The Gulf carrier’s move to buy 49 per cent in the ailing Italian airline reflects aviation players’ continued focus on building cost efficiencies through alliances and acquisitions.
The recent deal wherein Abu Dhabi-based Etihad Airways, which has earned the sobriquet of ‘rescuer’ of ailing airlines within 10 years after coming into being, has agreed to buy 49 per cent in loss-making Italian carrier Alitalia by investing $751 million as part of a $2.35 billion turnaround plan, has stirred talks around a few themes that have defined the dynamics of the global aviation industry over the last couple of decades—alliances, joint ventures and consolidation.
Before deciphering the larger motifs that this transaction too points to, let us put the deal—which is seen as a win-win for the 68-year-old Alitalia that was rescued from bankruptcy and privatized in 2008, and its younger but agile Gulf-based counterpart—into perspective.
Cleary, the immediate beneficiary of the deal is Alitalia—the airline, which was once Italy’s flag-carrier, was about to run out of cash this summer just months after receiving a government-engineered bailout of $670.5 million. Sitting on accumulated losses worth $1.1 billion, it was in a desperate need of a lifeline, especially after recent talks with Air France-KLM Group for a rescue deal too came a cropper. Also, after bleeding profusely for years, it failed to tackle high labor costs and forge a strategy to fight off competition from low-cost carriers and high-speed trains that ate into earnings from a few profitable routes in Europe. Though not a quick-fix, the deal is expected to turn Alitalia profitable in 2017, albeit at the cost of 1,635 jobs.
For Etihad, which has spent around $1 billion over the past three years buying equity stakes in more than half a dozen struggling airlines in four continents, this is the most ambitious investment yet. Within 10 years since inception with Abu Dhabi government’s backing, it has expanded around the globe by partnering with peers from Australia to Ireland.
The deal will help Etihad expand its list of global destinations including those in Europe besides taking on two other Gulf-based rivals—Emirates and Qatar Airways.
A litany of challenges, including rising fuel prices, stiff competition and surging labor costs, has forced global aviation players to form a spate of alliances over the last couple of decades in their effort to stay floated.
From Star Alliance, which was formed in 1997 and went on to become the largest global airline partnership with 27 member carriers, to Oneworld, which has 15 airlines as partners, to SkyTeam (20 members), airlines have been targeting cost efficiencies by integrating airport operations including cargo loading by co-locating aircraft of alliance members in the same terminal at larger airports, pooling check-in, ground handling and airport lounge functions, clubbing IT and back-office support activities, making joint aircraft procurement, etc. For example, SkyTeam has implemented Sky Priority, a project to create procedural synergy across partner carriers at 800 airports.
The tremors the global economy felt after the 2008 crisis and the subsequent debt pile-up that shook many a European country revived the call for alliances and consolidation in the aviation space. Despite the revival of momentum since then in both developed and emerging economies, growth in demand continues to lag behind the increase in capacity for both passengers and cargo segments, forcing airlines to reach out to more passengers to shore up revenues. This has made acquisitions or management control through significant stake purchase the obvious choice for carriers that foresee long-term growth. Etihad’s deal with Alitalia, which is the eight equity partnership the Gulf carrier has forged over the last few years, clearly reflects this theme which is likely to find resonance from more airlines in the years to come.
The recent deal wherein Abu Dhabi-based Etihad Airways, which has earned the sobriquet of ‘rescuer’ of ailing airlines within 10 years after coming into being, has agreed to buy 49 per cent in loss-making Italian carrier Alitalia by investing $751 million as part of a $2.35 billion turnaround plan, has stirred talks around a few themes that have defined the dynamics of the global aviation industry over the last couple of decades—alliances, joint ventures and consolidation.
Before deciphering the larger motifs that this transaction too points to, let us put the deal—which is seen as a win-win for the 68-year-old Alitalia that was rescued from bankruptcy and privatized in 2008, and its younger but agile Gulf-based counterpart—into perspective.
Cleary, the immediate beneficiary of the deal is Alitalia—the airline, which was once Italy’s flag-carrier, was about to run out of cash this summer just months after receiving a government-engineered bailout of $670.5 million. Sitting on accumulated losses worth $1.1 billion, it was in a desperate need of a lifeline, especially after recent talks with Air France-KLM Group for a rescue deal too came a cropper. Also, after bleeding profusely for years, it failed to tackle high labor costs and forge a strategy to fight off competition from low-cost carriers and high-speed trains that ate into earnings from a few profitable routes in Europe. Though not a quick-fix, the deal is expected to turn Alitalia profitable in 2017, albeit at the cost of 1,635 jobs.
For Etihad, which has spent around $1 billion over the past three years buying equity stakes in more than half a dozen struggling airlines in four continents, this is the most ambitious investment yet. Within 10 years since inception with Abu Dhabi government’s backing, it has expanded around the globe by partnering with peers from Australia to Ireland.
The deal will help Etihad expand its list of global destinations including those in Europe besides taking on two other Gulf-based rivals—Emirates and Qatar Airways.
A litany of challenges, including rising fuel prices, stiff competition and surging labor costs, has forced global aviation players to form a spate of alliances over the last couple of decades in their effort to stay floated.
From Star Alliance, which was formed in 1997 and went on to become the largest global airline partnership with 27 member carriers, to Oneworld, which has 15 airlines as partners, to SkyTeam (20 members), airlines have been targeting cost efficiencies by integrating airport operations including cargo loading by co-locating aircraft of alliance members in the same terminal at larger airports, pooling check-in, ground handling and airport lounge functions, clubbing IT and back-office support activities, making joint aircraft procurement, etc. For example, SkyTeam has implemented Sky Priority, a project to create procedural synergy across partner carriers at 800 airports.
The tremors the global economy felt after the 2008 crisis and the subsequent debt pile-up that shook many a European country revived the call for alliances and consolidation in the aviation space. Despite the revival of momentum since then in both developed and emerging economies, growth in demand continues to lag behind the increase in capacity for both passengers and cargo segments, forcing airlines to reach out to more passengers to shore up revenues. This has made acquisitions or management control through significant stake purchase the obvious choice for carriers that foresee long-term growth. Etihad’s deal with Alitalia, which is the eight equity partnership the Gulf carrier has forged over the last few years, clearly reflects this theme which is likely to find resonance from more airlines in the years to come.
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