Interview with Adel Ali Group CEO Air Arabia and Tony Douglas, CEO Etihad at ATM 2022

Good morning, ladies and gentlemen. Welcome to the Arabian Travel Market 2022 aviation session with myself, John Strickland. It's great to see you all and great to be back here after three years doing this event in the flesh, as opposed to the virtual events of the last two years. The pandemic is not behind us, but airlines are looking ahead, and we're talking today about airlines evolving for the future. We've got two great speakers from two major performing airlines here in the Gulf. I'll invite them to the stage: Tony Douglas, CEO of Etihad Group, and Adel Ali, Group CEO of Air Arabia.

We've had the challenge of COVID going on. I want to run through with each of you the background of your airlines against that challenge, what you've been doing during and since. There's overlapping business between your two companies which we'll touch on, and we'll look at some of the challenges we're all facing. Adel, let's kick off with you. Studying your financial results for the last year, they look remarkable — not just delivering a profit for the year, but each quarter within the year was profitable. Tell us about the last two years: how have you managed to keep the company going and deliver this level of profitability?

So when you say tidy it up and make it more efficient — you're an efficient low-cost airline, so what else could you do? You changed the approach on network alone, I would think.

In terms of network development, you've launched about 44 new routes out of five hubs. But another challenge is being based in different countries — governments have been far from consistent. I spoke to your CEO in Morocco during the last year, and Morocco was closed down completely for periods. Restrictions have been different elsewhere. Do you think lessons have been learned? Are governments going to be better prepared to work together if we face something like this again?

I notice you were quoted saying in an interview that many of the routes you fly are ones that others aren't interested in, but you've made them work. Tell us about that philosophy.

That would be a backwards step, especially when the UAE, as you both know, is open-sky favorable. I did a recorded interview with Akbar Al Baker a couple of weeks ago, and his biggest frustration was the lack of liberalization worldwide. That would be a backward step.

Tony, I'll touch on that in a few minutes. Fleet-wise, Adel, you've stuck with the Airbus family. You've now got around 60 aircraft. The last time I saw you, you hadn't yet taken delivery of A321neo LRs, but now you've got about six. How are they going? Have they made a big difference, and are you able to exploit what they offer in terms of range?

That order of 120 aircraft — how much is expansion and how much is renewal? You've stayed relatively stable in fleet size for years, so this almost doubles your fleet. Will you be three times bigger, or will some be replacements?

A big step forward. Would you ever consider looking at the A220? That aircraft seems to be really coming into its own — it was a regional jet but has become more than that. I've noticed a number of airlines putting in twin orders for the A320 family and the A220 family. Do you see scope to top up with the A220 for routes where you don't quite need the larger A320?

Interesting. I'm going to come to the joint venture in a moment, but quickly — you've already touched on the two new ventures announced in the last few months: one in Armenia named Fly Arna, and in Pakistan, Fly Jinnah. Tell us more about those concepts. Are they still on track to launch in the next few months? Are they different in terms of partners and the approach you'll take?

And the markets are quite different. I don't know so much about Armenia, but about half the Armenians in the world are elsewhere, so I guess there's the immediate VFR opportunity.

Pakistan is a massive population with a massive expat population and growing trade, but in aviation has perhaps been slower than India to grow. India has seen a proliferation of airlines including LCCs. Pakistan hasn't had that until now, so perhaps this is the beginning of a similar flourishing of the market there.

Thanks, Adel. Now turning to the joint relationship between the two of you in the airline business. Air Arabia Abu Dhabi has been up and running since July 2020 — it is a joint venture. Tell me about how that came about. It would have seemed unlikely that a network airline like Etihad would work with a primarily point-to-point LCC like yourselves. Adel, perhaps some closing words on this, then I'll come to Tony.

