FLUG REVUE April 2006: Etihad on growth path

April 2006

ETIHAD AIRWAYS SEES RAPID GROWTH

By Andreas Spaeth

27 January 2006 was a special day for an airline which many, even in the aviation industry, had never even heard of. On that day, a brand new Boeing 777-300ER flew non-stop from the production facility in Everett near Seattle to Abu Dhabi on the Persian Gulf in 15 hours. It was the very first aircraft that actually belonged to Etihad Airways, which up to that point had relied on nine leased passenger jets and three cargo planes.

A380

Airbus A380

The name Etihad sounds alien to our ears and does not invoke any associations. In English, the Arab term Etihad means “United” and the name is supposed to symbolise the cohesion of the seven sheikhdoms which together comprise the United Arab Emirates on the Persian Gulf. Everyone thinks of Dubai and the airline which has its home there, Emirates Airlines, but in fact the Emirate of Abu Dhabi, about 100 kilometres to the south-west on the Gulf coast, is not only the richest of the sheikhdoms, but its metropolis of the same name is also the capital city of the country. There the ruling family of Al Nayhan is now seeking to have its own weighty say in international air transport and to emulate the shining example of Dubai.

In July 2003, the then Crown Prince, Sheikh Khalifa bin Zayed Al Nayhan, issued a decree for the foundation of a national airline, going on to choose both the name Etihad and the aircraft livery. The company name is resplendent in giant golden letters on a beige background, and the tail unit also depicts a mighty hawk and a dhow, the legendary Arab cargo vessel.

Less than six months later, on 5 November 2003, the inaugural flight took off for the oasis city of Al Ain, and a week later the first scheduled flight to Beirut followed. Abu Dhabi, which until the end of 2005 had been one of the three co-owners of the multi-national Gulf Air along with Bahrain and Oman, now had its own carrier. At the start of operations, several Airbus A330's were hurriedly leased and from 17 June 2004 these were used inter al. to fly a thrice weekly service to Munich, the first destination on the European continent.

But the ruling family and its new start-up did not really come to the notice even of the aerospace industry until the Farnborough Air Show 2004, at which the new chairman, Sheikh Ahmed bin Saif al Nayhan, himself a military and commercial pilot, signed a declaration of intent committing the airline to purchase no fewer than 24 Airbus jets – four A380's, four A340-500's, four A340-600's and twelve A330-200's – plus a further twelve options.

“I cannot recall any time in the history of aviation,” said the youthful looking Sheikh at that time, “at which a start-up airline, barely eight months old, had the self-confidence, the resources and the ambition to place an order for up to 36 widebody aircraft with a total value of over seven billion dollars... If you think that the last eight months were a challenge for us, then that is nothing compared with the months and years which lie ahead of us.”

There is no doubt that the owners of Etihad have the financial resources to pay for this meteoric rate of expansion. Unlike Dubai, which will soon run out of oil, the considerably larger Abu Dhabi is sitting on virtually inexhaustible reserves of fuel: over 90 billion barrels of oil, enough to last 120 years, and the third largest reserves of gas in the globe.

Abu Dhabi wants to become as forward-looking as Dubai and, above all, to stimulate tourism. A 25-year plan sets out the various stages in its planned development.

“Etihad is an integral element of this plan and also the flagship because we will be represented all over the world.” Here, it is an Austrian who is using the word “we”. 55-year-old Robert Strodel from Neunkirchen was appointed the first CEO of Etihad in July 2005, after several Germans had been or still are heavily involved in building up the company. One of the outstanding Germans was former LTU pilot Werner Borchert, who occasionally stood in for Strodel as COO, but has since left the airline with several other colleagues. Another former LTU captain, Helmut Weixler, is still a member of the management team in the cramped headquarters at Abu Dhabi airport, which is shortly to be relocated into a bigger, new building.

Robert Strodel has always been an air cargo specialist, having begun his career in 1968 as cargo sales manager in the London office and worked for Lufthansa until 2001. He then founded an aviation management consultancy firm where in December 2003 he won the contract to build up the cargo business at Etihad. Two years later, in an interview with FLUG REVUE in his office, from where he now controls the entire airline, he talks about his life at Etihad. “The project was so important that at the beginning of 2004 I flew straight to Abu Dhabi.”

