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Abu Dhabi: Expanding in aviation

Etihad Airways , the UAE's national airline, is pushing forward with an expansion policy that should prepare it to compete in the increasingly competitive regional aviation environment.

Founded in 2003, Etihad - which is backed by one of Abu Dhabi's sovereign wealth funds - has built up a fleet of more than 65 aircraft, with an additional 100 on order, including many wide-body, long-haul planes. While working to expand its own operations, Etihad has also recently acquired strategic holdings in other regional and global carriers to boost passenger growth figures via code sharing.

In December 2011, Etihad took a major stake in German carrier Air Berlin, lifting its existing holding in the airline from just under 3% to 29.2%. The airline spent $95m for the increased share in Europe's sixth-largest passenger line. More recently, in May Etihad acquired 3% of the shares in Irish carrier Aer Lingus, and in January the airline purchased 40% of Air Seychelles.

The airline's latest venture saw it spend some $40m to take a 4.99% slice of Virgin Australia in early June, giving it a direct stake in one of its busiest markets. According to James Hogan, the CEO of Etihad , the airline is looking to develop its stake in Virgin Australia further with some suggestions it would like to increase its holding to 10% or above. In order to do so, however, it would need to obtain approval from Australia's Foreign Investment Review Board.

"Our intention is to build up our stake but we need to do it step by step, as we need to get regulatory approval," Hogan said on June 6. "The Australian market is a very strong market for us."

Though the airline is raising its profile in Australia, Hogan said it is not looking to increase the number of flights into that country at the moment. Etihad is already well served on Australian routes, with 11 services into Sydney, seven into Melbourne and three into Brisbane. Etihad also has plans to make the Brisbane route daily, as well as fly into Perth, but that this would happen in the medium to long term. Instead, the carrier's plans to expand into the South American and African markets have become a priority.

"It is the other parts of the world that we are focusing our capacity on," Hogan told the Australian Associated Press in mid-June.

Etihad 's direct buying into the Australian market has not been welcomed by everyone, however, with the move prompting concerns for the future of local flag carrier Qantas, which has been posting major losses and losing customers to Virgin and other international carriers over the past few years. Etihad has made it clear it is not seeking to take over Virgin Australia. Officials have ruled out a play for the shares of the airline's two other major shareholders, Virgin Group, which has a 26% stake, or Air New Zealand, which holds 20%.

Such are Etihad 's ambitions to be a major player on the world stage that the airline's name seems to crop up whenever another carrier comes on the market. On June 7, Etihad had to issue a statement that, contrary to reports carried in the Dutch media, it was not in talks to buy a stake in Air France-KLM, Europe's largest airline group.

However, the possibility of a tie-up between the two airlines has not been completely ruled out, with an Air France-KLM official later saying that the Franco-Dutch airline was seeking a commercial partnership with Etihad , but not a capital deal.

Like all other airlines, Etihad has to contend with rising costs and the strain put on the sector by the economic slowdown in Europe and elsewhere. However, despite this, the carrier was able to post gross revenue of just under $1bn for the first quarter of 2012, with officials confident it will top $5bn for 2012, marking profitability for the second year running.

Etihad is also facing stiff competition. Qatar Airways and Emirates Airlines, among others, are investing heavily in new aircraft and looking to break into new long-haul and regional markets. Additionally, there are a number low-cost carriers springing up in the Middle East and beyond.

But with an expanding route network of more than 80 destinations, Etihad is better placed than many to weather any setbacks the sector may experience in the short to medium term. By extending its reach into new markets, the carrier has given itself access to solid revenue streams, thus helping it to be better placed for a long-term future in the industry.

© Oxford Business Group 2012

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