Citing four unnamed sources, business news channel Bloomberg is reporting that the Dubai-based Emirates is in preliminary talks to acquire Etihad Airways of neighbouring Abu Dhabi. Bloomberg said that based on the latest figures available, the joint airline group (whatever that would be called) would become the largest airline in the world by passenger numbers – if the deal went ahead.
Many news sites have been quick to report this new rumour as fact, despite both Emirates and Etihad quickly coming out to deny that any such talks have taken place. And while we love a good rumour as much as anyone, it’s important to stress that it’s just that – a rumour. In reality, the truth of the matter is that the chances of Emirates and Etihad merging are still really slim.
We’ve been here before – In March 2017, German business newspaper Handelsblatt cited two unnamed sources who claimed the two airlines had started discussions about a possible merger. In January of the same year, the newspaper even claimed Etihad had been in talks with Lufthansa on a possible merger. Both reports amounted to nothing.
The benefits of Emirates and Etihad merging…
The rumours, though, keep on doing the rounds – maybe there’s no smoke without fire? After all, both Emirates and Etihad – based at airports which are just 72 miles apart from one another – are largely competing for the same passengers. Is there really a market for two massive hub airports which are so close together?
While Emirates has successfully scaled itself to such a size that it can pretty much support itself without government support, the story couldn’t be more different for rival Etihad.
For one, Etihad joined the party a little too late – it’s spent huge sums of money trying to scale its operation as quickly as possible in order to compete with Emirates and regional player Qatar Airways. But all that effort has for all intents and purposes spectacularly backfired.
In 2016, Etihad reported an eye watering loss of $1.9 billion USD on the back of a failed equity investment scheme which saw the airline group take minority stakes in foreign carriers. The plan was to feed passengers from these failing airlines into Etihad’s own network – it was always a gamble and it was one that didn’t pay off.
In the last year, Etihad has only managed to reduce its losses to $1.52 billion. – clearly, there’s a long way for the airline to go if its to turn itself around. New chief executive, Tony Douglas has introduced a major transformation programme which will see Etihad’s route network and aircraft fleet shrink as the airline readjusts its global ambitions.
Rumours abound that the rulers of Abu Dhabi have tired of bailing out the national airline – a tie up with Emirates would make sense. There are so many synergies to be made between the two and it’s not as if the two businesses haven’t already been working together.
Only recently, Etihad started to offer secondment opportunities for its pilots to work at Emirates. And in January, the two airlines announced a memorandum of understanding on cooperating more closely on aviation security. At the time, it was understood Emirates and Etihad would also look at other ways to increase cooperation – such as in procurement and training.
The obstacles that would need to be overcome…
But wait one minute. There are so many reasons why this deal might not ever go ahead – least of all the popular assumption that the ruling family of Abu Dhabi couldn’t ever bear to lose face to Dubai by offloading its prized asset.
What are the benefits for Emirates?
Why would Emirates want to take on a debt-laden airline? It’s gone there only once before – back in 1998 when the airline spent $70 million to acquire a 43.6% stake in Sri Lanken Airlines. The turnaround plan didn’t go well and Emirates ultimately gave up – unlike other airlines, Emirates just hasn’t had the same interest in buying equity stakes in rivals.
Explaining the airline’s startegy, Emirates’ President, Sir Tim Clark, said earlier this year:
“It’s a small, lean management team that run this business (Emirates) and the notion that we’ll be sidetracked by M&A (mergers and acquisition) activity, taking on or getting involved with another carrier would be not without its difficulties.”
The question is this: Would the benefits of Emirates taking on Etihad ever outweigh the huge risks?
How would the hub model work with a combined airline?
Both Emirates and Etihad have very similar business models – through their respective hub airports they connect passengers. Yes, many passengers get off in Dubai and Abu Dhabi as the two become tourist destinations in their own right but the vast majority are simply connecting onto other flights.
How then, would that business model work if the joint airline was operaing from both Dubai International Airport and Abu Dhabi Airport?
The logical option would be to base the new combined airline at Dubai World Central Airport – just 57 miles from Abu Dhabi. But the huge DWC airport is still under construction and is years away from being completed. In the meantime, the two airlines would likely have to operate as seperate businesses.
And then there’s the question of what to do with the giant multi-billionaire dollar Midfield Terminal airport being built in Abu Dhabi?
Merging fleets and schedules
Since its inception in, Etihad has pretty much aped Emirates’ route network. Clearly then, there would be limited advantage of gaining access to Etihad’s routes – save for some precious landing slots in certain overstretched airports where demand outstrips capacity.
Admittedly, Etihad does have a fleet of single-aisle Airbus aircraft which could serve destinations which don’t make sense for an Emirates Airbus A380 or Boeing 777 to fly into – but then again, Emirates has a major partnership with low-cost operator flydubai who use single-aisle Boeing 737 aircraft.
How it could work…
There’s talk that Tony Douglas has been looking to refocus Etihad as an airline which serves Abu Dhabi and the local population – helping to fuel its economy with point to point traffic rather than acting as a hub.
In the event of a merger or takeover, we could see Etihad serve a smaller network of cities with direct flights to Abu Dhabi, while much of the fleet is transferred over to Emirates to build its hub model with profits shared between the two governments.
Where do we currently stand?
Both Emirates and Etihad have said there’s no truth in the rumour and in the past, Sir Tim Clark has always said a possible merger wasn’t on his radar. The significant hurdles which would need to be overcome probably mean we shouldn’t worry about Etihad disappearing anytime soon.
