Overview
The Emirates group is made up of the Dubai National Air Transport Association; EmirateS Airlines as well as a hotel group. The government of Dubai owns the Emirates group. The airline has recorded immense success especially under the “wide open skies” policies adopted by the Sheikdom (Naeem 17). The policy has over the years brought in over 100 foreign airlines to the modern Dubai airport which is ranked as the busiest in the middle east.
The airline is known for high-class in-flight service and consistent profitability. Emirates airline operates close to 2,500 passenger flights per week. However, it is unique amongst the major long-haul airlines in its resistance to joining global alliances such as Oneworld and the Star Alliance. However, the airline participates in code-sharing arrangements with numerous other carries and is a minority stake holder in Sri Lankan Airlines (Naeem 24).
The airline has been accorded different recognitions, and in 2010, it was awarded as the sixth largest airline globally based on the number of international passengers carried. However, it is ranked as the largest based on the scheduled-international passenger-kilometers flown. The airline is renowned for being one of only five airlines that operate in the wide-body aircraft feel. With a fleet of more than 150, Emirates Airlines currently flies to more than 100 destinations spread in 65 countries globally (Naeem 33).
The airline is constantly expanding its flight network by adding new routes and countries on its schedule. More than 705 Emirates flights fly out of the Dubai International Airport on a weekly basis on their way to destinations that span six continents. The airline accounts for more than 45% of all flight activities in and out of the airport. Since the airline began its operations, it has been able to gain a competitive position as well as an advantage in the market. The company’s success has been attributed to the continuity of its competent management team, many of whom have worked with the airline for more than two decades (Uwagwuna 41).
Problem Statement
The airline is increasingly faced with resistance to its open sky policy that does not allow it to join other airlines in forming alliances. The resistance emanates from crucial markets such as Australia that the airline is yet to exploit fully. This is a problem for the airline since it is faced with stiff competition along its traditional routes and markets and there is an urgent need to venture into new markets to increase its revenues and boost its bottom line. The airline is also faced with unpredictable global fuel prices.
Alliances
Emirates Airlines is currently not part of any of the major global airline alliances. However, in 2000 the carrier briefly toyed with the idea of joining the Star Alliance, but a decision was made for it to remain independent. The decision to remain independent was arrived at because the management believed that the airline’s ability to react to the various market forces is often curtailed by the need for a consensus between all the partners of the alliance (Naeem 57).
Scenario of the Aviation Industry
The global aviation industry experienced a tumultuous period during the previous economic and financial crisis. It witnessed a spike in the number of airline bankruptcies, a contraction of the airline services and networks which led to IAT adjusting its predicted losses to $11 billion, up from $9.4 billion (Cento 63). While the price of oil had dominated the initial half of 2008, the recession was the main fear for many airlines towards the end of the same year.
Shattered consumer confidence, shrinking demand as well as unattractive yields confronted the airlines. A 15% contraction in global trade forced changes in business patterns which meant that companies slashed their travel budgets (White 31). The aviation industry back then was faced with a need to invest more than US$1 trillion in better more fuel efficient aircraft while at the same time it was confronted with a banking sector that was not enthusiastic to lend after the near complete collapse of the finance sector (White 55).
Strategy
Emirates airlines, though faced with the same challenges faced by other industry players, was lucky to be operating in the Middle East. The Middle East was still witnessing a positive growth in air passenger numbers. According to the IATA, Middle East-based carriers witnessed a 14.3% growth, which was the highest in the world at the time. Emirates Airlines was still able to generate net earnings of US$ 965million, which was an increase of the more than $770 million on revenues of US$12 billion. The numbers were a clear sign of the management’s efficient response to the changes in the market (O’Connell, et al. 64).
The airline was also able to catch up with better ideas and challenges from their experience in the international airline market. The airline went a step further and improved its in-flight entertainment systems as well as customer safety features. When the crisis hit the global economy and Dubai to be specific, the financial institutions had almost halted lending money. Emirates continued to have requirements for better financial instruments that could support its growth strategy (O’Connell, et al. 72). The airline also came up with new financial instruments that elicited considerable excitement in the financial and aviation sectors.
