Hello tomorrowUna Galani / April 20, 2012, 0:26 IST
Emirates airline is changing its flight path. After more than a decade of organic growth, the Dubai carrier announced this week that it was 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 per cent of its local carriers.
The Dubai airline, which carries 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 in vain for landing slots at Berlin airport. Then Etihad waltzed in last year by picking up nearly 30 per cent 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 per cent stake in Kingfisher, 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. Last year, Emirates itself sold its 44 per cent 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.
Do's and don't
Pierre Briancon / April 20, 2012, 0:24 IST
Euro zone members won’t meet their fiscal targets, but that doesn’t mean they should all force themselves to be even more austere. This is the message the International Monetary Fund (IMF) is sending to Europe’s troubled economies. Both, disciplinarian central bankers and populist politicians should take note. Austerity remains a must. But too much, too fast will be lethal.
Spain and France illustrate the point IMF is trying to make. Both should have budget shortfalls next year that will be much higher than forecast, the Fund says. Both countries were supposed to shrink their deficits to three per cent of GDP in 2013. But, according to IMF, both will miss their targets — Spain’s deficit would reach 5.7 per cent of GDP, while France’s would stand at 3.9 per cent.
The misses should lead to different conclusions in Madrid and Paris. Spain’s target was absurdly unrealistic. Since the deficit stood at 8.5 per cent in 2011, the target could only be met if the country cut spending or raised taxes by a combined 5.5 per cent of GDP over two years. Spain needs understanding from its euro zone partners: flexibility is needed to implement painful reforms that need political support.
For France, on the other hand, the IMF report should serve as a wake-up call: more needs to be done. Nicolas Sarkozy and Francois Hollande, the main presidential candidates, seem impervious to the need to seriously shrink the public sector. In a country which hasn’t balanced a budget since 1976, cutting public spending — a euro zone record at 56 per cent of GDP — is in and by itself a structural reform.
This government-heavy economy sets the country apart from other euro zone members. The IMF forecast shows Paris can’t simply wait for better days, especially with the weak GDP growth expected this year (0.5 per cent) and the next (1 per cent).
What really matters in the current euro debate is not the targets by themselves, but what governments are doing — or not — to reach them.
For further commentary see www.breakingviews.com