Turbulence Ahead

Etihad Continues to Struggle with European Airlines

  • Why it matters

    Why it matters

    Etihad has major stakes in European airlines including Air Berlin and Alitalia, but they are consistently unprofitable.

  • Facts


    • A deal on restructuring German airline Air Berlin could be reached by Christmas.
    • Alitalia, another Etihad partner, is expected to make a loss of €400 million in 2016 and €500 million in 2017, according to Italian media.
    • Etihad CEO James Hogan is finding it increasingly difficult to justify his European investments to the Abu Dhabi government, according to sources.
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Etihad Chief Executive James Hogan. Source: Peter Boer

James Hogan, the chief executive of Etihad Aviation Group, hasn’t had a great year ­— at least as far as European operations concerned.

While the head of the national carrier of the United Arab Emirates has helped the company grow, investments in European airlines have proved costly, and analysts see Etihad going through turbulent times.

“Etihad’s investments in Europe so far haven’t helped to gain significant market share or to form an effective airline group,” said aviation industry analyst Gerald Wissel of Airborne Consulting. Recently, in fact, they have mainly been generating negative headlines.

Take Air Berlin, Germany’s second-largest airline, which continues to struggle despite repeated restructuring attempts and management changes. Now it’s being broken up.

The current plan sees the airline placing its tourism business into a joint venture with holiday airline Tuifly. Etihad will then own a 25 percent stake in the new company. Air Berlin’s remaining short-haul and medium-haul fleet is to be leased out to German national carrier Lufthansa. Negotiations have reached a delicate phase, said sources close to the companies. A deal could be reached before Christmas.

In the future, Air Berlin will focus on long-haul flights with a fleet of 75 planes, but hardly anyone in the aviation industry expects this to work. According to analysts, Air Berlin is simply too small, too uncompetitive and its finances are too weak. Even after the reorganization, the company would have debt of just over €1 billion, or $1.06 billion, and negative equity capital almost that high.

Then there’s Alitalia. Etihad bought a 49 percent stake in the Italian carrier for €560 million in early 2015 and has racked up investments in the company totaling €2.54 billion. For a while things were looking good: Mr. Hogan had learned from the Air Berlin disaster and scrutinized Alitalia more closely before making the financial commitment, said aviation analysts.

A rigorous restructuring plan was agreed to before Etihad made its investment. Alitalia managed to reduce its losses to €199 million last year from €580 million in 2015, and plans to return to profit in 2017. But that’s looking like wishful thinking. “Alitalia is deep in the red and will remain so for the time being,” said sources in Abu Dhabi. Italian media have reported that Alitalia is expected to make a loss of €400 million in 2016 and even a projected €500 million in 2017.


While those numbers have yet to be confirmed, Mr. Hogan recently vented his frustration about Alitalia, complaining in an interview with Italian newspaper “Il Corriere Della Sera” that the Italian government wasn’t keeping its promises. Etihad wants to use Milan’s Linate airport as a base for long-haul flights to the U.S. and the Middle East but it still hasn’t received the necessary government authorization. Meanwhile, Mr. Hogan had to look on while Irish budget carrier Ryanair expanded its market share in Italy to 50 percent from 20 percent since Etihad bought into Alitalia. “In most countries of the world national carriers are at least protected to a certain degree,” Mr. Hogan fumed.

According to sources in Abu Dhabi, Alitalia needs fresh money again, but Etihad is unwilling to provide it due to a lack of support from Rome. Mr. Hogan is even said to have threatened to pull out of Alitalia, a posture that has angered the Italian government, who are now rumored to be on the lookout for an alternate investor, industry sources said. Either way, Alitalia’s fate has looked less clear since the collapse of the Italian government earlier this month, when Italians rejected constitutional reform in a referendum.

While Etihad has declined to give an official statement addressing these issues, sources in the emirate said Mr. Hogan is finding it increasingly difficult to justify his European investments to the Abu Dhabi government. He has argued that the stakes give Etihad access to European customers, as well as synergies. To be sure, the investment has contributed some $1.4 billion to Etihad’s group revenue of just over $9 billion last year. But that figure isn’t particularly convincing when compared to the sizeable sums Etihad has been pumping into Air Berlin and Alitalia.

Mr. Hogan also argues that the investments have been a relatively cheap way to establish the Etihad brand in Europe. And yet the problem persists that the struggling partner airlines can’t live up to the premium service Etihad prides itself on. Etihad offers “The Residence” on its Airbus A380 fleet, a three-room suite complete with butler for $25,000 per flight. The relatively spartan furnishings and the standard service of Air Berlin, Alitalia or Air Serbia don’t fit with that image of luxury.

Air Berlin has also struggled with these two identities. Its chief executive, Stefan Pichler, recently wanted to start charging passengers for onboard snacks and drinks, but Mr. Hogan stopped him. The compromise they struck fails to meet market requirements, said analysts. Passengers in economy class must pay for food and drinks but the front seats have been fashioned into a makeshift business class with a free middle seat between  — to at least create the illusion of a premium service.

“To this day, Etihad has been unable to achieve a clear positioning of its brand. Its image ranges from premium services with the most luxury suite in the A380 to the basic turboprop planes of Swiss partner Darwin Airline,” said Mr. Wissel, the aviation consultant. And there doesn’t appear to be an end to the brand turbulence in sight.

Jens Koenen leads Handelsblatt’s coverage of the aviation and IT industry and is bureau chief of the Frankfurt office. Contact him at: koenen@handelsblatt.com

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