The new instruments even won an award and were recognized by the aviation industry. Emirates also became the pioneer airline across the globe to introduce the smart-runway and smart landing safety features to significantly reduce the risks associated with runway incursions. Customer service lies at the heart of the Emirates Airlines, just like any other airline all over the globe (O’Connell, et al. 81). The company stated that there was no given time that it was tempted to compromise on standards or implement a “hold operation” policy as it waited for the global economy to improve.
Every year, the company seeks to make improvements on its core fleet. For example, during the financial year that spans 2009/2010, it took delivery of fifteen new aircraft that included four Airbus A380s and eleven Boeing 777S. These additions brought the total number of its fleet to 152 aircraft. The company has plans in place to take delivery of new planes at the impressive rate of one every month. This shows that it is still optimistic about the prospects of the Aviation industry. The Airbus A380 is the ultimate symbol of the pioneering spirit of the airline and it is popularly referred to as the superjumbo. The aircraft continues to be the most sought after airline for any international airline and transport hub (Naeem 71).
Fleet Financing and Acquisition
During the 2009/2010 financial year, the airline managed to raise a total of US$2,390 million in aircraft financing which included aircraft operating leases over the same period. The company’s eight B777-300ER airplanes were funded with the help of lease agreements. According to the company, its financial highlight of the year was the first ever financing of Boeing with the help of capital markets with a guarantee by the United States Export-Import Bank The step allowed the transaction to eventually come up with US$413 million that was to finance the three new Boeing 777 – 300 ERs (Naeem 75).
This kind of financial arrangement that had been pioneered by the airline earned it an award. The latest structure managed to reach a deeper investor base that the other conventional methods were unable to. The result was thus a more durable financing option that was less exposed to the financial stress that had crippled the lending abilities of the banking institutions towards the end of 2008. The new option was subsequently recognized by the aviation industry and earned numerous accolades from the key financiers of the industry.
The airline has gone ahead to refinance two other 777 – 300 ER aircraft via the global capital markets. Of the four Airbus A380 aircraft that were delivered, two of them were financed in the form of finance leases while the remaining were done through sale and lease back arrangements with the help of the German KG market (Naeem 93).
Dealing With Recent Aviation Challenges
The aviation industry was faced with numerous challenges that were mainly due to the recent recession. Even though Emirates was confronted with the same, the airline called upon its experience in the sector to chart a clear path towards recovery that allowed it to weather the storm unlike most of its peers. The company continued to take delivery of the latest and more efficient aircraft, invested in their brand, as well as expanded its network which surprised its competitors (O’Connell, et al. 101).
This is because it went against the popular industry trend back then which was to cut back on costs and expenditure. Emirates’ cost containment strategies were used to maintain its organizational costs within a required budget as well as to restrain any expenditure to meet any project and organizational targets. The airline’s internal audit initiatives that were designed to underpin the policy of cost containment included the incorporation of the program of Control l Self Assessment at all its outstations. This particular strategy was well-balanced against the inherent need to safeguard Jobs and keep the staffing costs within a manageable level (Naeem 98).
Over the years, Emirates Airlines has added new markets to its operations both within and outside the Middle East. Through the creation of global account managers, the company was able to add value to all of its existing customers. The new marketing target included the widely important cruise segment that operated out of Dubai. The airline signed new agreements with the likes of Costa Cruises as well as Royal Caribbean International.
Several new and attractive packages were delivered during major regional and global events such as the World Cup and the Dubai Sevens Rugby tournament (Naeem 103). The company achieved this with the help of innovative payment schemes for customers that booked online. Cardholders were given a chance with nil interest to pay for their tickets in three installments. This approach offered an incentive to customers to shift to online to conduct their business transactions.
The innovative system was made available to 59 key markets and translated into 13 languages, and it has recorded phenomenal growth over the years. The airline’s revenue through emirates.com continues to increase at an impressive rate of 45% per annum while in some of the markets it is responsible for more than 20% of the airline’s entire revenue (Naeem 112). The company clearly gained an edge over its competitors with the implementation of this new system that also tracks consumer behavior and preferences. This allowed the company to maintain competitive fares while at the same time being supported by excellent load factors.
