Sun. Oct 2nd, 2022

After a painful four years of deep cost cuts and restructuring at Etihad Airways, CEO Tony Douglas finally has something to boast about. In a visit to New York this week to mark the launch of expanded service from the airline’s home base of Abu Dhabi to New York and Chicago with next-generation A350-1000 widebody jets that it started flying this spring, the voluble Englishman says his planes were packed to 94% of capacity in August as the release of a pent-up desire to travel has produced a “fire hydrant” of leisure bookings.

Etihad says it logged a record core operating profit for its first half of almost $296 million, breaking a streak of $7.8 billion in reported losses going back to 2016. Douglas says the rest of the year is shaping up well and he’s not worried about a slowdown of pandemic “revenge tourism” any time soon. “China’s going to open up again at some stage,” Douglas told Forbes. “That will make that kind of fire hydrant go off with a turbocharger behind it.”

With the mixed blessing of already having embarked on an overhaul before the pandemic forced virtually all airlines to do so, Etihad, which launched in 2003, has pulled back sharply from the initial ambitions of its owners, the emirate of Abu Dhabi, to create a world-leading airline akin to UAE neighbor Dubai’s Emirates. Etihad has shrunk from 29,000 employees in 2017 to 8,500 today, offloading airport support businesses to an Abu Dhabi sovereign wealth fund, and dialed back from a disparate array of 122 aircraft to 71 planes in active service, with two types — the fuel-efficient Boeing 787 and Airbus A350-1000 — making up the backbone of the fleet.

Douglas, who took over as CEO in 2018, has canceled or threatened to back out of much of two massive orders placed with Boeing and Airbus in 2013 for 143 jetliners that had a then-record total list value of $67 billion. He also retreated from money-losing partnerships with airlines around the globe and disastrous equity investments that produced billions in losses with the failure of carriers such as Air Berlin and India’s Jet Airways.

What’s left is what Douglas describes as a leaner, middle-size airline that can nimbly move its smaller fleet around opportunistically to meet seasonal demand, and that has pulled back from the trap of serving marquee destinations that were unprofitable for it much of the year, like San Francisco, Dallas and Edinburgh. This summer Etihad has launched temporary service from Abu Dhabi to vacation hotspots like the Greek islands of Mykonos and Santorini; Malaga, Spain; and Zanzibar.

“The network will drive the fleet rather than the fleet driving the network,” he says.

Etihad still shares the natural advantage that Emirates and Qatar have leveraged of a crossroads location to connect travelers from Asia to Europe and North America — their Persian Gulf hubs are within an eight-hour flight of two-thirds of the world population. Their competitiveness has been enhanced since March with U.S. and European airlines iced out from Russian airspace on many of the most efficient routes to Asia, including the Indian subcontinent. The Gulf airlines continue to fly through Russian skies.

That’s likely part of the reason that United Airlines is reportedly set to unveil a partnership with Emirates next week in which they will sell seats on each other’s flights, an arrangement known as codesharing, giving customers of both the ability to reach more far-flung places. Meanwhile American Airlines and Qatar Airways expanded their codeshare deal in June to 16 more countries.

The United-Emirates tie-up “could generate huge amounts of revenue for both, opening up new traffic streams and markets for both carriers,” Linus Bauer, a Dubai-based aviation consultant, told Forbes by email.

With Delta Air Lines the only major U.S. carrier without a Gulf partner, Douglas says Etihad would be open to linking up with the Atlanta-based airline. It already shares flights with JetBlue and American. “We’re not going back to a quasi-alliance, we tried that and failed,” says Douglas, but “we’d be delighted to talk to Delta.”

Delta didn’t respond to a request for comment.

The tie-ups come after American, United and Delta spent years trying to convince the U.S. government to take action over the oil-rich Gulf states’ subsidies for Emirates, Qatar and Etihad that they said amounted to $52 billion from 2004 to 2018, giving the airlines an unfair advantage on routes they operate into the U.S. – something the Gulf carriers denied.

Etihad alone received $17.5 billion in state funding from 2004 through 2014, according to a report from the U.S. carriers and labor unions based on an analysis of its financial statements. Etihad reported small net profits from 2011 through 2015, but the report asserted that was courtesy of regular government cash infusions that allowed the airline to paper over operating losses.

Through 2019, Abu Dhabi’s total investment in Etihad amounted to about $22 billion, the airline disclosed to potential investors in a bond offering, according to Bloomberg.

It’s unclear how much additional state support during the pandemic has underwritten Etihad’s restructuring efforts and contributed to its first-half core operating profit, but in 2021 Fitch Ratings said that its confidence that Abu Dhabi would continue to pump money into the airline was the main driver in a decision to maintain its ‘A’ debt rating. “This was demonstrated during the current pandemic with the state providing tangible support to prevent Etihad’s transformation plan being derailed,” Fitch analysts wrote.

An Etihad spokesman declined to discuss the extent of state funding, but he said that in 2021 the carrier received government reimbursement for Covid-related operational expenses such as testing and PPE that “was a fraction of what other airlines have received.”

Nonetheless, the airline appears to have made substantial progress toward financial sustainability. Bauer says its sharp cutbacks and more fuel-efficient fleet, coupled with lean management and better use of data, have generated productivity gains and cost savings.

“It is clearly visible that the years-long transformation effort is beginning to produce improved results, however, the airline can’t rest on its laurels yet,” he notes.

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