By Lubna Hamdan
It's complicated but a merger would create the biggest carrier by passenger traffic
Who would have thought that two of the Middle East’s largest airlines, who have denied rumours of a merger for years, would release a joint statement? Then again, who would have predicted that a virus would wipe out $314bn in ticket sales in 2020?
In May, Emirates airline President Tim Clark and Etihad Airways CEO Tony Douglas warned that 85 percent of airlines globally face insolvency by the end of the year without government intervention.
It may have taken a global health pandemic, but maybe now is the time for the airlines to hook up. They already cooperate in aviation security, maintenance, repair, and overhaul (MRO) works. Emirates’ tie-up with Flydubai in terms has also kind of transformed into a de facto merger. So what is keeping them from creating the world’s biggest carrier by passenger traffic? Well it’s a little more complicated than it seems.
On the one hand, a merger will help Etihad Airways cut its losses, which it managed to shrink from $1.52bn in 2017 to $1.28bn in 2018, extending the deficit over three years to $4.8bn thanks in no small part to investments in Alitalia, Air Berlin and India’s Jet Airways which turned sour. Emirates would also have to take on the Abu Dhabi carrier’s struggling load factor, having carried over a million passengers less in 2018 compared to 2017.
But there’s something in it for the Dubai carrier too. A merger with Etihad could help lessen Flydubai’s exposure to Boeing, with which it made a $27bn deal to purchase 225 of the troubled 737 Max aircraft, not to mention it is the aircraft manufacturer’s second biggest customer for the plane crippled by technical problems.
It doesn’t help that it also depends largely on the industry’s two largest aircraft, the Airbus A380 and Boeing 777, which have become less popular due to their high running and fuel costs – now an even bigger concern since Covid-19.
While Clark told local media that the A380 “is over,” the aircraft still forms the backbone of the airline’s operations, with 115 A380s in its fleet, and eight more to be delivered. And despite Clark and Douglas’ claim that passenger demand won’t return to pre-crisis levels until at least 2023, the UAE is still pursuing an aggressive travel expansion plan, particularly with Expo 2020 in the pipeline. While the event has been delayed to 2021, it hasn’t revised its 25 million target visits, which means a huge surge of travellers to Dubai.
“Emirates is already helping Etihad restructure its order book, which will see it commit to taking in only a fraction of aircraft it had sought”
So if Emirates were to merge with Etihad, it wouldn’t have to worry about a shortage in planes. Etihad has the Dreamliners, the A380s, and tons of planes. Adjusting aircraft for different routes increases the complexity of operations, but also provides flexibility in the post-Covid era, when experts predict travel demand will return in chunks, particularly in the region, whether it is to the Expo or 2022 World Cup.
If they were to merge, they may have the perfect hub: Dubai World Central (DWC). Aviation analysts have previously suggested Dubai could focus on European travellers while Abu Dhabi would cater to US passengers since it has a US pre-clearance facility that speeds passage.
But it’s never been done before. An analyst who spoke on condition of anonymity told Arabian Business it will take a massive jump in passenger travel to make a new hub work.
“Could you have three airlines operating out of two hubs 60 or 80 kilometres apart?” he argues, adding that while a merger makes sense in terms of revenue, operational costs “would hit the roof,” meaning they won’t be profitable for a long time, particularly if Emirates is to fly Etihad’s fleet.
“That increases complexity. It’s a complete nightmare doing that strategy. The one person who has always been great at that is Tim Clark, but he’s leaving,” he says. While Clark was set to retire at the end of June 2020, he hinted in an interview with The National that he will stay “for the time it takes the management group that I am working with to get a way forward and then we’ll see after that how it goes on,” he said.
A combined Emirates and Etihad force will also allow the airlines to increase their leverage among international competition. Emirates is already helping Etihad restructure its order book, which will see it commit to taking in only a fraction of aircraft it had sought. It looks like Emirates may be grooming Etihad for a merger after all.