In March of 2011, the company finally opened its 103rd route which was the Dubai to Tokyo route. The company also made major strides in deploying one of the most efficient airplanes, the Boeing 777 – 300ER to the United States West Coast. One of its most feted trip on the new route was when the company was contracted to transport the FIFA delegates to attend the Nassau conference. According to the company’s annual report, during the 2009/2010 financial year, the aviation industry contracted by close to 10% with one month alone registering a fall of over 23%. This led the Emirates SkyCargo to employ a strategy that was aimed at protecting and securing the company’s freight market share.
The strategy was to resist the urge to respond to the global recession with downsizing its fleet due to the declining volumes of cargo being transported (Naeem 115). The strategy paid off with the company recording near double-digit growth during the same period. The airline’s investment in aircraft that were more fuel efficient gave it a significant competitive edge over its closest competitors such as Qatar Airways and Etihad Airways.
Interest Rate and Foreign Currency Risk
Multinational corporations hedge against currency and interest rate exposures. This is what the airline did to protect itself from sudden currency movements and even currency swaps. The company hedged around half of its interest rates and loans portfolio. It also did the same against currency risk exposures with the help of options, as well as swaps. The company’s lease and borrowing liabilities, as well as aircraft operating leases as at the first quarter of 2010 comprised 82.9% on a fixed interest rate and was composed of a 61% basis with the remaining 395 being on floating interest (O’Connell, et al. 76).
An increase of just 1% in interest rates would have had the effect of significantly increasing interest charges together with the operating lease charges by over $20 million. The company’s currency outflows were mainly denominated in Euros, Pound Sterling, New Zealand dollars as well as the Japanese Yen. By the end of March 2010, Emirates’ hedging coverage for the British Pound, Euro, AUD, NZ dollars and Japanese Yen were at 14, 24, 29, 81 and 91 percent respectively (Naeem 88).
Overall Corporate Strategy
The airline has a competitive business model that directly influences its corporate strategy in the aviation industry. However, the volatility of oil prices forced the airline to come up with other strategies that would shield its bottom line from this. Emirates has entered into agreements with major oil companies to supply the airline with fuel and competitive agreed-upon prices for an agreed number of years. Such strategic oil partnerships have allowed ensured that the company maintains its profitability in the midst of a dynamic fuel market thus remaining ahead of its closest competitors (Uwagwuna 49). The enormous investments that have been made on long haul flights have allowed the airline to offer competitive long-haul flights at a cheaper rate. By the end of 2012, Emirates Airlines had expanded its long-haul flight services to several new territories.
Emirates has over the years diversified its investment portfolio into other areas such as airport services and infrastructural upgrades within its routes of operation. The company has also launched cab services at the numerous airports that it operates to facilitate the quick and easy transportation of its passengers. The airline’s primary goal is the provision of airport and flight services with a difference (Naeem 115). The firm has incorporated a strategy of free competition that makes it be extremely competitive as its overall corporate image becomes more visible. Many stakeholders including its regular passengers view this step as a positive one that will see the firm enter new market niches without having to deal with many hurdles.
Amidst the terrorism threats that have become all too common in the Middle East, the airline has managed to increase its security and airport surveillance as a way of curbing cases of terrorism and kidnap. The airline also ensures that all its staff members are regularly trained to ensure that they deliver exceptional services to their corporate and regular customers. However, the airline acknowledges the fact that recruitment of new staff members in their specific areas of specialization is costly time-wise as well as financially (Cento 49).
The airline has adopted an open skies policy which enables it to fly to virtually any country globally without any unnecessary sanctions. However, the strategy appears to be facing resistance as more countries are increasingly seeking alliances with any airlines that fly through their airspace. Emirates has been overly careful in the past not to join any alliances but there is a possibility that the airline will not be able to maintain this strategy for long.
For example, Australia has gone a step further and placed a flight sanction on the Dubai-based airline since it has refused to form an alliance with the country owing to its open skies policy. The airline will thus be forced to relax its stand on the formation of alliances so as to be allowed access to certain lucrative markets that will grow its annual revenue as well as profits (Cento 66).
