‘Etihad Alliance’ under scrutiny

August 25, 2014 4:21 pm

By Philip P. Merrell

Etihad’s equity alliance receives a double blow as questions are raised about the airline’s acquisition strategy in Serbia and Switzerland.

Earlier this month, Etihad’s chief, James Hogan, was in Rome celebrating the much-anticipated 49 per cent stake takeover of Alitalia. Having expanded its equity alliance to eight airlines, Hogan insisted that there would be no further acquisitions in 2014, and that the focus would now turn to consolidating the existing partnerships.

However, following months of public pressure, last Friday (August 15) Serbia’s government finally released the contracts it signed with Etihad in August 2013, in relation to the formation of Air Serbia.

Previously, it was understood that Serbia and Etihad would invest $40 million and $100m, respectively, into newly formed Air Serbia. In return, the UAE’s national carrier would receive a 49 per cent stake in the firm, as well as management rights for the next five years.

However, the contracts reveal that, in reality, Serbia has assumed a far heavier financial commitment and that in 2013 alone, it has pledged $90m, when compared with a $40m loan from Etihad. Namely, as an extension of the ageing Jat Airways, Air Serbia has inherited a $233m debt, which Jat had accumulated; a debt that Etihad is exempt from. Moreover, as part of the deal, Serbia must also provide $93.2m for settling staff layoffs, debt restructuring and outstanding fees that Jat had towards Belgrade’s airport, as well as its pre-deal assets, which are valued at approximately $200m.

Furthermore, the government has pledged $82m worth of subsidies to the new company, which include offering one terminal in Belgrade’s airport exclusively to Air Serbia, as well as providing the airline with discounted fuel from state-owned NIS Petrol.

Former Minister of Finance, Sasa Radulovic, explained that “the deal is utterly unacceptable for Serbia, who is contributing over $500m to the new company and receiving 51 per cent, whereas Etihad is contributing $40m and a repayable loan of $60m, and receiving 49 per cent.”

Nonetheless, proponents of the deal have argued that Etihad’s reputation and experience would encourage growth in Air Serbia, who is set to make a profit this year for the first time in its 87-year history (under Jat Airways). A source within Serbia’s Ministry of Transport told AMEInfo: “as a government, we have proved incompetent in running our own airline, which is why we now need Etihad to come in and take control for a while”.

It is precisely the issue of control that has landed Etihad into further scrutiny regarding its stake in Swiss-based Darwin Airline.

In November 2013, Etihad completed a 33 per cent takeover of the airline, rebranding it into Etihad Regional. However, under Swiss law, a Swiss or EU national must own majority shares, as well control the airline. While Etihad has not acquired a majority stake, the Federal Office of Civil Aviation (FOCA) has argued that, as the largest shareholder, Etihad has effectively assumed control and ordered it to rework the agreement.

In a press release on Sunday, James Hogan welcomed the review, saying that “we are comfortable with FOCA’s review and understand and support the need for there to be absolute clarity that Etihad Airways does not, cannot and will not exercise control over Darwin Airline.” He also reiterated that “Etihad Regional was, and will continue to be, majority owned by Swiss shareholders and operated by Swiss management.”

Having only just completed the dragged negotiations surrounding Alitalia, few expected Etihad would face criticisms from other, previous deals. One thing seems certain however; 2014 will indeed be about consolidating the alliance.