Handelsblatt Exclusive

Etihad To Ditch CEO James Hogan

  • Why it matters

    Why it matters

    With chief executive James Hogan on the way out, Etihad seems set to sell its stakes in loss-making European carriers and rethink strategy, as pressure grows on the Gulf airlines.

  • Facts


    • James Hogan, Etihad boss since 2006, has overseen billions in losses in recent years, pursuing a strategy of investing in smaller European carriers.
    • Air Berlin lost nearly €500 million this year, with Alitalia expected to lose €400 million in 2016 and €500 million in 2017.
    • Overall profitability for all Gulf carriers is radically down, with their aggregate net profit expected to reach just $300 million in 2016, compared to a predicted $900 million.
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Etihad Airways Chief Executive Officer James Hogan News Conference
Etihad boss James Hogan is on his way out. Source: Bloomberg

The United Arab Emirate’s national airline Etihad plans to remove James Hogan as its chief executive after a failed spree of acquisitions in Europe, multiple independent sources told Handelsblatt on condition of anonymity.

Mr. Hogan sought to expand Etihad’s presence in Europe, buying a 29-percent stake in Air Berlin, Germany’s second-largest airline, in 2011. The Gulf carrier then purchased Air Serbia and bought a stake in Alitalia three months later.

But Etihad’s European expansion has proven to be a misadventure. The Gulf airline has suffered €2.5 billion ($2.6 billion) in losses from its investments in Europe. Air Berlin alone was €477 million in the red in 2015.



Etihad is now planning to roll back its European businesses. The supervisory board chairman Ahmed Ali Al Sayegh will lead the effort. The airline is considering selling its European holdings at considerably under value, one insider told Handelsblatt.

Mr. Hogan took over in 2006 with ambitions to turn Etihad, the second-largest carrier of the United Arab Emirates after Emirates Airlines, into the world’s best airline. Now the 60-year-old Australian seems certain to be shown the door. Several sources independently suggested the long-time chief executive was informed earlier this week that his days were numbered. Etihad did not reply to Handelsblatt’s requests for comment on the reports.

Founded in 2003, the airline currently faces a major crisis. On the surface, its performance seems healthy enough: in 2015, the last year for which figures are available, revenues increased from $7.6 billion to $9.02 billion, and net profits rose from $73 million to $103 million. Wholly owned by the government of Abu Dhabi, the airline publishes no detailed results, although the limited figures released are compiled according to international standards, and audited by Deloitte.

However, information from sources close to both owners and company suggests that the published figures do not tell the full story, and the airline continues to lose money on its many investments.

Insiders suggest preparations are already under way for Etihad to quickly dispose of European airline stakes, including Air Berlin.

Recent events at Etihad can only really be explained by financial pressures. By all accounts, the company is about to embark on a radical restructuring, with the rapid growth of the last 13 years now a thing of the past. Cost-cutting is the new mantra: savings to be made include job losses, with 3,000 of the airline’s 26,000 employees set to go, affecting both ground staff and flight crews.

Job losses are just the beginning. Handelsblatt has learned that the company’s entire European investment strategy, masterminded by Mr. Hogan, is now radically open to question. In 2011, the airline took a 29.2 percent stake in Air Berlin, making Etihad its largest shareholder. In September 2013, Etihad bought into Air Serbia. Three months later, it was Alitalia’s turn. In 2015, Mr. Hogan expanded Etihad’s empire with the acquisition of 33.3 percent of Swiss regional carrier Darwin Airlines.

The goal of this so-called “equity airline alliance” was to accelerate Etihad’s access to the European market, one of the largest in the world. Organic growth was simply not fast enough for the airline’s ambitions. In addition, foreign airlines are substantially limited in most European markets, with tight restrictions on the number of airports and routes they can serve.

Holdings in a range of European airlines — so went the calculation — would bring substantially more passengers through the airline’s Abu Dhabi hub, connecting them with long-haul Etihad flights. “Even with an investment like Air Berlin, which is taking longer than expected to achieve sustainable profitability, we are achieving unbelievably high returns,” Mr. Hogan said in April of this year.

But in reality, Etihad’s largest European investments brought massive losses. In the last three years, Alitalia registered net losses totaling €1.3 billion. In 2015, Air Berlin showed a deficit of €477 million, and is on the verge of bankruptcy.

Just days ago, Etihad injected another €300 million, with the hurried purchase of half of Niki, Air Berlin’s Austrian subsidiary, a stake which now passes over into a joint venture with TUIfly. Air Serbia is one of the few bright spots for its parent company, finishing 2015 with net profits of €3.9 million, 44 percent up on the previous year.

Air Berlin alone has cost Etihad more than €1 billion; Alitalia added another €2.54 billion to the Gulf carrier’s costs. At first, the Italian airline seemed set to turn a corner, bucking the trend of Etihad’s European strategy: in 2015, it reduced losses from €580 million to €199 million, raising hopes of profitability by 2017. But according to information from Etihad sources, the Italian airline is back in the red. Italian media reports have suggested it will lose €400 million this year, and €500 million in 2017.

