Sharing Codes for Growth

“Our strategic collaboration with Etihad Airways includes network integration, joint sales effort, sharing of resources, collaborated procurement and knowledge transfer. All of these have enabled us to leverage cost advantages and economies of scale to the eventual benefit of our guests, as well as our employees,” said Naresh Goyal,?Chairman of Jet Airways, at a media conference in Mumbai. “Together with Etihad Airways, we now operate over 4,300 international flights a month, more flights to/from India than any other airline and provide our guests with an unparalleled global and domestic network, with perhaps the best and most convenient connectivity.”

Strategic Investment

The strategic investment of Etihad Airways into Jet Airways is delivering strong results for both airlines across areas including network growth, revenue enhancement and operational and cost improvements. Since November 2013, when Etihad Airways’ 24 % investment in Jet Airways was finalised, the two airlines together now offer more flights to and from India than any other airline, and commands a 21 % share of the country’s booming international air travel market. ?The airlines now offer a combined total of 40,000 seats each way, each week between India and Abu Dhabi. This has resulted in more choice and better connectivity for guests travelling out and into India from across the world. Both Jet and Etihad have also aligned their schedules between Abu Dhabi and India to improve flight connectivity between their networks, substantially increasing choice for passengers on both airlines. In terms of the combined network, Jet Airways now has its 9W code on Etihad Airways flights to 33 destinations across the world, while Etihad Airways now places its EY code on 60 Jet Airways routes, mostly within India.

A bit of history

Before its equity deal with Jet Airways, Ethad had just 2 % of the international traffic out of India. Today, with Jet Airways, Etihad has 21 % of India’s booming international air travel market, and combined, they are the dominant carriers out of India. “Jet Airways is now our number one equity partner for revenue and passenger contribution on Etihad Airways. India is now Abu Dhabi’s number one source market for international visitors,” said James Hogan, Etihad Airways’ President and Chief Executive at that conference in Mumbai where Goyal spoke earlier. “Jet Airways is a perfect partner for us. It is a strong, recognisable brand in India, has an established network and infrastructure, a skilled workforce and a large customer base. We provided fresh capital and financial stability for Jet Airways, assisted global network growth, increased flight connectivity, and delivered efficiencies through activities including joint procurement and resource sharing” added Hogan.

The improved Jet Airways performance followed a number of other key strategic moves that had been taken, including the airline’s return to being a single brand with a full service offering, the standardization of its Boeing 737-800 fleet and a refreshing and reconfiguring of cabins on its Airbus A330 and Boeing 777 aircraft.

Circa 2008

In 2008, Etihad entered into a code-share agreement with Jet for connecting various cities in India to destinations in Europe. Under the code-share agreement, Jet had rights to codeshare flights between India and Abu Dhabi and between Abu Dhabi and Paris. The code-sharing was available from Chennai, Delhi, Hyderabad, Kochi, Kozhikode, Mumbai and Thiruvananthapuram in India. Jet is now in the process of expanding its code sharing agreement with Etihad to the Mumbai- Brussels- Newark route as well.

Simultaneously with the code-share agreement, Jet and Etihad also entered into an agreement to link their frequent flyers programs. Etihad has now agreed to invest US$ 150 million into Jet Privilege Private Limited (JetPrivilege), a wholly owned subsidiary of Jet. Post completion of this transaction, Etihad will hold 50.1 % of JetPrivilege with 49.9 % being held by Jet.

It may be recalled that in 2008, Jet Airways had also entered into an alliance with rival Kingfisher Airlines for code-sharing on domestic and international flights, collaboration on frequent-flyer program and sharing crew and ground handling equipment. Kingfisher was grounded a few years later due to non-payment of dues to creditors and its lenders.

