Emirates-Etihad merger: will they or won’t they? 

October 15, 2017 1:00 pm


When Reuters recently asked Dubai’s Emirates Airlines president Tim Clark if the carrier could merge with its Abu Dhabi counterpart Etihad, he said: “unlikely”, which was an improvement on “nonsense”, a remark he said in March, and later in May when probed with the same question.

Rumors circulating around the Emirates-Etihad merger go back to 2008 when CAPA, market intelligence providers for the aviation industry, said that consolidation in the Middle East was imminent. That year, IATA, aviation’s regulatory body, expected 30+ carriers to incur deep losses, coinciding with a global financial crisis.

“There have also been reports growing financial pressures in the UAE could even prompt a merger between powerhouse airlines Emirates and Etihad,” CAPA said, rationalising that the aim was to create an Air France-KLM style force in global aviation.

Circumstances have changed but the question remains, will the two merge, why and why not?

A storm is brewing

The American Journal of Transportation had a May 2017 interview with Clark when he said he’s bracing for a “gathering storm”.

In the eye of the tempest were low-cost airlines, like flydubai, with whom Emirates recently announced a codeshare partnership for a number of destinations, who were  intruding on long haul routes, a business top carriers had spent years and money building.

Clark told the magazine that Emirates may also need to establish a short-haul fleet as previously poorly accessed Mideast nations begin to open up.

The deal with flydubai explains why that plan is not practical before at least a decade down the road when the new Al Maktoum International hub will provide runway flexibility to smaller planes.

Today Terminal 2 is where low-cost airlines are located and terminal 3 has Emirates and Quantas and other top-tier international destination carriers and where Emirates’ 250-plus fleet of Boeing 777 jets and Airbus A380s can take flight.

Clark again told the journal that the aforementioned merger talks were “nonsense.”

“Emirates is not averse to a merger, it just doesn’t need to because of its own success and critical mass,” Saj Ahmad, Chief Analyst at StrategicAero Research, UK, told AMEinfo.

He said that there’s more likelihood that Emirates and flydubai will integrate deeper before there is a prospect of merging with Etihad adding that equally, Etihad’s new management wants to plot a new strategic course and turn around its losses.

“I wouldn’t rule out a merger later in the future, but right now, it’s not a requirement or necessity for either party. And let’s not forget, Emirates is the biggest airline in the GCC. It doesn’t need to merge with anyone. If anything, it’s smaller players who would likely look to Emirates so that they could codeshare or cooperate – because many know that they simply cannot compete head to head with Emirates’ massive regional and international network.”

Read: Gulf Air and Turkish Airlines latest to partner; ‘more to come’

From ‘nonsense’ to ‘unlikely’

Clark told Reuters that there may not likely be a merger, but that cooperation in areas like procurement, could take place.

“I think there is value to be had working more closely with them,” Clark was quoted as saying.

“There are many areas that the airlines could work together on, like procurement. But we have to [take] the first jump first to understand what it is we could do. It is my superiors who have to make that call, not me.”

Why can’t two national airlines located over an hour’s drive from each other work together as one?

There are typical challenges facing horizontal integration of any two large companies, such as the need to incorporate and align cultural differences, configuring a common technology platform and agreeing on a future divestment or exit strategy.

But there are two real reasons. For one, Dubai is the preferred tourism destination and not Abu Dhabi, and while Abu Dhabi is the capital, it has yet to make a similar impression on travelers, with Dubai considered the UAE’s aviation hub.

Secondly, and importantly, the cash flow doesn’t make sense. While Emirates is struggling, it is still able to clear a profit, while Etihad is in the loss column, despite subsidy efforts.

The numbers do the talking

The math simply doesn’t add up when it comes to merger propositions.

Emirates

Emirates Group announced it had made a profit for the  28th consecutive year, posting as a group AED8.2 billion ($2.2 bn) profit for the financial year ending March 31, 2016, or a profit of AED 7.1 billion ($1.9bn),a 56 per cent increase over the previous year.

The financial year ending March 31, 2017, was much worse, but still allowed Emirates Group to post an AED2.5bn ($670 million) profit, down 70 per cent.

Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive of Emirates Airline and Group, said, in 2017: “Over the years, we have invested to build our business capabilities and brand reputation. We now reap the benefits as these strong foundations have helped us to weather the destabilising events, which have impacted travel demand during the year – from the Brexit vote to Europe’s immigration challenges and terror attacks, from the new policies impacting air travel into the US, to currency devaluation and funds repatriation issues in parts of Africa, and the continued knock-on effect of a sluggish oil and gas industry on business confidence and travel demand.”

Read:Will flydubai deal save Emirates Airline’s plummeting profits?

In 2015-16, the Group collectively invested over AED17.3bn ($4.7bn) in new aircraft and equipment.  Then Emirates Airlines’ received 29 new aircraft, including 16 A380s, 12 Boeing 777-300ERs and one Boeing 777F, bringing its total fleet count to 251 at the end of March 2016.