The losses outweigh any successes Etihad has enjoyed in Europe, said Gerald Wissel, from consultants Airborne Consulting. Part of the wider purpose of Etihad as a company was to secure the future of the United Arab Emirates by expanding its industrial and financial base beyond the oil industry, he points out.

Its larger UAE rival, Emirates, blazed a trail in achieving synergies for the oil-rich country. “With Emirates, the city of Dubai, the airport, and the airline were all marketed together, in order to strengthen tourism for the UAE,” Mr. Wissel said. However, he added, Air Berlin, Alitalia and Air Serbia did not help Etihad to achieve anything similar.

Now, it seems, Etihad’s board of directors is starting to agree with this view. With Mr. Hogan on his way out, a new strategy will be launched in January, according to a number of sources close to the board. Mr. Al Sayegh, long a critic of Mr. Hogan, will supervise the company’s new strategic direction in Europe.

One possibility being examined is a firesale of the company’s European assets. Insiders suggested preparations are already under way for a possible disposal of European airline stakes below their nominal value, including Air Berlin. Part of the airline will transfer to the TUIfly joint venture, of which Etihad will own 25 percent. What happens to the remaining Air Berlin holdings is an open question: sooner or later, it seems likely to be swallowed up by Lufthansa.

Mr. Hogan had already threatened to pull out of Italy, unwelcome news for the government in Rome. Sources within the airline industry suggest the Italian government is already in search of possible replacement investors. It is unclear what, if any, impact Italy’s recent change of government may have on this.

One way or another, Etihad seems determined to stop propping up failing European airlines with hundreds of millions of euros. But in public at least the company is saying little, although a spokesperson confirmed to the Bloomberg news agency that the firm would be reorganized and restructured: costs are to be cut, and productivity and revenues closely examined.

Etihad’s troubles form part of a broader crisis affecting all Gulf carriers, which seemed invincible until very recently, but now seem vulnerable. Emirates, the older and more established UAE airline, has also had to come to terms with growing difficulties and setbacks.

Net profits at Emirates in the first half of 2016 collapsed 75 percent to $214 million. Despite a 9 percent rise in passenger numbers, revenues fell slightly to $11.4 billion. The figures reveal that even Emirates has been hard hit by the airline industry’s ongoing price war.

“Increased competition and ongoing economic and political instability in many parts of the world have contributed to downward pressure on prices as well as slower demand,” was how Emirates chairman Ahmed bin Saeed Al Maktoum explained the airline’s poor results.

Along with the entire airline industry, the Gulf carriers from Abu Dhabi, Dubai, and Doha are squeezed by several simultaneous developments. First, there is currently massive overcapacity in air transportation, as airlines offer additional flights and routes in the ongoing battle for market share. As a result, capacity utilization is sinking, and with it, profitability.

In addition to overcapacity, demand has fallen, as more and more regions fall into political instability, reducing tourist traffic to many destinations. Third, low-cost carriers have begun to make serious inroads into long-haul traffic, with Norwegian in Europe and Jet Blue in the United States presenting a real threat to premium carriers. This development has been driven by low oil prices, which allow for radical undercutting strategies in the long-haul sector.

There is no improvement in sight, including in the Persian Gulf. In its latest market prognosis, IATA, the world air transportation organization, predicted aggregate net profit of around $300 million for all the Gulf airlines, considerably below the $900 million profit expected. At the same time, the Gulf airlines will probably expand capacity by around 10 percent in 2017, further increasing pressure on prices. The IATA also warns of increases in airport charges across the Gulf states, yet another drag on profits.

Etihad’s troubles form part of a broader crisis affecting all Gulf carriers. Emirates has also had to come to terms with growing difficulties and setbacks.

These developments form the background to rapid strategic rethinking in boardrooms across the region. Etihad is not alone in a radical re-evaluation: at Emirates headquarters in Dubai, old certainties are crumbling. The company is apparently now weighing up plans to found its own low-cost long-haul airline.

“More and more international network airlines are starting to move into the low-cost long-haul business,”  Tim Clark, president of Emirates, said at a recent industry event in Berlin. The outlook for 2017 was not great, he added, however, “we will continue to expand our business: we have a number of plans in the pipeline.”

As for Etihad, Mr. Wissel, the airline consultant, welcomed a strategic reappraisal by the firm. “Etihad’s position is unclear. On the one hand, they are a premium carrier. But on the other hand, there are a lot of weak airlines in the group. So a new direction offers a real chance for the airline.”


Sönke Iwersen leads Handelsblatt team of investigative reporters. Jens Koenen leads Handelsblatt’s coverage of the aviation and space industry. To contact the authors: iwersen@handelsblatt.com, koenen@handelsblatt.com

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