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Emir formality

20 September 2018 By George Hay, Aimee Donnellan

Emirates and Etihad are not flying in formation – at least, not yet. The airlines owned respectively by Dubai and Abu Dhabi on Thursday both denied a Bloomberg story reporting rumours of a potential merger. Though a deal may be politically unpalatable, the idea is loaded with logic.

Consolidation has been in vogue in the Gulf ever since oil prices started to plummet in 2014. Abu Dhabi has seen its main banks hook up to cut costs and protect bottom lines. While crude values have since recovered, governments look favourably on bolstering state-owned companies’ defences during better times. For airlines, a 30 percent jump in fuel costs over the past year, according to the International Air Transport Association, adds to the impetus.

A takeover would be particularly good for Etihad, which has lost money two years in a row after repositioning a failed strategy of investing in second-tier European carriers like Air Berlin. Emirates is faring better – profit more than doubled to 2.8 billion dirhams ($762 million) in the year to March 31. With 58.5 million passengers over that period against Etihad’s 18.6 million, it also has more heft.

In a wider sense, combining would help face down some existential threats to both enterprises, which make most of their money as a hub between Europe, the Far East and Africa. Once in service, Boeing’s Dreamliner will allow other airlines to efficiently fly direct as far as Australia from Europe. A combined Emirati airline would also be one of the world’s biggest by passenger numbers, allowing it to drive a harder bargain with aircraft manufacturers and other suppliers.

Like most deals, the main stumbling blocks will be the so-called social issues, namely whether proud Abu Dhabi, the United Arab Emirates’ richest state, would agree to see its domestic air champion subsumed by its rival in Dubai, which it bailed out during the financial crisis. Blushes could be spared by creating a holding company that pools costs and retains the separate brands, not unlike the one running British Airways and Iberia – perhaps even repositioning Etihad as a short-haul specialist.

Either way, the initial cool reaction doesn’t mean a deal can’t fly. Just that it could take a long time to happen.

 

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