How Etihad Gambled Away A Cool $4 billion

News : Travel

Etihad needs no introduction, it is a wonderful airline that has invested heavily in its premium product. The company is the United Arab Emirates flag carrier and owned by the government of Abu Dhabi.

The tiny emirate of Abu Dhabi is rich, very rich, more than a trillion dollars are parked in a government-owned wealth fund alone, the Abu Dhabi Investment Authority.

Etihad developed quickly after its foundation in 2003 and passengers loved the new fleet, good service and low fares.

In the late 2000s, the airline saw breakneck growth and neither the Abu Dhabi airport nor fleet acquisition or recruiting could keep pace. So why not use the ‘Midas touch‘ to go shopping for cheap airlines globally?

The CEO James Hogan (who came from Gulf Airways) went to work and got meetings with the world’s worst airlines ready to drop a few hundred million at a time.

1. Air Berlin

Air Berlin was always the ‘looser airline’ in Germany but was still providing an excuse for Lufthansa to not run a full monopoly at most German airports.

That sounded like a great opportunity to get a piece of the lucrative German market to Asia (that Etihad was already serving but it wasn’t able to expand due to the German government’s rules).

$255 USD did not sound expensive for a German airline that served almost off of Central and Western Europe.

Predictably Air Berlin stayed their lazy self and never slimmed down to size. After a few years of losing money, Etihad could have walked away but instead dropped another $255 million USD by buying the (rather worthless) loyalty program.

Air Berlin kept running its course without feeling the need to actually run a profitable business (instead they kept dialing Etihad for more money).

In 2017 the part was finally over and the ‘first victim of the Etihad investments’ was ready to go out of business.

A loss of $500 USD isn’t a big deal for Etihad (it may have never accounted any profits for codeshare passengers to Air Berlin anyways) but the German consortium sued the airline for another cool $2 billion USD. Proceedings are ongoing (and they will likely settle).

2. Jet Airways

India has been a rough marketplace for any airline to survive long enough (just ask the former market leader Kingfisher) but Etihad banked heavily on luxury segment leader Jet Airways. Jet Airways had it all – a popular domestic network, great service, and a great reputation.

Etihad could not help themselves and bought $379 million USD in shares outright and the loyalty program a few years later for another $150 million USD.

Half a billion dollars should buy you a small Indian city but for Etihad, the investment was worth a big fat zero in 2019. Jet Airways just declared bankruptcy after a long struggle in 2018.

Again you can’t shake that feeling that Jet Airways did not find enough ways to reduce costs and India is a booming aviation market with very price-sensitive consumers (not surprisingly).

3. AlItalia

Alitalia is famous for its losses, corruption, and staying power. The airline hasn’t made money in decades but refuses to die. Etihad was intrigued.

$500 USD went into a 49% stake of Alitalia and $150 million USD later to buy the MilleMiglia program.

Alitalia kept running out of money – but manages to keep flying even after it declared bankruptcy in 2018.

You can’t shake the feeling that outsiders bear the losses but insiders in Alitalia distribute the gains from the business.

Alitalia will likely survive in some form but the shareholders will likely we wiped out in another ‘restructuring’. Another big zero for Etihad.

4. Air Serbia

Air Serbia serves a tiny market that should never be worth the attention of massive Etihad. But Etihad was flush with cash and $40 million USD went to Serbia in 2013.

Air Serbia is finally turning a profit in 2017 and may actually survive the Etihad ‘kiss of death’.

5. Air Seychelles

Air Seychelles is another tiny airline that should never have gotten any attention. Etihad itself runs a small A320 to Mahe and can barely fill it.

It got $25 million USD in 2012 – expanded quickly and burned through all the money.

In 2018 it finally dropped all the money-losing routes and may eke out a small profit.

6. Virgin Australia

Virgin Australia is still around – that’s the good news. Etihad owns 515 million shares for $0.18 AUD each. That’s quite a penny stock!

Virgin Australia is struggling against local ‘quasi-monopoly’ Qantas but has turned a profit recently.

7. Etihad

It would not be unfair to describe Etihad investments as disastrous. Most industry insiders never believed they can make money and would be better off installing a codeshare agreement (which they did with plenty more airlines). A codeshare agreement is not free but can be done under $5 million USD for most partners with minimal maintenance costs.

However, Etihad operation itself manages to lose a cool $1 billion USD every year (even with industry veteran Peter Baumgartner) or more (with a revenue of just six billion). So maybe the investments have done not much worse than this rather awful standard?

Let’s keep that in perspective – the UAE produces about 2.9 million at an average price of $70 USD per barrel this is worth $74 billion USD from ‘dead dinosaurs’ with minimal production costs. Loosing a few billion dollars isn’t a big deal – is it?

About the Author:
Torsten Jacobi is a serial entrepreneur and founder of Mighty Travels and Mighty Travels Premium. Mighty Travels Premium finds all the world’s mistake fares and hotel mistake rates. Try it out with a 30 day FREE trial subscription.

Disclosure: Posts may be sponsored by the proprietor or brand being appraised. All opinions remain our own & are in no way influenced.