MIAMI — In a rare, and unprecedented move for one of the Big Three Gulf carriers, Abu Dhabi-based Etihad Airways is cancelling an international, long-haul route in March 2017 once it ends its nonstop Abu Dhabi – São Paulo route. Etihad has been flying to São Paulo since June 2013.
Etihad has never dropped an ultra-long haul route from its network. Though rival carriers Qatar Airways and Emirates Airline are much larger —and faster growing— network carriers, the Big Three from the Middle East have been characterized far more with injecting large volumes of seats into global markets using the latest and greatest Boeing and Airbus aircraft. In other words, taking a disciplined approached to capacity management has usually taken a back seat to market share growth, but São Paulo may be an indication that the attitude is changing.
São Paulo has typically been served by Etihad’s oldest aircraft, the Airbus A340
Etihad launched São Paulo in June 2013 utilizing an Airbus A340-500 seating approximately 240 seats. Since then, the carrier has also sent the Airbus A340-600 (~290 seats), the 777-300ER (~330 seats), the 777-200LR (225 seats) and a Jet Airways-leased 777-300ER (seating 346 seats). It returned to a A340-600 in October 2016. This has likely created some product confusion among Etihad customers as the varying aircraft types feature blended generations of hardware offered on-board.
While Etihad’s nine active Airbus A340s (two -500s and seven -600s) are less than a decade old, the operating costs of a four-Engined aircraft on ultra long-haul routes is becoming increasingly difficult to justify. Etihad does, however, have over 150 aircraft on order to join its widebody fleet in the future. The vast majority of these orders will be comprised of the Airbus A350 (-900 and -1000), the 787 (-9 and -10), and the 777 (-8 and -9). Several of these deliveries, namely additional 787s and its first A350, are scheduled to arrive in January 2017.
It is unclear whether Etihad had intentions of deploying one of its newer aircraft to São Paulo, which offered better cost allocations to maintain a presence in Latin America. Etihad is currently unaligned to any of the major Big Three Global marketing alliances, but did establish a codeshare partnership with Avianca Brasil in June 2016. Etihad also codeshares with Brazilian low-cost carrier Gol as well as SkyTeam’s Aerolineas Argentinas.
Etihad already had intentions of slowing growth, but dropping São Paulo was not part of the original plan
Etihad pursues a different growth strategy versus its major rivals, Emirates and Qatar: it is, as previously mentioned, unaligned with any of the major global carriers, but it has been receptive to codeshare and interline agreements with many of them, including carriers such as Air France/KLM, Air Canada and American Airlines, despite being founding members of the SkyTeam, Star Alliance and oneworld, respectively, the often times some of the most vocal opponents of growth from the ME3 in their hometown nations.
Moreover, Etihad has invested heavily in acquiring partial ownership stakes in State-owned, largely inefficient national carriers, such as Air Seychelles, Alitalia and Air Serbia, while also gaining non-controlling stakes in struggling airlines such as Jet Airways, Virgin Australia and airberlin. Together, this group of airlines, along with Aer Lingus and Etihad Regional, in some part or whole, comprise Etihad Airways Partners.
But what started out as Etihad providing managerial and operational guidance (namely crew resources, IT, joint procurement, aircraft and on-board training) eventually grew to a macro financing venture through joint bond financing. Over the years, Etihad has invested over $1 billion in its equity partners – and that figure is likely to grow.
It is conceivable that Etihad needs to turn its attention away from loss-making long-haul routes and improve the financial situations among its partner carriers, particularly in light of the public spending cuts announced by Abu Dhabi in late 2015.
The downturn in oil prices have similarly impacted other Gulf carriers, but Etihad has fewer routes, and large investments outside of its domain, to spread the risk as easily as Qatar and Emirates can (although Dubai is less dependent on oil compared to Abu Dhabi, Emirates CEO Tim Clark remarked in a September 2016 Skift interview that falling oil prices had led to a huge downturn in demand for high-fare seats on Emirates).
Although load factor data on Etihad’s São Paulo route is (which is also flown by Qatar and Emirates) is unavailable, it is unclear whether Etihad had intentions of cancelling São Paulo as part of its slowdown in growth initiative. Although several global airlines have reduced capacity to Brazil in recent months, the economy has showed signs of recovery.
Despite the rarity of a ME3 dropping a route, Qatar and Emirates continue to expand
Even as Etihad contracts, somewhat, Qatar and Emirates have intentions to grow their networks. Earlier this year, Emirates linked Dubai nonstop to Auckland, creating the world’s longest route, although Qatar will be overtaking that right in December 2016 when it launches nonstop service from Doha to Auckland. Emirates is also expanding in the U.S. with new service to Fort Lauderdale while Qatar intends to open up Las Vegas, both in 2017.
Meanwhile, Etihad has not grown its U.S. operations in over two years, since launching nonstop service to Dallas/Ft. Worth in December 2014. It will, however, grow its frequencies to Dallas starting in February 2017.
Etihad is now at a crossroads to show the world that the equity partner model is viable, although doubt looms over the continued beleaguered status of carriers like Alitalia and aerberlin, or rudderless ones such as Virgin Australia. More disconcertingly, these three carriers represent some of Etihad’s biggest intra-carrier investments in recent years.
If taking plans away from its own organic growth provides the stability that it needs to nurture its alliance partners, then Etihad is taking the right steps. Nevertheless, withdrawing from a crucial market such as São Paulo will not be forgotten easily.