Emirates’ External Competitive Advantage
The airline, through is open skies policy copes, as well as encourages competition with other industry players. For example, the airline shared Dubai International airport with other major global airlines thus encouraging the market’s competitive forces to control and influence the direction of the company (Naeem 82). The government of the United Arab Emirates has allowed the airline to nurture a liberal market that welcomes healthy competition. As a key stakeholder, the UAE has closely monitored the airline’s operations to make sure that it consistently complies with the required international standards. This has ensured that the airline can compete with established brands such as Lufthansa and British Airways.
In the past, most Asian governments used to operate under the firm guise of paternal government policies. This meant that an external player’s entry, as well as exit from their market, was dictated by the policy of the paternal government. However, with the turn of the new millennium, most of these governments have discarded this paternal policy making the companies that operate within the region to enjoy the freedom and competitiveness that is common in advanced open economies (White 77). Emirates Airlines have been able to become competitive due to this opening up of the aviation market.
Emirates Airlines SWOT Analysis
The strategic position of the airline has previously and currently is still being challenged due to the changing environments in the airline industry. There has been an increase in competition especially when it comes to the budget airline segment. This competition has provided passengers with a variety of options to choose from thus increasing their overall bargaining power when it comes to air fares.
Strengths
As a renowned brand in the global aviation industry, Emirates Airlines has been able to carve out a strategic niche globally. The airline already had a competitive advantage owing to its size when it decided to streamline its business model during the recent financial crisis. With yearly astronomical profits the company has managed to overshadow all of its regional competitors from the Middle East. The company’s move to diversify its markets and expand into the Sky Cargo system was master stroke which placed the airline in a better position to take advantage of the recovering global economy (Naeem 121).
It has improved its customer care experience by upgrading its numerous Emirates Contact centers, a contract that was awarded to British Telecom Global connect. The company’s reluctance to join the global alliances such as Star Alliance has allowed it to be flexible in adjusting to the changing aviation industry to increase its profitability. Listening to, as well as identifying with all of its customers has allowed the airline to develop a corporate culture that has a human face, a stark contrast to the Emirates of the past.
The airline is also the official airline of the Dubai government. This makes it the first point of call whenever a government delegation is traveling to any part of the globe. Dubai is a favored city for most of the global multinational companies. This means that a lot of Corporate travel involves the Dubai International Airport which is the airline’s home. The company also has a well qualified and efficient work force that work round the clock to ensure the airline’s passengers are well catered for both on the airplane and on the ground (Cento 69).
Weaknesses
Not all of the company’s diversification efforts and approaches have yielded success. This can be regarded as one of the company’s major weakness or flaws in strategy. Marketing and financial analysts have accused the company of focusing too much on high-end acquisitions ignoring the risks and resources that are associated with doing this. The strategy has exposed the airline to unnecessary risks (Uwagwuna 55).
Opportunities
The airline still has more opportunities to penetrate into the emerging markets such as Brazil and China. It can leverage its current resources and financial muscles to gain first choice and a strong entry into the untapped markets. The increased penetration of the internet offers an opportunity for the airline to shift most of its customer’s bookings as well as advertising to its online portal and platform. These channels are not only cheaper but also convenient to both the customers and the airline (Naeem 74).
Threats
Rival airline companies such as Qatar Airways and Lufthansa pose a significant threat to the airline in the routes that are nearing saturation. Most of these competitors started out as airline companies and thus have decades of experience and innovation to keep up with the changing markets. On the other hand, Emirates airline is a relatively young entrant in the aviation industry meaning that it is difficult to match the experience and industry lessons that its key competitors possess.
The airline’s inability to constantly keep up with innovations or recognize its demand early enough poses a threat of it being displaced by other industry players. The company’s global nature also comes with a set of problems for the airline. For example, the diverse political and legal environments in which it operates makes it difficult to track all the changes in regulations which expose the airline to numerous legal suits and fines.
Alternative Solutions
Emirates Airlines can overcome the problem of sanctions in Australia by joining an airline alliance. However, the airline alliance comes with its fair share of pros and cons. The alliance may offer the company with economies of scale, but at the same time, it loses some form of autonomy in its decision-making. When it comes to increased competition, the airline can launch a budget subsidiary to allow it to have market share in the budget airline market.
