When Will Emirates Finally Buy Etihad?

Etihad has been cutting costs and slashing routes after a $1.5 billion loss last year and a $2 billion loss the year before. They’ve been expected to walk away from some aircraft orders and investors have been nervous about their bonds.

Since Etihad’s attempt at building its own alliance has fallen apart, Star Alliance will no longer forbid member airlines from codesharing with the Abu Dhabi-based carrier and they’re looking for codeshare partners. (It’s unclear how significant this rule has actually been considering that Etihad has already been codesharing with Aegean, ANA, Air Canada, Asiana, Brussels Airlines, Lufthansa, SAS, SWISS, TAP Air Portugal, and Turkish.)

The CEO of Emirates teased merger speculation last year. Etihad’s CEO teased it this year. The two airlines have been cooperating more closely. Etihad is lending pilots to Emirates.

It makes little sense to have two global aviation hub airports a mere 72 miles from each other. This depresses yields on non-stop flights between the UAE and Europe, and it depresses connecting fares between North American and Europe on the one hand and India and Pakistan on the other.

Dubai is the more attractive hub, and Emirates the stronger carrier. In fact London – Dubai is one of the most lucrative business markets in the world. Etihad has bribed customers for years with complimentary car service anywhere in the UAE for business class passengers, and even provided free bus service for economy passengers.

The new Dubai World Central airport makes a combination far more palatable, as I’ve been pointing out for several years. It’s situated in between the current Abu Dhabi and Dubai airports.

One Mile at a Time asks, “Why Don’t Emirates And Etihad Just Merge Already?”

So why is it taking so long, if it makes so much sense?

Lucky points out that Etihad doesn’t add much to Emirates at this point. They bring planes, including aircraft types Emirates doesn’t need — Emirates has a simply fleet of Boeing 777s and Airbus A380s and they’re working increasingly closely with flyDubai and its 737s.

I wouldn’t read too much into delays here in doing a deal. Businesses often need to clean up their balance sheet before getting acquired in order to become more attractive to an acquirer. It’s plausible that there have been these very merger discussions, and Etihad is going to downsize its order book and close some stations before Emirates will go through with the deal. Better to be able to blame it on the last guy,.

The reason for Emirates to do the deal is to take out competition. They certainly see lower yields with with Etihad carrying passengers over AUH to India, Pakistan, etc. And they see lower yields on routes like UAE-Europe non-stop.

Before Etihad launched Gulf Air had an Abu Dhabi hub. Gulf Air had been owned by Qatar, Bahrain, Abu Dhabi, and Oman. Qatar pulled out in 2002. Gulf Air dropped its Abu Dhabi hub and Etihad was launched a dozen years ago, Gulf Air CEO James Hogan became Etihad’s CEO.

The Al Nahyan family wanted their emirate to be a world center, but got tired of the massive losses James Hogan’s strategy of buying troubled carriers, redirecting their traffic through Abu Dhabi, and ‘turning them around’ entailed. Giving up an Abu Dhabi global aviation hub is a hard pill to swallow even if Dubai World Central makes complete sense for a unified operation.

There’s a tremendous history of airlines acquiring competitors just to put them out of business. Perhaps my favorite was Southwest’s acquisition of Muse Air. Muse was also known as ‘Revenge Air’. Southwest’s founding President wasn’t Herb Kelleher. It was Lamar Muse, who was President from 1971 – 1978 when he was pushed out. His son started an airline two years later and it competed head to head with Southwest, which acquired the carrier five years later to stop the bleeding on both sides.

Ultimately the question is whether there’s too much pride on the line, and whether Etihad remains enough of a drag on Emirates’ operations that they’ll want to buy.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Could it NOT make sense as they would lose ALOT of the reason for most of their flights into most spots? If its the same certificate, could they fly into the restricted airports in the same quantity of flights? Also, lets not forget that a short time ago the AD govt had to bail out Dubai’s, so money is VERY fluid there.

