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Air Europa-Etihad codeshare links LatAm to Asia Pacific: Etihad again challenges alliance status quo

The new codeshare agreement announced this week by Air Europa and Etihad is clearly based on each party gaining access to parts of the other’s network that complement their own. Air Europa will link its Madrid hub to Etihad’s in Abu Dhabi, giving the latter non-stop access to Spain for the first time (albeit via codeshare), but this deal does not seem to be about Europe.

Air Europa’s greatest asset is its Latin American network, where Etihad has only one destination currently. Under the new deal, Etihad will have the widest access to Latin America of the three big Gulf carriers. For its part, Air Europa is currently absent from Asia Pacific and the Middle East, but it will gain better access to these regions through Etihad than its Spanish rival Iberia has through its oneworld partners.

The agreement also casts the spotlight once more on the development of airline alliances. On the surface, this is just another bilateral partnership, but it raises further questions. For example, what does the addition of another codeshare agreement between Etihad and a SkyTeam member mean for that alliance grouping, as the ties grow stronger? How will arch-enemy Delta view its SkyTeam partners' ever-closer friend? And is this new codeshare a precursor to Air Europa’s joining the Etihad ‘Equity Alliance’?

Air Europa’s new Madrid-Abu Dhabi service will carry the Etihad code; other European cities will also carry both codes

Under the new codeshare, signed on 20-Jan-2014, Air Europa will commence a three times weekly service from Madrid to Abu Dhabi in late 2014, using Airbus A330 aircraft. This Air Europa-operated route will also have Etihad’s code, as will Air Europa’s services to Amsterdam, Barcelona, Brussels, Milan Malpensa and Palma de Mallorca. In return, Air Europa’s code will be placed on Etihad’s services from Abu Dhabi to Amsterdam, Brussels and Milan Malpensa.

Etihad Airways president and CEO James Hogan said in a statement: "The fact that Air Europa has chosen Abu Dhabi for the next wave of its international expansion, speaks volumes of what the emirate and our global hub have to offer. We have been keen to offer our customers direct access to the Spanish capital for a number of years, and doing this now in partnership with Air Europa makes perfect business sense. It is the right thing to do. The new route will support the growing trade volumes between the UAE and Spain, up 75% over the last three years, introduce more Spanish business and leisure travellers to the world class city that is Abu Dhabi, not to mention, make access to Abu Dhabi, Madrid and numerous destinations across our combined networks easier than ever."

Air Europa’s new service will be the only service between Spain and Abu Dhabi, but not the only service between Spain and the Gulf. Its three times weekly operation compares with Emirates’ existing twice daily 777-300ER/-200LR service between Madrid and Dubai (a service that also carries Qantas’ code). This is strong competition.

Air Europa Lineas Aereas international seat capacity by region: 20-Jan-2014 to 26-Jan-2014

The codeshare will extend to other parts of both networks

The two carriers plan to extend the codeshare in summer 2014 to include additional Air Europa destinations in Spain and, perhaps more significantly for Etihad, in South America. Air Europa will also see its code on Etihad flights to Africa, Asia, Australia and the Gulf. The agreement is subject to regulatory approval.

Air Europa president and CEO Juan José Hidalgo said: "We have chosen Abu Dhabi and Etihad Airways as the gateway to India, China, Australia and other destinations served in the Far East. As one of the most important operators to the American continent, especially Central and South America via our hub in Madrid, for Air Europa the agreement between the two airlines is a step forward in a global market. Both airlines will provide an excellent link between America and Asia via Madrid and Abu Dhabi."

Etihad Airways international seat capacity by region: 20-Jan-2014 to 26-Jan-2014

Etihad does not serve Spain, but has good connections in Europe via partners

Out of a total of 78 international passenger destinations, Etihad operates to 34 in Asia Pacific, 17 in Europe, 14 in Middle East, eight in Africa, four in North America and just one in Latin America (source: OAG, as of 26-Jan-2014). It does not serve the Spanish market – the only large Western European market that it does not serve directly – but existing European codeshare partners airberlin, KLM, Brussels Airlines, Alitalia and Air France offer EY-coded flights via their respective hubs.

Indeed, Etihad already has an extensive list of 41 codeshare partners across the globe, including 19 in Europe. In addition to the 17 European destinations served by Etihad using its own equipment, its codeshare partners offer a further 81 European destinations. While the combined networks of Etihad and its codeshare partners offer a significant number of European destinations, the new non-stop codeshare flight to Madrid will be a welcome addition.

