Emirates, Etihad quash rumours of merger to create world's largest airline

The old buzz that Dubai-based Emirates Airlines is looking to acquire Abu Dhabi-based Etihad Airways - a move that would create the world's biggest carrier by passenger traffic - is getting louder. Citing sources aware of the developments Bloomberg reported that the talks, which are at a preliminary stage, would see Emirates acquire the main airline business of the unprofitable Etihad. The latter intends to retain its maintenance arm.

However, both airlines were quick to deny the development. There is no truth to this rumour," an Emirates spokeswoman told Reuters yesterday. Etihad made a similar statement. Nonetheless, the speculation continues because any such deal would not only impact the regional aviation space, but also have global ramifications.

Although the two Gulf airlines have traditionally been arch rivals, with their hubs competing to attract the same transfer passengers making long-distance trips between Asia and the West, the sheikdoms have recently been consolidating businesses to boost competitiveness.

For instance, Abu Dhabi and Dubai companies formed Emirates Global Aluminium, one of the world's largest producers, in a $15 billion combination in 2013, and the two have studied a merger of their stock exchanges. Earlier this year, the flagship carrier of the two emirates signed agreements to cooperate in some areas, such as a deal under which Etihad pilots can join Emirates on a temporary basis for two years. So an Emirates-Etihad deal fits into the pattern.

Of course, as the news portal pointed out, the deal, if it were to happen, would require the blessing of the rulers of both sheikhdoms, the richest in the United Arab Emirates. The rumours come against the backdrop of turbulent times for the aviation sector. Both airlines, which grew rapidly earlier this decade, have faced financial pressures in the past two years because of tough competition in the industry and a regional economic slowdown due to low oil prices.

While Emirates was quick to recover as the oil price rebounded, with its net income jumping by two-thirds to around $1.12 billion in the last fiscal, Etihad hasn't been as lucky. The airline posted a loss of $1.52 billion in 2017, taking the two-year deficit at the airline unit to almost $3.5 billion. Fitch Ratings last month said it expected Etihad to continue losing money through 2022.

Etihad, moreover, took a huge hit after its 'equity alliance' strategy backfired. The idea was to invest in a number of struggling foreign operators to help feed more traffic through Abu Dhabi and expand its international footprint, but the collapse of partners like Air Berlin and Italy's Alitalia resulted in huge losses for Etihad.

No wonder Tony Douglas, Etihad's group CEO, who took over in January, is focussing on shrinking the airline's operations. He has been abandoning weaker routes and paring back the fleet in order to cut costs and boost revenues and cash flow, though he said in June that the measures, so far, amount only to first steps.

Given that Emirates and Etihad serve the same markets and have hubs a little over an hour's drive apart, a merger certainly makes commercial sense. However, bringing the airlines together would not be easy because of the duplication of routes. According to a senior banker monitoring business in the Gulf, though the idea of an Emirates-Etihad merger had been circulating "on and off for at least five years", he hadn't heard of any new development. He added that no bank has been mandated to arrange a deal, which would be very difficult operationally.

Besides, as a source close to Etihad told the agency, while a merger could conceivably happen in the future, Abu Dhabi won't want to give up control of its airline and brand in a hurry, especially having invested billions of dollars in its international airport and other aviation infrastructure.

But if the deal does come to pass, the merged airline would surpass current industry No. 1 American Airlines. Based on the most recent annual traffic figures from the International Air Transport Association. Emirates is already the world's biggest airline on international routes and ranks fourth overall, behind the top three U.S. carriers.

With Reuters inputs

Edited By Sushmita Choudhury Agarwal