Analaysis: Etihad reports full year 2012 profit; equity investments beneficial for both Etihad and partners

Etihad Airways Boeing 777-300ER — Image Credit Etihad Airways

Abu Dhabi based Eithad Airways reported its second straight year of profitability, with calendar year 2012 witnessing a net profit of US $42 million (versus $14 million), on revenues of $4.8 billion (up from $4.1 billion in 2011). Full year EBITDAR (earnings before interest, taxes, depreciation, amortization, and rents) hit $753 million while EBIT (earnings before interest and taxes) was $170 million.

Strong expansion helped fuel Etihad’s successful performance, even as they dealt with local headwinds including continued demand softness in the Middle East and North Africa due to political instability, and a decrease in Iranian demand due to runaway hyperinflation causing decreased purchase power. Moreover, global business travel demand registered weak growth overall thanks especially to a declining European market. However, Etihad (and its so-called Middle East Big 3 [MEB3] rivals Qatar Airways and Emirates) persevered through these headwinds and continued on a path of robust expansion.

For the year, passenger traffic as measured by revenue passenger kilometers (RPKs) grew 23% to 48 billion year over year, while capacity as measured in available seat kilometers (ASKs) grew 20% to 61 billion. These contributed to a 2.4 percentage point increase in load factor from 75.8% to 78.2%. The carrier added 6 aircraft to its fleet which now includes 70 aircraft serving a network of 86 passenger and cargo destinations. Revenue passengers carried crossed the 10 million passengers mark for the first time, 10.3 million to be exact.

Freight loads, as measured in metric tons, recorded a robust 19% growth to 367,837; bucking the global trend of declining cargo volumes. The carrier also reported a decline in non-fuel cost per available seat kilometer (CASK – the most reliable indicator of an airline’s cost discipline) of more than 5%. While fuel prices remained volatile throughout the year, Eithad used a strong program of fuel hedging (more than 80% of total use) to offset that volatility.

Said Etihad President and CEO James Hogan about the quarterly results:

We understand how to manage costs without compromising our innovative product and outstanding service experience….We have delivered improved net profit, the second consecutive year we have been in the black, a remarkable achievement given the youth, ambitious growth and ongoing investment made by this airline in a challenging global economic environment… And we have met our mandate of contributing to the economic development of Abu Dhabi, growing its aviation sector and building trade and tourism connections across the globe.

Etihad CEO James Hogan (left) and CFO James Rigney (right) – Image Credit  Etihad Airways

An important contributor to Eithad’s success in 2012 was its quasi-alliance of partner airlines, all of whom Etihad has invested in. This so called ‘equity alliance’ is comprised of Etihad investments in Air Seychelles (40% stake), airberlin (29.21%), Virgin Australia (9%) and Aer Lingus (2.987%).

According to Etihad, these investments and the resultant code shares have already played a vital role in Eithad’s finances. Equity and code share partners transferred more than 1.2 million passengers onto the Etihad route network, with airberlin in particular transferring 300,000 passengers, which drove $130 million in joint revenue synergies.

The model in which Eithad’s equity partners transfer certain long haul traffic flows through Abu Dhabi to Etihad while focusing on regional opportunities and long haul traffic flows not viably served via Abu Dhabi appears to have paid dividends. Aer Lingus just reported record quarterly and annual profits, while airberlin appears to have stabilized financially and recently launched a trans-Atlantic expansion. Similarly, Virgin Australia has displayed a renewed focus on the Australian domestic, trans-Tasman, Asian, and trans-Pacific markets where it is challenging a weakened Qantas  for lucrative business travelers and frequent flyers.

All of this takes on especial importance when one considers the increased likelihood that Etihad will take an equity stake in India’s largest private carrier Jet Airways under the new foreign direct investment (FDI) regime that allows foreign airlines to invest in the Indian airline market. While the vagaries of such an investment can be analyzed once the deal is finalized and officially announced.
Hogan had this to say about a potential investment in Jet Airways. “We are doing our due diligence (on Jet Airways) in the next week. We will present it to our board and take it from there.”

He also explained a visit with senior ministers in India “We wanted to understand the new rules under the Foreign Direct Investment (FDI) scheme. We also wanted to understand the issues that have impacted Indian domestic aviation and how these are being addressed in the coming years.”

Suffice to say that the experience of other carriers shows that an Eithad investment would not necessarily be detrimental to Jet’s financial health as many in the Indian media and aviation community fear. Rather, a hybrid model for Jet Airways’ international network could be developed to build off of the synergies offered by Etihad.

Kudos to Etihad for a very successful 2012 and for its incredible development. In 2006, Etihad was a $750 million a year business serving primarily regional traffic. Today, just six years later, it has become a global powerhouse; a $5 billion dollar a year powerhouse that serves intercontinental traffic flows. And with each passing year of profitability Etihad helps prove wrong the skeptics who doubted the viability of the MEB3 (and Turkish) business model.