Do Emirates and Etihad need to merge?

It seems odd, on the face of it, to have two of the world's biggest airlines operating 75 minutes down the road from one another, in the same country.Emirates and the younger Etihad compete on friendly terms, they say, taking advantage of the geography of Dubai and Abu Dhabi, respectively, to make the global hub model as profitable as possible.

The hub model, of course, is everything. The UAE's population of just over four million people is nowhere near big enough to sustain two such large airlines. The hub model relies on taking people from one corner of the world, and depositing them in another, often via Dubai or Abu Dhabi, where travellers can relieve themselves of some tourist dollars.

So far, particularly in the case of Emirates, it has become a hugely profitable business. Emirates flew 21 million passengers last year, and is said to be set to become the world's largest airline during the next ten years.

Etihad, which was set up five years ago and is heavily backed by the Abu Dhabi government, is yet to break even, but is on course to do so. Last year it carried six million passengers. Between them, the airlines have over $100 billion worth of aircraft on order.

Emirates alone is awaiting 58 Airbus A380's - the biggest planes in the sky. Such is the power said to be enjoyed by Tim Clark, head of Emirates, within the industry that he was believed to be able to pressure Airbus and Boeing into designing aircraft that are ideally suited to the needs of his airline, rather than to those of others. The aviation story of these two airlines has long been one of success. They are homegrown, world renowned brands. And the government of the UAE is rightly proud of them.

Now, however, there are strong rumours that they are to merge. The rumours have been carried in the international press, and will be causing no small amount of consternation in the head offices of all of their rivals. Both parties have issued denials, but with the global economy in its current shape, and passenger numbers down all over the world, the merger looks like an awfully good idea.

Emirates last month announced that its profits were down 88 per cent. Pooling resources and taking on the industry as one, could not only see the airlines enduring the economic slowdown, but also, when the dust has settled, leave the Gulf region poised at the centre international trade and tourist routes. It is a prize that is certainly worth fighting for.

Last year, when asked about the possibility of a merger, Etihad CEO James Hogan said: "What's the difference between having Emirates and Etihad nearby to each other here, and the cluster of European hubs - London, Paris, Frankfurt and Amsterdam? Or Kuala Lumpur, Singapore and Bangkok? We have seen that proximity doesn't negate viability.

"The issue isn't about competing with other Gulf carriers. The issue is competing with our global rivals, taking market share from them. In the past, European carriers didn't stop here. They just flew straight over us. Now they stop here. There is a shift going on, from European and Asian hubs to Gulf hubs."

The rumour that the airlines will merge is based upon the belief that Dubai will be hit hard by the credit crunch, and will be looking to its near-neighbour to help it through tough times. But only last week top officials in Dubai moved to try to quash this speculation.

In an extraordinary display of transparency, Mohammed Ali Alabbar, a member of the Dubai executive council, told an audience at the Dubai International Financial Centre that rumours of Dubai's demise were grossly exaggerated.

The rapidly growing emirate, he said, had debts amounting to $80 billion. $70 billion of that debt, he said, was to Dubai-affiliated companies. The debt was balanced, he added, by government assets of $90 billion, and assets belonging to state-backed companies of $260 billion.

Certainly, the move has quietened negative speculation. However, a merger of Emirates and Etihad, or any other large institutions in Dubai or Abu Dhabi would not now be unprecedented; less than a fortnight ago the UAE government announced the creation of Emirates Development Bank - which is the end product of a merger between two banks and the UAE's two largest home finance providers.

The speculation over the possible Emirates/Etihad merger will rumble on, as it has for the last few years. That it has intensified recently could be as much to do with global uncertainty regarding the future of aviation in the rest of the world, as it is with realities of Gulf aviation.

Time will tell.

Damian Reilly is the editor of Arabian Insight.