First of all, it's really good being able to do something as normal as this again. I didn't expect to see as many people here on day two, the week after Eid, and it's yet another reflection that there is huge pent-up demand to get back to the normality of travel. In terms of Air Arabia Abu Dhabi, my dear friend on my right and I had a plotting session at the Abu Dhabi Grand Prix a number of years ago. Off the back of that, we shook hands and saw a clear opportunity to bring Air Arabia's model — with its obsessional focus on detail, safety, and cost — as an exciting product offering to travelers flowing in and out of Abu Dhabi, and to present another option to connect on our global network. The ability to buy a ticket on Etihad in New York, fly to Abu Dhabi, and connect onwards with Air Arabia Abu Dhabi, or vice versa, is something we saw great value in. Year one was exceptional, even as we were coming out of the pandemic. In our opinion, Air Arabia is the standout model within the region because of its excellence in everything it does — and the numbers don't lie. These days when I need a loan, I don't go to the bank; I go to my friend here because he's making that much money. I joke, of course. But the serious point is we were heavily engaged in a transformation process starting in 2017 — an acknowledgement that we had become overstretched and needed open-heart surgery on our balance sheet to get back to a sustainable commercial model. Whilst our business models might seem like polar opposites, there's actually more in common than not. For us too, big is not necessarily beautiful — what you can commercially sustain from a profitability point of view is the name of the game. I'd humbly say we've learned an awful lot more from working with Air Arabia than they've ever learned from us. This has been a marriage made in heaven.

Fantastic. The airline is expanding — how many aircraft are in the actual operation now?

I saw quite a bit of route expansion, including to your home town so to speak, coming on the network fairly soon — Bahrain and a number of Indian destinations.

Many people outside the region aren't aware that Dubai has built up a big point-to-point market over the years — it's not all about connections. Abu Dhabi is doing the same because there's a lot to offer. On that point, there's another airline that's arrived in Abu Dhabi — Wizz Air. When that was announced, I was a bit confused about the ownership. Tony, can you give me some background? There's an interest by Abu Dhabi as a country in Wizz Air — it's a different partnership. Does it work with you, or is it a standalone operation? Is it competitive?

There are so many places we're now looking at connecting to that wouldn't normally have been in Etihad's network. Given our historical cost base, it would have been very difficult to make any of those work. Air Arabia Abu Dhabi extends connectivity in and out of Abu Dhabi and gives much greater choice. In year one, it was fully profitable — probably the only AOC in the region where that claim could truly be made in year one. That's testimony to the discipline I referred to. This is strategic about getting greater connectivity, and not just through traffic but point-to-point is absolutely key for Abu Dhabi's strategy. Abu Dhabi could do with not just Air Arabia Abu Dhabi or Wizz Air, but arguably a third or fourth airline. Africa is hugely underserved currently, and with likely growth projections over the next decade, there'll be opportunity to expand further. Wizz Air sits under a different ownership and has no co-chair connection with Etihad, so they operate completely independently from Air Arabia Abu Dhabi and Etihad.

That's the way I see it. Especially being based in Europe, I see Wizz Air and Ryanair or EasyJet competing every day, but there's a massive market for all of them. You and Ryanair compete, especially in Morocco. Wizz Air even flew into Abu Dhabi and Dubai before this venture was set up, bringing people from their markets. It seems like a pie that can grow for all of you. Tony, you joined Etihad — was it 2018? We've seen a real shift in approach: Etihad was on a big expansion trail with shareholdings and equity alliances with airlines around the world, some of which were losing money significantly. That's changed radically. Tell us more about the journey — you were starting to slim down dramatically even before COVID hit. With hindsight, it looks like that was fortuitous.

Etihad is 18 years of age, so relatively young. In our earlier teenage years, we made a few mistakes — Adel and I will openly fess up, we probably did. Etihad pursued a strategy of accelerated growth with a quasi-alliance component — the likes of Alitalia, Air Berlin, and others. The aircraft orders placed off the back of growth assumptions couldn't be supported by the market, and the balance sheet could no longer be serviced. It was open-heart surgery on the balance sheet — a radical restructuring, a five-year plan. There was no quick fix. It was back to basics: creating an airline where the fleet is driven by the network, not the other way around, and the cost base keeps pace with the operating model. By the end of 2019, we were nine to 12 months ahead of plan. I was almost thinking, what could possibly go wrong? Then of course everything went wrong. But there were perversely some gifts from the pandemic. We had momentum — our best-ever Q1 performance was in 2020, just as the pandemic started. So we had the choice to hunker down and complain, or elect to accelerate, which we went with. We made difficult decisions on fleet reduction and the size of the Etihad family, resulting in a cost base far more in line with sustaining a profitable airline. Q1's performance for Etihad was $272.2 million EBITDA — a proxy for free cash flow. We had never made money before in 18 years. The ball is now hitting the back of the net. We're not getting carried away — this is still work in progress. But the market has come back like a fire hydrant going off. Yields are still reasonably good, and cargo yields have held up. We now have a cost base that works. Load factors yesterday were 84% network-wide, almost back to 2019 levels for the first four months of this year.

