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Middle East network carriers strategies vary on partnerships but both seem to work

Emirates has found itself in the limelight after impacting comments about how it does not like to pursue partnership strategies, unlike – although not explicitly named – its neighbour up the road, Etihad Airways, which has made partnerships a fundamental point of its business and has approximately 30.

But while Emirates and Etihad have the same broad strategy, nuances mean both carriers have chosen strategically sound paths and have little need to defend their strategies. Thierry Antinori, who last year turned down the CEO role at Lufthansa Group's Austrian Airlines to join Emirates as EVP Passenger Sales, told Reuters that at Emirates "we prefer to buy airplanes than airlines" and mused on partnerships: "We do not lose time in discussion with alliances, which are not very clear for the customer to understand. They say 'we offer you seamless travel' but in the end they offer seamless trouble."

Emirates has an early advantage, being founded in 1985 and drawing global attention when it became the largest customer for the A380 in 2001, two years prior to Etihad's establishment - although CEO James Hogan is quick to note Etihad is the fastest growing airline in history.

Emirates' lead has given it wider penetration in many markets. Consider Australia, Emirates' single largest market by available seat kilometres and home to Virgin Australia, one of Etihad's substantial partners. By the time Etihad made its first foray into Australia in 2006 with a Sydney service, Emirates was already entrenched, having entered the country in 1996 and since then building up multiple ports and frequencies. Etihad's 2010 partnership with Virgin Australia gives it country-wide domestic feed. Rather than building a much larger network in Australia, Etihad can take the cream of passengers made available by the Virgin partnership and pursue less ambitious expansion, narrowing its medium-term focus to introducing a Perth service, a second daily Melbourne service and making Brisbane non-stop. That creates opportunities for expansion in other markets.

Etihad's other codeshare partners – such as All Nippon Airways or Malaysia Airlines – give Etihad similar regional feed. Other partnerships like Air New Zealand or TAP Portugal give Etihad a presence in markets it does not serve at all, and in the case of Portugal, which neither Emirates nor Qatar Airways serves. Etihad's codeshares are strongest in Europe, Emirates' bread and butter, and overall alliances accounted for 20% of Etihad's revenue in 2011, up from 13% in 2010. They give Etihad access to 270 destinations, 80 more than its bigger and smaller competitors.

See related article: Etihad Airways extends reach with TAP codeshares to Portugal

Emirates, Etihad and Qatar Airways codeshare partners: Mar-2012

  Emirates Etihad Qatar
Africa

Air Mauritius

South African Airways

Air Seychelles

Royal Air Maroc

n/a
Asia

JAL
Jet Airways

Korean Air

Philippine Airlines

Thai Airways

ANA

Asiana

Bangkok Airways

Hainan Airlines

Jet Airways

Malaysia Airlines

Philippine Airlines

Sri Lankan

Vietnam Airlines

ANA

Asiana

Malaysia Airlines

Philippine Airlines

Australia/NZ n/a

Air New Zealand

Virgin Australia Group

n/a
Europe Air Malta

AerArann

airberlin

Air Astana

Air Malta

Alitalia

bmi

Brussels Airlines

Cyprus Airways

Czech Airlines

Flybe

Niki

Olympic

Siberia Airlines (S7)

TAP

Turkish Airlines

Ukraine International

bmi

Lufthansa

MEA

Middle East Oman Air

Kuwait Airways

MEA

Saudi Arabia Airlines

Yemenia Airways

 
North America n/a American Airlines

United

US Airways

Latin America n/a n/a GOL
Total 9 34 (36 including French Railways and Pacific Blue, part of Virgin Australia Group) 10

Other markets are barely accessible. The Canadian and German governments have been the most vocal about limiting Gulf network carriers. Etihad's Dec-2011 stake in German carrier airberlin has given it a significant presence in the EU, Germany and in particular Berlin, which the German government has blocked UAE carriers from serving. airberlin will increase its Germany-UAE capacity from four weekly services to double daily as well as introduce daily flights between Abu Dhabi and Phuket, which Etihad does not serve but will codeshare on in addition to codesharing on airberlin's Germany-UAE services.

See related article: airberlin prepares to drop Bangkok in order to boost Middle East, Africa and US services

Mr Hogan remarked in Sydney in Mar-2012 that the EUR150million airberlin alliance will boost both airlines' incremental revenue by USD50 million in the first year, and could recoup its investment after next year. That gain from airberlin, Mr Hogan told Bloomberg, made an equity investment "smarter than buying 10 more aircraft to crack the German market." In Australia, Etihad's revenues from partner Virgin Australia are 1000% higher than from Etihad's previous partner, Qantas, although no monetary figure has been stated. 

"Partnerships, particularly equity partnerships, are an enabler of exponential growth," Mr Hogan said in Sydney in Mar-2012. While Etihad has been able to gain revenue without a stake in Virgin Australia, airberlin and Virgin had different needs: a global virtual network for Virgin, equity for airberlin. (Mr Hogan has openly stated he would like to buy a stake in Virgin Australia, once its domestic arm is established.)

See related article: Virgin Australia, buoyed by yield growth, to split company to allow further foreign ownership

Codeshares, such as those introduced from Etihad's alliances with airberlin and Virgin Australia, do introduce product inconsistencies. It was Emirates' desire to avoid product inconsistencies that led to Mr Antinori's statement about partnerships; his full quote read: "We prefer to rely on our product, so we prefer to buy airplanes than airlines." Few partners offer an identical product. One standout is Air New Zealand and Virgin Atlantic, the former of whom has licensed the latter's business class seating, but the partnership is small. Even airlines do not have consistency amongst their own fleets, Emirates included. That situation is unlikely to change, as Virgin Australia CEO John Borghetti has remarked: "There are forever refitting programmes as the nuclear arms race of product development expedites."

So product alignment may not occur, but as long as alliances generate more revenue than their implementation costs, they are far from trouble, although that is not to look past the significant time and jockeying needed to balance wide-ranging partners, some of whom can be sceptical of each other.

More tellingly and rivalry aside, Mr Antinori also warned, "You cannot stop the Middle East airlines". Air France-KLM apparently adopted that thinking in discussions to forge a codeshare with Etihad.

See related article: Air France-KLM to partner with Etihad? - If you can’t beat them, join them

While that is generally true, in this fast changing industry there is no reason for the old-established airlines to spend too long dwelling on the point as there is a newly-emerging threat to the older established forces: Chinese carriers, just starting to feel their way with sixth freedom operations, but with enormous upside potential.

See related article: Chinese airlines' sixth freedom roles could challenge Middle East, Asian, European hubs this decade