Mapping a route for aviation success

WHEN JAMES RIGNEY TOOK ON THE ROLE OF CFO OF THE NEWLY FORMED ETIHAD AIRWAYS, THE SKY WAS THE LIMIT IF THEIR PLANS COULD BE REALISED. TODAY, WITH REVENUES SET TO EXCEED $7 BILLION, HE EXPLAINS TO LACHLAN COLQUHOUN HOW BEING ABLE TO DRAW UP A STRATEGY FROM SCRATCH GAVE THEM THE PERFECT START. 

James Rigney CA has experienced the turbulence of the aviation industry and is now enjoying a period of relatively smooth flying. As a business analyst and then a manager of fleet planning, Rigney spent the late 1990s with Australian airline Ansett in its last days, when the company went into liquidation following its takeover by Air New Zealand. 

Rigney was then lining up for a job as head of corporate strategy with the Solomon Lew and Lindsay Fox backed Tesna consortium, which planned to resurrect Ansett, but the history is that Tesna pulled its bid only 24 hours before it was due to be announced, bringing to an end an airline with around 70 years of flying history. Although the collapse of the Tesna bid left Rigney without a job, involvement in the consortium had introduced him to James Hogan, Ansett’s chief executive ‘in waiting’. 

And when Hogan became chief executive of Gulf Air and then, in 2006, of the newly formed Etihad Airways, Rigney joined him at Etihad as chief financial officer. Today, in a difficult aviation market, Etihad is a global success story – an airline that has grown from its Abu Dhabi hub to service more than 100 destinations and – perhaps more importantly – do so profitably. 2013 profits were up 27 per cent to US$62 million, struck on revenues of US$6.1 billion, and 2014 revenues are on track to surpass US$7 billion. 

In Australia, Etihad was originally best known for its naming sponsorship of the AFL Docklands stadium in Melbourne, but has recently entered Australia’s domestic aviation market in its own right, building a 20 per cent stake in Virgin Australia, making it a key player in the domestic aviation market. “Airlines are very difficult operations to manage because there are so many elements that are outside the actual control of management,” says Rigney. 

“There are fluctuating fuel prices, foreign exchange, geopolitical events, and the economic performance of the countries we fly into as well as natural events such as icing at airports, or earthquakes. “We are also in the technology game, not just in terms of aircraft but also in terms of what goes into the aircraft, and that means in-flight entertainment, IT systems, and it is also very labour and capital intensive. So that makes it a very difficult cocktail. There is never a dull day in managing an airline and you have to deal with rough times as well as the good times.” 

Looking back, Rigney can see big changes in the environment in which airlines operated when he began his career, and how they operate today. “When Rod Eddington was chief executive at Ansett he said it had the Noah’s Ark of fleets because we had two of every type of plane in the world, and most airlines were like that going back through the 1940s, 50s and 60s,” he says. “Airlines are a lot more sophisticated now and you don’t see that in fleet orders any more, especially from the medium to large carriers. 

“We placed a large fleet order in 2008 that runs out at the end of this decade, and we placed another large fleet order at the back end of last year which takes us out for the next 15 years, so it’s all about demand, about the network and its capacity to meet demand so it’s fit for market, and all about the likes of the deal you receive from Airbus and Rolls Royce, and other suppliers.”

 Looking at the aviation industry today, Rigney can see that Etihad enjoys some comparative advantages, while ‘legacy’ airlines in many parts of the world struggle with historical issues – such as labour relations – and not so advantageous geographical positioning. 

“If we step back to the 1950s and 1960s, if you wanted to fly from Sydney to Dublin you would have had numerous stopovers along the way, and then change aircraft in London, before you could arrive at your destination,” he says. “With the technology of the modern aircraft and the geographic positioning of the Gulf hubs, you can fly in a straight line from Sydney, Brisbane or Melbourne, and then fan out through our networks and into Europe. 

“Modern aircraft can now fly for 17 or 18 hours, and from the Gulf hub we can fly to any city in the world, so compare that to an airline in Australasia, which is at the end of the network, where we – geographically – have developed a hub which is at the centre of the world. 

“Just as the Asian hubs of Singapore, Bangkok and Hong Kong took advantage of their geographic position and aircraft technology a few decades ago, now we have that advantage of being one stop away from pretty much anywhere.” In addition to geography, another of Etihad’s advantages is that it was a start-up, with a ‘blank sheet of paper’. 

“We have several competitive advantages that I can see, and our geography is just one of those,” says Rigney. “Our management team has been together for a long time, some of us from the Gulf Air days, and we are flexible and not bureaucratic – we don’t have the legacy issues of airlines which are 70, 80 or 90 years old.” “We are a business that is 10 years old, which means we are building a business. When we came in to manage Etihad in 2006, turnover was US$300 million, and we will turn that into US$7.4 billion of revenues in 2014. 