Certainly not getting carried away by any stretch of imagination. What you talked to Tony about, one of the things he did was simplify the fleet. I think I was reading recently quoted somewhere, I was saying it was an aircraft spotter's delight because he had pretty well almost one of every type of aircraft. But in terms of the larger widebodies, the A380s, the Boeing 777s, the 330s or 340s are largely gone. Just on the 380, I mean it's a beautiful aircraft of course from a passenger point of view. Are you flying any? Are they all still grounded? Because I know Qatar, they said they were gone but they're now flying a few for a variety of reasons. Etihad of course, or rather Emirates, still using a large number. Are you open-minded about them at all?

So I think probably a couple of things. The 380 is an incredible guest proposition. Certainly the configuration on the 10 that we've got, 72 business class upstairs, an incredible first class product, is something we always used to get rave reviews about. But 30 years plus ago I started my love affair with commercial aviation and I used to be the manufacturing director of the BAE Systems regional aircraft and we used to build the 146 RJ, which is a lovely four-engined 100-seat or thereabouts regional jet. Way back even then I learned the hard way that anything with more than two engines will never commercially sustain itself in this day and age. And I think the punchline is almost as blunt as that in one sense. Now I would never say never because back to ticket yield and cost base, if the relationship of yield versus cost allows us to bring any of those 380s back into the game we would be delighted to present them to our guests. However, unless that equation is balanced off, we're not a registered charity. We won't be offering a product that might be delightful for the guest, but as my departed father always used to say to me when I was very young as part of my commercial learning from him: anybody can sell ten dollars for five, and it's true. Anybody can sell ten dollars for five. The trick is selling ten dollars for eleven. And unless that equation therefore gets itself back to a point where we can commercially sustain it, you know it would be a ten dollar for five type of example. But inshallah, you know there might be a route to get some of those machines back into the sky and we'd be delighted if we could do that.

Okay, but primarily we're focusing now long haul on the 787 Dreamliner. Got a large fleet of those and more to come, and just recently taken delivery of the first A350. I mean these seem to be the aircraft of the future in terms of efficiency. They're twins obviously, all the other issues about lighter materials, engine efficiency. I guess you're happy that you are in that position having them as a mainstay of the long-haul fleet?

Yeah, for sure John. Look, the two widebody aircraft of choice I think everybody would acknowledge is 787 and A350. Both largely composite aero structures, so benefit with the performance and the weight reduction that comes from that. Both operating in our case GenX on the 787 and XWB on the 350. Next generation power with the avionics and controls that go with it. So we're talking about machines that are 21 and 25 percent more fuel efficient than the kind of predecessor equivalent scale of machines. So when you look at it like that, that for us is definitely the stable of choice and is therefore now the mainstay of our fleet going forward. And perhaps as a call out, humbly if I may, for anybody here who's not been onto the Etihad stand, and this is not a direct plug albeit it might sound like one, if you go and take a look on the Etihad stand what you will see is the all-new interior that's on that A350 and we think it's an absolute winner. All the feedback we've had from guests supports that statement. But our new business class, I think when you go and take a look at it on our stand, you would probably conclude is better than most people's first. It's therefore probably more applicable to describe it as a business plus. Private doors, the personal space that comes with it. But go take a look at our new economy product as well. So we think we've lifted the bar. So it's not just about becoming low-cost base by diluting product. I think what we're talking about, and we've learnt a lot of this through Air Arabia, is it's low cost by being effective and efficient and making sure that in no way do you ever dilute the quality of the product. And back to the example I've just given, I think you'll probably conclude when you go and take a look at it, if anything we've significantly dialed it up.

