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

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%

*Note: Jazeera Airways' "premium" seating is standard seat pitch, but with a guaranteed free middle seat in each of he first three rows
Source: Centre for Asia Pacific Aviation & airline reports

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%

Source: Centre for Asia Pacific Aviation & OAG

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

Source: Centre for Asia Pacific Aviation and OAG

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

Source: Centre for Asia Pacific Aviation and OAG

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.