Etihad Airways codeshare partners (as at 21-Jan-2014)

Airline

Region

Aer Lingus

Europe

Air Astana

Asia Pacific

Air Canada

North America

Air France

Europe

Air Malta

Europe

Air New Zealand

Asia Pacific

Air Serbia

Europe

Air Seychelles

Asia Pacific

airBaltic

Europe

airberlin

Europe

Alitalia

Europe

All Nippon Airways

Asia Pacific

American Airlines

North America

Asiana Airlines

Asia Pacific

Bangkok Airways

Asia Pacific

Belavia

Europe

Brussels Airlines

Europe

China Eastern Airlines

Asia Pacific

CSA Czech Airlines

Europe

Cyprus Airways

Europe

Flybe

Europe

flynas

Middle East

Garuda Indonesia

Asia Pacific

Hainan Airlines

Asia Pacific

Jet Airways

Asia Pacific

Kenya Airways

Africa

KLM Royal Dutch Airlines

Europe

Korean Air

Asia Pacific

Malaysia Airlines

Asia Pacific

Middle East Airlines

Middle East

NIKI

Europe

Olympic Air

Europe

Royal Air Maroc

Africa

S7 Airlines

Europe

Saudia

Middle East

South African Airways

Africa

SriLankan Airlines

Asia Pacific

TAP Portugal

Europe

Turkish Airlines

Europe

Vietnam Airlines

Asia Pacific

Virgin Australia

Asia Pacific

Air Europa codeshare gives Etihad much greater access to South America

Nevertheless, of greater strategic importance to Etihad than the non-stop flights to Spain will be the addition of Air Europa’s South American network to its offer. Etihad currently serves only Sao Paulo using its own equipment and has no Latin American codeshare partners.

According to data from OAG for 26-Jan-2014, Air Europa has 12 Latin American destinations in its network (and a further nine in Mexico via its codeshare partner Aeromexico). Its market niche to Latin America is an important strategic asset, especially on routes to the Caribbean, where Iberia is a relatively small player. Moreover, Air Europa has targeted Latin America for further growth.

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The new codeshare agreement will allow Etihad to offer Latin American passengers connections to its Asia Pacific, Middle East and African destinations, albeit via a double connection at Madrid and Abu Dhabi. Emirates has three destinations in Latin America (Buenos Aires, Rio de Janeiro and Sao Paulo) and Qatar Airways has two (Buenos Aires and Sao Paulo).

Although the Emirates/Qantas partnership offers more destinations in the Middle East and Asia Pacific, Etihad/Air Europa will have a bigger presence in Latin America. Qatar Airways’ codeshare with Gol gives it a large indirect footprint in Brazil, but, overall, Etihad’s new deal gives it arguably the biggest presence (through codeshare) among the Gulf Three across Latin America.

Air Europa destinations in Latin America

Buenos Aires Ezeiza International Airport

Cancun Airport

Caracas Simon Bolivar International Airport

Havana Jose Marti International Airport

La Romana Airport

Lima Jorge Chavez International Airport

Montevideo Carrasco Airport

Punta Cana International Airport

Salvador Luis E Magalhaes Airport

Santa Cruz Viru Viru International Airport

Santo Domingo Las Americas International Airport

Sao Paulo Guarulhos International Airport

Another codeshare for Etihad with a SkyTeam member

Although Etihad’s CEO James Hogan has called the global alliances “fractured” and Etihad is not interested in joining one, it is interesting to note that the Air Europa agreement gives Etihad another codeshare with a SkyTeam member.

It already has bilateral codeshare agreements with 10 SkyTeam members: Air France, KLM, Alitalia, China Eastern, CSA Czech, Garuda, Kenya Airways, Korean Air, Saudia and Vietnam Airways.

See related report: Airberlin receives a vote of confidence from Etihad, but how will the relationship evolve now?

In addition, Etihad has a codeshare agreement with, and equity investment in, oneworld member airberlin and codeshares with other oneworld members, including American Airlines, Malaysia Airlines and S7. Etihad also has codeshares with eight Star Alliance members, including TAP Portugal, Turkish Airlines, Air Canada, South African Airways and ANA.

Whether deliberate or not, Etihad has more codeshares involving SkyTeam members than members of the other global alliances. At a SkyTeam hub such as Amsterdam, there will be a series of codeshare flights forming a kind of triangular relationship between Etihad, Air Europa and KLM. In this way, Etihad’s influence with individual SkyTeam members, if not necessarily with SkyTeam itself, is growing. Air France, once the Gulf carriers' strongest opponent is increasingly seizing the opportunity to expand the relationship - if for no other reason than if they don't someone else is going to.