And on the 777, Tony, the existing 777-300s are gone at the moment, but you've got orders for the 777X or I think the 777-9. Are you still going to go ahead with those? Because that's a much bigger aircraft, that's almost 747 size but much more efficiency. Do you still plan to go ahead with that a few years down the line?

Okay, so we sold our 777s back in 2019, early 2020, and we leased them back for a limited period of time. And we are currently phasing out those leases. Interestingly we took the seats out of a number of them, mini freighters during the pandemic, to great effect. Very versatile machine, the 300ER, for all manner of obvious reasons, but nowhere near as fuel efficient as the next generation big twins. The A350-1000 would be a really good case in point on that. We do have an option on 777-9X in the future, but I think again many of you will have heard in the last month Boeing making it clear they can't see a way to be able to deliver those way out to '25, '26 minimum. So we're not holding our breath on them. They're not in our network plan at this point in time until it becomes more real as an aspiration.

Okay, and on the A350 you also have, I think, a launch customer for the A350 cargo or freighter aircraft just announced?

Yeah, so we've signed a letter of intent which is now being novated to a full contract with Airbus for seven A350 freighters. And I guess the way we would describe this is, you know, if you go on to Flightradar and look at the number of freighters that are in the sky, obviously doing very well at the moment, you'll see a whole bunch of 747s, 767s, 757s, MD-11s. And the way I would describe them, with the passion for aviation, is they are the Ford F-150 pickup truck from 1986. In other words they look great, they sound great, but they're not necessarily good for the environment. The A350 freighter is a composite frame again with the next generation engines that I've described and is very much therefore the Tesla of the air freight rate market. So we've deliberately elected, given what we've been trying to do as well with commercial aviation sustainability, to go for the Tesla end of the freighter market going forward. And we see great opportunity in the way in which that aircraft could perform in that regard.

And just one immediate point on the A350, Tony, we've seen still playing out a very public dispute between Airbus and Qatar Airways about paint-related issues. There's been photos and stuff around. Several other operators who've had them over the last couple of years have said they've got issues, they haven't elaborated. Yours are brand new but obviously I guess just tell us what you can. Are you having some dialogue with the manufacturer about that and then looking for a resolution of this?

Obviously all I've got is the same inside as probably you and many other people in here, which is via the media. So I don't possess any greater insight to what seems to be a very public spat between Qatar Airways and Airbus. All I would say, and this is independent of the specific case, is composite aero structures have a completely different property attached to them for obvious reasons. Not least of which if you watch a 787 with its composite wings, from its maximum takeoff weight to a landing weight they flex almost like a carbon fiber fishing pole. That's what they're designed to do. The paint technology that goes on them is completely different. So it's only the word paint that is a similarity. It is, from a molecular structure, from a science point of view, totally different. Now what we saw, and a number of other operators did, on 787, so this has got nothing to do obviously with the A350 situation, is after three or four years UV in hot environments such as this region does have a habit, given the amount of flex in the aero structure, to impair the adhesion of the paint. And in the case where we had some of these problems we very constructively worked with Boeing to find solutions which we have done, and you know we don't see that as an issue. I go back to my start as I described earlier, I've never known any aircraft type in my recollection that ever got launched without a wide range of changes, always issues. Now how much of what I've just described is a read across to this A350 case, we at Etihad simply don't know. But I'm not surprised that there's a few challenges because frankly there always will be. And you know we'll play what's in front of us as and when in the future anything should present itself. At the moment we're having another big red letter day for the A350-1000. We're taking it to London next week. We took the first one into Paris a month ago. And we're doing that because we think the customer experience that we're presenting with it, its environmental credentials which I couldn't overstate by any stretch of imagination, are something that are going to give a very special option for us. And 372 seats configuration with 44 in J class, this is a big machine.