In 2016-2017 the Group collectively invested AED 13.7 billion (US$ 3.7 billion) in new aircraft and equipment, the acquisition of companies, modern facilities, the latest technologies and staff initiatives.

Passenger capacity was up on 2016. Carrying a record 51.9 million passengers (up 8 per cent), Emirates crossed the 50 million passenger milestone and achieved a Passenger Seat Factor of 76.5 per cent in 2015-2016 . In the latest report, Emirates carried a record 56.1 million passengers (again up 8 per cent).

Etihad

In July 2017, Bloomberg reported that Etihad Airways recorded a $1.87bn annual loss.

The report said the results reveal the full extent of the pressures facing Gulf carriers as they grapple with the impact of terrorism on global traffic flows and a low oil price that’s crimped local travel.

“The 2016 loss came after Abu Dhabi-based Etihad booked a $1.06 billion charge from writing down the value of aircraft and a further $808 million hit from the reduced value of stakes in so called equity partners, including struggling Air Berlin Plc and Italy’s Alitalia SpA, which filed for bankruptcy in May 2017,” Bloombrg said.

Bloomberg had also reported that Alitalia, which was mainly backed by Abu Dhabi-based Etihad Airways PJSC, had in May 2017 exhausted all options to stay solvent after workers nixed a 2 billion-euro refinancing plan involving 1,600 job losses. It reported that Etihad, which owns 49 percent of the carrier, said it won’t extend additional funding.

“This year is just as challenging for the global aviation industry and the ever-evolving competitive environment is likely to impact overall performance in 2017,” Ray Gammell, interim chief executive officer of Etihad Aviation Group, said in a statement, following the loss announcement.

According to Bloomberg, the loss was equivalent to almost 40 per cent of Etihad Air’s passenger revenue and more than 20 per cent of its overall revenue of $8.36bn.

“The company, which had a profit of $103 million a year earlier, didn’t publish full group numbers,” said the Bloomberg report.

According to Forbes last July, Etihad had not made $103 million as the carrier had claimed, but rather quoted a new report that contends that Etihad Airways lost $2.1bn in 2015, even after receiving subsidies of $1.7bn from the UAE government.

The report was issued by the Partnership for Open and Fair Skies, which represents US-based American, Delta and United and most of their labor unions. The group opposes the rapid growth in US service by subsidized Middle East carriers, in violation of the Open Skies treaties that enable the growth.

Read: Emirates boss slams US airlines over “unfounded” unfair competition claims

“Integration with another airline, whether full service or LCC brings a slew of challenges. One has to remember that Emirates and Etihad, while on the surface appear to be similar operating entities, they have vastly different operating structures, routes, costs and thousands of other factors which will influence whether they get together or not,” said Ahmad.

“Not all mergers are successful in this business. KLM have always expressed wishes to de-merge with AF and even BA’s merger with Iberia is still fraught with endless strikes and strife, years after merging,” he added.

What’s Emirates to do meanwhile?

Emriates has no choice but to solidify a closer relationship with low-cost sister airline flydubai and it recently prolonged a deal with Australian carrier Qantas, according to a joint statement by the two long-haul carriers.

They announced additional network changes under the joint partnership providing greater year-round frequency and more services between Australia and New Zealand, pending approval for the current agreement’s extension.

From March 2018, Emirates will stop flying from Melbourne and Brisbane to Auckland and instead focus on its non-stop Auckland-Dubai service,” the statement said.

“Emirates will retain its existing daily A380 flights from Dubai to Christchurch via Sydney, and the airline is also evaluating potential new direct services between New Zealand and Dubai.”

The statement continued by saying that Qantas will increase the frequency of its services between the two countries, adding seven new return flights per week between Melbourne and Auckland and an extra two return services per week between Brisbane and Auckland.

Qantas’ new trans-Tasman services will carry Emirates code and will connect seamlessly to Qantas’ London services via Perth or Singapore and Emirates’ services between Australia and Europe via Dubai.

Clark said “Reauthorisation of the partnership will allow us to leverage our combined network strengths to offer customers even more flight choices and reciprocal benefits for our millions of frequent flyer members.”

Speaking more broadly of the airline’s plans, Clark said it was considering an order for Airbus 380s to replace 25 aircraft due to retire in the mid 2020s and was also looking at the Airbus A350 and Boeing 787 for the 250-300 seat market.

Qantas Group CEO, Alan Joyce said: “Since 2013 we have delivered more choice and a larger network to eight million passengers who have travelled more than 65 billion kilometres on our joint network.

“We are now enhancing the partnership to reflect customer demand, new aircraft technology and our respective network strengths.”

 

 

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By Hadi Khatib
Hadi Khatib is a business editor with more than 15 years' experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.



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