Emirates Airline – Strategic Analysis

Introduction

Emirates airline is a (relatively) new full-service network carrier in Dubai, United Arab Emirates (UAE). Despite being a relatively new company, the airline has become among the fastest growing companies in the Gulf region (The Emirates Group 2014). In fact, globally, the airline is the most profitable aviation company. Furthermore, Nataraja & Al-Aali (2011) say it operates among the longest non-stop flights around the world. Under The Emirates Group (2014), the airline has won several service excellence awards, and now stands out as the most profitable entity in the group’s two business sub-sectors (Dnata is the other business group). Although the UAE government owns the company, the Dubai-based Airline operates as an independent business entity that does not experience government interference in its business operations.

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Emirates Airline provides different services to its customers, including passenger and cargo transport (Joseph 2013). The company also provides other airlines with technical support at its Dubai hub. Despite its success, the airline is struggling to manage high operational costs, increased competition, and an increasingly uncertain business environment. This report proposes some strategic options for overcoming these challenges. Similarly, it offers recommendations for overcoming today’s uncertain economic times. These findings would benefit the airline’s managers and give valuable lessons for similar airlines that experience the same challenges. However, to gain a deep understanding of the available strategic options for the company, it is important to understand its current strategies. This effort involves explaining the political, economic, social, technical and environmental factors that underlie its strategies.

PESTE Analysis

This PESTE analysis provides an overview of how external factors (macroeconomic factors) of the Emirates Airline affect its performance. Therefore, this tool is important for understanding the airline’s market growth. The same tool is useful in understanding its business position, potential for further growth, and strategies for overcoming future operational challenges.

Political

Experts say Emirates Airline has benefitted from a favourable political environment in the Middle East (Nataraja & Al-Aali 2011). Indeed, this environment has benefitted the airline locally and internationally. For example, the company benefitted from political cooperation agreements between Asian countries and European countries. The same agreements have helped the organisation to fly to several European, Asian, and American destinations. Similarly, they have provided it with ready markets for expanding its operations, globally (Nataraja & Al-Aali 2011). Locally, the UAE government has provided Emirates Airline with infrastructure support for complementing the airline’s existing and future operations (Nataraja & Al-Aali 2011, p. 472). Comprehensively, favourable political conditions have helped Emirates Airline to grow within a short time.

Economic

Many Middle East economies have experienced several years of economic progress. Particularly, the UAE has benefitted in this regard because it has diversified its economy from being exclusively dependent on oil to include new economic sectors, such as tourism and construction. These economic conditions complement Emirate’s operations because they have increased people’s disposable income, thereby making it easier for them to afford air transport. Besides the growth of per capita income, Nataraja & Al-Aali (2011) also say inter-government partnerships (especially in the gulf region) have increased economic cooperation among states, thereby making it easy for local airlines to exploit the opportunities that come with it.

Statistics show that more than three billion people can fly using Emirates Airlines in eight hours, or less (Nataraja & Al-Aali 2011). This means the company has experienced a sustained demand for passenger transport throughout the years. This demand, coupled with increased economic policy streamlining (in markets that the airline serves), has contributed to the Airline’s growth in the past few years.

Social

The airline industry is (mainly) a service-oriented business that relies on social factors for its success. Therefore, regardless of how an airline restructures its business operations, it has to consider the impact of employee issues across its strategic objectives. Emirates Airline has a huge pool of human capital. Since there is a significant wage difference between the UAE and western countries, the airline has reduced its labour costs by employing local and cheap labour. Consequently, labour costs only account for about 10% of the airline’s operating cost (Nataraja & Al-Aali 2011). Comparatively, western-based airlines use up to 40% of their revenues to pay their employees (Nataraja & Al-Aali 2011). This cost-reduction strategy has contributed to the company’s success.

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Technological

The aviation sector (mainly) relies on technology to undertake its operations. Furthermore, many airline companies compete because of technological development (Joseph 2013). Since Emirates Airline serves different types of customers, in multiple locations, it uses technology to localise its operations. For example, the company operates one technological platform that serves its customers using 14 languages (Nataraja & Al-Aali 2011). Similarly, the same platform supports payments through 40 currencies (Joseph 2013). Technology also supports other aspects of its operations, including inventory control and product optimisation. Therefore, the airline meets the societal preference of every market.

Environmental

Nataraja & Al-Aali (2011) say global organisations have a duty to formulate their strategies after considering the environmental safety of their operations. In this regard, many companies follow environmental regulations when formulating their organisational strategies. Emirates airline is no exception. For example, the company engages in environmental conservation initiatives around the world. Similarly, the airline has reduced its carbon footprint by reducing pollution from its aircrafts. This is why the company has undertaken many eco-friendly initiatives in the last two decades (Nataraja & Al-Aali 2011). Such efforts have created a positive image for the company. Consequently, the company has received immense support from governments, the business community, and well-wishers.

