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….
