Fitch Ratings, one of the world’s largest credit ratings agencies, issued the Long-term Issuer Default Rating (IDR) following a detailed independent analysis of Etihad Airways’ business, its commercial performance and its equity alliance strategy.
James Hogan, President and Chief Executive Officer of Etihad Airways, said: “The Fitch A rating is further independent recognition of the strength of this business and of our strategy.
“We have a clear mandate from our shareholder to deliver long-term, sustainable profitability. Our organic growth, boosted by our minority equity investment model, is increasingly being recognised as a highly effective strategy to deliver that return.
“We have already raised more than US$ 11 billion to support our growth, from more than 80 financial institutions around the world. We raise that finance on commercial terms, with no sovereign guarantees or letters of comfort.
“We have always operated with a high level of transparency to the financial community. Our first credit rating now takes that transparency a step further.
“This rating, which is based upon detailed analysis of our business performance and our strategy, will help international investors understand our story as we continue to expand our operations and raise additional external financing.
“The A rating also supports Etihad Airways’ strategy of fast-paced organic growth and establishing minority equity investments in key strategic partners around the world. These are delivering significant benefits, with our Etihad Partners delivering new revenues as well as major business synergies.”
The Fitch rating states:
“Formed in 2003, Etihad is a relatively young airline but has managed to establish a global network with the scale and depth similar to that of its more established European and Gulf peers by implementing a growth model combining organic fleet expansion with codeshare partnerships and minority equity investments in other airlines. This has enabled Etihad to reach a sustainable operational scale and diversity at a much faster pace than rivals, and established a platform for more measured future growth. An established network is key to any airline’s success and sustainability because it underpins revenue generation and cost management.”
It continues: “One of the key competitive advantages of Etihad compared with European and to some extent US peers is the geographic location of its hub in proximity to the fast-growing travel markets of Asia, Middle East and Africa. Etihad’s more developed route network in these regions gives it a competitive edge over European carriers that are also focusing on connecting the Asian, Middle Eastern and African passenger traffic to Europe and the US. Etihad’s increasing penetration of the US market is also likely to help compared with the European and US rivals.”
Whilst recognising that Etihad Airways operates in an environment of ‘fierce competition’, the ratings agency says the airline “has three competitive advantages over its Gulf peers – US pre-clearance at its Abu Dhabi hub, shorter connecting time and greater domestic access to key markets such as Europe and India, through its airline partnerships.”
The Fitch rating recognises that Etihad Airways is in a good position to deliver increasing profitability, stating:
“We believe that the achieved critical network size should enable the company to focus on profitability management capitalising on its scale and brand recognition, as well as on incremental revenue and synergies from its operations with equity partners. The company on its own generated 28% of 2014 passenger revenue from premium class and business travellers accounted for 16% of total passengers carried in 2014 and quality focused leisure travellers for 26% of passenger traffic, all of which provide a solid base for enhanced profitability focus.”
The rating also highlights Etihad Airways’ focus on cost management: “Etihad is favourably positioned on the cost curve compared with the European legacy carriers, which provided a foundation for its extensive growth, despite pressure on unit revenues, and should support its sustained profitability. The company’s unit costs (eg cost per available seat-kilometre (CASK)) are much lower than those of its European rivals but are comparable with those of other emerging market airlines, including Aeroflot (BB-/Stable) and Emirates.
“Having reached scalability, the company plans to increase its focus on profitability and cost management through network management, fleet optimisation and higher fleet utilisation. The cooperation with equity airline partners may also bring in synergies and cost savings on joint fleet orders, joint procurement (eg ground handling, catering, fuel, etc) and aircraft maintenance and joint staff training, among other things.”
The rating recognises that the airline’s significant investments have helped it to reach a more mature stage as a business:
“While the company plans to continue heavy investments in fleet expansion, we believe it has reached a more mature stage of its business profile development, which should enable it to focus more on profitable growth.”
The rating also confirmed that Etihad has commercial independence from its shareholder: “We assess the legal ties between Etihad and Abu Dhabi to be limited as Etihad does not benefit from cross-default provisions and/or guarantees.”
Etihad Airways recently reported revenues of US$ 7.6 billion and net profits of US$ 73 million for 2014, marking its fourth consecutive year of profitability.
Fitch Ratings is a leading provider of credit ratings, commentary and research. Dedicated to providing value beyond the rating through independent and prospective credit opinions, Fitch Ratings offers global perspectives shaped by strong local market experience and credit market expertise. The additional context, perspective and insights it provides has helped investors fund a century of growth and make important credit judgments with confidence.