Emirates Seeks Etihad Takeover to Create World’s Largest Airline

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https://www.bloomberg.com/news/arti...e-exploring-etihad-deal-to-forge-no-1-airline


[h=1]Emirates Seeks Etihad Takeover to Create World’s Largest Airline[/h]Layan OdehSeptember 20, 2018, 3:31 PM GMT+2
Dubai giant would take over bulk of its neighbor’s business

Dubai’s flagship airline Emirates is looking at taking over unprofitable neighbor Etihad, according to four people familiar with the matter, in a move that would create the world’s biggest carrier by passenger traffic.
The talks, which are at a preliminary stage, would see Emirates acquire the main airline business of Abu Dhabi’s Etihad, which would keep its maintenance arm, according to the people, who asked not to be named because the matter is confidential. The negotiations could yet fall through, they said.
Both airlines initially declined to comment, before later denying that any talks were underway. Were a transaction to go ahead the enlarged airline operation would be bigger than that of American Airlines Group Inc., which has a market value of $19.2 billion.
Any deal would require the blessing of the rulers of the richest sheikhdoms in the United Arab Emirates. For Abu Dhabi, which sits on 6 percent of global oil reserves, it would advance a drive to overhaul state-controlled entities as it adapts to lower crude prices. The airlines have traditionally been arch rivals, with their hubs competing to attract the same transfer passengers making long-distance trips between Asia and the West.
[h=3]New Leader[/h]Emirates would eclipse the U.S. Big Three with the addition of Etihad
Sources: IATA World Air Transport Statistics


Emirates Chairman Sheikh Ahmed bin Saeed Al Maktoum and President Tim Clark have previously played down speculation that the carriers might combine, Sheikh Ahmed saying in May that there have never been merger talks. Clark said in June that the question was one for shareholders, while adding that he saw nothing happening in the short-to-medium-term.
Timeline of Abu Dhabi consolidation

Sheikh Ahmed bin Saeed Al Maktoum

Photographer: Jasper Juinen/Bloomberg
A combination of the airlines would provide further evidence of the sheikdoms consolidating businesses to boost competitiveness. Abu Dhabi and Dubai companies formed Emirates Global Aluminium, one of the world’s largest producers, in a $15 billion combination in 2013, and the two have studied a merger of their stock exchanges. The Dubai government was also the driving force in compelling Emirates to cooperate with local discount carrier FlyDubai.
Etihad has been shrinking its operations following the failure of a so-called equity alliance strategy that saw it invest in a number of generally ailing foreign operators to help feed more traffic through Abu Dhabi. One of those, Air Berlin Plc, collapsed last year while another, Italy’s Alitalia, filed for bankruptcy protection, causing the pact to largely unravel.
The Middle Eastern company also saw its own business come under pressure as a slide in the price of oil led to a drop in travel in crude-based economies. That contributed to a $1.52 billion loss in 2017, taking the two-year deficit at the airline unit to almost $3.5 billion. Fitch Ratings last month said it expected Etihad to continue losing money through 2022.
[h=3]Emirates Rebound[/h]Emirates also suffered during the Gulf slump but was quick to recover as the oil price -- and local economies -- rebounded, with net income jumping by two-thirds to 4.11 billion dirhams ($1.12 billion) in the year ended March 31.

Photographer: Christopher Pike/Bloomberg
At Etihad, group Chief Executive Officer Tony Douglas, who took over in January, has been abandoning weaker routes and paring back the fleet in order to cut costs and boost revenues and cash flow, though he said in June that the measures so far amount only to first steps.
The strategic rethink has also meant reining in Etihad’s ambitions to dominate global traffic, with the main aim now being to drive Abu Dhabi’s tourism sector and foreign commercial links. Douglas has also been negotiating with Airbus SEand Boeing Co.after concluding that doubling the fleet is no longer viable, calling into question scores of wide-body jet orders.
Bringing the airlines together would not be easy because of the duplication of routes from their Dubai and Abu Dhabi bases. Both have sought to exploit the region’s position at a natural global crossroads, but to wring maximum value from the hub model, flights need to be focused at a single location, making transfers easy and more routes viable.
Emirates, which has built the world’s biggest fleet of Airbus A380 superjumbos, supplemented by smaller Boeing 777 wide-bodies, is already far larger than Etihad, yet handing the Abu Dhabi company responsibility for certain markets might jeopardize its own success.
The formation of a merged airline would surpass current industry No. 1 American, based on the most recent annual traffic figures from the International Air Transport Association. It’s not clear how much further Etihad’s operations might actually be reduced.
Emirates is already the world’s biggest airline on international routes and ranks fourth overall, according to IATA, behind the top three U.S. carriers.

