Etihad Airways is little more than eight years old. Five years ago, its new management led by Australian James Hogan set out an ambitious plan: to be in profit by 2012. Today that plan has become a reality. Joanna Andrews caught up with the man behind the numbers, Etihad Airways CFO James Rigney...
Etihad Airways began operations in 2003. Today, it is one of the world's fastest growing airlines. The airline recently announced its first-ever annual profit. Etihad reported net profit of $14 million in 2011 - beating its own goal to break even. The United Arab Emirates flag carrier said revenues were up 36 per cent last year to $4.1 billion.
"This is an historic day for Etihad Airways and an amazing achievement for an airline just eight years old," said James Hogan, president and chief executive officer of Etihad.
"Five years ago we said we would be profitable by 2011. Despite the global financial crisis, continued high oil prices, regional instability and natural disasters, we have delivered," he added.
Passenger traffic was up 17 per cent from the previous year, with an average seat factor of 75.8 per cent. A total of 8.3 million passengers flew with the airline.
RAPID EXPANSION PLAN
Etihad is on a rapid expansion path. The airline recently announced the launch of flights to its first West African destination - Lagos. The inaugural flight is slated for July 1, subject to regulation. It will mark its 83rd destination in its global network. It's not the only new destination this year, Etihad started flying to Tripoli in January, Shanghai in February, and will add Nairobi to its flight path in April.
The airline recently increased its stake in Germany's second-largest airline Airberlin to 29.21 per cent, with an investment of EUR 72.9 million ($95 million), and will provide financing for the purchase of new aircraft. The deal gives it access to Europe's biggest travel market.
It also snapped up a 40 per cent stake in Air Seychelles in a deal worth $20 million - giving it access to the African travel market.
BME sat down with James Rigney, the airline's Chief Financial Officer.
Etihad Airways, a relatively new player in the aviation space, looks like it has found its place in the market. What is the secret to its success?
We have an eight year old airline, the fastest growing airline in commercial aviation history. As a management team, we have been at the management table for a little over five years, with James Hogan coming in as CEO, I came in with James Hogan. The big advantage that we have is a clean sheet of paper, we are a non-legacy airline and quite frankly for us as a management team this is a once in a lifetime opportunity, to build an airline basically from scratch.
How significant was the move to profitability and how does it change the tempo of the company going forward?
When we came in to manage at the end of 2006 we built a business plan. The mandate given to us from our board was to create a safe airline, a 'best in class airline' and a commercially viable airline with sustainable profitability. We have hit our budget numbers each year. Our plan was to break even in 2010; the global financial crisis took that off course, even though we had a strong second half in 2010, we had momentum going into 2011 despite a few challenges, especially in the first half, to achieve profitability in 2011 which is what our plan set, so we are back on track with our plan.
You defied the odds, despite the global financial crisis and continued high oil prices. What has been the greatest challenge to navigate through?
Over the last five years we have had everything from war, natural disasters, a number of geopolitical events, commodity prices fluctuating, exchange rates, growing competition. If you look at 2011 we started the year with the icing of airports in Europe into the Arab Spring and natural disasters, the biggest one impacting us was what happened in Japan so that obviously had a negative impact on our passenger sales in the first half. However passenger sales rebounded quite strongly, we had a record third quarter and that momentum continued into the fourth quarter.
At the same time we've had high oil prices, if you look at oil prices today they are about $119 dollars a barrel of Brent. We embarked in early 2007 on a three year rolling hedge programme for oil where we hedge up to 80 per cent 12 months out, the second year - up to 50 per cent and the third year - up to 25 per cent. In 2011 we had a number of positions that we had taken in 2009 and 2010. So our fuel expense was hedged at 80 per cent in 2011, which saved us a significant amount of money.
We also embarked on an aggressive cost reduction programme where we benchmarked with other airlines, we identified opportunities, we selected opportunities that we would go after and then we monitored the results. We have take out 22 per cent of our non-fuel cost base since 2008.
How much have the cost controls saved you?
They saved us $187 million year on year in 2011 compared to 2010, but if we look at our unit cost base that we had in 2008 and we overlay that to our unit cost base in 2011 we have saved around $600 million.
Your management culture is said to be that of a low-cost airline. Can you explain this ethos?
We are a non legacy carrier, so we are not burdened with 50 year old scope agreements, we are non unionized and we have a young and active workforce, so we are very flexible. If we need to make a change like the challenges we had in 2011, like pressure on our passenger sales and fuel we can adapt very, very quickly, and we have learned a few lessons from the low-cost carriers, who have historically moved a lot faster than the legacy carriers.
How hard is it to balance growth while managing financial risk and ushering in regulation?
Airline management tends to be very robust and we are used to facing a number of challenges. We have created an airline from scratch, into a $5 billion revenue company in 2012, so significant growth year on year. At the same time, the challenges of bringing about a very efficient cost base. What we have been able to move into very quickly is scale.
What are the main challenges being CFO of such a fast-growing airline?
