Lufthansa and Etihad: will we see a merger?

by Business Travel iQ | 26 January 2017

Drill into why stories of a tie-up between the two carriers were so plausible and you’ll understand airlines’ business challenges

This week it was announced that James Hogan, CEO of Etihad for the past decade, was going to leave his post in the second half of this year. James Rigney, Etihad’s CFO, is also departing. The carrier is in the middle of a strategic review but was at pains to say that Hogan’s decision to leave was actually made last year.

Hogan has been a high profile member of the international travel fraternity for more than 20 years and his phone will not be silent given his airline pedigree plus past senior experience in both ground transport (Hertz) and hotels (Forte).

As influential as Hogan is, however, the story is not his but that of the airline business – its ambitions and its challenges. Middle East carriers Emirates, Qatar and Etihad have all pursued aggressive growth policies in the past decade. They have all aimed to move from being regional carriers to global airlines with new airport development to support their becoming major hubs for the lucrative long-haul, east-west market.

But ten years ago they were in different positions and still are although all are pursuing growth and want to increase aircraft, passengers, routes - and revenue.

Hogan has expanded Etihad from being a regional airline with about 20 planes to a global player with more than 700 aircraft carrying 120 million passengers a year.

But it’s challenging times for Middle East aviation. The carriers’ growth strategies have resulted in excess capacity which, combined with unfavourable market conditions caused by lower oil prices and general economic uncertainty, has meant their having to discount fares heavily to try to retain market share. Emirates’ profits for the first half of its 2016-17 financial year have dropped 75% because of a “bleak global economic outlook . . . with no resolution in sight”.

Hogan’s growth strategy for Etihad has been built on a series of codeshares and minority investments in seven other carriers – Air Serbia, Air Seychelles, airberlin, Alitalia, Etihad Regional, Jet Airways and Virgin Australia – to give it access to routes. The stakes in non-European carriers have grown Etihad’s passenger numbers, profits and coffers but the investments in airberlin and Alitalia have delivered only more losses.

However, the strategy has brought Lufthansa unforeseen benefits. The German short-haul market is dominated by airberlin and Eurowings. If airberlin were to fail, another European low-cost carrier would probably try to fill the gap and that would threaten Eurowings whose owner is . . . Lufthansa.

Etihad has seen the success that Qatar’s investment in IAG has been for its traffic. It probably wants Lufthansa because it is in much better financial health than the only remaining European network carrier, AirFrance KLM.

Etihad may also be about to face a tougher time expanding in the US where the Big Three carriers have been asking for a review of the Open Skies Treaty because they believe that the UAE carriers and Qatar are state-aided. And the new President, President Trump, has pledged to defend American business and jobs.

The future could be tough for Etihad.

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