Code sharing agreements have been one of the most important strategic tools used by airlines globally, and Etihad’s business strategy is also heavily reliant on such arrangements. It has been reported that as of July 2013, Etihad had 46 codeshare partners, such as Air Berlin, Air France, South African Airlines, Korean Air, amongst a host of other airlines across the globe with a total coverage of approximately 350 destinations. This network of codesharing arrangements has provided Etihad access to a large number of passengers in various countries. It is interesting to note that with a small fleet of 70 airplanes, compared to that of Emirates and Qatar Airways, Etihad has a larger network of destination than the other two Middle East airlines. The revenue generated by Etihad through codeshare agreements in the first two quarters of 2013 amounted to US$ 182 million, approximating 20% of its total revenues.

Jet Airways too has codeshare agreements with numerous airlines, in addition to Etihad. Some such code-sharing partners of Jet include leading airlines such as - Air France, Alitalia, Garuda Indonesia, KLM, Korean Air, Malaysia Airlines, Qantas, United Airlines among others.

Circa 2013

Etihad which has grown to be one of the major airlines has largely relied on an inorganic growth strategy. As compared to Emirates Airline, one of leading Eithad’s competitors which believes in organic growth by increasing its fleet size, Etihad has entered into alliances globally to increase its market share in the global airspace.

In 2013, Etihad Airways proposed to buy a stake in Jet following the Government of India's announcement in September 2012 that foreign airlines could take a stake of up to 49% in Indian carriers. India has a complex web of regulatory approvals that are required for a new company/ venture to commence aviation operations. These include no-objection certificates for scheduled or?non-scheduled operators; security clearance for board of directors of ground handling agencies and airline operators; approval for international traffic rights, etc. Being an established player in India, Jet has all these approvals, as a result of which Etihad will not have to wait for commencement of operations post the investment.

On 24 April 2013, Jet announced that it was ready to sell a 24% stake to Etihad. As part of the deal, there will be an overall cash infusion of $ 750 million in debt and equity. This infusion will help Jet cut its debt from $2.1 billion to $ 1.5 billion. The Jet-Etihad deal indeed became the first ever investment by a foreign airline to invest in an Indian airline.

Etihad’s strategic investment into Jet was also based on a very important consideration that it would have a first mover advantage. By moving first, it seems Etihad might be able to get a major share of the outbound passengers from India.

Circa 2015

Strategic alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. Here in the case of Jet, the initial years of strategic alliance between the airlines, later translated into strategic investment of one into another, which provided both entities with increased revenues by way of better distribution of each other’s service offerings and also easing off the pressure of debt for one of the players.

Many companies often do struggle to operate their alliances in the way they imagined it and many of these partnerships fail to reach their defined goals.

Notes:

1. Etihad is the national airline of the United Arab Emirates. It is a public joint stock company set up in July 2003 by the Royal (Amiri) Decree, and commenced its commercial operations in November 2003.?Etihad is primarily engaged in the business of international air transport of passengers. Additionally, Etihad is also engaged in maintenance and repair services, ground handling services, cargo transportation and travel management services, with Etihad Cargo and Etihad Holidays being its two main divisions.
2. Jet Airways is an airline based in Mumbai, India. As of February 2016, it is the second largest airline in India after IndiGo with a 21.2% passenger market share. It operates over 300 flights daily to 68 destinations worldwide from its main hub at Chhatrapati Shivaji International Airport and secondary hubs at Amsterdam Airport Schiphol, Chennai International Airport, Indira Gandhi International Airport, Kempegowda International Airport and Netaji Subhas Chandra Bose International Airport. On 28 December, 2004 Jet became a public limited company, and is now listed both on the National Stock Exchange of India and the Bombay Stock Exchange.
3. A codeshare agreement, sometimes simply codeshare, is an aviation business arrangement where two or more airlines share the same flight. Most of the major airlines today have code sharing partnerships with other airlines, and code sharing is a key feature of the major airline alliances. Typically, code-sharing agreements are also a part of the commercial agreements between airlines in the same airline alliances. Under a code sharing agreement, the airline that administrates the flight (the one holding the operational permissions, airport slots and planning/controlling the flight and responsible for the ground handling services) is commonly called the operating carrier.