B777-200

13,386

0

0

13,386

SAUDI ARABIAN AIRLINES

B777-300ER

17,520

1,056

3,360

13,104

SAUDI ARABIAN AIRLINES

B777-300

12,672

0

0

12,672

SAUDI ARABIAN AIRLINES

B777

10,248

1,260

1,302

7,686

SAUDI ARABIAN AIRLINES

MD-90

70,785

10,530

0

60,255

SAUDI ARABIAN AIRLINES

E 170

41,184

3,744

0

37,440

SUDAN AIRWAYS

A300

1,100

104

0

996

SYRIAN ARAB AIRLINES

A320

2,280

0

120

2,160

SYRIAN ARAB AIRLINES

ATR42/ATR72

2,254

0

0

2,254

SYRIAN ARAB AIRLINES

B737-300

816

0

0

816

SYRIAN ARAB AIRLINES

B767-200

1,260

0

0

1,260

SYRIAN ARAB AIRLINES

Tu134

432

0

0

432

SYRIAN ARAB AIRLINES

Yak-40

840

0

0

840

TABAN AIR

BAE146

1,870

0

0

1,870

TABAN AIR

Tu154

2,869

0

0

2,869

YEMENIA YEMEN AIRWAYS

A310

935

60

0

875

YEMENIA YEMEN AIRWAYS

B737-800

7,854

612

0

7,242

YEMENIA YEMEN AIRWAYS

CRJ700

210

0

0

210

Other carriers acting similarly: Air Austral to introduce single-class A380; bmi relaunches single-class short haul product in UK/Ireland

Out of the Middle East/SAARC region, there have been some recent examples of airlines moving away from business-seat configurations to the use of all-economy productions.

For example, Reunion-based Air Austral last year announced plans to become the world's first airline with an all-economy class A380 configuration, of 840 seats (the A380 is certified to handle 853 passengers). 

Meanwhile, in the UK, bmi in Jan-2010 announced the relaunch of its short-haul product across all UK and Ireland services to/from London Heathrow Airport, removing the Business class cabin from the services.

The carrier has introduced a new single Economy cabin with enhanced services for customers travelling on Flexible Economy fares, such as guaranteed seating, use of lounges and complimentary food and beverages. The new product was rolled out on 27-Jan-2010.

But there is no one-size-fits-all solution. A continuing evolution, with important ramifications

There is no definitive or universal road map for determining the most appropriate response to adopt when confronted by low cost competition, the direction instead being highly dependent on local circumstances.

Many US airlines (and British Airways) experimented with LCC subsidiaries and failed for one reason or another - mostly their inability to deal effectively with the threat of cannibalisation, either giving them too much freedom or, more often, not segregating them sufficiently from the parent.

Most major European airlines for example  are seriously constrained in their freedom of action by threat of union action and have sought simply to reduce costs at the mainline carrier, while basically maintaining standard configurations, or merely reducing - rather than removing - premium seating. As Qantas found with its pre-LCC segmentation attempts, even if premium numbers are low on any route, they can be very vociferous and losing them is a high risk option.

However, long term failure to achieve cost levels close to their competition must mean that this strategy is time-limited. SAS for example has talked openly of a 25% margin in costs between its own operations and its local LCC competition. Some other major airlines are still absorbing even bigger differentials than that. So long as there is some prospect of generating compensatory higher yields through their network pricing, it may be possible to absorb such handicaps. But it does not suggest a stable equilibrium, so that considerable evolutionary change is still occurring. There may still be dinosaurs abroad.

Asia Pacific flag carriers meanwhile, amid the fastest growing markets in the world, mostly either have or are moving quickly to establish, subsidiary LCCs in one form or another. They have long since learned that they are otherwise uncompetitive in short haul point to point markets and that, unless they engage actively in low cost operations, will both cede traffic to their competition and miss out on the remarkable growth upside that presents itself.

So it is in between these large bodies of differing behaviour that Etihad manoeuvres to achieve the best of both worlds. On the balance, it would appear that the decision to adopt a segmentation approach with its new single class operation is the right one in this case. However, at the slightest whiff of brand pollution, management will be sure to be reviewing the situation.


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