Etihad should merge with Emirates, Davy report argues


A MERGER between Gulf carriers Emirates and Etihad would be the "most logical" solution to Etihad's financial and strategic woes, a report from Davy Stockbrokers has claimed.

Under its previous chief executive, James Hogan, Etihad pursued a strategy of strategic investments - an equity alliance - in airlines in Europe and elsewhere. But the strategy has proved a failure.

Etihad invested in airlines including Alitalia and Air Berlin, both of which collapsed.

Etihad used to own a small stake in Aer Lingus.

The report published by Davy Stockbrokers, in conjunction with consultants Aviation Strategy, questions if Abu Dhabi-based Etihad should now be considering selling its investments in Virgin Australia and Jet Airways.

"Abu Dhabi has a specific financial problem, which illustrates the difficulty of unwinding its airline investments," suggested the Davy report.

The report also suggested that a tie-up between Etihad and neighbouring Qatar Airways is not a realistic option given that the United Arab Emirates is among the regions that has ostracised Qatar.

"That leaves exploring links with the far larger Emirates - where there may be strategic rationale to create a dual-hub network à la Air France KLM," it added.

"However, there would be significant political issues, complicated by the relationships, rivalries and relative wealth of the ruling Al Maktoum and Al Nahyan cousins."

Etihad, Emirates and Qatar Airways all have a strong presence at Dublin Airport, serving their respective hubs in the Gulf twice a day from the capital.

Other options that could be explored by Etihad, according to Davy's report, include cancelling its aircraft orders. But Davy warned that such a move "would probably destroy" relationships with Airbus and Boeing and undermine Etihad's attempts to counter claims that it benefits from unfair subsidies.

A full government bailout of Etihad would be an "aeropolitical nightmare", the broker added.

"This is the situation facing the new CEO (Tony Douglas): a fundamentally unprofitable airline, complex and questionable financial transactions, failure of its equity alliance strategy and heavy capex commitments.

"A radical solution will be needed; the Emirates merger option would appear the most logical," said Davy.