Sibling rivalry: 7 reasons why Emirates-Etihad merger will not happen

Rumours of the possible Emirates-Etihad merger made news last week. Analysts claim that it will be the deal of the decade, if it could be pulled off.

Bloomberg cited people familiar with the matter who said that the two carriers are in preliminary talks over a deal. If this happens, UAE will have around 60% of passenger capacity from Australia to Europe, the Middle East, and Africa. Thus, it will dominate the skies taking into consideration that Emirates is now the fourth largest airline.

TD reached out to both airlines and while Etihad declined to comment on the news, a spokesperson for Emirates told us that “there is no truth to the rumour of a merger with Etihad.”

TD analyses why the rumoured Emirates-Etihad merger will not happen (at least not anytime soon).

Higher fares

The combined forces of Emirates and Etihad Airways will result in higher ticket prices due to reduced competition among gulf carriers.

“Any reduction in that competition would be a setback for consumers”

Craig Hewett, COO and co-founder of Wego, told TD exclusively that, “the competition between the big three Gulf carriers, each of whom offers world-class service, has been hugely beneficial for travellers whether you are flying to, from or thru the Gulf, and any reduction in that competition would be a setback for consumers.”

Tug of war

Emirates and Etihad Airways are state enterprises owned by two ruling royal families in the United Arab Emirates with the two airlines based in Dubai and Abu Dhabi, respectively.

The deal between the two sheikdoms would mean compromises to keep everyone happy. Any deal that seemed unfair by one another would mean modern day version of Montagues and Capulets with its resources that can be used as weapons – Abu Dhabi’s oil reserve vs Dubai’s tourism and industries.

Emirates seems to have an advantage in the rumoured merger given Etihad’s financial woes and Dubai’s influx on tourism. However, oil-rich Abu Dhabi helped bail out Dubai after the 2008 financial crisis – the kingpin of UAE’s oil houses 90% of the reserves.

The combined group will somehow have to maintain service levels to Abu Dhabi to please the Al Nahyan family, the final arbiter of economic and political power in the UAE.

Tim Clark’s free hand

With Emirates clearly having the upper hand, Emirates’ president Tim Clark, who was known for operating the company with a ruthlessly free hand, may use the carrier’s position to squash the competition.

It would be sensible to cherry pick the best aircraft, employees and routes and tuck them under Emirates wings and simply close down Etihad. However, internal politics in the UAE makes that impossible.

One less customer for planemakers

Etihad currently has an order book of 174 planes worth USD 46 billion on Airbus and Boeing and this may be cancelled if the deal pushes through. Emirates is also a bigger buyer than Etihad and the alleged merger would mean fleet expansion for both airlines.

Moreover, the merger will lead to the reduction of overlapping 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,” Peter Harbison, chairman of the CAPA Centre for Aviation, said in a Bloomberg Television interview. “So if you do start to rationalize you’re talking about probably removing quite a lot of aircraft from the fleet initially.”

Duplicate flights

The two gulf carriers have many duplicates in terms of routes. Of Etihad’s 88 passenger destinations, all but 11 are also served by Emirates – and that group of destinations is a distinctly third-tier bunch including the likes of Chengdu, Edinburgh, Kathmandu, Nagoya and Riga.

Emirates proved to be dominant in many destinations in the Middle East, Asia, and Australia. If a merger will happen, the carriers will have to drop some routes or slots in major hubs.

Control of UAE’s airports

The combined forces of Emirates and Etihad Airways would mean greater control of the two major connecting airports and the group can use it at will to increase their leverage among the international competition.

“The airlines could split focus by airport to different regions, with Abu Dhabi concentrating on U.S. passengers, as it already has a U.S. pre-clearance facility that speeds passage,” according to BI analyst George Ferguson. “Dubai could focus on European travellers.”

Dubai-based Emirates will also be a step closer to its goal of becoming the world’s largest long-haul carrier.

Politics

Gulf carriers have been under extreme scrutiny of US airlines waging an ongoing protest over allegations of billions of dollars of state subsidies fuelled to Emirates and Etihad. An agreement that calls for greater transparency in financial reporting by the government-owned carriers was reached this year. However, the possible Emirates-Etihad merger could be something US airlines would be wary about.

One thing is clear, it will be difficult to find a middle ground for these gulf carriers and this groundbreaking merger, while it could shake the travel industry, will be forever in the back burner.