The strategy's flagging

Abu Dhabi has developed an unhealthy appetite for European airlines. The UAE’s official national carrier, state-owned Etihad Airways, is eyeing a tie-up with Virgin Atlantic — which is bidding for Lufthansa’s bmi unit — and mulling a 25 per cent stake in Aer Lingus being sold by the Irish government. Such deals may deliver tactical gains. However, they would be a messy way to trying to catch up with rival Dubai-owned Emirates.

Etihad is in an awkward position, outdone by Emirates in terms of profile and passenger numbers. The eight-year-old Etihad flew seven million passengers in 2010, with a 74 per cent seat load factor. Emirates — which is almost three decades old — flew 31 million passengers at an 80 per cent load over the same period. Its sheer scale means Emirates is often wrongly assumed to be the UAE’s national carrier.

There’s room for two large airlines in the tiny Gulf country. This is a global market, and the Gulf is a strategic link between east and west. Etihad doesn’t disclose its finances but says it’s on track to be profitable next year. Operational growth has been impressive, driven by its 30-plus bilateral code-share agreements with other airlines. Emirates has roughly one-third of that amount.

Any financial investment into Aer Lingus, or Virgin to assist with its bmi ambitions, would mark a big strategic shift. European ownership rules limit Etihad to a minority stake. Indirectly funding a bmi deal and buying the Aer Lingus stake could cost around euro 600 million. But, it isn’t clear what benefits this would bring. Ownership isn’t required to have a code-share agreement and there would be limited synergies, given that fuel and staff are the two main costs. Nor is Etihad desperate for more of the landing slots held by each airline.

The industry is littered with failed minority investments by airlines into rivals. Singapore Airlines’ 49 per cent stake in Virgin Atlantic, picked up in 2000, didn’t help it grow overseas and few analysts now attribute any value to the shareholding. Last year, Emirates sold its stake in Sri Lankan Airlines back to the operator for less than it paid. And, Swissair’s buy-to-grow strategy in the 1990s helped bankrupt the airline.

Emirates’ success has come from years of disciplined organic growth. Etihad’s search for strategic shortcuts is probably in vain.