Etihad Airways has always needed “something more than organic growth to gain global scale”, according to it’s Chief Executive James Hogan. Admission into any of the three global alliances Oneworld, SkyTeam and Star Alliance has not been an easy task for Gulf carriers. So it comes at no surprise that airlines in this part of the world have had to find operational efficiencies through traditional interline, and in the case of relatively new entrant Etihad, through equity acquisition in cash-strapped airlines.
Building an empire one decade at a time
Since 2011, Etihad has bought equity stakes in seven airlines starting with a 2.99 percent share in Air Berlin, which months later increased to 29 percent after Etihad injected 300 million euros into the struggling German carrier. Other acquisitions include Aer Lingus (4.1%), Air Serbia (49%), Air Seychelles (40%), Air Berlin (29.21%), and most recently and perhaps surprisingly, Alitalia (49%).
James Hogan has been more of an M&A specialist than an airline CEO for the past several years and some of his targets like Alitalia have raised eyebrows among analysts and his peers. Often outspoken Qatar Airways CEO Akbar Al Baker commented in a March 2014 interview that he does not favor investments “in bits and pieces,” having declined to buy a stake in Alitalia which was made available “several times” he reported.
Hogan justifies Etihad’s rag tag equity collection as a strategy that will increase his airline’s traffic and create operational and cost efficiencies. He also warns that significant results will be slow in coming “This isn’t for 12 months; this is for the next 20,30, 40 years.” he explained.
History repeating itself?
Criticism of Etihad’s strategy, notwithstanding the long view, is well justified considering previous examples of acquisitions in troubled airlines. During the 1990s Swissair acquired a 49% stake in Sabena a struggling Belian airline, as well as stakes in Air Liberté, AOM, Air Littoral, Volare, LOT, Turkish Airlines, South African Airways, Portugalia and LTU. Swissair planned to acquire stakes in Aer Lingus, Finnair, Malev, TAM and Transbrasil before it succumbed to an enormous debt of 17 billion francs in 2001.
Enter the loyalty dragon
Loyalty programs, especially frequent flier programs, have proven to be valuable assets and resilient during tough economic times. Starting with the IPO of Aeroplan in 2005, which eventually grew into the formidable loyalty holdings of Amia today, building an international coalition of loyalty programs can prove to be quite profitable.
This week the news came that Etihad acquired a 75% stake in Alitalia’s MilleMiglia program. James Hogan commented that “the loyalty program sector is a faster growing and higher margin business than the airline industry. This approach allows both Etihad Airways and Alitalia to reap greater rewards together, with opportunities to generate sustained profits from our loyalty programs.”
Looking back at the landscape of airline acquisitions, Etihad has also amassed a tidy group of FFPs, which incidentally were secured with majority stakes since airline foreign ownership laws don’t apply to loyalty programs housed in separate holding companies. The 4.6 million member MilleMiglia will now join the ranks of the Global Loyalty Company (GLC) owned by Etihad, currently overseeing Etihad Guest, AirBerlin’s Topbonus and Jet Airways Jet Privilege. These programs combined represent 14 million members whose activity generates a significant amount of revenue from partner mileage sales and customer data mining.
Fourteen million FFP members may not compare in size to those of US Majors, but it competes well with Etihad’s Mid East rivals. Furthermore, with Etihad’s innovative loyalty track record, we can expect the loyalty programs under GLC control to be very enterprising; and unlike some of their airline counterparts, profitable.