Etihad Airways’ bright profit result against a dark background


Etihad Airways has joined an elite club of airlines in the Middle East, reporting its first ever annual profit. Outside standouts such as Emirates, few of the region's state-owned carriers have been able to report regular profits. Indeed, state-owned carriers in the region typically report heavy losses, when their results are made public at all.

The result is all the more remarkable in Etihad's case, because the airline is not only the fastest growing network carrier in history - it only commenced operations in 2003 and today operates a fleet of 63 mostly widebody aircraft, with another 102 on order - managing to report a modest net profit of USD14 million for 2011, which just bettered its target of breakeven. The result comes as little surprise, as the carrier has been reporting month-to-month operating profits for several quarters and forecasting a breakeven result since early last year.

  • Etihad Airways reports its first-ever annual profit, becoming one of the few Middle Eastern state-owned carriers to achieve profitability.
  • Despite regional instability and economic uncertainty, Etihad Airways managed to report a modest net profit of USD14 million for 2011, exceeding its target of breakeven.
  • The airline's cost containment efforts, including a reduction in unit costs and fuel price hedging, contributed to its profitable result.
  • Etihad Airways experienced a 17% increase in passenger numbers in 2011, with an improvement in average load factor.
  • The airline's strategic partnerships and codeshare agreements, particularly with airberlin and Virgin Australia, have significantly expanded its network and boosted revenues.
  • Etihad Airways plans for further growth in 2012, with the addition of new destinations and aircraft, aiming to reach 10 million passengers and continue delivering profitability.

Etihad's good result against the difficult backdrop

Given the past year's regional instability, high oil prices and economic uncertainty and natural disasters in some of the carrier's key markets, the result has to be seen as impressive. Etihad Airways president and CEO, James Hogan, said the carrier can now move into its next phase of development, delivering "consistent, sustainable profitability".

Etihad reported an EBITDAR result of USD648 million and an EBIT of USD137 million. Given the carrier's full-year revenue of USD4.1 billion - up 36% from the USD3 billion it reported in 2010 - the net profit margin was just 0.34%, a narrow result even for the airline industry, but on the right side of the line. Mr Hogan stated that against the challenges faced by the industry, Etihad's achievement of both revenue growth and entry into profitability "must be one of the best results of any airline in 2011".

A major factor in the carrier's profitable result was its cost containment efforts. Etihad unit costs per available seat kilometre (CASK) excluding fuel were down 4.6% in 2011 and have declined 16.6% over the last two years.

Fuel price hedge has been invaluable

Notable work has been done to reduce oil costs and protect the carrier from fuel price volatility. Etihad has a three-year rolling fuel hedge, with 75% of its 2011 fuel costs hedged at USD80 per barrel. According to IATA data, the average price of a barrel of jet fuel in 2011 was USD127.5. Etihad Airways CFO James Rigney went on record in Nov-2011 that the carrier's hedging policy reduced costs by nearly USD300 million.

77% of Etihad's 1Q2012 fuel costs are hedged at USD80 per barrel and the carrier has hedged 75% of its overall 2012 fuel costs.

Passenger numbers up 17%, with a 1.8 ppt improvement in load factor

As the carrier has rapidly expanded during the year, it has been able to carry the demand with it.

During 2011, Etihad handled 8.3 million passengers, a 17% improvement on the 7.1 million handled in 2010. Average passenger load factors were 75.8%, up 1.8 ppts on 2010.

In the process, Etihad's network grew by five destinations - Bangalore, the Maldives, the Seychelles, Chengdu and Dusseldorf. The airline continues to add scale and maturity to its operations, reinforcing many secondary destinations with more frequencies. Its network is now beginning to reach a critical mass, feeding connections through its Abu Dhabi hub.

The airberlin partnership becomes a cornerstone in Europe

Just as important as its organic network growth are the partnerships and codeshares that Etihad has entered - a strategy Mr Hogan has actively espoused throughout his time at the carrier. The airline signed eight new codeshare agreements in 2011, taking its number of codeshare partners to 35. With the new codeshare agreements, Etihad has access to 259 destinations worldwide, three times the number of destinations it operates with its own aircraft.

