POTENTIAL AIRLINE DEAL OF DECADE?

Any Emirates-Etihad tie-up will create world’s biggest airline by passenger traffic but headwinds abound

ACOMBINATION 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 had 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 US$29.3 billion (RM121 billion) and control almost five per cent of the world’s airline routes.

Etihad and Emirates publicly denied merger talks, but an exploratory looked at Emirates taking over Etihad’s airline operations remained on the table, according to the people.

Talks had occurred on-and-off for some time, said the people, 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 could expect ticket prices to rise, according to Bloomberg Intelligence (BI) analysts, as the merger partners took 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 United States passengers, as it has a US pre-clearance facility that speeds passage,” according to BI analysts analyst George Ferguson.

“Dubai could focus on European travellers.”

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 longdistance routes.

Planemakers Get Squeezed With Emirates’ backing, Etihad would gain more clout negotiating with Airbus SE and Boeing Co to cancel part of an order book, which now totals 174 planes worth US$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,” said Peter Harbison, chairman of the CAPA Centre for Aviation.

“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 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

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 governmentowned carriers was reached this year, but a combination of the two Gulf carriers could be seen as a bailout for struggling Etihad.