A combination of Dubai-based Emirates and Abu Dhabi’s Etihad would be the airline industry’s deal of the decade, if it can be pulled off.

Executives at the two companies have been quietly laying plans to create what would be the world’s biggest airline by passenger traffic, according to people familiar with the discussions. The group would have combined revenue of $29.3 billion and control almost 5 percent of the world’s airline routes.

Etihad and Emirates publicly deny merger talks, but an exploratory look at Emirates taking over Etihad’s airline operations remains on the table, according to the people, who asked not to be identified discussing private considerations. Talks have occurred on-and-off for some time, one of the people said, and any deal would face antitrust as well as political challenges.

Here are five ways a tie-up would transform the airline industry:

Higher Fares

Passengers in Europe and Asia can expect ticket prices to rise, according to Bloomberg Intelligence analysts, as the merger partners take capacity out of the market. That would lower pressure on competitors such as Deutsche Lufthansa AG and Air France-KLM that fly similar routes. Almost every route flown by Etihad is also flown by Emirates, and more than half of Emirates’ routes are duplicated by Etihad.

Mega-Hub

A deal would inject life into the Gulf’s hub model by giving the combined group control over two major connecting airports.

“The airlines could split focus by airport to different regions, with Abu Dhabi concentrating on U.S. passengers, as it already has a U.S. pre-clearance facility that speeds passage,” according to BI analyst George Ferguson. “Dubai could focus on European travelers.”

Dubai-based Emirates used the hub concept to transform itself into the world’s largest long-haul carrier. But it’s facing pressure with the rise of competing airports in Asia and the small but fast-growing number of low-cost direct long-distance routes.

Planemakers Get Squeezed

With Emirates’ backing, Etihad would gain more clout negotiating with Airbus SE and Boeing Co. to cancel part of an order book which now totals 174 planes worth $46 billion. Emirates is a bigger and better buyer of aircraft, and a critical customer for both planemakers’ biggest jets. Much of the potential for efficiencies in a merger would come from reducing overlap on routes, which would lessen the need for more aircraft.

“There’s a bit of complimentality but also quite a bit of overlap in those structures,” Peter Harbison, chairman of the CAPA Centre for Aviation, said in a Bloomberg Television interview. “So if you do start to rationalize you’re talking about probably removing quite a lot of aircraft from the fleet initially.”

Antitrust Woes

One reason for caution about a tie-up is the overlap on routes. Emirates is already the dominant carrier for many destinations in the Middle East, India and Australia. That means the carriers would likely be forced to drop routes or slots at major hubs, according to Bloomberg Opinion columnist David Fickling.

Politics

Oil-rich Abu Dhabi helped bail out Dubai after the 2008 financial crisis and remains the linchpin for the United Arab Emirates’ oil reserves. Yet Dubai has done a better job of developing a tourism industry and has the stronger airline. While the two sheikdoms have cooperated in the past on consolidating businesses, any deal would require delicate compromises.

Then there’s the U.S., whose carriers have waged an ongoing protest over allegations of billions of dollars of state subsidies to Emirates and Etihad. An agreement that provides for greater transparency in financial reporting by the government-owned carriers was reached this year, but a combination of the two Gulf carriers could be seen as a bailout for struggling Etihad.

–With assistance from Kyunghee Park, Dinesh Nair, Matthew Martin and Layan Odeh.

 

©2018 Bloomberg L.P.

 

This article was written by Benjamin Katz from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Photo Credit: An Etihad aircraft takes off from Madrid-Barajas Airport in Spain. Executives at Etihad and Emirates have reportedly been talking about a merger. Daniel Luis Gómez Adenis / Flickr