The global aviation industry has been marred by numerous challenges over the recent past. From the volatile global oil price and the global economic recession to rising cases of terrorism and cyber threats, the aviation industry is in a precarious situation where individual companies have to find ways of withstanding these challenges. Over the past three years, the international oil price has remained low, which many have viewed as a benefit to the aviation industry. However, the negative impact that the trend has had on the oil and gas industry has also impacted the aviation industry negatively. In the United Arab Emirates, local airlines are dealing with the same challenges faced by international players in the aviation industry. Emirates Airline and Etihad Airways are some of the top airline companies in the country. Others include Air Arabia, Flydubai, Rotana, Unique Air, and Sky Bizz (Walker 2016). These airlines face unique challenges that threaten their existence in the aviation market. This paper seeks to evaluate the way that the United Arab Emirates airlines have handled the current issues that have impacted on the aviation industry in the light of the current economic situation and how mergers and strategic alliances can benefit them.
The aviation industry remains one of the most important sectors of the United Arab Emirates’ economy. The government has invested heavily in the transport sector to help boost other industries in the bid to reduce the overreliance on the oil and gas sector. The airlines in this country have played an incredible role in boosting the tourism and trade sectors of this country. Their existence and success are critical to the country’s economic success. However, these airlines are currently facing numerous challenges, some of which may force others out of the market. It is important to find means of addressing these problems. This paper explores ways in which strategic alliances, commercial agreements, and mergers can help alleviate the burden that these airlines currently bear while operating in the industry.
The United Arab Emirates has one of the most robust economies in the Middle East and North Africa (MENA) region. Its aviation industry has registered impressive growth over the years, especially because of the direct government support. Emirates Airline and Etihad Airways are some of the top global airline companies with several destinations around the world. They play a critical role in ensuring that major cities in the country, especially the cities of Dubai and Abu Dhabi, are properly connected to the rest of the world. Tourists and traders alike can easily find their way into this country, the fact that has helped boost these industries.
According to Harrison and Sharpley (2017), the biggest challenge that these airlines face is stiff market competition. American Airlines, Delta Airlines, Southwest Airlines, and SkyWest Airlines are some of the top competitors that the local companies have to compete against (Hensel 2016). Other top competitors in the global market include Air Canada, Lufthansa, Air France, British Airways, Qatar Airways, and Australian Airlines (Baaghil 2015). Besides stiff market competition, these airlines also face other economic problems. The dropping international oil price has affected some of the leading oil exporters around the world, especially in the Middle East and North Africa. The impact is felt negatively in the aviation industry, especially in terms of reduced travels made by the affected individuals. A constant threat of terror attack is a reality in the region, and the growing cases of cyber attack also affect these companies. Finding a solution to these problems is critical in ensuring that these companies continue registering growth.
Review of Supporting Evidence
The challenges faced by firms in the aviation industry have attracted the attention of many scholars around the world. These scholars have been interested in finding ways of addressing some of the most common and significant challenges in this industry. According to Abeyratne (2016), every airline faces unique challenges based on its size, the market that it dominates, the expertise of its employees and managers, among other internal factors. However, some of the forces in the market affect all the airlines, irrespective of the uniqueness of their internal structures. Daft and Samson (2015) note that strategic alliances and mergers have come out as some of the critical tools that these companies can use to overcome the current challenges they face in the market. It is important to look at some of the theories that explain the relevance of these strategies in overcoming some of the challenges that these firms face.
Taneja (2016) argues that scholars have put forth different theoretical concepts and models to help explain how strategic partnerships can help two different entities overcome a common problem in the market. One such theory is the resource-based theory of strategic alliances. The theory holds that strategic alliances create value for the firms through pooling of resources (Nevin 2016). Firms get to spend lesser resources than before in meeting the current needs when engaging in strategic alliances. Important activities such as research, advertisement, and customer relations can be shared so that each firm can spend half the original cost without compromising the quality of the outcome. The resource-based theory of strategic alliances is closely related to transaction cost theory. The transaction cost theory holds that for a firm to achieve maximum profits in its operations, it must find ways of reducing its costs of operation (Abeyratne 2013). That can be achieved through mergers and acquisitions. Mergers and acquisitions not only reduce the transaction costs but also help in reducing the cost of operations. However, Abeyratne (2013) warns that not all mergers and strategic alliances often lead to reduced transaction costs. Poorly planned and executed mergers or alliances can sometimes prove more expensive than when a firm operates independently.
The critical analysis and the review of the literature demonstrate that the aviation industry is currently faced with numerous challenges. Although the industry is still very profitable and is attracting new entrants, the challenges that it faces can sometimes force a firm out of the market. The current economic situation in the United Arab Emirates puts a lot of pressure on the aviation industry in the United Arab Emirates. The economy of the country still relies heavily on the exportation of the oil and gas into the international market as the major source of revenue. Since the global oil price started falling in 2014, the price has reduced by over a half what it used to be before the emergence of the problem (Howson 2017). It means that the local airlines can not enjoy the massive support it used to get from the government. With the oil and gas business affected, it means that some of the clients of the local airlines who used these services regularly can no longer afford to make frequent flights because of reduced income. The airline companies must find ways of overcoming these problems to avoid the possibility of having to be forced out of the market. Some of the strategies commonly proposed by scholars and industry experts include the following.
Nevin (2016, p. 26) defines a strategic alliance as “an agreement made between two or more entities that allow them to pursue a set of objectives while at the same time remaining independent organizations.” In a strategic alliance, two or more airline companies will agree to share specific responsibilities and tasks with the aim of achieving specific goals within a given period. The companies will remain independent, but they will share specific common responsibilities or face given challenges as united entities to enhance chances of achieving success (Howson 2017). For instance, Emirates Airline can have a strategic alliance with Etihad Airways to promote the local tourism industry. In such arrangements, when the numbers of tourists visiting the country increases, both firms get to benefit. The strategic partners get to share specific costs such as advertisements, research, and cyber/terror attack management, which help in reducing costs of operation.
A merger has become another strategy that companies use to overcome challenges they face in various industries. According to Nevin (2016), a merger is an agreement made by two companies to unite and form one entity. Unlike strategic alliances where the firms remain independent, mergers involve a complete unification of the companies to form a single entity with a single chain of command. The strategy is specifically important when there is stiff competition in the market. When the two firms merge, the competition is reduced as they will operate as one. In fact, the resultant firm will be larger, financially stronger, and more empowered in terms of human resource, making it easy to outsmart other competitors in the market. Etihad Airways may consider merging with other local firms to boost its capacity to succeed in the market despite the existing challenges.
Commercial agreements, as explained by Howson (2017), refer to legally binding agreements made between two or more parties where they commit to do or restrain from doing particular things. In the current aviation market where competition is getting stiffer, commercial agreements may be critical in stemming out unethical practices or in enabling specific firms to achieve particular goals. For instance, all the airline companies in the country can agree not to lower the cost of air ticket beyond a specific limit. The agreement can help in eliminating cases where price wars become common. Nevin (2016) contend that price wars can easily destroy upcoming companies in the market. The local airlines can also have a commercial agreement with international air companies to help in sharing specific common responsibilities.
The aviation industry in the United Arab Emirates has enjoyed a period of consistent growth over the past two decades. Emirates Airline and Etihad Airways are currently some of the top global airline companies in the world. However, these local companies are currently faced with a number of challenges, some of which threaten to force them out of the market. This study suggests that strategic alliance, mergers, and commercial agreements are some of the emerging strategies that can be used to overcome these challenges.
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