“We are not custodial management where management has been handed from one team to another; we have had to build this from scratch and that includes the infrastructure from office accommodation to IT systems to a culture that comprises 140 different nationalities.” 

The original mandate for Etihad from the airline’s shareholder – the Government of Abu Dhabi – had three key tenets. Firstly, Etihad was to be an airline which was ‘best in its class’ in terms of service, online performance and safety. Secondly, the vision for Etihad was part of the Abu Dhabi 2030 vision – to create a sustainable, vibrant and world-class city by 2030, with Etihad serving the aviation needs of the re-invented city and capital. And finally – and the mandate most dear to James Rigney – was to create a “sustainable business that would continue to be profitable.” 

“Every decision we make and the business plan we update on an annual basis is always focused on this three-pronged mandate,” he says. “That profitability comes from several areas. We have organic growth and a network plan, and we have a fleet plan that delivers to that, and is delivering growth of 20 per cent per annum. 

“But as a new airline with more developed competitors on either side of us, we needed to find a way to grow our airline and fill our aircraft, and we embarked on a code share strategy where we have 47 code share partners today, and we also have taken equity stakes in seven other airlines to date.” 

In the past 12 months, Etihad has taken minority equity stakes in Air Serbia, India’s Jet Airways, and Switzerland’s Darwin Airline (soon to become Etihad Regional), adding to previous investments in Air Seychelles, Aer Lingus and Virgin Australia. Etihad also has nearly 30 per cent of airberlin, and Rigney is on the board of that airline. “These code share partners and equity investments are on track to deliver US$1 billion in revenue in 2014,” he says. 

One key part of Etihad’s financial management is its fuel hedging strategy. Fuel is the airline’s largest cost and also the most volatile, and one of the principles of the business plan is to strive for as much financial certainty as possible in an uncertain market. 

“We can’t control the cost of fuel and that is why we have embarked on a fuel hedging strategy and we’ve stuck to that for the past seven years, so as we entered 2014 we are 75 per cent hedging on the cost of our fuel,” says Rigney. “That takes away the risk and volatility out of what is 40 per cent of our cost base. 

“It is not about beating the market, it is about providing certainty, and our strategy has been mitigating the risk of fluctuations, and if you speak to most CFOs of airlines and ask what their result will be at the end of the year, most of them will give you a return question and ask you to tell them what the price of fuel will be. 

“The hedging enables us to say with some certainty what our numbers are going to be, and we have a track record where we have hit our numbers seven years in a row, and that is because we go into that process with some confidence about our costs.” 

Another key part of the CFO role is arranging financing for the growing fleet, which now numbers close to 100 aircraft, with more than 200 on firm order from both Airbus and Boeing. In November last year, Etihad announced orders for up to 199 aircraft plus 294 engines, worth $67 billion at current list prices. 

All this, says Rigney, requires good relationships and understanding with banks and the capital markets, and an ability to tap diverse sources of funding. “When we came to manage Etihad seven and a half years ago the airline had a relationship with a handful of banks and we knew that given the aspirations of the airline to grow at 20 per cent per annum, we had a need to access best-of-breed finance,” he says. 

“So we go out to the market and we do the traditional road shows in London, New York, Sydney and also Japan, China, and Singapore, because it’s all about diversification of forms and sources of finance. 

“Today we have 68 financial institutions in our lending pools. We have commercial leases, some capital markets funding, some Islamic finance and some operating leases. So it’s about diversification and it’s also about mitigating residual value risk of the major infrastructure component of our business, which is obviously aircraft.” 

As a modern CFO, Rigney sees his role as encompassing finance, treasury, property, infrastructure and corporate investment and strategy. His current role is the culmination of a career that began at KPMG as a Chartered Accountant, and included an MBA at RMIT in Melbourne. 

“The grounding I received at KPMG and the discipline and professionalism they instil in you from an early stage has been extremely important in the foundation of my career, and you don’t lose that,” he says. 

“I’ve worked through difficult environments at Ansett and as a Chartered Accountant I saw many companies going through difficulties, and always learnt from that. At Etihad, we have come a long way but we are still a very new company and have some key milestones and goals to achieve.” 

For an aviation executive to have the opportunity to help build a global airline brand from scratch has been a “dream opportunity”. 

“So the way I look at it is that the journey has come a long way, but there is a long way still to go,” says Rigney. “And to use a sporting analogy, when you are in a winning team you want to keep winning.”

Article last updated 30 April 2014