He works very long hours. “The day begins shortly after 6am and only finishes when one is too tired to continue, but it is a job which inspires me, a fantastic challenge,” he says with genuine enthusiasm. It is all go in this company, which intends to master the incredible balancing act of growing at an unheard-of tempo and simultaneously acquiring a reputation for outstanding service and passenger comfort, even though the infrastructure required to support this is only partially in place. The plan, he explains, is “to achieve the same thing that has taken Emirates 20 years in Dubai, in a much shorter time. We want to push ahead with our expansion in such a way that in a few years' time the name Etihad will be synonymous with quality.”

Already the airline has achieved an amazing amount. In the first full business year, 2004, it carried 250,000 passengers, last year it exceeded that number by a full million, and for 2006 it is aiming for three million as the fleet grows from nine to around 25 passenger jets and the number of destinations served is doubled from 20 to 40. “Our five-year plan assumes that in 2010 we will be flying to 70 destinations with 56 aircraft,” says Strodel.

A Herculean task, not least because the home airport of Abu Dhabi is much too small. Originally opened in 1982, the complex 30 kilometres to the east of the city has only 11 aircraft parking places close to a building and five others which are further away. Although 32 airlines and nine cargo airlines fly to this airport today, interim solutions have only succeeded in increasing capacity slightly. At least at the peak hours of midday and late in the evening, the facilities were simply inadequate to cope with the over 6 million passengers who used the airport last year. The plan is that by December 2006, as a short term solution, Etihad will be given an extension to the terminal all to itself, with seven new parking positions. Expansion of the airport to include a second runway and a completely new terminal between the two runways is expected to be completed in 2010. The current realignment taking place among the Gulf airlines may be creating extra room, but it is also bringing new problems for Etihad.

When Abu Dhabi withdrew from Gulf Air, the airline increasingly drew back from its former hub and already in 2005 the number of passengers carried by Gulf Air here fell to 2.7 million, less than half of the total volume. “Gulf Air will retain its intra-Gulf routes, but we have to take over the other routes, even though they are not in our business plan,” says Robert Strodel. “That will mean further pressure. We now not only have to cope with our own expansion, which was already aggressive enough, but we also have to take on extra tasks for which we really do not have the resources.” Yet all in all Etihad will benefit. “Things are going a lot better than we had assumed, we will probably be flying at a profit as early as 2008, rather than only in 2010, as we originally assumed.”

One factor which is essential to unhindered growth is the attractive conditions under which Europeans are able to work in the Gulf. There are no taxes, either for companies or for individuals in the form of income tax. “The tax-free environment is naturally a huge advantage, but every company out here benefits from it too,” says Robert Strodel. “If on top of all the costs of building up an airline we had to pay taxes as well and crazy social security contributions, then obviously it would take longer to achieve break-even.”

It is here that the reason for the high level of service of the Gulf airlines is to be found. They can select their crew and other staff from all over the world. Net earnings are the same here as gross earnings, which means that expatriates earn about 45 percent more than in Europe, and on top of that there are generous social benefits, with free accommodation and other perks. Unlike many other airlines, the cockpit crew contracts are not for a fixed term. On the other hand, there are no unions to stand in the way of expansion and none of the staff sit there twiddling their thumbs to retirement age in the knowledge that they have a permanent job – a dream for every airline manager.

“These conditions are definitely one of the reasons why we have so far not have any problems in finding enough cockpit personnel, even though it is definitely getting more difficult because a lot of airlines are getting new aircraft,” Strodel explains The ambitious airline is always receptive to job applications. “We have a huge need for personnel and we are taking on staff at an unbelievable rate, 200 flight attendants in just one month.” In the cockpit, Etihad has a lot of Malaysian staff, but there are also 17 former Swiss pilots.

As is customary in the Gulf, people from all over the world work at Etihad. It is not unusual to find up to 13 nationalities among the crew members on a single flight, with not a single one of them a native of the Emirate. Altogether the airline employs just under 2,500 staff from 76 nations. These include about 250 pilots and co-pilots plus over 1,000 cabin crew.

