Bloomberg reported last week that Emirates is in early talks to take over Etihad’s airline assets, which would create the world’s largest airline by passenger volume. The potential merger has been the subject of frequent speculation throughout the industry for a while, and it makes sense: Both airlines have a similar business model, relying on a large volume of connecting traffic to fill planes that also carry a smaller population of high-yield traffic. They also have similar planes in their fleets and similar service levels and customer experiences. The integration of the two carriers should be easier than past industry mergers.
Both airlines also have reached a level of maturity in their route networks and scale where a combination will be beneficial. When airlines are young and small, they can grow their fleets and routes without much regard to the rest of the industry because there are so many untapped opportunities. However, the airlines’ financial results of the past few years of low oil prices show that both Emirates and Etihad are past this point. Both must now watch the rest of the industry, the economy and political trends when planning further growth. This will be easier done together than when competing against a rival based at an airport a little over an hour’s drive away.
There is also the matter of the carriers’ huge airplane order books. Many network planners, the people who decide which routes and schedules their airline flies, have voiced doubt that there is profitable use for all of the aircraft that Emirates and Etihad combined have on order. Given the nearness of their two hubs, and the similarity in their network models, the two airlines likely are each planning to buy aircraft to serve the same future markets and demand. Combining the network and fleet planning for the two carriers will allow them to rationalize any overlap and either find new markets for their fleet or, more likely, to reduce their fleet orders.
There are a few areas to watch. One is the very reason why two large airlines with such similar business models exist so close to one another: the economic rivalry between Dubai and Abu Dhabi. Unless Abu Dhabi gives up all ownership and control of the combined airline, the combined airline’s leadership would be working for two masters. Will this be manageable?
Another factor is the increasing closeness between Emirates and flydubai, which announced an expanded code-sharing partnership in late 2017. The short haul network of flydubai makes a nice complement to Emirates’ long haul network, which has led to speculation of an Emirates takeover of flydubai. Trying to integrate either Etihad or flydubai into Emirates will be a difficult task. If Emirates were to try to do both (which hasn’t been discussed at this point), it could overwhelm Emirates’ management capacity.
The rest of the industry is likely hoping that this combination happens. While Emirates has been run as a business with expectations of making a profit for some years, that’s not true for Etihad. Many in the industry view Etihad as having undisciplined capacity planning, harkening back to the bad old days of capacity wars in the U.S. and elsewhere.
If there are any losers from this combination, it’s Airbus and Boeing, the manufacturers with all those plane orders on their books. However, both have many other customers to sell planes to, and both watch the market closely, so they’re unlikely to be surprised and may well already have contingencies planned.
Overall, the positives of this potential combination clearly outweigh the negatives. This is true for Emirates and Etihad, as well as the industry as whole. This merger should proceed.
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