Etihad's imminent capital tie-up with perennial loss-maker Alitalia, Italy’s flagship carrier, is a sure road to burning a few hundred million euros in the coming years. But given the Abu Dhabi carrier's ambitions, the deal is not as loony as it looks. De facto control over the Italian carrier will help Etihad's ambition to become a leading player in global aviation.
The United Arab Emirates group is not guided by short-term financial results. It has not been founded to generate immediate returns on equity, but as an instrument of economic policy. Etihad is supposed to drive the long-term economic development of the Gulf region - meanwhile flattering the vanity of local rulers.
Etihad needs global partners to feed traffic into its Abu Dhabi hub. In 2003, the year the company was founded, most attractive peers were already engaged in global alliances. So the Abu Dhabi carrier must put up with what's left on the table: weaker carriers that would not survive on their own.
Aviation's regulations make full cross-continental takeovers impossible. Etihad is limited to taking minority stakes. But at struggling carriers on the brink of collapse, actual control does not necessarily equate with voting rights.
Thanks to Abu Dhabi's abundant cash reserves, Etihad can afford taking the long view. In late April, it stumped up another 300 million euros to keep struggling Air Berlinafloat, lifting its support for Germany's second-largest carrier to more than 800 million euros.
Limited cost synergies were generated by joint aircraft orders and training of pilots, but weren’t enough to stop Air Berlin's losses. Coordinating Air Berlin's and Alitalia's route network may help - a little. Re-directing parts of Alitalia's long-haul traffic to Abu Dhabi could be the most significant immediate benefit.
The main upside of the Alitalia deal is political. By rescuing an Italian icon, Etihad buys political capital in Rome. The rise of the Gulf carriers, which aren’t subject to European employment and social security laws, and enjoy tax advantages at home, has become a threat for European long-haul carriers. Pressured competitors like Lufthansaare lobbying for political intervention. Teaming up with Alitalia means that Etihad can hope to have the government of the euro zone’s third-largest member state on its side. That insurance is worth a premium.
- Etihad Airways on June 1 said it had set the terms for investing in loss-making airline Alitalia. In a joint statement, the two airlines said that they would proceed with final documentation to complete the transaction, once the board and stakeholders in Alitalia confirm acceptance of the terms. According to the statement, the tie-up has the backing of the Italian government.
- Etihad already has minority stakes in seven other airlines, among them Germany's Air Berlin, India's Jet Airways, Virgin Australia and Air Serbia.
- No details on the terms of the deal or the size of the investment were provided. Italian Transport Minister Maurizio Lupi told state television that Etihad was ready to invest around 600 million euros in Alitalia. He also said the deal would not involve creation of a separate company to hive off its bad debt.
- Abu Dhabi-based Etihad has been looking at the possibility of an investment in Alitalia since the start of the year. One source familiar with the talks told Reuters an agreement had been reached that would involve reducing Alitalia's payroll by up to 2,900 jobs.
- "We are delighted to be able to move forward with this process and look forward to the successful conclusion of the proposed transaction with Alitalia," Etihad Chief Executive James Hogan said in a statement.
Source: Reuters
The United Arab Emirates group is not guided by short-term financial results. It has not been founded to generate immediate returns on equity, but as an instrument of economic policy. Etihad is supposed to drive the long-term economic development of the Gulf region - meanwhile flattering the vanity of local rulers.
Etihad needs global partners to feed traffic into its Abu Dhabi hub. In 2003, the year the company was founded, most attractive peers were already engaged in global alliances. So the Abu Dhabi carrier must put up with what's left on the table: weaker carriers that would not survive on their own.
Aviation's regulations make full cross-continental takeovers impossible. Etihad is limited to taking minority stakes. But at struggling carriers on the brink of collapse, actual control does not necessarily equate with voting rights.
Thanks to Abu Dhabi's abundant cash reserves, Etihad can afford taking the long view. In late April, it stumped up another 300 million euros to keep struggling Air Berlin
Limited cost synergies were generated by joint aircraft orders and training of pilots, but weren’t enough to stop Air Berlin's losses. Coordinating Air Berlin's and Alitalia's route network may help - a little. Re-directing parts of Alitalia's long-haul traffic to Abu Dhabi could be the most significant immediate benefit.
The main upside of the Alitalia deal is political. By rescuing an Italian icon, Etihad buys political capital in Rome. The rise of the Gulf carriers, which aren’t subject to European employment and social security laws, and enjoy tax advantages at home, has become a threat for European long-haul carriers. Pressured competitors like Lufthansa
- Etihad already has minority stakes in seven other airlines, among them Germany's Air Berlin, India's Jet Airways
- No details on the terms of the deal or the size of the investment were provided. Italian Transport Minister Maurizio Lupi told state television that Etihad was ready to invest around 600 million euros in Alitalia. He also said the deal would not involve creation of a separate company to hive off its bad debt.
- Abu Dhabi-based Etihad has been looking at the possibility of an investment in Alitalia since the start of the year. One source familiar with the talks told Reuters an agreement had been reached that would involve reducing Alitalia's payroll by up to 2,900 jobs.
- "We are delighted to be able to move forward with this process and look forward to the successful conclusion of the proposed transaction with Alitalia," Etihad Chief Executive James Hogan said in a statement.