And you mentioned already on product, in terms of importance of a premium product, and cutting cost doesn't mean cutting customer experience. But you are updating it, refreshing all the time with these new aircraft, so it changes again from what it was. You've got a premium economy cabin and as you just said, people can go and have a look. I'm going to get a look myself at the new economy. So you're across the range from top to bottom, first class, I shouldn't even say bottom, but the economy product.

So yeah, and I think you know the things that most aviation chiefs point at in the cabin is the seat, the difference and upgrades on business and so on and so forth. But we presented on the Etihad stand yesterday an all-new F&B and soft furnishings proposition. And we've done this for two reasons. First of all, again we made a commitment to reduce by 80 percent single-use plastics a number of years ago. What you'll see on our stand is how we've actually achieved that, number one. But simple things, we've gone back to stainless steel knives and forks. And everybody who went on the stand yesterday mistakenly thought that this was the new business class F&B offer. It's not. It's our economy offer. And we're doing it for two things. First of all, with the right cost base you can trade up your proposition, case in point, but this one's part of an airline conversation. And we've significantly reduced the environmental implications of it. We're no longer throwing away single-use plastic knives and forks, which let's face it, for all of us who've used the old single-use knives and thought they suck anyway, right? Absolutely, they normally snap in your chicken. Exactly, and Arnold doesn't like that. They're winning all around, customers.

And just tell me, Tony, I mean you've hinted already in terms of results. I mean you're an airline that, you know, to earn your living relies on premium traffic. There's a lot of speculation about will business traffic come back. You've said about probably a changing mix, there's going to be business cabin demand but it may be more premium leisure or more people buying premium economy.

So it's for me quite an interesting point because historically, pre-pandemic, about 45 percent of the people who were in the business or first class cabin were actually traveling on leisure. Right. So of course the nomenclature of business class always used to infer that most of the people who were turning left and traveling up front were actually business travelers, not necessarily the case. Yes. Now what we've seen post-pandemic is our premium cabin load factors are higher than pre-pandemic. Now the mix is different. So the 45 that would have been leisure is now more like 90 percent. But the load factor is higher because people are quite keen to trade up to more space if they have the means to do so. I think there's probably a correlation with some element of disposable income as a result of the pandemic, coupled with the fact of more space and one's own personal wellness. So we've seen a significant upturn in premium cabin load factors. And back to business travel in the purest form, we're also now starting to see the big corporates getting back into the game. And what we've been doing with them is signing them into what for us is the first ever green loyalty program that's out there. It's called Conscious Choices, and it's the ability where the corporates can also do a sign-in with us where they get the carbon accreditation for the offsets, of how they can then invest through the ticket price into sustainable aviation fuel, into forestation that's accredited or mangrove planting, and giving them the tier three carbon offset. So we think for big corporates this is also a way in which they can be far more responsible as they come back to normality as well.

Okay. Yeah, I should say the clock is ticking unfortunately against us. I know there's a lot more you're doing on the environment. I mean you said you're using the name also on the aircraft of the Greenliner and the Sustainable50, and you've done a number of special flights. I think it's interesting to see flights you've done in recent weeks where you've worked for example with Eurocontrol and it's about continuous descent, using sustainable aviation fuels. I mean this is a big challenge the industry faces and can't escape, isn't it, in the coming years?

Yeah, I think look, the pandemic was something unprecedented for commercial aviation. Put a huge amount of hurt in the system for everybody. But I guess the one thing we could confidently predict, at some stage it would end. And inshallah, you know we're at the end now or pretty close to it, fingers crossed. But I think the commercial sustainability challenge, or environmentally sustainable sustainability challenge for commercial aviation is something that's going to be around for generations to come. The physics of flight obviously don't present an easy answer to it anytime soon. So those two aircraft that you mentioned, the Greenliner which is a Boeing 787, the Sustainable50 that's the machine we're going to take to London next week, they are out there as poster children to demonstrate how we can put all sorts of different ideas, be they big or small, together and demonstrate what is feasible and achievable today. But also a means to really bring other people's ideas to bear as well. And we've made some massive steps in the right direction. But I think more than anything else it's probably allowed us also to shine a far brighter light on this, that it requires not just airlines, not just manufacturers, not just policy setters, regulators and governments, but also the traveling public on how they choose to fly. It needs to connect all of the dots to get anywhere close to net zero by 2050.

