Etihad’s IPO is a risky proposition

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You know when the airline industry is confident: airlines place orders and expand their networks. But when an airline starts talking about an initial public offering then history suggests that the carrier sees the top, or very close to the top, of the trading cycle in the industry. 

Antonaldo Neves, Etihad’s CEO, has hinted that an IPO may be on the cards for his airline. The Abu Dhabi-owned carrier is now two years into its latest recovery plan and is beginning to stretch its network again.

But are IPOs in the airline sector successful and what makes Etihad such a stand-out case?

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The industry has seen more ups and downs than a rollercoaster this century. While some events have been outside carriers’ control, in the case of Etihad there have equally been some poor choices of partner, such as its stake in India’s collapsed Jet Airways.

Etihad is recovering from a series of misadventures. With a change of CEO, the airline is setting off on a fresh strategy, adding destinations and bringing more connecting traffic to new facilities in Abu Dhabi. 

But investors will still be naturally nervous about buying stocks that are strongly subject to factors over which they have little control. Airlines fit nicely into that category.

So, why the suggestions of an IPO now? Is it a matter of now or never?

There is no doubt that in the next two years competition is going to get tougher in the Middle East aviation market and especially in the connecting markets that fly through the region. 

However impressive the current Etihad operation, it’s got a few challenges to stay competitive

A significant proportion of Etihad’s traffic connects through Abu Dhabi and many of these passengers select the carrier based on price rather than product – as has always been the case for connecting traffic.

And as the choice of connecting points grows in the coming years, the risk of either losing that traffic or significant yield dilution increases. 

Despite its fleet of 86 operating aircraft, Etihad is a mid-market carrier compared with other airlines in the region. Emirates has 232 operational aircraft, while Qatar Airways has 247.

And while the number of destinations served by Etihad will have grown to 78 routes this summer, Emirates’ network alone stands at 148 and Qatar’s at an incredible 184 airport pairs. 

Despite all its marketing and promotion, Etihad’s product (while one of the better in the skies) is no better than the offerings of Emirates and Qatar, even without considering any of the developments in Saudi Arabia.

So, however impressive the current Etihad operation, it’s got a few challenges to stay competitive. And that’s before we look at how the market is shaping up. 

An outstanding order for 95 aircraft is certainly large. Twelve of those aircraft are scheduled for delivery this year and 23 in 2025 – with 10 of these coming from Boeing. However, as current production faces challenges and delivery dates slip all the time, there have to be doubts about when those new machines will be operational. 

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Producing an IPO prospectus that loosely refers to planned expansion, aircraft deliveries, new cabin interiors, carbon-neutral operations and superior comfort levels is likely to stretch the marketing blurb.

But acknowledging the threat that comes from what is happening in Saudi Arabia may be the biggest challenge.

Although Riyadh Air is still around a year away from operating its first commercial flight, we can expect a rapid ramp up in its network in 2025 and into the second half of the decade to support the Saudi Vision 2030 projects. 

Riyadh, the kingdom’s capital city, is also developing rapidly. Major corporations are actively being encouraged to relocate there and the construction sector is thriving on the back of new properties and developments. 

Riyadh Air’s ambition is to serve the local market, but connecting traffic will be just as important as local demand since it allows markets to develop and an airline to sustain higher frequencies of service than would otherwise be the case.

Quite how much of that connecting traffic will come from points such as Abu Dhabi, Dubai, Istanbul or Doha has yet to be seen, but it will affect all of those hubs and place downward pressure on regional air fares. A prospectus for Etihad that seeks to square away this competitive threat may require creative thinking.

Airline IPOs are very rare and there are probably more examples of such projects being halted before getting to market than there are success stories. There are certainly no “best case” examples in recent years. 

Tellingly, those major airlines around the world that are currently listed have just reported strong financials in the last few weeks and expectations for 2024 are seemingly just as good. And yet, stock prices remain well below pre-pandemic levels and are sluggish compared with the early stages of the market recovery. 

If investors can’t see increased value in the shares of established, larger and more market secure carriers, what price Etihad’s IPO? It may be a now or never moment – and it just may end up being never.

John Grant is partner at UK consultancy Midas Aviation