Emirates & Etihad Merger Not Happening – Etihad CEO
Everybody knew this all along. Yet, with lines between mainstream media and social media (including blogosphere) getting increasingly blurred, somehow this notion got traction.
Both parties have denied this a few times now. However, this was probably the first outright rejection from a senior official. Tony Douglas, CEO of Etihad, said
“I often fall about laughing because when Bloomberg run that story, quite frankly it was the laziest piece of Thursday afternoon journalism I’ve ever seen. So, the clown who wrote it was probably no more than a clown as anyone could have wrote the story, quite frankly. But, not surprisingly, as a result of said clown writing said clownesque story, I’ve been asked this question ten thousand times.”
Background
Looking back in time, the seeds were probably sown by this Bloomberg article (link). The article was titled “Emirates’ Clark Says Any Etihad Merger Plan Is Up to Shareholders”
Let us just say that the headlines and the content didn’t match. This is what Tim Clark had said
“That (merger) is in the hands of the shareholders, On the short-term, medium-term horizon, I would say no.”
Now, short-term usually means less than a year. Medium-term means anywhere between 1 to 5 years depending on who you are talking to. This is pretty much settled. And, one of the greatest economist ever, John Maynard Keynes said, “In the long run we are all dead”.
Get it?
The speculations were further fueled with these Bloomberg articles:
- Emirates-Etihad May Be Airline Deal of the Decade. Here’s Why
-
Emirates Seeks Etihad Takeover to Create World’s Largest Airline
And the entire world was thrown into a tizzy.
The Deal That Never Was
There were many reasons for the deals to make sense
Creating World’s Largest Airline
UAE loves big, everybody knows it. It has the world’s tallest building, tallest hotel, biggest indoor theme park etc. Why not the world’s biggest airline? Merger between Emirates and Etihad would catapult Emirates from 4th to the 1st position beating Delta, United and American.
While that sounds great, it is worth considering that Emirates is already the largest airline in the world in terms of international kilometers flown (ASK). It has no domestic service. Thus, Emirates’ ASKs are not comparable with the three larger airlines.
One Country, One National Airline
Many outside of gulf countries do not understand why UAE needs two government-owned airlines. The answer is UAE is not a collection of states (or emirates) like USA. While it is a futile exercise to go into further discussion, it is useful to know that UAE structure is closer to EU region than USA.
Hence, the larger emirates – Abu Dhabi, Dubai and Sharjah all have their own airline and hubs.
Etihad’s Losses
This was the most talked about rationale. And the one that was the most bewildering.
Sure, Etihad made losses worth billions of dollars in the last three years. However, Etihad’s has a clear role as an enabler of economic growth in the emirate of Abu Dhabi. This is what Tony Douglas said while releasing the 2018 numbers for Etihad:
“As a major enabler of commerce and tourism to and from Abu Dhabi, we are intrinsically linked to the continued success of the emirate.”
Partnership Between Emirates and flydubai
Emirates and flydubai have had a working arrangement since 2016. The flight schedules were aligned in 2017 and the frequent flyer programs were merged in 2018. However, there is a big difference. Emirates and flydubai have the same shareholders, Etihad doesn’t.
It is only a matter of time that this will happen in my opinion. Putting all operating losses to one side, in my estimation Emirates almost certainly has a negative net worth and would be grossly insolvent by all reasonable measures when the value of the A380’s on its Balance Sheet are written down to any reasonable market based value instead of the unreasonable values they are held at – particularly given that we know that there is basically no market for these aircraft outside of Emirates. Emirates is a financial disaster of a significance which is not yet appreciated all down the financial system for its lessors and their bankers — but one day soon probably will be. While Europe will bail out its own bankers, Etihad/Abu Dhabi will be the only parties willing and able to bail out Emirates.
Ok. So you are suggesting Etihad will be the savior of Emirates? I always thought the general notion was the other way around.
Obviously anything is possible in the long-term. I am not privy to any secret information on Emirates’ financial health.
What I do not understand it, why would Emirates want to present itself better than the actual picture? Would it not be better to acknowledge they are at least in some distress so that the whole story that US airlines are at an disadvantage falls flat?
Etihad will be the only possible savior of Emirates, as there is nobody else who has a willingness and ability to do it. This has nothing to do with either Etihad or Emirates as operating businesses, but everything to do with the political relationship between Abu Dhabi and Dubai, and the explicit unwillingness of vastly wealthier Abu Dhabi to allow the financially reckless and profligate Dubai to suffer the consequences of its frivolities – this would not be the first bailout of Dubai by Abu Dhabi and it will not be the last.
Emirates and much of the Dubai economy (i.e., all of the real estate companies that own all of those giant empty buildings) exist by virtue of appearances. Like all bubbles, these appearances must be kept up at all costs, lest the banks and lessors walk away, and the bubble allowed to deflate. The Balance Sheet of Emirates is a massive house of cards in my opinion, and the question is when, not if, it comes tumbling down, and what it will take with it when it does. Emirates/Etihad/Qatar all have operational issues on the horizon when the next generation of aircraft will likely obsolete their hubs and allow point to point between almost anywhere, but those risks are nothing compared to the financial risks hanging over Emirates as a result of the overvalued assets on their Balance Sheet and the systemic risks to Gulf/European banking/lessors.
We are all entitled to our opinions.
I live and work in Dubai and see nothing like the doomsday scenario you painted.
As far as Emirates’ financial health is concerned, I am not knowledgeable enough to speculate.
Nobody saw the doomsday scenario before the big bailout 10 years ago, and Abu Dhabi are about to roll over that “loan” — due next month — for the second time because they are unable to repay it, while Dubai property prices are up 20% in only a year. That is just my opinion, but sounds like a bubble to me.
https://www.reuters.com/article/us-dubai-debt-exclusive/exclusive-abu-dhabi-expected-to-extend-bailout-loan-to-dubai-sources-say-idUSKCN1PU1HU
https://www.reuters.com/article/us-emirates-dubai-debt/uae-abu-dhabi-roll-over-20-billion-of-dubais-debt-idUSBREA2F0EQ20140316
It is ok to have a difference of opinion.
Very few predicted the Global recession of 2009. Since then I meet a couple of experts every month who expect imminent crashes and meltdowns.