Etihad targets second year of profitability with 30% increase in revenue and declining cost base

5 July, 2012

Etihad Airways in 1H2012 reported another period of remarkable growth as revenue for the six months to 30-Jun-2012 rose 30% compared to 1H2011 to USD2.24 billion as the carrier increased capacity, added new destinations and improved its load factors. It did not disclose bottom-line profitability.

Six new aircraft were delivered in the six month period, including the carrier's first three class Boeing 777-300ER. Etihad added services to Basra, Sahnghai Pudong and Nairobi in 1H2012. Lagos service was also launched on 01-Jul-2012.

With the new aircraft and expanded network, passenger numbers for the half year rose 30% to 4.89 million, while revenue passenger kilometres also rose 30%, reaching 22.73 billion. Capacity was up only 23%, to 29.5 billion available seat kilometres. With demand growth well ahead of capacity, passenger load factors rose 4.2ppt to 77.1%.

2Q2012 traffic performance was even stronger. Passenger traffic rose 34%, to 2.55 million, while RPKs in the quarter were up 33%. Capacity expanded 25% again lagging demand, and pushing load factors up 4.6ppt, to 77.6%.

Passenger revenue growth has not been quite as solid as demand, hinting at the increasingly competitive environment that is developing in the Gulf region. For 1H2012, passenger revenue rose 20%, to USD1.61 billion. Etihad Airways CEO James Hogan stated that while many airlines have seen demand softening in 2Q2012 and there "continues to be a tough operating environment for all airlines" Eithad has "been able to add more passengers than ever before, with growth outstripping our capacity increases".

Cargo revenue rose 14% to USD348 million. While this is slower than passenger growth, it is still a solid performance, as global air freight traffic virtually stalled in 2Q2012 and the double-digit revenue growth was achieved on just a 6% increase in cargo tonnage. Etihad reported particularly strong cargo growth in Bangladesh as well as Germany and the UK, despite the eurozone sluggishness that threatens to deteriorate even further.

Overall, revenue at the carrier rose 30% in 1H2012, to USD2.24 billion. The carrier's own organic growth in passenger and cargo revenue was boosted by Etihad's extensive set of commercial relationships with other carriers.

Partners feed 16% of Etihad's traffic

Etihad Airways reported that its partnerships with other carriers funnelled 800,000 passenger into its network over the past six months (16% of the total), contributing USD281 million to its revenue, around an eighth of its total revenue. This figure is only going to increase as during 1H2012 Etihad Airways deepened its relationships with several carriers. In 2011 revenue generated from alliance traffic was only USD418 million, an increase of 48%.

Etihad has more than 35 codeshare relationships with other carriers (up from just two in 2006) and has been building a network of strategic partnership agreements.

During 1H2012, Etihad Airways took minority equity stakes in Aer Lingus (2.987%) and in Virgin Australia (4.99%, with intentions to increase it to 10%). These were both carriers it has been sizing up for some time: Virgin and Etihad already had an anti-trust immunity agreement allowing them to cooperate while rumours about a possible acquisition of Aer Lingus by Etihad have been around for several years.

See related article: Etihad Airways gets springboard into Northern Europe wtih 2.9% stake in Aer Lingus

These recent purchases are in addition to the minority stakes it already holds in airberlin and Air Seychelles.

Etihad Airways airline investment portfolio

Carrier Ownership level Relationship
Aer Lingus 2.99% Share purchase reflects a desire to forge a commercial partnership. Exploring codeshare opportunities. Future discussions may explore additional commercial and cost opportunities to develop a closer working relationship between the two airlines, in areas such as joint procurement. Will not increase stake until codeshare relationship discussions are complete.
airberlin 29.20% Strategic partnership agreement. Extensive Codeshare agreement, with Etihad Airways codesharing on 36 of airberlin's 171 destinations and airberlin codesharing on 24 of Etihad Airways' 82 passenger destinations, and plan further expansion of the pool of codeshare routes. Codeshare agreements with the airberlin group for all European activities including NIKI and Belair. Reciprocal frequent flyer programmes. Joint procurement taskforce to look for cost efficiencies across the two companies, including restructuring 787 purchases.
Air Seychelles 40% USD20 million for equity stake, plus USD25 million to meet working capital requirements and support Air Seychelles' network development. Developing renewed fleet and network growth plan for Air Seychelles. Provision for a five-year management contract for Etihad Airways. Linked frequent flyer programmes. Codeshare agreement and restructuring of both carriers' operations to/from the Seychelles.
Virgin Australia 4.99% Strategic partnership agreement including revenue sharing, fully reciprocal frequent flyer programmes and airport lounge access. Codeshare across 44 new destinations in Australia, New Zealand, the Pacific Islands, Asia and the US. Exploring cooperation across a broad range of commercial functions. Remains interested in building a larger stake. May be interested in acquiring the 26% stake controlled by Sir Richard Branson's Virgin Group.

Etihad Airways boasts that its (online and offline) network is "by far the largest of any Gulf carrier". The carrier directly serves 87 destinations, a number that is shaded by Emirates at 122 destinations, Qatar Airways at 118 and Saudia at 90. However, once Etihad counts its extensive codeshare relationships, the carrier's virtual network stretches to 308 destinations.

Mr Hogan said that the "projected revenue benefits and cost synergies for both Etihad Airways and our partners tracking in line with, or even above, plan". Air Seychelles has made "significant strides towards profitability in its own right" and Mr Hogan said he is confident it will break even this year. Much of this will be thanks to Etihad's strategic partnership agreement, and the shift of significant management expertise from Etihad to Air Seychelles. airberlin is also reporting better than expected progress in its road to profitability.

See related article:Etihad Airways stake in Air Seychelles gives 'realistic way forward' to the island carrier's future

Etihad is also looking to stay with its equity partners in the long term but disclosing few additional strategic insights. Mr Hogan reacted to questions about the carrier's stake in Aer Lingus this week by stating in The Financial Times that the carrier's equity investments are "strategic and long term". Etihad has not discounted increasing its stake in Aer Lingus, although this will wait until the two carriers have finished codeshare discussions.

Etihad aims to have a second profitable year

Eithad reported its maiden full-year profit in 2011, earning USD14 million. The carrier is looking to improve on that performance in 2012. Mr Hogan says the carrier remains "focused and on track to deliver profitability for the full year". Etihad Airways did not report an overall profit (or loss) figure in its 1H2012 performance review. However, the airline did note that its non-fuel costs per ASK were down 1% for 2Q2012.

Three months ago Etihad came out with a similar preformance report for 1Q2012. In the first three months of 2012, the carrier's revenues were up 28% to nearly USD1 billion.

See related article: Etihad nears USD1 billion as quarterly growth slightly outpaces capacity

Fuel prices have eased considerably over the past two months, something that will bring relief for airlines globally. Despite claims of state-support from rivals, Etihad steadfastly maintains that it receives no fuel subsidies or any other relief from the Abu Dhabi government. The carrier has committed itself to an active hedging strategy. At the end of 1Q2012, when oil prices were above USD100 per barrel, the carrier announced that it had hedged 74% of its 2012 fuel requirements.

Against a background of capacity reductions, the carrier is surging ahead, as are Emirates and Qatar Airways. Etihad continues to tailor its strategy and improve its product to compete with Emirates and Qatar Airways, as well as the European and Asian carriers at either end of its growing network.

With a year of profitability behind it and a strong outlook for 2H2012, Etihad aims to deliver a second year in the black, ready to fulfil the profitability part of its mandate.