12 October 2017, Middle East – Emirates’ President Tim Clark commented yesterday that Emirates, following the establishment of its extensive partnership with flydubai, is open to cooperating with Etihad. We analyse what an alliance of these two major Gulf carriers could potentially look like. Combining Dubai-based Emirates and Abu Dhabi-based Etihad will form the world’s largest passenger and cargo airline with 80% market share on routes to/from the United Arab Emirates. Emirates’ willingness to cooperate with Etihad also reflects the weaker demand conditions and industry overcapacity faced by the Middle Eastern airlines this year which are impacting their financial results.
We also observed that both Emirates and Etihad have scaled back on their planned capacity growth in 4Q17, particularly on North American and Asian routes respectively – This could help ease competitive pressure on the Asia Pacific long-haul carriers on routes where they compete with Emirates and Etihad. Singapore Airlines (SIA:SP), Thai Airways (THAI:TB) and Jet Airways (JET:IN) will be the key beneficiaries among the Asia Pacific carriers.
EMIRATES & ETIHAD OPERATE HALF OF THE GLOBAL POPULATION OF AIRBUS A380 AIRCRAFT
If rivals Emirates and Etihad agree to cooperate, it will be a game-changer for the global aviation industry. The alliance of Emirates, Etihad and flydubai (which has established an extensive partnership with Emirates) will have a total of 434 aircraft currently in service plus another 450 aircraft on order. This includes 108 Airbus A380-800s in service (plus another 44 on order), accounting for half of the global population of 215 A380 aircraft in service.
Chart: Emirates, Etihad and flydubai’s combined aircraft fleet in service and on order
COMBINING EMIRATES AND ETIHAD WOULD FORM THE WORLD’S LARGEST AIRLINE FOR BOTH PASSENGER AND CARGO
Emirates ranks the fourth largest passenger airline and second largest cargo airline in the world. Combining Emirates and Etihad’s operations will form the world’s largest passenger and cargo airline in terms of passenger and cargo traffic, overtaking American Airlines and Federal Express.
Chart: Top 5 passenger airlines in the world (2016)
Chart: Top 5 cargo airlines in the world (2016)
EMIRATES + ETIHAD + FLYDUBAI WILL DOMINATE 80% OF CAPACITY ON ROUTES TO/FROM UAE
Emirates accounts for 58% of the current capacity on routes to/from the United Arab Emirates. Combining Emirates, Etihad and flydubai’s operations will raise the alliance’s market share to 80%, greatly enhancing their market position and pricing power.
Chart: Airline market share in United Arab Emirates (2017)
ASIAN AND EUROPEAN ROUTE REGIONS REMAIN THE MOST IMPORTANT FOR EMIRATES & ETIHAD
Asian routes will constitute 30% of Emirates and Etihad’s overall passenger capacity, closely followed by Europe at 29%. North American routes will remain the carriers’ third largest market at 15% of overall capacity, followed by South West Pacific (11%) and Africa (10%).
Chart: Emirates and Etihad’s capacity exposure by route region (2017)
WEAK PASSENGER TRAFFIC GROWTH AND FINANCIAL RESULTS COULD DRIVE EMIRATES AND ETIHAD TOWARDS AN ALLIANCE
As predicted in our earlier reports, the Middle Eastern airline sector’s passenger traffic growth has been negatively impacted by the earlier US and UK electronics ban as well as the Saudi-led blockade on Qatar.
Passenger traffic of the Gulf carriers, which carry 9.6% of the global passenger market, grew only 7.0% y/y ytd and 5.4% y/y in August 2017. This is the slowest pace of growth experienced by the Gulf carriers in the past 6 years and a marked deceleration from the sector’s 11.2% growth in full year 2016, 10.0% in 2015 and 12.6% in 2014.
As such, we expect Emirates and Etihad’s FY18 and 2017 underlying financial results to be worse than the previous year. Emirates’ net profit fell 83% y/y to AED1250m in FY17 and its net profit margin and ROE fell to 1.5% and 3.8% respectively. Etihad reported a net loss of US$1873m in 2016 (from US$103m net profit in 2015), implying a net loss margin of 22.4%.
Chart: Middle Eastern airline sector international passenger traffic growth (2003 to 2017)
THIS HAS DRIVEN EMIRATES AND ETIHAD TO SCALE BACK ON THEIR CAPACITY GROWTH PLANS FURTHER IN 4Q17
Based on the current flight schedules, Emirates’ overall planned capacity growth is only 2% in 4Q17, a marked deceleration from its 4% capacity growth in 9M17. Notably, Emirates has cut its capacity on North American routes by 14% y/y in 4Q17. Emirates’ planned capacity growth on Europe, Asia and Southwest Pacific routes is only 4%, 5% and 6% y/y respectively.
Meanwhile, Etihad’s capacity grew only 1% y/y in 9M17 and is not growing its overall capacity at all in 4Q17. Notably, Etihad has cut its capacity on Asian routes by 3% y/y in 4Q17.
This could help ease competitive pressure on the Asia Pacific long-haul carriers on routes where they compete with Emirates and Etihad. Singapore Airlines (SIA:SP), Thai Airways (THAI:TB) and Jet Airways (JET:IN) will be the key beneficiaries.
EMIRATES & ETIHAD’S SEAT CAPACITY GROWTH WILL BECOME MUCH MORE MODERATE IN THE NEXT 5 YEARS
Interestingly, the United Arab Emirates carriers’ seat capacity growth is moderating to 5% per annum for the next 5 years from 8% in 2016 based on their existing aircraft orders.
However, investors will still have to watch out for Qatar Airways’ aggressive capacity growth of 15% per annum in the next 5 years. Overall, the Middle Eastern airline sector’s seat capacity growth is expected to be 11% per annum for the next 5 years.
Chart: Middle Eastern airline sector capacity growth (2016 to 2021)
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