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Abu Dhabi-based Etihad Airways, the flag carrier of the United Arab Emirates, has posted its financial results for 2016…and it’s not pretty. The airline reported a huge loss in the amount of $1.87 billion.

It’s the first time that Etihad has reported losses since 2011; just two years ago, the airline was in the black with $103 million in profits. Last year’s dramatic loss in profits reveal the full extent of the pressures that Etihad and other Gulf Carriers are feeling at the moment. The carrier has placed part of the blame for these losses on the cost of $1.06 billion charge on aircraft, as well as lower market values and the early phase out of certain aircraft types from the Etihad fleet.

While there are a variety of political issues causing disruption for airlines in the Gulf region at the moment, (including the blockade of Qatar by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt), there are other, Etihad-specific factors that have contributed to the airline’s financial struggles.

Etihad Airways has invested in seven airlines, bringing them together to form a small alliance. Of the seven carriers, two are incredibly costly to Etihad — perennially struggling Alitalia and Air Berlin, which is just as fragile. Both airlines are built on decades of debt and have suffered huge losses. Alitalia is in arguably in the worst spot it’s been in for years, leading it to file for bankruptcy in May. Overall, Etihad’s investment in partner airlines is responsible for $808 million in losses for the carrier.

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With Etihad owning a 49% stake in Alitalia, the Gulf carrier was injecting a lot of cash that was essentially swallowed up by the mammoth debt and complexities of the Italian flag carrier. Despite Etihad’s help, Alitalia has continued its downward spiral, and will likely cease operations if a new buyer isn’t found for the airline by the the last few months of this year. It’s also worth noting that Etihad recently sold its stake in Darwin Airline, known as “Etihad Regional.” The small airline wasn’t bringing the return on investment Etihad had hoped for and as a result, the Gulf carrier has cut ties with it.

Etihad President and Group CEO James Hogan and CFO James Rigney left the airline on July 1, 2017. This represents a huge loss to the carrier, as Hogan and Rigney are credited with launching a successful “reimagined” plan to increase profits, maximize aircraft utilization and boost the brand’s profile through products like The Residence (which TPG experienced himself), an increase in frequencies and a new joint-venture partnership with Lufthansa (announced earlier this year).

The living room of the A380
The living room of the A380’s Residence.

While Hogan implemented a successful investment strategy to ensure Etihad was in the same league with Gulf neighbors Emirates and Qatar, the strategy he pursued with the seven airlines it invested in has proven to be very costly, as mentioned earlier. Plus, the carrier has faced a slowdown in the worldwide cargo market, adding to the large loss.

The political crisis in the Gulf hasn’t helped matters, either. The United Arab Emirates, home to Etihad, has cut ties with Qatar, meaning Qatar Airways can no longer fly to the UAE. It’s not just Qatar that’s going to feel the pinch, however. Etihad operated 37 flights weekly to Doha (DOH), and as recently as last year acknowledged that Qatar is a tremendously important market for the airline.

With the loss of Doha market, Etihad isn’t just losing Qatari flyers, but also a large group of passengers who travel from DOH to Abu Dhabi (AUH) and then onward to one of a great variety of long-haul destinations Etihad serves. Instead, these passengers will likely fly with Qatar Airways — meaning Etihad’s loss is Qatar’s gain.

The Trump administration’s introduction of the carry-on electronics ban (which has since been lifted) has negatively impacted the airline. Passengers were unable to take electronic devices larger than a smartphone into the cabin, meaning many business travelers chose to fly on different airlines to avoid the potential lack of productivity on the long flight from the UAE to the US.

In an effort to reduce costs, Etihad implemented various cuts including the discontinuation of complimentary chauffeur service globally for first and business-class passengers (with the exception of its hub in Abu Dhabi). In addition to this, the airline the Gulf carrier recently shared that it will be introducing a new “Neighbour-Free Seat” option in economy, where passengers can bid to have up to three empty seats next to them. The airline likely wouldn’t introduce such an option if it wasn’t having trouble filling up the cabins of its planes.

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Bottom Line

The commercial aviation industry as a whole isn’t the strongest currently, but Etihad has a host of problems that are unique. Its partnership with troubled Alitalia has been a drag on its bottom line, and contributed significantly to the staggering loss it recorded in 2016. Can the airline return to profit? Yes — but many factors unique (so far) to 2017 make that prospect unlikely for this year.

For passengers, the cost-cutting measures are relatively minor, but evident. On a recent trip with Etihad, the menu options were noticeably smaller, the bottled water brand had been downgraded and, of course, it has eliminated the chauffeur service for first and business-class passengers. While they may sound like small small changes, they’re part of a larger strategy that will (hopefully) aid in returning the carrier to profit.

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