The most important addition to its partnering programme was the Dec-2011 agreement to increase Etihad's ownership in Germany's airberlin from the previous 2.99% to 29.2%. With the increased stake, which recently received competition authority approval earlier, the airlines have also entered an extensive strategic partnership agreement and have applied for anti-trust immunity.

Etihad estimates the airberlin relationship will have a major impact on revenues in 2012, with an expected contribution of up to USD50 million. Mr Hogan said the deal will be Etihad's "most important catalyst for growth in 2012".

Under the agreement, airberlin swapped its Middle East hub from Dubai to Abu Dhabi. Etihad Airways is now codesharing on 36 of airberlin's 171 destinations, while airberlin is codesharing on 24 of Etihad Airways' 82 passenger destinations. Etihad will also codeshare with the Air Berlin Group for all European activities, including NIKI and Belair. A further expansion of the pool of codeshare routes is expected.

This month, the two carriers announced a major expansion of services to Thailand in addition to increased services between Abu Dhabi and Germany. Thailand is a major market for German tourists, among the most peripatetic in the world. airberlin plans to launch daily Abu Dhabi-Phuket service and Etihad plans to operate a third daily Abu Dhabi-Bangkok frequency. Announcing the expansion, Mr Hogan said the increased operations are a "game changing proposition for travellers in Europe, the Middle East, Asia".

Virgin Australia's first year of partnership expands previous revenue share sevenfold

Outside the airberlin partnership, Etihad and Virgin Australia also celebrated the first full year of their strategic partnership agreement. Mr Hogan said the alliance had boosted revenue by 700% over what the carrier had achieved with Qantas, its previous Australian airline partner - a result of a more comprehensive sharing of traffic. Load factors out of Australian have averaged a very healthy 80%.

Air Seychelles ownership stake a useful stepping stone

The carrier's partnership focus was renewed this year, with a 40% ownership stake and strategic partnership agreement with Air Seychelles signed in Jan-2012, following an approach from Air Seychelles. The deal offers a useful stepping stone for Etihad to grow its own operations into Indian Ocean and African leisure markets, as well the Seychelles favourable geographic positioning in linking the fast-emerging China-Africa market. Most of Air Seychelles operations will in future be driven from Abu Dhabi, helping consolidate the role of the smaller carrier within the Etihad network.

Global alliances on the back burner 'for a few months'

Despite persistent rumours of an Etihad combination in one of the major airline alliances, more recently oneworld, Mr Hogan maintains the airline will sit back and wait to see what happens for a few months. Meanwhile, the attention is on bedding down and optimising the airberlin relationship.

2012 - more growth, more profit

That is hardly a forward strategy for most airlines. But Etihad's outlook for 2012 is for more growth and more profits. The airline has added Tripoli, Shanghai and Nairobi to its network already this year and has also announced plans for a new Lagos service - each of the points drawing further on the strong pattern of Africa-China resource related growth. More route announcements are to be made throughout the year.

The carrier has only a relative handful of aircraft arriving this year using the time to consolidate operations before a planned growth spurt later in the decade as the Boeing 787 orders begin arriving.

In Dec-2011, IATA slashed its 2012 profit forecast for Middle East carriers from USD700 million to USD300 million, suggesting that the higher price of oil has squeezed profit margins on the more price sensitive long-haul traffic connecting over Middle Eastern hubs.

Yet Etihad exudes confidence. A focus on continued improvement in product and culture (moving "from good to great") and a fixation on cost reduction are to characterise the short term. The carrier is targeting a milestone 10 million passengers for 2012 and will add another seven aircraft to its fleet. The airline will continue to look at investment opportunities in 2012.

Against the dark background of tough economic conditions, Etihad plans to continue to deliver brightly on its mandate to become a profitable and sustainable airline.

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