  2. This possible merger smells so similar to the 2009-2010 acquisition of Air Jamaica by Caribbean Airlines of Trinidad. Made a world of sense for the two regional carriers to combine and be a more potent competitor against the AAs and B6s. But what was underestimated was the animosity between the two sides (Jamaicans and Trinis) and that has meant a less than stellar or successful combination to this day.

  3. Another such takeover that comes to mind is Reno Air, which was founded by American pilots unhappy about American’s decision to decrease pilot hubbing at LAX. In the end, AA wound up buying Reno Air.

  4. @Gary

    What about FlyDubai, the synergies between them are far greater and they complement each other.
    FlyDubai needs to expand, needs planes, wants to add destinations.
    Etihad has planes, destinations, permits to fly to them, slots. It has the fleet flexibility that FlyDubai would need aircraft for all sorts of short haul and low yield routes. It has the planes that can better cope with low load factors.

    AUH is ready with a new Midfield terminal almost done
    DXB is bursting at the seams
    DWC is barely ready, less than 10% of projected scope.

    Perhaps DWC is not central to the upcoming alliance of Emirates, Etihad and FlyDubai. Perhaps AUH can be the DWC?

    We should be watching FlyDubai and Etihad perhaps…

  5. @Vineet – That would just add another competitor, and the last thing Etihad wants is more competition in the area.

  6. This speculation is exactly backwards. It is vastly more likely that Abu Dhabi bails out Dubai and Emirates — which is historically the natural order of things — and not the reverse. This article wrongly views these companies as ordinary business enterprises that are capitalized in the normal fashion with the goal of free cash flow or profit, when in reality they are state directed enterprises that have historically operated in a manner unlinked from the realities of the market because the goal is not to make a profit but to deploy surplus petrodollars. What seems like relative success to outsiders does not tell the real story. Emirates might be — and we have to say “might be” because we have no idea what’s going on behind the curtain — the more successful airline, but Abu Dhabi is by far in much better financial condition than Dubai, which has already come near governmental insolvency on several occasions only to be bailed out by Abu Dhabi. The difference driving the divergent growth patterns of EK and EY follow from the fact that conservative Abu Dhabi has now turned off the EY spigot, whilst Dubai continues to lavish unlimited funds on EK. When the music stops with the next inevitable crisis though, Abu Dhabi will be able to absorb the loss (and is already taking the write-offs) while EK will absolutely not be able. Also interesting is that much of the massive EK debt is external (much of it ultimately landing in Europe through its securitized leases, not to mention what the loss of EK as the purchaser of last resort for the entire A380 program would mean to Airbus and its stakeholders and lenders), and represents a systemic financial risk that few have considered. Its not inconceivable that the bailout will be funded not only by Abu Dhabi but also by the ECB.

    In any case, the question we should all be asking, despite outward appearances, is who is going to bail out EK, as EY won’t need it and can fade away more gracefully — its actually a relatively minor loss for what has been the worst sovereign institutional investor in the world, if not in world history.

  7. Obviously, the demise of Etihad is inevitable as it’s existence is economically absurd. I guess everyone will have to wait and see how it happens. I think few of us are sufficient experts in UAE politics and business dealings to offer much guidance.

    Even without the obvious overcapacity of Etihad’s flying, I’m still skeptical that Emirates is a “real business” — at least at its current size. Logic would suggest that Emirates would have to cut its capacity by about half (like rid itself of most of its A380s) and maybe eliminate Qatar Airways to be profitable in a conventional sense. But obviously getting rid of Etihad would be an excellent first step and make the continued subsidization of Emirates more manageable for the Maktoum family.

  8. @Mak — I didn’t see your post, which appears to offer excellent insight. So many folks are blinded by the bells, whistles and perks of the Mideast carriers that they fail to appreciate the economic absurdity of their operations. It will be fascinating to see what actually happens to Emirates in the future. I don’t think any of us really know.

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