The competition in Dubai and in Doha, Qatar, which is twice as far away in the other direction, is working under similar conditions and is quite relaxed over the new airline. Although, according to expert opinion, Emirates has the most to lose through competition in its own country, Tim Clark, head of the Dubai-based mega-carrier, even goes so far as to welcome the newcomer: “The economy of the Emirates is exploding; as an airline we have to keep our heads above water during this stormy phase – and the advent of Etihad is good for the country.” Akbar Al Baker, head of Qatar Airways, which resembles Etihad more closely on account of its own rapid growth, is unconcerned. “There is enough business for all of us, the states here are very progressive and all of them are geared towards economic growth.”

But even with all the money in the world, a finished quality airline cannot be bought overnight. Because of this, passengers' impressions of Etihad have so far been very mixed, as becomes clear when one examines the ratings on the website airlinequality.com. Customers are especially critical of the inconsistency of product and service.

Moreover, the fleet currently operated by Etihad, consisting of short- or longer-term leased Airbus jets and one Boeing 767, is a motley hodgepodge. “We have flown a few times with equipment that really was not up to the standard that we wanted,” the CEO concedes. Two A330-200's, employed inter al. on the daily Frankfurt service, serve as a showpiece. They were leased new from CITG in mid-2005 and offer “virtually the standard in all three classes that we are aiming for,” according to Strodel, who is only too aware of his problem on the market. The rest come from a variety of sources, such as TAM, from Singapore Airlines via Boeing Aircraft Trading, particularly unpopular with the customers, in a single-class version and with Spanish crew from the chartered airline Iberworld (these are to be returned in February). Then there are two planes which come from the bankrupt Italian holiday airline, Volare.

“We want to keep the period in which we fly with a non-perfect product as short as possible,” says Strodel. “That was also the reason why we placed such big orders early on.” In the present year alone, Etihad will take delivery of 17 brand new aircraft. All five of the Boeing 777-300ER's on order, in a two-class configuration, will have arrived by March. They are already in service on the Frankfurt route. “Through pure chance we were presented with the opportunity to take over the 777 delivery slots and we grabbed it immediately,” says Strodel, “as we need more aircraft than planned to take over the extra routes from Gulf Air.” This year Airbus will also deliver four A340-500's in the three-class version, plus eight A330-200's, some of which are configured with two and three classes.

“That will mean we can return some of the leased aircraft and offer our customers a product which is really new and in every class is better than that of competition. The new First Class in our A340's should be one of the best seats flying in the air.” Already for the first six months of 2006, Strodel is planning to place some further orders to build up one of the aircraft types already in use, either the Airbus A330 or the Boeing 777. On the other hand there are no plans to order any additional A380's over and above the four which are due for delivery commencing in January 2008.

The growth of the route network is directly determined by the availability of aircraft. One milestone was the launch of three flights a week to Toronto via Brussels in October 2005. When the first A340-500 for ultra-long distances arrives in the middle of the year, it should be possible to fly to the Canadian metropolis non-stop, and in any event the airline will fly to New York without any intermediate stops from the summer. Daily flights to Paris CDG and Manchester are also on the list, along with services to Manila, Jakarta, Casablanca and East Africa. They are looking into the possibility of flying to Shanghai as well. After Munich, Etihad hopes to fly a daily service to Frankfurt as soon as possible and before long twice a day. “Our aim is to establish a balanced network of connections for Abu Dhabi,” says Robert Strodel. “In the long-term we are hoping for a somewhat lower transfer proportion than Emirates, with only 40 percent of our passengers having to change planes.”

On the other hand, like all the other Gulf airlines, Etihad does not want to join any alliance. “We want to develop to our own specification and not be dependent on others. We are the youngest and fastest-growing Gulf airline and very likely the one in the strongest financial situation; in the long term we want to be different from the competition.” So Strodel outlines his strategy. “Inshallah – God willing – as they say here.”

From FLUG REVUE 4/2006

Last updated 10 March 2006

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