Certainly, any fractures that exist within SkyTeam (or the other global alliances) are likely to be further exposed by its members’ growing tendency pragmatically to seek value from an airline previously perceived as a threat and now as an option for strategic development.

Air Europa will leapfrog Iberia and its partners in Africa, Asia Pacific and the Middle East

For its part, Air Europa’s international network outside Europe and Latin America consists only of one destination in Africa (Dakar in Senegal), with no destinations in the Middle East or Asia Pacific. Almost at a stroke, the new agreement will add up to 14 Middle East destinations and 34 Asia Pacific destinations using Etihad’s network under codeshare.

Air Europa’s great rival in Spain, Iberia, has no Asia Pacific destinations and only one in the Middle East (Tel Aviv). Through codeshares with IAG sister carrier British Airways, Iberia can offer seven Asia Pacific destinations. It also has 10 codeshare destinations operated by partners in the Middle East (mainly via BA).

Air Europa’s codeshare with Etihad will leapfrog Iberia and its partners in terms of the number of destinations in these two regions. In Latin America, Iberia has 16 destinations versus Air Europa’s 12, but Air Europa/Etihad will be able to offer Latin American passengers a greater number of global connections than Iberia and its partners can.

Will Air Europa join Etihad’s equity alliance?

Speaking at a recent joint press conference with airberlin, Etihad CEO James Hogan summarised Etihad’s partnership strategy: “Global reach is beyond the capability of any single airline”. There are three aspects of its strategic approach: organic growth, codeshares and Etihad’s ‘Equity Alliance’.

The agreement with Air Europa further extends the second of these elements, taking Etihad’s number of codeshare partners to 42. It is also bound to raise the question of whether the relationship may evolve to embrace Air Europa in Etihad’s equity alliance, adding to the seven investments already made?

This is not part of the agreement and neither party has suggested that it could be. Nevertheless, Etihad’s recent history of taking stakes in a range of European carriers (airberlin, Aer Lingus, Air Serbia and Darwin Airline/Etihad Regional) makes it reasonable to consider the possibility. Etihad may see this as a way to cement the codeshare relationship and to strengthen the co-operation with Air Europa. Moreover, there appear to be both financial and strategic reasons why Air Europa’s parent company, the privately-owned travel group Globalia, might be open to an equity relationship with Etihad.

Air Europa and Globalia were loss-making in 2012, according to Globalia’s annual report. At the end of 2012, the Globalia group had a cash balance of EUR57 million, equivalent to only one week of revenues. While its balance sheet net debt had fallen to just under half of the book value of its equity, the addition of capitalised operating leases meant that adjusted net debt was more than eight times equity. This brief analysis of Globalia’s balance sheet suggests that the group may be open to an influx of funds. This would give it a comfort cushion and also help it rise on the wave of new access it gains from the Etihad partnership.

In a report in Aug-2013, CAPA concluded that Air Europa was a cost efficient operator, but that its product and network were not strong enough to attract the necessary revenue premium. Etihad has strengths in both of these areas, which could potentially be of benefit to Air Europa if a deeper relationship were to evolve. Moreover, if synergies in areas such as procurement could be developed, thereby further improving Air Europa’s cost efficiency, it might be able to be profitable without a significant revenue uplift.

See related report: Air Europa: it started competition in Spain, but now pays the price, despite unit cost efficiency

Whether or not equity involvement is on the cards, this arrangement has strong mutual benefits

Financially and strategically, then, Globalia/Air Europa could potentially benefit from selling an equity stake in the airline to Etihad. However, the case is not clear cut. Globalia’s finances may have improved during 2013 and/or it may prefer to rely on existing investors. In addition, Air Europa may feel that its own network and product development, supplemented by the Etihad codeshare, sufficiently fulfil its strategic aims.

Moreover, Etihad cannot be expected to invest in the equity of every one of its codeshare partners and it is reported currently to be considering an investment in Alitalia. Etihad has a lot of relationships to manage already, whether codeshare, equity, or both, and this presents a not insignificant management challenge.

On balance, it seems more likely that Etihad and Air Europa will focus for now on extracting as much value as possible from the codeshare agreement without adding an equity relationship. There should be plenty of time for that as the relationship deepens.

See related reports:

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