Recommendations
Emirates airlines should reconsider its stance against alliances in the swift changing aviation industry. This is because alliances have become fundamental for major players in the airline industry. For example, Lufthansa Airlines credits its alliances as major drivers behind its success and stability over the years. As a founding member of the Star Alliance, the airline derives innumerable advantages in the globe’s largest network (Çetiner 44). Joining an Alliance has for long not been part of the Emirates airline’s strategy, however, a shift in policy may provide the airline with some numerous benefits that it may be currently losing out on.
The benefits that come with an airline alliance lie on the benefits of size, economies of scale, network as well as learning. The negotiating power, as well as the large membership size of member alliances in any global airline alliance, has the advantage of increasing the bargaining power when procuring resources or negotiating with a new airport (Çetiner 52). Alliance members have been shown to achieve competitive deals and prices since they make their purchases in large quantity and negotiate the airport charges as a team.
This was appropriately demonstrated by the agreement that was signed between Coca-Cola and Sky team at the start of the millennium. It was also illustrated in the agreement between the British Airport Authority and Sky team back in 2006. Whenever the member countries embark on the purchase of an aircraft, they will get it at a much more competitive price regarding financing, maintenance, training costs as well as operations (Cetiner 64).
The increased network size that comes with a global alliance has its shares of advantages when it comes to marketing terms. Through the help of joint advertising promotions, alliance members can easily afford a far-reaching marketing promotion that is usually more effective than campaigns that are done by individual members on individual routes that they only operate in. The management of Emirates has grappled with some key markets such as Australia (Cetiner 76).
Alliances reduce the hurdles, as well as costs that are associated with entry into a new market. Instead of going alone and incurring the significant costs associated with the development of a new route, an airline alliance may invite an area’s dominant airline in the particular area to become a member and in the process incorporate its network of routes thus providing efficient service connections. This can be accomplished while at the same time avoiding the costs that come with advertising, capital investments, price wars, and landing charges (Cetiner 81).
Industry players in a particular airline alliance can increase their overall network offerings or market position as a result of the newly included routes. A good example is the star alliance which in 2012, offered a mouthwatering incentive to prospective members of 650 million passengers per year, a far-reaching system of more than 20,400 regular schedules of departures that covered 1,300 destinations that were spread across more than 189 countries.
By combining connections, frequencies, as well as scheduling in its Frequent Flyer program, its members could benefit from an exponential growth in market share, the creation of a strategic advantage as well as a reduction in competition (Cetiner 102). Passengers that use any alliance member can achieve numerous rewards once they become members. Alliance members can also readily benefit from knowledge sharing as well as best practice with another member of the same group. These lessons may range from safety to customer service.
Lastly, the airline should not renew its previous fuel hedging agreements with its fuel suppliers. This is mainly because the price of oil has been depressed for several months now. With the entry of Iran and discovery of new oil deposits across the globe more so in Africa, analysts believe that the oil price will never hit the highs it did in the years that preceded the recent financial crisis. However, if the company must hedge the price to aid in forecasting of expenditure it should only do so at oil prices rates that are informed by the current changes in the supply and average global oil prices (Centro 96).
Works Cited
Cento, Alessandro. The Airline Industry: Challenges in the 21st Century. Heidelberg: Physica-Verl, 2009. Print.
Çetiner, Demet. Fair Revenue Sharing Mechanisms for Strategic Passenger Airline Alliances. Berlin: Springer, 2013. Internet resource.
Naeem, Muhammad. An Analysis of the Emirates Airline Operation Management System. , 2015. Internet resource.
O’Connell, John F, and George Williams. Air Transport in the 21st Century: Key Strategic Developments. Farnham, Surrey, England: Ashgate, 2011. Print.
Uwagwuna, Christian. How the Macroeconomic Environment of the Airline Industry Affects the Strategic Decision of Boing Vs Airbus: A Case Study. München: GRIN Verlag GmbH, 2011. Internet resource.
White, James R. Aviation Industry Performance: A Review of the Aviation Industry in 2008. S.l.: Diane Pub Co, 2009. Print.