Abu Dhabi's Etihad Airways PJSC is attempting a feat that many airlines have tried and none has managed to achieve: building a global travel network through investments in foreign carriers.
Etihad has snapped up stakes in seven airlines from Australia to Ireland over the past two years. It is currently assessing whether to invest in Italy's troubled Alitalia SpA, according to people familiar with the talks. Etihad's goal is to quickly boost traffic and cut costs on its own network without buying hundreds of planes and expanding globally, company officials say.
European airlines including British Airways and Scandinavia's SAS AB tried similar expansions in the 1990s but later exited their unsuccessful investments. Swissair gobbled up European airlines, then collapsed under the weight of its deals and was liquidated in 2001. Last year, Singapore Airlines Ltd. sold its 49% stake in Britain's Virgin Atlantic Airways Ltd. at a loss after a 14-year partnership.
Etihad Chief Executive James Hogan insists his approach is different. "What we are doing is investing in airlines with strong management," Mr. Hogan said. "We expect them to run their own business model, and we will achieve the top-line and bottom-line benefits."
Those investments cross the spectrum. Etihad recently took a 24% stake in Jet Airways (India) Ltd. one of the biggest airlines in the Indian market, and in 2011 bought 29.2% of Air Berlin Inc. Germany's No. 2 airline.
It also holds 3% of Aer Lingus Group PLC, the national airline of Ireland. Last month it bought 33.3% of Swiss regional carrier Darwin Airline and announced plans to rebrand it as Etihad Regional, the first time it has put its name on an investment. At least two of its investments, in Air Seychelles and Air Serbia, were initiated by the Abu Dhabi government, company officials say.
Thanks in part to its airline investments, state-owned Etihad carried 8.6 million passengers through September this year, up from 7.6 million in the same period last year. In the third quarter, partnerships provided 23% of passenger revenue, or $247 million, Etihad said. Its revenue rose to $4.8 billion last year, from $2.5 billion in 2008. It doesn't release profit figures or audited financial results.
The newest and smallest of the Persian Gulf's three global players, Etihad is playing catch-up. Emirates Airline of Dubai has nearly 20 years on Etihad and is larger. Qatar Airways is also bigger.
Mr. Hogan's acquisitions differentiate Etihad's expansion strategy from those of Emirates, which is building the world's largest fleet of giant jetliners and aims to serve almost every large city around the globe, and Qatar Airways, which is linking to foreign carriers through membership in the Oneworld airline marketing alliance.
"This is a smarter way in my opinion of building the network," Mr. Hogan said. He described the method as "working with like-minded carriers, covering countries and regions where we would never have the depth to cover their domestic network."
Mr. Hogan said one of the big benefits of Etihad's approach is greater scale in joint purchasing of planes and spare parts, training and maintenance services. With Air Berlin, for example, Mr. Hogan said Etihad has made back its $95 million investment through savings and increased passenger traffic.
"We do a lot together in procurement," said Aer Lingus Chief Executive Christoph Mueller, who said cooperation is expanding from basics to engines, planes and information-technology systems.
John McCullogh, who ran the Oneworld alliance for eight years until 2011, said Etihad's alliance has "a strong chance of working" because the carriers involved "can cherry pick what actually works and ignore the rest." Mr. McCullough, now a senior principal at aviation investment bank Seabury Group, said his alliance days involved "countless wasted hours trying to bring simple concepts of cooperation to fruition" when members' priorities varied. The benefit of aligned interests among CEOs in Etihad's group "cannot be underestimated," he said.
Others are less optimistic. Hubert Horan, who worked at Swissair before it collapsed and previously in other airline alliances, said he sees "no coherent pattern" in Etihad's investments.
From afar, he said, "it's unclear if Etihad is pursuing a similar expand-through-deals strategy, or whether these are all opportunistic moves to solve short-term tactical issues" like entering a market.
Mr. Hogan countered that Swissair's strategy "was totally flawed" and rejects the comparison. "They tried to pan-Europeanize the management group," while Etihad is focused on intercontinental operations, he said. Limiting Etihad's deals to minority stakes also reduces its financial exposure, which Swissair failed to do, he added.
Skeptics note that Etihad's strategy follows Abu Dhabi's political priorities. The oil-rich desert state aims to diversify its economy away from hydrocarbons into sectors such as manufacturing, aviation, tourism and agriculture. Etihad is a promotional vehicle and occasionally a foreign policy tool.
After Abu Dhabi contributed more than $100 million in aid in the Seychelles, Etihad bought a 40% stake in the island nation's carrier for $20 million. In Serbia, Abu Dhabi also has invested in a range of businesses as part of a Western-backed effort to integrate the once war-torn country in the global economy. In October, Etihad bought 49% of Air Serbia for $40 million.
Etihad executives said government officials introduced the airlines but Mr. Hogan says his strategy is commercial.
"If an opportunity like Seychelles or Serbia appears, and we're asked to look at it, we look at it," said Mr. Hogan. "Unless it makes sense commercially, we don't step into it."
Qantas woe's just keep on coming.