Emirates reaches limits of organic growth strategy

Wed Apr 18, 2012 10:46am EDT

An Airbus A380 aircraft of Deutsche Lufthansa (top) takes of passing over an Airbus A380 aircraft of Emirates at the ILA International Air Show in Schoenefeld south of Berlin, June 8, 2010. REUTERS/Fabrizio Bensch

An Airbus A380 aircraft of Deutsche Lufthansa (top) takes of passing over an Airbus A380 aircraft of Emirates at the ILA International Air Show in Schoenefeld south of Berlin, June 8, 2010.

Credit: Reuters/Fabrizio Bensch

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Una Galani

DUBAI, April 18 (Reuters Breakingviews) - Emirates airline is changing its flight path. After more than a decade of organic growth, the Dubai carrier announced this week that it is studying foreign acquisitions. While the airline says it hasn't entered any talks for the moment, the shift comes amid rising competition. Meanwhile, India is due to decide whether to allow foreign airlines to own up to 49 percent of its local carriers.

The Dubai airline, which carries more than 30 million passengers a year, faces competition from its equally ambitious, deep-pocketed rival Etihad, the Abu Dhabi-owned official carrier of the UAE. Emirates airline is larger and has been profitable for longer. But the upstart has started to cherry pick minority stakes in the very markets Emirates is eyeing, and it is growing fast.

The German market is a case in point. Emirates for years lobbied for landing slots at Berlin airport - in vain. Then Etihad waltzed in last year by picking up a near 30 percent stake in cash-strapped Air Berlin for a total of $350 million in loans and fresh capital.

It's easy to see why acquisitions would be tempting for Emirates. Loss-making airlines in the fast-growing Indian market are obvious targets. A 49 percent stake in Kingfisher (KING.NS), for example, would cost just $95 million, while the Dubai group could provide cheap financing to lighten the airline's $1.3 billion debt burden.

Despite India's high taxes, Sudeep Ghai at consultancy Athena Aviation suggests Emirates could find value in the market even if the airline doesn't make money at first on the short flights from Mumbai or Delhi to Dubai. That's because a significant share of the passengers would transit into Emirates' profitable long-haul network.

In India or elsewhere, the challenge for Emirates would be to turn around a business with only a minority control. That kind of buy-to-build strategy has failed many. Emirates itself last year sold its 44 percent stake in Sri Lankan Airlines, bought in 1998, back to the operator at a loss. But in a buyers market, it is easy to see why Emirates might be tempted to stray from its tried-and-tested organic route.

(Editing by Pierre Briançon and David Evans)

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