The Airline Deal of the Decade?

Written by Andres Gomez Perry

In a September 2018 article, Bloomberg reported that Emirates, the flagship carrier of Dubai, is assessing whether to merge with Etihad, the Abu Dhabi owned airline. The article stated that the deal comes as no surprise because Etihad has been experiencing extensive losses over the past few years– $1.87 billion in 2016 and $1.52 billion in 2017. At the source of Etihad’s extensive losses lies an inorganic growth strategy based on investing in a network of global airlines to expand its reach. Because Etihad has become the primary shareholder of six low-budget airlines ranging from airberlin to Air Seychelles, it has absorbed their losses. For example, from 2011 to 2017 when it filed for bankruptcy, Airberlin, one of these low-budget airlines, lost $2.7 billion. During this period, it was Etihad that supplied the failed airline with capital. Combined, Airberlin and Airitalia’s bankruptcies cost Etihad $808 million. Therefore, at the center of the merger lies this question: “Can Emirates save Etihad?”

Although the merger is financially feasible, a major barrier prevents this deal from occurring: the Abu Dhabi government. As Etihad’s sole shareholder, the Abu Dhabi government may prevent the deal from passing if the deal does not align with its interests. Assessing this barrier requires an analysis of Abu Dhabi as Etihad’s primary owner and why it founded Etihad in the first place.

While a primary purpose of any company is to make money, Etihad is part of a broader Abu Dhabi strategy to diversify the economy away from oil. The Abu Dhabi government may block the deal if the merger threatens this diversifications strategy. Founded in 2003 by the Abu Dhabi government, Etihad falls into the government’s Economic Vision 2030, which seeks to to foster new industries in Abu Dhabi. According to an article published by The National, Etihad is central to the diversification plan because it connects Abu Dhabi to the world and represents the Emirate as its global ambassador. According to the companies’ vision, Etihad’s operations “enhance the reputation of Abu Dhabi as a world class business and leisure destination.” For Abu Dhabi to become an international center for business and leisure, having a global airline that connects the city with the world is pivotal in formulating this strategy. The Abu Dhabi government may not care whether Etihad is profitable in the short term if the airline’s purpose is to expand Abu Dhabi’s role as a global capital.

The deal would threaten Abu Dhabi’s Economic Vision 2030 in two ways. First, the Emirates-Etihad deal would hinder Etihad’s ability to serve as Abu Dhabi’s ambassador abroad. Because Emirates is larger, more profitable, and better known than Etihad, then new merged airline will likely take Emirate’s brand. The Emirates brand is synonymous with Dubai, the new merged airline would advance Dubai as a global business and leisure capital instead of Abu Dhabi. Similarly, the acquiring company’s C-suite would take over the new merged company and follow the acquiring company’s strategy. The newly merged airline would then favor Dubai’s agenda over Abu Dhabi’s. Second, the new merged airline would likely create a new system of flight routes, limiting the flights coming in and out of Abu Dhabi. Currently, Emirates flies the same routes as Etihad with the exception of eleven. The new merged airline will likely eliminate several routes to limit supply and as a result reduce Etihad’s connectivity to the world. Both of these situations would undermine Etihad’s purpose—advance Abu Dhabi’s reputation as a global business and leisure hub.

Since the deal would threaten Abu Dhabi’s diversification strategy, the Abu Dhabi government will likely ask for concessions so that the new merged airline aligns with Abu Dhabi’s diversification strategy. For example, Abu Dhabi could ask to combine the Emirates and Etihad names, similar to when LAN Airlines and Tam Airlines merged to form LATAM, in order to preserve at least part of Etihad’s brand. Similarly, in order to preserve Etihad’s strategy of bringing business and leisure seekers to Abu Dhabi, the Abu Dhabi government will likely require the new merged airline to maintain certain key routes flying in and out of Abu Dhabi instead of Dubai. The government of Abu Dhabi has a diversification strategy in which Etihad plays a clear role as a global ambassador for the city. If the Emirates-Etihad merger threatens this strategy, the Abu Dhabi government will either block the deal or further dictate what the merger will look like.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: