Rumblings of a tie-up between UAE giants Emirates and Etihad Airways – heard throughout the year – have reached a crescendo with a report that Dubai-based Emirates is in preliminary talks on a takeover of its Abu Dhabi rival.
A decade ago, amid the wider financial challenges of Dubai, there surfaced rumours predicated on a different scenario – that of Etihad helping to rescue Emirates. Both carriers quashed the notion.
Long-serving Emirates Airline president Tim Clark responded to questions about a possible link-up by saying that, while the Dubai carrier was open to co-operation, any such decisions would be made by its owners, and had not been indicated.
Bloomberg's 20 September report of preliminary talks – in which it cites unnamed people familiar with the matter – suggests that the deal would involve Emirates acquiring the main airline operation of Etihad, leaving the Abu Dhabi group with its maintenance operation.
The talks are at an early stage and "could yet fall through", the report notes.
Responding to the story, Etihad and Emirates both say: "There is no truth to this rumour."
If the financial problems of Dubai sparked the talk of a tie-up a decade ago, Etihad's own challenges may have revived the notion.
Etihad has spent the last year in restructuring mode after losing patience with its failing European airline investments. Air Berlin and Alitalia both entered formal restructuring in the absence of further financial backing from Abu Dhabi – the German carrier terminally, while efforts to revive the Italian operator continue.
Darwin Airline also collapsed a few months after Etihad sold its holding in the Swiss regional operator.
These failed investments, together with wider air travel demand challenges in the region over the last 18 months, have taken a toll on the group's financial performance. Etihad disclosed a group loss of $1.5 billion in last year's financial statement.
Etihad Aviation Group chief Tony Douglas, who took the helm at the start of the year, said the company had been "improving the quality" of its revenues and "streamlining" its cost base.
"These are solid first steps in an ongoing journey to transform this business into one that is positioned for financially sustainable growth over the long term," he said in June, as he detailed the scale of the loss.
Restructuring efforts have focused on Etihad's core airline operation, of which Douglas himself has taken charge, and included an overhaul of network and fleet. After years of rapid growth, the measures have trimmed Etihad capacity over the last 12 months.
But the carrier's wider equity partnership strategy so far remains in place. This include investments in Jet Airways, Virgin Australia, Air Serbia and Air Seychelles.
Struggling investments accounted for just part of Etihad's woes. Travel restrictions impacting US services from the UAE in the early days of the Trump administration compounded local demand issues stemming from the stuttering energy industry, key to Gulf economies.
They also impacted Emirates, which reported a sharp downturn in profit for the year ended March 2017. But the Dubai carrier has rebounded strongly, restoring its profits over the last full year. It did, however, point to continued yield pressures and challenges in some of its key markets.
While co-operation or merger suggestions have been raised before, the idea of Emirates taking over Etihad has not been floated and would seem to sit at odds with the ambitions of Abu Dhabi.
After all, Etihad embarked on its partnership strategy in part as a mechanism for fast-tracking growth of its Abu Dhabi hub to help catch up with its more established airline neighbours in Dubai and Doha. There has been little sign that Abu Dhabi's global ambitions have altered, nor that the rationale of developing its hub in support of wider economic activity has changed.
A merger – be it a takeover or not – would also alter the trend of decoupling in the Gulf states. This fuelled the disbanding of the former Gulf Air ownership, spawning the creation or rapid development of Etihad, Qatar Airways and Oman Air.
This perhaps makes closer co-operation rather than a merger between two UAE giants a more likely outcome. Emirates has itself already rethought its relationship with sister carrier Flydubai in the last year, tightening links with the low-cost operation.
"The first question in everyone’s mind would be the degree of [Etihad-Emirates] network overlap, bearing in mind that their Middle East hubs are fairly close to each other and a high percentage of true origins and destinations overlap," notes Peter Morris, chief economist at Flight Ascend Consultancy.
"The second question would perhaps be the degree of the arrangement between the two state owners made for continued 'core services', however that is defined, through Abu Dhabi – which is, after all, the senior emirate.
"Given the degree of current service overlap there would, of course, be significant scope for cutting and synchronising schedules. But if this would be a success it would not purely be by cutting services. Another element to factor in is the absorption of Flydubai in to Emirates, which may complicate matters too."
Analysis of FlightGlobal schedules data for September shows the great extent to which Etihad's network overlaps with Emirates. Only nine of the 78 destinations Etihad serves from Abu Dhabi are not also served by its neighbour from Dubai, an airport little more than 100km away. These include five destinations in the Asia-Pacific region: Astana, Baku, Chengdu, Kathmandu and Kozhikode - though it offers onward flights to Nagoya which Emirates does not serve. They also includes Rabat in Africa, as well as Belgrade, Edinburgh and Minsk in Europe.
That will go down to eight at the end of the month when Etihad closes its route to Edinburgh – a city which Emirates will begin serving from Dubai at the start of October.
By contrast, the 69 common destinations account for roughly half the number Emirates serves from Dubai, reflecting Emirates' larger network.
Much of the interest in consolidation of the two carriers is the sheer scale of a combination. Outside any theoretical tie-ups between US majors, an Emirates-Etihad link would be the largest merger of two carriers from the same country, which would avoid the various challenges inherent in – and which still stymie – true cross-border consolidation.
Emirates generated revenue of $27.9 billion in 2017, making it the seventh biggest airline group in the world by that metric; it was the fourth-biggest in terms of traffic. Etihad posted revenue of $6.1 billion in the same year, ranking it among the top 30 by revenues, and is just outside the top 20 by traffic. Combined, the two groups carried just under 75 million passengers in 2017.
Both are also huge players in long-haul operations. Emirates operates a fleet of 271 aircraft, over 100 of which are Airbus A380s, and has a further 215 on order, Flight Fleets Analyzer shows.
Etihad operates 10 A380s as part of its 111-strong fleet and has another 164 jets on order. Etihad and Emirates are both Boeing 777 operators and customers for the 777X. Emirates is intending to take Boeing 787s, variants of which are already operated by Etihad. The huge order backlogs of the two airlines would come under scrutiny with any tie-up plan, with both major airframers exposed.
A combined carrier would undoubtedly place already-significant players higher on the global stage. It may help yields in long-haul markets, not just their own but those of rivals by removing capacity. And it would present an even more powerful purchaser of aircraft.
Despite the close proximity of their bases and similarities in their business models, including hub transit, the two carriers have key differences. Emirates, some two decades older than its rival, has largely eschewed airline partnerships, the Qantas venture notwithstanding. Etihad has instead pursued partners to build scale, encountering some high-profile difficulties.
Both share a crucial common aspect, however. They are state-owned, by the governments of their respective emirates, and any tie-up agreement, however tight or loose, will ultimately depend on their wider approaches and ambitions.
Source: Cirium Dashboard