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 euro 300 million to keep struggling Air Berlin afloat, lifting its support for Germany's second-largest carrier to more than euro 800 million.
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 are lobbying for political intervention. Teaming 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.
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.
More From This Section
Thanks to Abu Dhabi's abundant cash reserves, Etihad can afford taking the long view. In late April, it stumped up another euro 300 million to keep struggling Air Berlin afloat, lifting its support for Germany's second-largest carrier to more than euro 800 million.
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 are lobbying for political intervention. Teaming 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.