Etihad Airways To Introduce New Ecomony Service

GROWING COMPETITION

Etihad Airways will reconfigure two aircraft to have a seat capacity of 162 passengers on its A320 aircraft and increase of 42 seats on existing capacity. It is an interesting move for Etihad which has postioned itself as a premium carrier, and is largely a move focused around competing on routes with the growing numbers of low cost carriers in the Middle East market. The move to an all-economy configuration is reflective of the previous innovations of current CEO James Hogan who established a similar low cost brand with Gulf Air, named Gulf Traveller in 2003 with the aim of competing in low yielding markets with low cost competitors.

With Etihad's largest competitor, Emirates, having created its own low cost operator in the shape of FlyDubai and carriers such as Air Arabia in Sharjah, Nas Air in Saudi Arabia and Jazeera Airways in Kuwait growing their market share, the launch of an all economy Etihad product will mean that it is able to compete in low yielding but high capacity markets, particularly the Visit Friends and Relatives and ethnic markets of the sub continent.

Etihad recently went head to head with Air Arabia Egypt on the Abu Dhabi to Alexandria Egypt sector, and for Etihad it will be difficult to compete in this market, where front end traffic will be at a premium and Air Arabia will no doubt drive down yield. With Etihad planning to extend its all economy fleet to ten A320 aircraft, it will be able to and compete effectively in these low yielding markets which have a high proportion of O+D traffic. Emirates' own low cost subsidiary, FlyDubai serves twenty destinations from Dubai to destinations in the Middle East, North Africa and the sub continent, it would be likely that Etihad would employ a similar network strategy. FlyDubai carried nearly 200,000 passengers between May 2009 and 2010 and has allowed Emirates to concentrate its mainline fleet on higher yielding markets.

WHERE WILL ETIHAD FLY?

It is clear that there are a number of markets that require connectivity but have no premium demand on the route. Secondary Indian markets, the Egyptian markets and possibly some Turkish markets may be ideal for this operation. The range of the A320 aircraft can be pushed to four to five hours radius, opening up a lot of markets that could bolster the Abu Dhabi hub but do not demand the five to ten business class passengers to make the route viable.

Etihad has publicly stated that markets such as Alexandria, Colombo, Damascus, Doha, Thiruvananthapuram and Calcutta could all be markets for the new service.

India will be of particular interest to Etihad. Between May 2009 and 2010, IATA BSP data shows that over 13 million O+D passengers flew between India and the Middle East and the market continues to grow, largely fuelled by Indian workers based in the Middle East and VFR traffic. Even during a tough economic climate this market has grown. Between May 2007 and 2008 the total O+D passenger number was 11.4 million and 12 million between May 2008 and 2009. Etihad currently operates 45 weekly flights from its Abu Dhabi hub to seven destinations in India, however according to IATA BSP data, Etihad has just 2% of the traffic from the Middle East to India.

With the average one-way yield between India and the Middle East a relatively low 164USD (one-way) Etihad may well look to the Indian market to place more all economy capacity. Its Indian services currently consist of;

Source Flightbase 14-20 September 2010

As Abu Dhabi continues to grow as a destination, there is increasing demand for cheap labour which will be largely filled with workers from the sub-continent.

The introduction of the all economy jets is a sensible move assuming that the cost structure of the operation can afford the degradation in yields that such an operation brings. There may be an implication on the integrity of the brand and the impact on routes where the premium traffic will not be able to gain access to a premium class product. However the carrier is not making the same mistake as Gulf Traveller creating a new brand and therefore brand confusion but instead is providing extra economy seats in markets where there is little need for a business class product.

The all economy product is a clear gap in the market between the three class connecting widebody model of Etihad's neighbours and the low cost non connecting point to point model. For this new venture to work it will be a case of getting the yield management aligned with the cost base of providing the service.