There is a lot of momentum at Etihad, our revenue base in 2010 was $3 billion, $4 billion in 2011 and will be $5 billion in 2012, so that's significant growth year on year. We have real momentum at Etihad in most things that we do, so as a CFO it is important for me to run alongside the business and not retard that momentum - to keep the business running and running fast. However, sometimes things do need to slow and business does need to catch its breath, especially when we hit a crisis like oil is high, Arab Spring; where we just need to just slow up and take stock of what we need to do to mitigate those financial risks.
You currently have 66 planes in your fleet, and have orders for 100 more. Tell me about your expansion plans?
We have organic growth where we have a network plan, we have a large fleet order, and we take delivery of those aircraft on a fairly systematic basis, so that's our organic growth. What we embarked upon was as a very important part of our strategy; our code share relationships. We had two code share partners in 2006, we have 35 today, in fact 15 per cent of the company's revenue is from our code share partners, and then we have growth
through acquisition.
You recently snapped up stakes in other airlines. Is this the main catalyst for growth going forward?
Recently we concluded the Airberlin acquisition, 29 per cent investment, and 40 per cent investment in Air Seychelles. Now if you look at Airberlin, overnight we have direct access into the biggest travel market in Europe, over 70 million people. We have access to Airberlin's 35 million passengers, in fact Airberlin carry more passengers than British Airways. We have access to Airberlin's 160 destinations, we have access to Airberlin's distribution systems, both physical and online.
Tell me about your decision to boost your presences in Africa?
Africa is very important and you will see Etihad continue its growth into Africa over the next 10 years. Leisure destinations are also very important to Etihad, so what we are able to do with Air Seychelles is to provide our customers, and potential customers, with access to the Seychelles.
What other areas of growth are you eyeing?
There are three types of growth. There's the organic, there is code share and via acquisitions, so if the right opportunity presents itself we will look at that opportunity. If it makes sense and we are able to complete the deal with like-minded management where we are invited in and it makes strategic, financial and commercial sense to Etihad we would look very strongly at those types of proposals.
Where do you expect to see Etihad in five to ten years from now?
Just like we did at the end of 2006, we knew what the airline would look like in 2011 in terms of product, service, network, fleet and financial performance. We also have a plan where we do know what the airline looks like in five, and ten years from now, managing a few crises along the way. So, we do have a vision for the future. What you will see with Etihad is it will be a very good, mid-size airline where we will peak at 150 aircraft in our own right, over 100 destinations and over 20,000 staff.
What do you think Etihad has done for Abu Dhabi?
Etihad is a commercial business, but it is also a flying ambassador for Abu Dhabi. What we have is a business that has got a very good product and service, which is recognised through international awards.
In addition, we have a strong rotation in the banking community; we undertake financial road shows and in fact we are just about to undertake a financial road show in New York and London. We do this on an annual basis, but the numbers have swelled each year. There is more interest in Etihad this year because we are now a profitable business, and because of the recent acquisitions in Airberlin and in Air Seychelles.
We have raised over the last five years externally $5 billion to finance our aircraft. We have raised that money through 41 financial institutions, with very diverse forms of finance. At the same time, included in our road shows is our commodity and derivative hedging. We are hedged this year at 76 per cent of fuel. We have active hedges on fuel with 24 financial institutions across the world.
We also have strong hedging of foreign exchange given that we are an international business. Sixty per cent of our revenue is in non-US equivalent currency. Twenty-five per cent of our cost base is in non-US pegged currency so we do pay significant imbalance which means that we have financial exposure to foreign currency.
What benefits have you seen from this?
We hedge currency to provide us with certainty - and the same with fuel. Fuel is our largest expense, and most volatile expense and we can't control the commodity price of fuel, but what we can do is mitigate that volatility and bring certainty. It is not about beating the markets, it is about a management team building certainty into our business and that is why we hedge fuel.
How important is diversification to you?
When we joined the business at the end of 2006, we had a handful of banks in our lending portfolio (mainly local and regional banks) knowing that we were going to place a large fleet order and we would be in the financial markets every year for the next decade.
We had a deliberate strategy where we went out to the marketplace because Etihad wasn't very well known back in 2007. We took the Etihad and the Abu Dhabi story out to the financial markets and we targeted international banks and regions. That's why we have a strong lending portfolio from the UK and Europe, from America but we also targeted Japan and China and diverse forms of finance, and that is why we have 41 financial institutions in our lending portfolio today.
Did you ever imagine when you joined that the airline that it would look like it does today?
It is quite remarkable. When you have a look at where the airline is today and we dust off the plan that we put together as a management team and we worked very closely with our board. The airline looks very similar to what that plan said; in terms of safety, our safety reports, our on-time performance, our technical dispatch reliability. We set ourselves targets in the main indicators and then financially. Our financial results, our treasury programmes, the raising of finance, our staff numbers look very similar to the plan set five years ago.
© Banker Middle East 2012
