Are Emirates and Etihad about to merge?

By M.W. & C.R.

THE aviation industry tends to make a lot of noise about potential mergers and tie-ups. But this might be a story worth getting into a flutter about. On September 20th Bloomberg, a news service, reported that Emirates Airlines of Dubai is looking into taking over Etihad, the flag carrier of neighbouring Abu Dhabi, a merger which would create the world’s largest airline group. The takeover looks like an obvious move on paper—the route maps of both airlines overlap and their home airports are just an hour’s drive apart. Etihad’s finances have imploded in recent years, making it an obvious target for Emirates, which has continued to churn out reasonable profits in spite of turbulence. But the logistical challenges of such a tie-up, and the political sensitives of the region, make the prospects of such a deal rather uncertain.

Emirates grew from being a minnow in the 1980s into the world’s biggest airline by international passenger-kilometres by connecting passengers to and from other places via its hub in Dubai. In 2003 Abu Dhabi decided to set up its own flag carrier, Etihad, to try and emulate Emirates’s success. But lower oil prices, the region’s geopolitical instability and tougher American regulations on flights from the Middle East have hit demand for flights. In 2016 Etihad lost $1.87bn and in 2017, $1.52bn. Its strategy to buy minority stakes in other airlines to drive traffic through Abu Dhabi imploded, with Air Berlin of Germany and Alitalia of Italy going bust last year. The airline has begun to slash routes to contain costs, but Fitch, a credit-ratings agency, predicts it will remain in the red until at least 2022.

A merger with Emirates would certainly help Etihad to get out of its financial mess. It would also increase its scale, helping it to cut unit costs. It is also pursuing greater co-operation with FlyDubai, a low-cost airline based in Dubai, to achieve this. But Sir Tim Clark, president of Emirates, naturally cautious, and is aware of the risks that taking on Etihad’s liabilities would entail. Lower oil revenues in recent years have put greater pressure on Emirates to pay dividends to the government of Dubai, Sir Tim told Gulliver at last year’s Dubai Air Show.

Yet there is a big obstacle on the path to a deal: politics. Both airlines are flagship brands for their respective emirates. Abu Dhabi’s ruling Al Nahyan family, which used their oil wealth to bail out Dubai’s government in 2008, would almost certainly want to avoid losing face. This would require striking a delicate deal, perhaps retaining both brands for a while. The question of how much flying would continue to take place in Abu Dhabi is also a touchy subject for its government. A dual hub model would not be unprecedented—it has worked for Air France-KLM in Paris and Amsterdam. But with the rise of impressive new hubs in the region (Istanbul’s new airport, due to open on October 29th, hopes to be largest in the world), there may be pressure to channel investment into one flagship airport. The Dubai World Central Airport, undergoing expansion and located close to the border between the two emirates, could be an option.

Neither airline bosses has confirmed the rumours of a merger. Any negotiations in the future will be long and tough. But in any potential tie-up, Emirates will be dominant. Etihad would then have to live up to its own motto: “flying reimagined”.