 

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What an Emirates-Etihad merger deal could mean for aviation

Etihad and Emirates publicly deny merger talks but an exploratory look at operations remains on the table, according to the people who asked not to be identified

A combination of Dubai-based Emirates and Abu Dhabi’s Etihad would be the airline industry’s deal of the decade, if it can be pulled off.
Executives at the two companies have been quietly laying plans to create what would be the world’s biggest airline by passenger traffic, according to people familiar with the discussions. The group would have combined revenue of $29.3 billion and control almost 5 percent of the world’s airline routes.
Etihad and Emirates publicly deny merger talks, but an exploratory look at Emirates taking over Etihad’s airline operations remains on the table, according to the people, who asked not to be identified discussing private considerations. Talks have occurred on-and-off for some time, one of the people said, and any deal would face antitrust as well as political challenges.

Here are five ways a tie-up would transform the airline industry:

Higher Fares
Passengers in Europe and Asia can expect ticket prices to rise, according to Bloomberg Intelligence analysts, as the merger partners take capacity out of the market. That would lower pressure on competitors such as Deutsche Lufthansa AG and Air France-KLM that fly similar routes. Almost every route flown by Etihad is also flown by Emirates, and more than half of Emirates’ routes are duplicated by Etihad.

Mega-Hub
A deal would inject life into the Gulf’s hub model by giving the combined group control over two major connecting airports.
“The airlines could split focus by airport to different regions, with Abu Dhabi concentrating on US passengers, as it already has a US pre-clearance facility that speeds passage,” according to BI analyst George Ferguson. “Dubai could focus on European travelers.”
Dubai-based Emirates used the hub concept to transform itself into the world’s largest long-haul carrier. But it’s facing pressure with the rise of competing airports in Asia and the small but fast-growing number of low-cost direct long-distance routes.

Planemakers Get Squeezed
With Emirates’ backing, Etihad would gain more clout negotiating with Airbus and Boeing to cancel part of an order book which now totals 174 planes worth $46 billion. Emirates is a bigger and better buyer of aircraft, and a critical customer for both planemakers’ biggest jets. Much of the potential for efficiencies in a merger would come from reducing overlap on routes, which would lessen the need for more aircraft.
“There’s a bit of complimentality but also quite a bit of overlap in those structures,” Peter Harbison, chairman of the CAPA Centre for Aviation, said in a Bloomberg Television interview. “So if you do start to rationalise you’re talking about probably removing quite a lot of aircraft from the fleet initially.”

Antitrust Woes
One reason for caution about a tie-up is the overlap on routes. Emirates is already the dominant carrier for many destinations in the Middle East, India and Australia. That means the carriers would likely be forced to drop routes or slots at major hubs, according to Bloomberg Opinion columnist David Fickling.

Politics
Oil-rich Abu Dhabi helped bail out Dubai after the 2008 financial crisis and remains the linchpin for the United Arab Emirates’ oil reserves. Yet Dubai has done a better job of developing a tourism industry and has the stronger airline. While the two sheikdoms have cooperated in the past on consolidating businesses, any deal would require delicate compromises.

Then there’s the US, whose carriers have waged an ongoing protest over allegations of billions of dollars of state subsidies to Emirates and Etihad. An agreement that provides for greater transparency in financial reporting by the government-owned carriers was reached this year, but a combination of the two Gulf carriers could be seen as a bailout for struggling Etihad.

https://www.arabianbusiness.com/ind...es-etihad-merger-deal-could-mean-for-aviation