Emirate’s Current Plans and how it should overcome Future Turbulent Times

Current Strategic Plan

Fuel is the main operation cost of Emirates Airline. The company can improve its profits by reducing this cost. Moreover, experts predict that in the 2013/2014 financial year, the global price of jet fuel would further increase to more than US$130 per barrel (The Emirates Group 2014). This is why the company intends to buy fuel-efficient aeroplanes. For example, in the 2013/2014 financial year, the company plans to buy 20 new fuel-efficient aircrafts (The Emirates Group 2014). Unlike other financing models where airline companies seek bank loans to do so, Emirates Airline plans to issue different types of bonds, with different investment models to meet the same goal (OECD 2011). This approach reflects the company’s diverse financing options. So far, the plans have been successful.

Future Plans

Despite the challenges that affect Emirates Airline, the company aims to overcome future turbulent times by investing in its future operations. This strategy translates to increased investments in its machinery and equipment. For example, in the 2012/2013 financial year, the company invested in its airline fleet by purchasing 34 wide-bodied aeroplanes (The Emirates Group 2014). Consequently, the company has accumulated among the highest number of wide-bodied aircraft fleets, globally. In line with its customer service needs, and increased operational demands, Emirates Airline also increased its employee numbers by 5,000 people, globally (Joseph 2013).

As part of its future strategy, the airline has collaborated with other companies to decrease competition and improve its operational network. For example, Australian authorities recently approved the airline’s partnership with Australia’s Qantas Airline (The Emirates Group 2014). This partnership should increase Emirate’s future performance through integrated network collaboration. Similarly, the company should benefit from aligned frequent flyer programs, and shared sales and scheduling models. Besides pursuing profitable partnerships, part of the airline’s future involves adding its capacity for more cargo and passenger numbers.

During the 2012/2013 financial year, alone, the company pursued this strategy by adding ten new destinations in its flight map (The Emirates Group 2014). These destinations include “Adelaide, Algiers, Barcelona, Erbil, Ho Chi Minh City, Lisbon, Lyon, Phuket, Warsaw and Washington, DC as well as six dedicated freighter routes – Chicago, Chittagong, Djibouti, Hanoi, Liege and Tripoli” (The Emirates Group 2014, p. 18). Comprehensively, the plans of Emirates Airline involve pursuing network expansion programs, capacity increments, and mutual partnerships.

Financial Performance

Generally, Emirates Airline has had a positive financial performance in the last three years. For example, it has experienced a long period of profitability within this time. The company has always reported huge profits since 2011. For example, in 2011/2012 financial year, the airline reported a profit of AED 62, 287 million (The Emirates Group 2014). In 2012/2013, this figure increased to AED73, 113 million.

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Its operating profit similarly increased from AED1, 813 million to AED2, 839 million during the same period (The Emirates Group 2014). This figure represents a 56.6% change in revenue collection. Similarly, it shows that the company’s profit margin increased from 2.4% to 3.1%. Part of the company’s profitability stems from its high passenger and cargo numbers during the above periods. For example, operating statistics show that the airline carried 33,981,000 passengers during the 2011/2012 financial year. This figure increased to 39,391,000 during the 2012/2013 financial year (The Emirates Group 2014). The volume of cargo carried by the airline also increased in the same way. For example, in the 2011/2012 financial year, the company carried 1,796,000 tonnes of cargo. During the 2012/2013 financial year, this number increased to 2,086,000 tonnes (The Emirates Group 2014).

This means there has been a direct correlation between the company’s profitability and increased cargo and passenger numbers. The diagram below shows how the profitability figures correlate with increased cargo and passenger numbers.

The Financial Performance of Emirates Airline.
Figure One: The Financial Performance of Emirates Airline (Source: The Emirates Group 2014).

As mentioned in this paper, Emirates Airline is a profitable company. The above statistics affirm this fact because they show that the airline has never made a loss for many years. The Dubai-based company has managed to report positive financial figures despite increased operation costs that emerge from increased prices of jet fuel. For example, in the 2012/2013 financial year, the global price of jet fuel was more than US$127 a barrel (The Emirates Group 2014). Although this cost was the highest operating expense for the airline, political and economic instability also affected the company’s performance. For example, the “Euro-zone” crisis affected the company’s profitability from 2011 to 2013. These statistics show that although the company has reported positive financial results, it still experiences several macroeconomic challenges.

Which Year did Emirates Adopt the Best Business Model?

Emirates airline adopted the best business model in 2013 when it started pursuing joint venture strategies. The aviation industry is becoming increasingly competitive and it is more difficult for such airlines to wade through the challenges alone. Although joint ventures and partnerships are common phenomena in the aviation sector, Emirates Airline has benefitted from improved pricing plans and expanded transport networks through recent partnerships with other successful airline companies, such as Qantas. This strategy promises to safeguard the airline’s long-term business growth.

