Who’s next James?

Etihad Airway’s invasion of Europe spread into new territory last month when the chief executive of the Abu Dhabi airline signed on for 49% of Italy’s Alitalia. Etihad’s latest European investment has irked some established European airlines, but that won’t stop the gulf carrier’s expansion.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

September 1st 2014

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It has been a busy few months for Etihad Airways chief executive, James Hogan. Commuting between Abu Dhabi, Italy and India, he pinned down a 49% holding in Italy’s struggling Alitalia in early August before he flew on to Mumbai to underscore his commitment to turning around India’s Jet Airways, another of his poorly performing investments. Read More »

The Italian airline will be the eighth carrier in Etihad’s global equity alliance and its fifth in Europe.

Etihad Airways CEO, James Hogan, and Alitalia boss, Gabriele Del Torchio, sign on the dotted line

The price of the Rome-headquartered carrier was close to $2.4 billion, but Etihad will not totally fund the acquisition. Hogan said his airline would pay $518.2 million for its 49% equity, $150.4 million for 75% of Alitalia’s frequent flyer program and $80.2 million for five London Heathrow slot pairs that will be leased back to the Italian carrier.

The remaining funds for the 49% purchase will be made up of $401.2 million from existing Alitalia shareholders, $799.6 million of financial restructuring of short and medium term debt from financial institutions and existing bank shareholders and $401 million in new loan facilities supported by Italian financial institutions. Alitalia is more than a $1 billion in debt. It has not announced its results for 2013. It lost $375 million in 2012.

“Overnight, the financial position of Alitalia will change,” Hogan told a press conference in Rome after the deal was agreed. “There’s no quick fix. We have a three-year plan to bring Alitalia back to profit by 2017.”

The rescue and resuscitation exercise includes a rebrand. The Alitalia name will remain, but the livery will be refreshed. Unprofitable short-haul routes will be terminated while the long-haul network will be increased from multiple Italian cities to Abu Dhabi where they will connect with Etihad’s global network.

Both Hogan and Alitalia chief, Gabriele Del Torchio, were confident the deal will gain European Commission (EC) approval. Pressure from big European airlines had already provoked the EC into a review of ownership and control conditions, including Etihad’s European ventures and the 49% ownership of Virgin Atlantic by Delta Airlines. Opponents of these investments questioned where “effective control” lies, despite the fact that Etihad and Delta are minority shareholders in the European carriers.

However, local operators are right to be worried. Etihad has plenty of muscle in the European market. It holds nearly 30% of Germany’s Airberlin as well as equity in Aer Lingus and Air Serbia. It also is awaiting approval for its part purchase of Swiss carrier, Etihad Regional, formerly Darwin Airline.

Switzerland’s Federal Office of Civil Aviation (FOCA) has given the carrier until to September 30 to satisfy the agency that the airline effectively remains in the control of Swiss or European Union citizens. Etihad took a 33.3% holding in Darwin Airline, now rebranded as Etihad Regional, in November 2013, but the Abu Dhabi airline has not completed the transaction. Last month, FOCA announced it had examined the deal and had concluded the “co-operation mechanisms” between Etihad and Darwin would lead to Etihad having effective control of Darwin. The September deadline is intended to give the parties time to bring their agreement into line with Swiss regulations.

Hogan said documents had been finalised for the EC review and he was confident of the EC’s approval. “We respect EU requirements,” he said.

Del Torchio said: “If they (rival European airlines) are worried, it means this partnership is good. We are in line with EU regulations. Control is with EU shareholders. There is no doubt.”

Hogan said the airline will stay in the hands of Alitalia management, but he declined to comment specifically on the possibility of Etihad engineered senior management changes or Etihad director numbers. “Certainly, there will be changes. “We’re coming back with the human resources team and the Alitalia team at the end of September,” he said.

Etihad sees Alitalia as a strategic, long-term commercial investment. “On completion, we are committed, with the other shareholders, to building a reinvigorated Alitalia as a competitive, sustainable and profitable business that can operate successfully in the global air travel market,” said Hogan.

“We believe in Alitalia. It is great brand with enormous potential. With the right level of capitalization and a strong, strategic business plan, we have confidence the airline can be turned around and repositioned as a premium global airline once again.”

Within days of his Italian adventure, Hogan was in Mumbai, where Jet Airways chairman, Naresh Goyal, announced the demise of its low-cost subsidiary, Jet Konnect. Etihad has paid $330 million for 24% of the privately owned international airline. By the end of this year, Jet Konnect will fly under the Jet brand with business and economy sections. The change came only weeks after Jet and Etihad outlined a major turnaround strategy intended to return the carrier to profitability by 2017. Jet has not made a profit since 2007 and has debts of $1.8 billion.

In its last financial year, ended March 31, losses at Jet widened to $675.8 million from $127.6 million a year earlier. It reported a loss of $35.6 million in its first quarter, to June 30.

The recovery plan contains cost-cuts, route-sharing with Etihad and restructuring of debt,” explained Jet’s new chief executive designate, Cramer Ball. The Australian, a former Etihad executive and chief executive of another Etihad partner, Air Seychelles, before he moved to India earlier this year, said: “The game plan is in place, it’s now about delivery.

“It’s a three-year plan: 2015 we will reduce losses, 2016 we will consolidate and 2017 we’ll have profitability.” He said Jet was profitable on international routes, which contribute 43% of revenues, a figure he projected would rise to 63% by 2015.

Hogan said the problem was the Indian company’s debt. In the first quarter, Jet said it had brought down debt by 21%.“