Swiss International Air LinesExternal link is pumping CHF5 billion ($5.25 billion) into a bid to stave off rival carriers from its home turf. The latest challenger to Swiss domestic dominance is Etihad Regional.This content was published on October 23, 2014 - 11:00
No sooner had Swiss announced 22 new destinations and an overhaul of its fleet than Etihad Regional answered with its own network expansionExternal link and warnings of more to come. “We are in an expansion phase,” chief commercial officer Christian Schneider said of the airline that has grown from 100 to 320 staff since it started operations in Switzerland at the start of this year.
Patrick Huber, editor of the Swiss AviationExternal link journal believes that Etihad means business. “They are a strong company with a lot of money and they intend to grab a big slice of the cake in Switzerland,” he told swissinfo.ch. “Swiss are in a difficult position and they had to do something.”
Already squeezed by low-cost carrier EasyJet, particularly in Geneva, Swiss can ill-afford to let another rival snatch away market share, Huber added. Eithad Regional’s strategy of funneling some European passengers to the long haul network of Etihad Airways, represents a greater risk than EasyJet, which concentrates on flying passengers to a single destination and then back again (point-to-point).
“Etihad does not just fly point-to-point but also takes passengers to Abu Dhabi where they can fly on further,” Huber said. “This is more of a direct threat to the Swiss model that uses Zurich as a hub.”
In an interview with FlightglobalExternal link website in August, Swiss chief executive Harry Hohmeister recognised the threat from Etihad. Hohmeister bemoaned the fact that state-owned airlines from the Middle East can distort the European market by offering unsustainably low prices because “a Sheikh is giving the money”.
“There is a lot of state money in this system, by cheap infrastructure costs, by cheap credit lines and debts I only can dream of, so therefore [the cheap fare strategy] will not be over soon.”
Hohmeister called on European Union regulators to do something to level the playing field. “They let a system with completely different social costs in here without limitation – this is not fair. We have to talk about capacity limitations,” he said in the interview.
However, Etihad said Hohmeister's comments "have more holes in them than a piece of local cheese."
"We receive no state subsidies, no free aircraft fuel and no reduced airport charges in our home nation, the United Arab Emirates. We borrow money from more than 70 banks around the world at market rates to finance our flying programme and everything we do is fully audited to IFRS [International Financial Reporting Standards] independently," the airline said in a statement.
"Mr Hohmeister believes that Gulf carriers should have limitations placed on the number of aircraft seats they sell to the public. This is anti-consumer and anti-competitive in complete contrast to Etihad's pro-competitive and pro-collaboration position."
To get around limitations imposed on foreign airlines at European airports, Etihad employs a strategy of buying stakes in local carriers, such as Air Berlin and Alitalia. The Lugano-based Darwin Airline operates Etihad Regional’s network out of Switzerland.
Etihad Airways wants to secure a controlling one third stake in Darwin and is awaiting a decision from the Swiss aviation regulator (probably in late October) on whether Darwin would remain a local carrier if the deal goes through.
But Swiss is not sitting around waiting for the competition to make the next move. Fresh from a stringent cost-cutting exercise, imposed by its German parent company Lufthansa, Swiss is now free to splash the cash. In October it announced a multi-billion franc strategy to introduce new routes and revamp its ageing fleet.
This represents a change in strategy away from its Zurich hub concept towards the point-to-point model that rivals Easyjet and now Etihad are muscling in on. This follows an earlier decision to strengthen Swiss Air Line’s position in Geneva.
The addition of 22 new point-to-point European destinations to its existing network has had some observers scratching their heads. For Andreas Wittmer, head of the Center for Aviation Competence at the University of St Gallen, the move smacks of trying to beat Etihad at its own game.
“I don’t really understand their strategy,” Wittmer told swissinfo.ch. “Many of the routes they have announced, particularly to eastern Europe, can yield only limited income. They are not good routes for a premium airline with premium prices.”
“If Swiss wants to go head to head with Etihad or EasyJet on prices then they will lose the game because the budget airlines have a different business model and Etihad has access to greater financial resources.”
Wittmer does not believe that Swiss’s fleet upgrade will give them much competitive advantage, saying that the new aircraft are long overdue and should have been replaced two years’ ago.
Instead, Swiss should try to outclass the middle eastern airlines on long-haul routes in the high-class segment. “They should concentrate on the transatlantic and Asian markets where there are still some profitable destinations that they could fly to,” Wittmer said. “They should focus on the premium passenger by offering a premium service right along the whole travel service, not just at the airport and in the aircraft.”
For example, Wittmer highlighted that some airlines offer customers limousine services to and from airports.
But why should people in Switzerland care about the “Next-Generation Airline of Switzerland”External link strategy? After all, their national carrier is now a German-owned company following the collapse of Swissair in 2002.
Swiss International Air Lines was formed from the ashes of Swissair and another regional carrier Crossair. Lufthansa took over the recently formed airline in 2005.
“The demise of Swissair was a sad story that is still remembered in Switzerland,” Patrick Huber told swissinfo.ch. “People know that Swiss International Air Lines is a German-owned company, but they also know that we would not have a national carrier at all if it were not for Lufthansa.”
The message that Hohmeister wants to put across is clear: Swiss International Air Lines is a Swiss company. “It’s a real asset,” he told Flightglobal. “So my headline would be: Swiss-made, by Swiss. Swiss-made by anybody else would not really count. Forget it. We have a lot of freedom in designing our strategy.”
Besides, the distinction between the new airline and its collapsed predecessor barely registers outside of Switzerland, according to Huber. “I was recently in Vietnam and everybody talked about Swissair as if it still existed,” he said. “Internationally, people still don’t see the difference.”
Swiss in numbers
Swiss International Air Lines reported a CHF264 million profit in 2013, up 24% on the previous year following a cost-cutting exercise in 2012.
Revenues were CHF5.17 billion (up 3% from the CHF5.03 in 2012).
For the first six months of 2014, the airline posted a CHF118 million profit on revenues of CHF2.5 billion.
Those profits soared 64% on those reported the same period in the previous year, but only because the Lufthansa group changed its method of measuring depreciation. Profits were the same as in H1 2013 once these changes were stripped out.
Swiss enjoyed a 56.8% dominance at its Zurich airport stronghold last year with the next best competitor, Air Berlin, lagging behind with 5.5%.
But the situation is very different at Geneva where EasyJet have cornered 41.5% market share, soaring way above the 14.5% enjoyed by Swiss.
It is too early to tell what impact Etihad can make on the market in Switzerland as they have only been operating a few months.End of insertion
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