Etihad Financial Results – A Different Perspective

On March 14, 2019 Etihad declared the financial results for the year 2018. This was the first full year of operations since Etihad initiated a five year transformation program in 2017. Also, the first full year of the post-Hogan era.

Passenger revenues were flat, however, both total passengers carried and aircraft deployed had dropped. The reported losses were $1.28 billion, lower than $1.52 billion reported in 2016, but still substantial.

Clearly, the losses are unsustainable. However, after closely looking at the results and the commentary surrounding them, I have come to the conclusion that Etihad is on the right track.

Here is why.

Financials

A reduction in losses by $200 million doesn’t seem all that interesting. However, it needs to be put in perspective. 2018 was marred by a steep rise in fuel prices. While Etihad doesn’t disclose its fuel costs, we know how its peers have fared

• Emirates reported a fuel cost increase of 37% for first 6 months of 2018
• AirArabia reported an increase of about 20% for full year 2018
• Jet Airways had an increase of 43% in fuel costs

If you assume Etihad’s fuel cost increased by 25%-30%, it implies high fuel costs in 2018 led to a about $300 million increase in losses.

In other words, if the fuel prices were similar in 2017 and 2018, Etihad’s losses could have been reduced by about $500 million. This would have meant cutting the losses by one-third which is impressive. Here is another proof for this – Etihad’s total costs in 2018 reduced by more than $400 million despite increase in fuel costs.

Another impressive achievement is the 4% increase in yields. While higher fuel costs must have led to increase in fares, it is noteworthy that 2018 was a year of very high competition. Not just from Emirates, Qatar Airways and Turkish Airlines but also from several other Middle-Eastern carriers who deployed more capacity on the ‘east-west’ routes.

Commentary

The commentary accompanying the results make for a very interesting read.

This is what James Hogan said in 2014

“Our business model, which focuses on organic network growth, codeshare partnerships and minority equity investments in other airlines, continued to yield positive results in 2014. We enter 2015 as a stronger, more dynamic airline that will continue to enhance the growth of Abu Dhabi as one of the world’s emerging aviation hubs.”

And in 2015 (the last time Etihad reported profit)

“For an investment smaller than the cost of three new aircraft, we have been able to build our global network, attract five million new customers and $1.4 billion of revenues, and share massive cost synergies. That’s smart business.”

The previous comment was just 12 months before Etihad reported a massive loss of $1.9 billion. However, the 2018 commentary is very different.

“We are committed to developing commercially beneficial partnerships at home and overseas”

“As a major enabler of commerce and tourism to and from Abu Dhabi, we are intrinsically linked to the continued success of the emirate.”

There is a clear change in strategy here – from inorganic customer acquisition to enabler of Abu Dhabi’s economy. This, in conjunction with the other steps taken by Abu Dhabi government to increase their non-oil economy share, augurs well for Etihad.

Verdict

The jury is still out on Etihad. However, 2018 was an important first step towards transforming the airline.