An Airbus SAS A380 passenger aircraft, operated by Emirates Airlines, waits to take off at London Gatwick airport in this aerial view taken over Crawley, U.K. (Photographer: Jason Alden/Bloomberg)

Emirates Seeks Etihad Takeover to Create World’s Largest Airline

(Bloomberg) -- Dubai’s flagship airline Emirates is looking at taking over unprofitable neighbor Etihad, according to four people familiar with the matter, in a move that would create the world’s biggest carrier by passenger traffic.

The talks, which are at a preliminary stage, would see Emirates acquire the main airline business of Abu Dhabi’s Etihad, which would keep its maintenance arm, according to the people, who asked not to be named because the matter is confidential. The negotiations could yet fall through, they said.

Both airlines initially declined to comment, before later denying that any talks were underway. Were a transaction to go ahead the enlarged airline operation would be bigger than that of American Airlines Group Inc., which has a market value of $19.2 billion.

Any deal would require the blessing of the rulers of the richest sheikhdoms in the United Arab Emirates. For Abu Dhabi, which sits on 6 percent of global oil reserves, it would advance a drive to overhaul state-controlled entities as it adapts to lower crude prices. The airlines have traditionally been arch rivals, with their hubs competing to attract the same transfer passengers making long-distance trips between Asia and the West.

Emirates Seeks Etihad Takeover to Create World’s Largest Airline

Emirates Chairman Sheikh Ahmed bin Saeed Al Maktoum and President Tim Clark have previously played down speculation that the carriers might combine, Sheikh Ahmed saying in May that there have never been merger talks. Clark said in June that the question was one for shareholders, while adding that he saw nothing happening in the short-to-medium-term.

Timeline of Abu Dhabi consolidation

Emirates Seeks Etihad Takeover to Create World’s Largest Airline

A combination of the airlines would provide further evidence of the sheikdoms consolidating businesses to boost competitiveness. Abu Dhabi and Dubai companies formed Emirates Global Aluminium, one of the world’s largest producers, in a $15 billion combination in 2013, and the two have studied a merger of their stock exchanges. The Dubai government was also the driving force in compelling Emirates to cooperate with local discount carrier FlyDubai.

Etihad has been shrinking its operations following the failure of a so-called equity alliance strategy that saw it invest in a number of generally ailing foreign operators to help feed more traffic through Abu Dhabi. One of those, Air Berlin Plc, collapsed last year while another, Italy’s Alitalia, filed for bankruptcy protection, causing the pact to largely unravel.

The Middle Eastern company also saw its own business come under pressure as a slide in the price of oil led to a drop in travel in crude-based economies. That contributed to a $1.52 billion loss in 2017, taking the two-year deficit at the airline unit to almost $3.5 billion. Fitch Ratings last month said it expected Etihad to continue losing money through 2022.

Emirates Rebound

Emirates also suffered during the Gulf slump but was quick to recover as the oil price -- and local economies -- rebounded, with net income jumping by two-thirds to 4.11 billion dirhams ($1.12 billion) in the year ended March 31.

Emirates Seeks Etihad Takeover to Create World’s Largest Airline

At Etihad, group Chief Executive Officer Tony Douglas, who took over in January, has been abandoning weaker routes and paring back the fleet in order to cut costs and boost revenues and cash flow, though he said in June that the measures so far amount only to first steps.

The strategic rethink has also meant reining in Etihad’s ambitions to dominate global traffic, with the main aim now being to drive Abu Dhabi’s tourism sector and foreign commercial links. Douglas has also been negotiating with Airbus SE and Boeing Co. after concluding that doubling the fleet is no longer viable, calling into question scores of wide-body jet orders.

Bringing the airlines together would not be easy because of the duplication of routes from their Dubai and Abu Dhabi bases. Both have sought to exploit the region’s position at a natural global crossroads, but to wring maximum value from the hub model, flights need to be focused at a single location, making transfers easy and more routes viable.

Emirates, which has built the world’s biggest fleet of Airbus A380 superjumbos, supplemented by smaller Boeing 777 wide-bodies, is already far larger than Etihad, yet handing the Abu Dhabi company responsibility for certain markets might jeopardize its own success.

The formation of a merged airline would surpass current industry No. 1 American, based on the most recent annual traffic figures from the International Air Transport Association. It’s not clear how much further Etihad’s operations might actually be reduced.

Emirates is already the world’s biggest airline on international routes and ranks fourth overall, according to IATA, behind the top three U.S. carriers.

©2018 Bloomberg L.P.