Etihad's Residence on the A380 - thinking strategically on this possible game changer
May 5, 2014
If you have not checked out the video on Etihad Airlines The Residence cabins, you got to check out this video. And if you have seen it already, watch it again! This is the epitome of air travel, of decadence brought to a whole new level. In the age of low-cost-carriers and cut-throat pricing, is this the best strategy that Etihad can take? We apply strategic thinking to conjecture the thinking that brought about this product and see whether this will be a game changer - or whether it would end up a colossal white elephant.
It is not hard to see what is driving Etihad - to capture a greater share of the ultra high-net worth (UHNW) market and in so doing, boost its own standing in terms of being the premium carrier. Where money is of no concern, these UHNW travellers can be attracted by an unconventional experience. And the Residence is totally unconventional. It may not be the first in all aspects; but it certainly is the best.
Thinking in Time
When you look at Etihad, you may wonder if it is the least of three brothers. Emirates has led the way for the Gulf State Airlines, having won the Skytrax Airlines of the Year four times since 2001. Qatar comes in at a close second by winning twice. But more recently, over the past two years, they have been runner up to Emirates. These two Gulf State Airlines have left Singapore Airlines lying third over the last three years, amid a very brief showing by Asiana Airlines. But this story is not about the Asian tigers. The story has already shifted away from Asian carriers and onto the Gulf States. And Etihad is one. In fact, Etihad is the national carrier for the United Arab Emirates, although many people can be forgiven into thinking that it is Emirates that flies the flag (both in its name and in its standing). Therefore, to be a distant third to a non-national airline from the same country does little to boost Etihad's pride. So perhaps it is time the empire (err, emirate) strikes back.
Almost all airlines in the world would think about revenue and yields when they look at their system. Yet, this does not seem to be the same playing field for the Gulf State Airlines. Take one look at their fares and you will understand. They can offer much lower prices on the same sector as other carriers. When you think about it: all the carriers fly the same modern planes, all have the same level of service (and pay their crew similarly - although the Gulf State Airlines are known to pay even more than their competitors) and they all use the same amount of fuel. As fuel is the major cost component for any airline, a shift of one-cent in their fuel prices can lead to a big margin shift. As the Gulf States control most of the oil, one can only conjecture (and others have blantantly accused) these airlines of dumping empty seats at ridiculously low prices, leading to depressed seat prices. In almost all other airlines, these are negative yields; and therefore unsustainable. So one by one, they drop out of the race, leaving the Gulf States gaining in market share. So, it is fair to say that, for the Gulf State Airlines, increasing yields and revenue are not top of mind. Market share certainly is. By upping their market share, they also increase the number of people coming through their country, thereby shifting the economy away from oil and gas and into tourism. And it seems to be working; but at a huge cost to the other airlines.
If marketshare is indeed the intent and given the environment under which Etihad is competing, then to gain greater significance, Etihad needs to be bigger and bolder than its brothers. Certainly, they are moving themselves out of the mass market arena and competing on differentiated value. And what a differentiated value proposition the Residence is! And borrowing an additional leaf out of Starbucks, Etihad is asking the question "How can we use our product expertise to provide exceptional experience to our customers?" This is the bold result.
It does seem like the luxurious cabins on board Etihad are more than an experiment. It is a bold statement to announce that they are now trying to muscle their way in - and cost is no barrier! In a sense, SIA has done the market testing for Etihad and it seems that there is good demand for this class of "seats" (read Suites). Etihad did a good job of hanging back for a while to see if this was a sustainable business model. And it will be so long as they can fill in the other higher yielding seats back at coach or business class!
All in all, this is a bold move by Etihad and if we are correct about their intent, we will see them starting to climb up the ranking both for the Skytrax airline of the year (which has a large portion of the scoring on passenger voting) as well as for their revenue. Margins may be negative for quite some time, but one can suppose that for Etihad, that is the price to pay. This will therefore beg the question: Will it become a white elephant? By maintaining a healthy portfolio of other aircraft platforms, they should be able to make overall margins healthy. And they can then splurge on the UHNW customers who will make Etihad the best airline in the world.
This may well be a great bet, but ultimately only time will tell if they can make the difference! My bet is on them to make it! What's yours?