Emirate’s Marketing Strategy

Since 2011, Emirates Airline has adopted a consistent marketing strategy, which premises in three pillars. The first pillar involves marketing the company’s hub (Dubai) as a trade-free zone. This strategy has made sure that the company gets business throughout the year. In fact, IBP (2014) says the plan has brought a lot of business to the UAE (it now stretches Dubai’s airport capacity). The same marketing strategy has increased the flow of passenger numbers to the UAE-based airport. Dubai airport now handles more than 50 million passengers, annually (IBP 2014). Quality is the second pillar of the above-mentioned marketing strategy.

Emirates Airline has made sure that it provides excellent customer services to different customer groups, across its international destinations. Furthermore, it has bestowed its customers with the best services and an unmatched operational network (Joseph 2013). Consequently, although the company is Islam-based, it appeals to a non-Muslim market too. Some of the quality services they give to their customers stem from the company’s investments in modern aircrafts that offer many social amenities and luxury items to its customers. Therefore, the company has marketed itself as a “quality” brand. This strategy has attracted many customers. Comprehensively, the above marketing strategy has improved the airline’s load factors and enhanced its financial performance. Similarly, it has improved the company’s competitive position.

For example, its passenger numbers have made Dubai airport among the busiest airports in the world. Similarly, other airlines, such as Qantas, have shifted their key Asian operational bases to Dubai. Emirates Airline greatly capitalises on this fact.

Recommendations

Improving its Value Chain

Emirates Airline has many competencies that span across its marketing strategies, operational competencies, and business diversification strategies. However, the company needs to review its value chain process because of the rising cost of doing business and increased competition. This is true because the company depends on this competence to improve the quality for its market success. The airline’s value chain process adopts a vertical integration plan that distinguishes itself through improved technology, and marketing competencies (IBP 2014).

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For example, the airline uses advanced technology to operate different business segments, including pilot training programs, an engineering centre, hotels and resorts, and a catering department (Nataraja & Al-Aali 2011). Although these diversified business segments have accounted for most of the company’s business success, there is a huge potential for the airline to improve its value chain processes through value addition. This strategy would increase its passenger and cargo numbers because it could improve its cost-effectiveness, productivity, and managerial efficiency. This strategy would also improve the company’s key competency areas.

Cost Reduction

Poor economic conditions and a slowdown in the market uptake of airline services in some key markets, such as China, Europe, and America, highlight the need for Emirates Airline to adopt a cost-reduction strategy for its long-term growth (Nataraja & Al-Aali 2011).

Although the company has partly adopted this strategy by buying cost-efficient aircrafts, it needs to reduce its bureaucracy costs and restructure its organisation’s resources. Similarly, the company should renegotiate its employment terms with the employees to reduce its operational costs, further. However, the company needs to complement this strategy with an outsourcing business model for cutting the company’s operational costs. For example, it could outsource some of its catering, engineering, and maintenance services to third parties, as a cost-reduction measure. Lastly, the company needs to re-evaluate its operations in low-profit markets by withdrawing from them and increasing its dominance in profitable routes. Furthermore, its marketing campaigns should focus on boosting the company’s image in these (profitable) markets.

Price Sensitivity

Although the need to adopt a cost-reduction strategy is urgent, Emirates Airline needs to adopt a price differentiation strategy because customers are becoming more price-sensitive (The Emirates Group 2014). This push comes from the increased dominance of low-cost airlines in the aviation sector. Particularly, there is an urgent need for the company to reconsider its decision to compete with low-cost airlines because it already has unmatched competencies that that low-cost airlines cannot compete with. For example, the company could exploit its immense experience and economies of scale to eliminate such competition in the market.

Summary

This paper has highlighted the different types of strategies that could make Emirates Airline sustainable. To manage uncertain economic conditions, the Dubai-based airline needs to implement some of the strategies proposed in this paper. Consolidation and strategic alliances are also beneficial strategies because competition from low-cost airlines is bound to increase. The company also needs to restructure its route network, focus more on profitable markets, and withdraw from less profitable ones. The airline could easily sustain its strategic advantages if it exploits its key competencies (such as its political connection with the UAE government) and eliminate its core weaknesses.

However, it is important to highlight the need to focus on cost-reduction as a key strategy because Emirates Airline is a capital-intensive enterprise and needs to survive by minimising its operation costs. Therefore, it is important for the company’s value-chain to show cost-reduction principles. These strategies should increase the company’s profitability and help it to overcome the challenges of doing business in uncertain economic times.

References

IBP 2014, UAE: How to Invest, Start and Run Profitable Business in the UAE Guide – Practical Information, Opportunities, Contacts, Int’l Business Publications, London. Web.

Joseph, C 2013, Advanced Credit Risk Analysis and Management, John Wiley & Sons, London. Web.

Nataraja, S & Al-Aali, A 2011, ‘The exceptional performance strategies of Emirate Airlines’, Competitiveness Review, vol. 21, no. 5, pp.471 – 486. Web.

OECD 2011, Smart Rules for Fair Trade 50 years of Export Credits: 50 years of Export Credits, OECD Publishing, Washington. Web.

The Emirates Group 2014, Annual Report. Web.

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