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The strategy’s flagging

19 October 2011 By Una Galani

Abu Dhabi has developed an unhealthy appetite for European airlines. The UAE’s official national carrier, state-owned Etihad Airways, is eyeing a tie-up with Virgin Atlantic – which is bidding for Lufthansa’s bmi unit – and mulling a 25 percent stake in Aer Lingus being sold by the Irish government. Such deals may deliver tactical gains. But they would be a messy way to trying to catch up with rival Dubai-owned Emirates.

Etihad is in an awkward position, outdone by Emirates in terms of profile and passenger numbers. The eight-year-old Etihad flew 7 million passengers in 2010 with a 74 percent seat load factor. Emirates – which is almost three decades old – flew 31 million passengers at an 80 percent load over the same period. Its sheer scale means Emirates is often wrongly assumed to be the UAE national carrier.

There’s room for two large airlines in the tiny Gulf country. This is a global market, and the Gulf is a strategic link between east and west. Etihad doesn’t disclose its finances but says it’s on track to be profitable in the next year. Operational growth has been impressive, driven by its 30 plus bilateral code-share agreements with other airlines. Emirates has roughly one third of that amount.

Any financial investment into Aer Lingus, or into Virgin to assist with its bmi ambitions, would mark a big strategic shift. European ownership rules limit Etihad to a minority stake. Indirectly funding a bmi deal and buying the Aer Lingus stake could cost around 600 million euros. But it isn’t clear what benefits this would bring. Ownership isn’t required to have a code-share agreement and there would be limited synergies, given fuel and staff are the two main costs. Nor is Etihad desperate for more of the landing slots held by each airline.

The industry is littered with failed minority investments by airlines into rivals. Singapore Airlines’ 49 percent stake in Virgin Atlantic, picked up in 2000, didn’t help it grow overseas and few analysts now attribute any value to the shareholding. Emirates sold its stake in Sri Lankan Airlines back to the operator last year for less than it paid. And Swissair’s buy-to-grow strategy in the 1990s helped to bankrupt the airline.

Emirates’ success has come from years of disciplined organic growth. Etihad’s search for strategic shortcuts is probably in vain.


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