Dubai-based Emirates and Abu Dhabi’s Etihad could merge and become the airline industry’s deal of the decade—if these companies can manage to pull this off.
According to sources, executives at the two companies have been quietly planning to create what would be the world’s biggest airline, by passenger traffic, reports the Bloomberg.
If the merger is successful, the group would have the combined revenue of $29.3 billion and control almost 5% of the world’s airline routes.
Etihad and Emirates publicly deny talks of a merger, but the possibility of Emirates taking over Etihad’s airline operations remains on the table, according to sources preferring to remain anonymous.
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 an Emirates-Etihad merger could transform the airline industry:
Rising ticket prices
According to Bloomberg Intelligence analysts, passengers in Europe and Asia can expect ticket prices to rise, as the merger partners take capacity out of the market.
Higher prices 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.
Control over Gulf-hub
A deal would inject life into the Gulf’s hub model by giving the combined group control over two major connecting airports.
According to BI analyst George Ferguson, the airlines could split their 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.
He added that Dubai could focus on European travelers.
Dubai-based Emirates used the hub concept to transform itself into the world’s largest long-haul carrier. However, it is facing pressure with the rise of competing airports in Asia and the small but fast-growing number of low-cost direct long-distance routes.
Plane-makers in a rut
With Emirates’ backing, Etihad would gain more clout negotiating with Airbus SE and Boeing Co. to cancel part of an order of 174 planes worth $46 billion.
Emirates is a bigger and better buyer of aircrafts, and a critical customer for both plane-makers’ biggest jets. Much of the potential for efficiencies in a merger would come from reducing overlapping routes—which would lessen the need for more aircraft.
Peter Harbison, chairman of the CAPA Centre for Aviation, recently said that there is a bit of complementarity, but also quite a bit of overlap, in those structures.
Lack of trust
One reason for caution about a tie-up is overlapping routes. Emirates is already the dominant carrier for many destinations in the Middle East, India and Australia, which means the carriers would likely be forced to drop routes or slots at major hubs, according to Bloomberg Opinion columnist David Fickling.
Dominance over the market
A combined Emirates-Etihad would have about 60% of capacity from Australia to Europe, the Middle East and Africa.
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.
However, 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.