Launch of new UAE budget airline Air Arabia Abu Dhabi - Is India calling?

“The launch of “Air Arabia Abu Dhabi” falls well short of a full-scale merger, but there are so many cost and time efficiencies that can be generated,” said a consultant with an M&A advisory firm in London. “Etihad could assign even more focus on those routes that serve its status as a premium airline from the Middle East.

“It also has landing rights to several destinations where a budget/low-cost service could have served it better in the past. Now, it has the right sort vehicle to make it happen. Premium and low-cost services require two different mindsets.”

It is in this context that the word “re-purpose” is being thrown about, with Etihad in a position to place some of its existing fleet or new jet orders at the service of the new airline. “Put simply, there’s no need to reinvent the wheel - what they already have can be deployed at Air Arabia Abu Dhabi and at much less cost than is the case for most new airlines,” the source added.

India calling?

With the announcement of Air Arabia Abu Dhabi, Etihad could also have come up with the best alternative to pursue possibilities into India. And not have to be perpetually distracted by whatever is happening at Jet Airways, the grounded Indian carrier in which the Abu Dhabi entity has a 24 per cent stake. (Jet’s future is still clouded, with only one bidder - Synergy Group - taking formal steps to acquire it, base don media reports last month.) Jet had been operating services into the UAE, and “The loss of capacity following its folding up led to a significant increase in prices of international flight tickets from India,” said Ranvir Nayar, Managing Editor at Paris-based Media India Group. “The Gulf accounted for more than half of all the international flights operated by Jet.

“As ticket prices had already begun to harden in the Gulf-India sector, any further consolidation would have led to a sharp increase in the prices, hurting consumers, especially those Indians who earn their livelihood in the Gulf.

“The arrival of a new low-cost airline to focus on the Gulf-India sector is a development that would be welcomed by practically all consumers… as well as gain support of the Indian government.”

Air Arabia’s reach

Many didn’t foresee Sharjah-based Air Arabia turning up as Etihad’s joint venture partner. All through recent months, speculation was rife about Etihad seeking local-level alliances, and it was always the possibility of an Emirates tie-up that was speculated. Even when top officials at both Emirates and Etihad denied any such moves, the rumour counters would still go into overdrive.

With the Abu Dhabi connection, Air Arabia has new avenues to pursue “organic growth” more aggressively. Its latest financials show steady gains on the profit side - second quarter profits came in at Dh210 million, up 75 per cent year-on-year.

The Sharjah airline, which launched in 2003, now has a fleet of 54 aircraft serving more than 170 routes from four hubs, which include Morocco and Egypt apart from the UAE ones.

It is reckoned that Air Arabia as of now has no new aircraft orders.

Etihad could do the heavy lifting

For the new airline, Etihad would provide much of the fleet strength is what the industry expects. The question is where would that come from?

Earlier this year, Etihad concluded talks with Boeing and Airbus to “restructure” a major portion of its existing orders. As per the new plan, it would take delivery of 26 A321neos and five A350s from Airbus, and six 777-9x from Boeing.

“Would Etihad place new orders or make use of those orders it has already placed - it will be interesting to see how that pans out,” said an airline source. “The fact is Etihad had to restructure its orders because of the losses in the last three years.” (Last year, it lost $1.28 billion on revenues of $5.86 billion.) In the statement that accompanied the announcement of the new carrier, Tony Douglas, Group CEO of Etihad Aviation Group, said: “Air Arabia Abu Dhabi will be formed through the establishment of an independent joint venture company owned by Etihad Aviation Group and Air Arabia. The company will operate a low-cost business model and independent strategy, steered by its board of directors, which will consist of members nominated by Etihad and Air Arabia.”

Details regarding the capital structure, the shareholding split, and fleet management will naturally follow, and will give a better reading on the operational strategy.

Stormy regional skies

For the near-term, forecasts for the region’s airline industry are kind of downbeat. Passenger growth continues to be clocked, but “remains far below the double-digit growth trend of recent years,” IATA said in its latest update. “Falling business confidence in parts of the region, combined with some key airlines going through a process of structural change and geopolitical tensions are all likely to be contributing factors.”

Finding a way past all such uncertainties is the first challenge for UAE’s latest airline.

Abu Dhabi masters art of making a statement

Consolidation where possible. Or seek out alliances where these offer better chances.

That’s been Abu Dhabi’s grand strategy in trying to get the economy a booster shot. There was the three-way merger between ADCB, UNB and Al Hilal banks from earlier in the year.

And last year, there was the tie-up beween Aldar Properties and Emaar to take up specific mega-scale projects in Abu Dhabi and Dubai, and then, elsewhere.

There have also been regional and global alliances featuring Abu Dhabi’s blue-chip entities. The latest deal in the works - the one between Etihad and Air Arabia is again part of that masterplan.

In fact, the alliance goes against market trends within the region, where merges and acqusiitions far outnumber joint ventures, according to a report by Clyde & Co.

“Growing confidence in the legal environment and moves to open up foreign ownership may explain why the proportion of JVs versus M&A deals is down,” the consultancy states. “JVs were also more likely to be true partnerships rather than “structures of convenience”.”

That’s the point - “true partnerships”. The Etihad-Air Arabia combine will be looking to tick that particular box.

India will figure prominently in Air Arabia Abu Dhabi plans

By Ranvir Nayar, Special to Gulf News

The proposed low-cost carrier to be launched jointly by Etihad Airways and Air Arabia is good news for Indian consumers, especially those looking to fly to the Gulf.

The loss of capacity following the folding up of Jet Airways had led to a significant increase in prices of international tickets from India. The Gulf accounted for more than half of all the international flights operated by Jet Airways.

As prices had already begun to harden in the Gulf-India sector, any further consolidation would have led to a sharp increase in ticket prices. The arrival of a new low cost to focus on the region is a development that would be welcomed by practically all consumers as well as gain support of the Indian government, which is keen to ensure that the ticket prices for air travel remain reasonable, both within India and to overseas.

But the zero sum that aviation industry in India, specifically, means that anything which is good for the consumer is generally terrible news for the airline industry. Thus, even after Jet folded up, all other main private sector carriers from India continued to fly, even though they have been bleeding heavily.

Thus, while they may been praying for a consolidation in the industry to be able to raise prices, the launch of yet another low-cost carrier is likely to push down the revenue per passenger as well as returns on investment.

Ranvir Nayar is Managing Editor at Paris-based Media India Group.