Tuesday, September 25, 2018

OPINION: Alleged Emirates and Etihad merger

Another holy cow! Just when I thought I had learnt it all when the airline of Abu Dhabi Etihad was rumoured to buy into Germany's Lufthansa, Bloomberg steps up the game by announcing that Dubai's Emirates Airlines would merge with Abu Dhabi's Etihad Airways. So, after I recovered from this potential news - and it took me a long time to recover! -, I started thinking and present you herewith with my two cents' worth.

It seems that the GCC aviation industry – and the whole political and economic region, for that matter - is not coming to a rest. More than one year ago, under the leadership of Saudi Arabia, the neighbouring countries of Qatar, including the United Arab Emirates and Bahrain, imposed a political and economic blockade on the hydrocarbon-rich yet tiny island in the Persian Gulf – or the Arabian Gulf, depending on who you ask, of course. As a consequence, Qatar Airways recently reported heavy financial losses due to increased operational costs, certainly heavy blemishes on the now dented armour of the once sky-rocketing airline, in line to become the new Emirates by providing even better services throughout the whole process chain while spending just a bit less through the same chain than its rival across the narrow sea stretch. Further up north, Kuwait keeps seeing its air operations failing due to century old habits of ‘wasta’ and all subsequent consequences, Gulf Air of Bahrain is a mere shadow of its former glory, Oman Air… has there actually ever been something of importance to report about this small air operation other than it still operates? Emirates has downsized its personnel numbers, keeps aircraft parked, has entered into an alliance with arch rival Etihad on such matters as procurement. The new Dubai airport, once dubbed the largest in the world, still does not see air operations of any significance. Saudi and UAE airports get attacked by Houthi forces out of Yemen as retaliation for the proxy war fought by Saudi Arabia and its less important brethren – amongst them the UAE being the best of the rest – against Iran on Yemen’s soil. As a consequence of this turmoil in the region, and in combination with both fairly low oil prices on the spot market and the recent introduction of VAT in various GCC member states, Sheikh Ahmed of Dubai has seen to it that his two air operations - Emirates and Fly Dubai – started utilising common business grounds to take advantage of economies of scale; and now, the biggest step forward of them all - that is, when it actually evolves to a viable business model with politics taking a back seat: Bloomberg reports that Emirates of Dubai and Etihad of Abu Dhabi are in talks to fully merge after both airlines already explored and implemented strategic synergies over the last few months! Obviously, spokesmen for both airlines were quick to dismiss Bloomberg’s article but in all fairness, wouldn’t it make economic sense?

For those of you that have never lived in the region: this story is as big as a potential merger of McDonald’s and Burger King would be. Rubbish! The story is even bigger! We all remember when the tallest skyscraper in the world was renamed from Burj Dubai to Burj Khalifa after Abu Dhabi had bailed-out the more flamboyant Emirate of Dubai with an initial loan of USD 25 billion. Similarly, other projects, such as highways were renamed every time Abu Dhabi needed to gallop-in to the financial rescue of its northern neighbour again. In fact, the Emirate of Dubai was known to have one single sustainable economic success story only, and that was the one of its airline Emirates. Yes, I have predicted many times that, in the mid run, Emirates would face hefty headwinds when aircraft that are capable of flying direct from Europe to the Far East would start entering the passenger market and thus making a stop-over halfway through obsolete. The latter being the business model Emirates and its neighbouring airlines are heftily relying upon. And no doubt, we are slowly seeing these exciting times of technologic advances. Yet, Rome was not built in one day and similarly, Emirates would not be driven into insolvency within one year upon the entrance of such ULR capable aircraft. So, other economic – and political - forces must be at work.

For Etihad, the picture is clear. The failure of its strategy to acquire voting-dominant minorities in (f)ailing airlines around the world by its now departed former CEO has been observed and commented upon many, many times (also by yours truly, I admit). The company faced losses of around USD 2 billion in 2016, USD 1.5 billion in 2017, has sold/returned a major proportion of its aircraft fleet early 2018, and is rumoured to negotiate with Boeing to cancel the airline’s order for 25 B777X, which pretty much sums-up the current state of the airline, I believe. Emirates, however, is another story altogether. True, major established airlines in Europe and the USA lobbied hard to have Emirates’ freedoms of the air restricted and first successes have become evident over the last few months, yet most of us always believed Emirates to fly above all economic laws with unlimited (financial) supplies available to the airline anywhere and at all times.

The economy feels brittle, as a good friend of mine told me a few days back on the state of the economy in the UAE. He should know, of course, having been a resident of the UAE for the last two decades or so. SMEs falter all around due to increased costs related to the recent introduction of taxes and workers’ benefits. Oil prices remain low (currently hovering around the USD 80 mark), alternative air routes to the Far East open up, the war in Yemen costs the UAE serious money, the tourism hype of the rich-and-famous-wannabees that imperatively needed to visit Dubai seems, if nothing else, to slow down (during my last visit to the ITB Berlin last spring the GCC hall was practically empty), the blockade on Qatar certainly does not inspire confidence in the political stability of the region, and President Trump’s expressed strategy – if one can call it a strategy - towards the region results in reluctance to invest in the region by large parts of the rest of the world.

Obviously, something needs to be happening to shield-off the downward spiral. A radical step such as a full merger with Etihad (and Fly Dubai) might very well be a strategy to explore. However, and I never thought I needed to raise this query ever in relation to the GCC: who is paying? Etihad is in tremendous financial woes, Emirates seems a bit better at best, so that would leave, as usual, the two respective governments as the owners of the two respective airlines. I doubt that the Emirate of Dubai is able to stem the financial burden and it would make little sense for the much smaller air operation to acquire the much larger - and healthier - one. However, I do believe a potential United Emirates Airlines has its rightful place in the aviation industry but can there be a way to be found that leaves both sheikhdoms in their respective prides?

From an operational point-of-view, the two hub operation would need to be scrapped surely. Not a major hurdle for Dubai since its Dubai International has been facing capacity restraints as long as I have been involved in the aviation industry in the Middle East and I am sure the sand the airport occupies can be sold at the usual inflated rates, considering its location in the heart of the old Dubai business district. But Abu Dhabi has shed major bucks to upgrade its infrastructure recently and would be far from happy to abandon its investment with little return, if any. If only there were an international airport somewhere in the middle between Dubai and Abu Dhabi. Oh, wait….