This week, Etihad Aviation Group – which owns the UAE carrier Etihad – announced that it is launching a new low-cost carrier (LCC) in partnership with Sharjah’s Air Arabia. The companies announced that they would create an independent joint venture company to operate Air Arabia Abu Dhabi, which will use Abu Dhabi International Airport as its hub.
The board of directors will have executives nominated by Etihad and Air Arabia, a statement said. There was no specific date for the launch of the airline and the statement added that more details will be announced soon.
While the partnership is still in its early stages, the deal signifies the appetite in the region’s maturing aviation market to tap into the LCC segment. The Middle East market enjoys the third-highest gains in intra-regional low-cost carrier penetration rates. Low-cost carriers accounted for a 17% share of seat capacity to and from the Middle East in 2018, compared to only 8% in 2009.
With four major airlines and three major airports targeting hub traffic, aviation has been an economic pillar of the UAE in the last decade or so. Airport Council International estimated that the industry contributed to 15% of the country’s GDP last year.
But the regional aviation industry, which has seen double-digit growth in the last decade, is now slowing down as demand for air travel dampens and hub traffic reduces due to more efficient aircraft models. So, will another airline further pressure the margins for the industry?
“It won't fundamentally change the UAE dynamic in any major way - except perhaps the risk that Air Arabia runs the real risk of losing traffic out of its Sharjah hub as passengers will no doubt prefer the bigger connection options at Abu Dhabi International through Etihad's bigger onward network,” says Saj Ahmad, chief analyst at StrategicAero Research.
Such fears did not seem to impact investors. Air Arabia's shares rallied on Thursday, trading higher than usual. Analysts opine that there is a business case for the recent merger. “The new LCC will complement the full-service operation and in cases be better suited to serve point-to-point markets,” says Richard Maslen, content editor at The Blue Swan Daily – CAPA.
Etihad, however, seems to be emerging a winner in the deal. The UAE carrier has been struggling following some ill-fated investments in European carriers like Alitalia and air berlin.
“Etihad clearly gains the most. It benefits from Air Arabia's popular brand and low-cost economics without having to pay a penny for setting that up,” says Ahmad. “Further, it brings to Abu Dhabi International a big LCC that otherwise doesn't exist and negates the need for passengers to go to Sharjah for an Air Arabia flight.”
Etihad’s latest investment also makes more economic sense and might be a way for it to return to profitability.