It's a major challenge, isn't it? Because in a long-haul aircraft, even when we're all long gone in 50 years' time, we're not going to be able to use electric power or hydrogen power. Maybe regional aircraft, perhaps A320s might be moving that way. But we have to be doing all these other things as you say. Let me just ask you, Adel. I mean we talked about new generation aircraft, I mean they're already more efficient with the new engines, notwithstanding teething problems in this hot part of the world. What is your philosophy about this in terms of, are you getting questioned a lot about Air Arabia's activity in ESG, environment, sustainability, governance and so on?

Do you feel optimistic, as you said, and you said Tony, it's lots of moving parts and lots of players. Do you feel optimistic, Adel, about in the region here on air traffic control? Because in Europe we talk about this CESAR, Single European Sky, it's been going on for decades and it's still not there. There's one sky in the USA, and in the Gulf or the wider Middle East there's military areas and all these issues. There is congestion inevitably at airports like Dubai in terms of ATC. I don't know what work is going on here. Is it being pushed quite hard here as it is in other places to get the politicians to move so we can do something?

But what about air traffic control? Are they really doing anything, yeah?

I think if I just add very quickly on this one, John, as well. So three of our sustainability flights, which were designed with optimum route planning and continuous descent, one was from Dublin, one was from Amsterdam, and one, EY20, from London Heathrow last October. On that kind of mid-range sector, six and a half hour sector, it saves 40 minutes and six tons of CO2. Now that's the good news. The bad news is the Romans almost designed the roads in the sky, and I'm not being flippant. What I mean by that is like many cities in Europe, the road system was just built on top of the previous one, which was built on top of the previous one, and you can almost trace it back to the Romans. Most of the air traffic control routing within Eurocontrol, for example, was designed where most aircraft had propellers. So there are all manner of massive challenges here, not in terms of what but how you do it. But back to the things that we've been doing, the likes of the Greenliner is actually shining a more accurate light on what the prize is. And on that kind of sector that's the number you're talking about, 40 minutes, six tons of CO2. How you get it done though will be about governments, regulators and policy setters across continents. So very easy to talk about, almost impossible to fix any time soon.

Absolutely. Listen, we are officially out of time. I just want to ask you quickly one final comment, and this could in itself bring another hour of discussion, which unfortunately we haven't got time for. We've talked a lot about coming out of the challenges of COVID, we've talked just now about the environment, what both of your businesses individually and jointly are doing for the future. But we do have a very challenging situation right now, sadly, the conflict in Ukraine, that is a direct human-induced conflict. As you said, Adel, this region is not unfamiliar with conflict. That has directly affected fuel prices going up. There's worries about consumer pressures, an economic outlook. After all that preamble, in brief words, what is your outlook for the year ahead? Each of you, do you still feel optimistic for sustaining profitability or moving to more profitable operations in the case of Adel at Air Arabia?

Have you had any manpower challenges in ramping up? Because in some parts of the world that's been a really big headache.

Thanks, Adel. Tony, last word to you. You've got almost the same answer, cautiously, very cautiously optimistic?

I'll start in reverse order. If the cargo rates maintain themselves for the rest of this year, which I think there's a good chance that they will do, and also the sort of load factors that I described before, I'd almost leave this with a call out to everybody in the audience to avoid disappointments, get onto etihad.com straight away. Because at 84 percent load factors I want to make sure that you all get the opportunity for a fantastic travel experience as well. And I say that half tongue in cheek but actually half serious to the point. There's a lot of demand out there, which is the second reason why I'm cautiously optimistic this will be a good year and a big part of the recovery that we all need.

Excellent. Well Tony, we look forward to watching your results, hopefully delivering less of a red and more of the blue in the coming months, and product developments. So Tony Douglas, Etihad Group CEO, thanks very much for your time today, been a pleasure to meet you. Adel Ali, Group CEO of Air Arabia, always a pleasure to spar with you over the years we've known each other. Thank you very much for your time today. Ladies and gentlemen, that's it for the aviation live session of this year's ATM.