Strategic Analysis on Emirate Airlines

ASSIGNMENT 1

UNIT NAME – BUSINESS STRATEGY & ANALYSIS UNIT CODE – MPM703

BUSINESS STRATEGY IN A GLOBAL ECONOMIC RECESSION AIRLINE INDUSTRY: EMIRATES AIRLINES

Prepared By: Group 02 VINH QUOC NGUYEN

– I D # 8 0 06 71 5 5 5

JUAN DAVID CAMPUZANO

– I D # 8 0 0 346 2 9 4

JUAN CAMILO MORENO

– I D # 8 0 0 238 1 4 5

X I Z H EN G

– ID# 800244062

DEAKIN UNIVERISTY FACULTY OF BUSINESS AND LAW DUE DATE: 30/04/2009 Word Count: 4000

1

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TABLE OF CONTENTS

EXECUTIVE SUMMARY................................................................................................3 1 INTRODUCTION............................................... .......................................................................................... ................................................... ............... .......... ...4 2 STRATEGIC ANALYSIS................................................. ............................................................................................... ...............................................6 . 3 CONCLUSION AND RECOMMENDATIONS...................................... ............................................. ............... .............. ...... 19 REFERENCES.................................................................................................................21 APPENDICES..................................................................................................................24













EXECUTIVE SUMMARY

This report on strategic analysis of the airline industry with Emirates Airline, as a case study is to help concerned managers gain a closer review of changing environments in which the company operates. As a result, they are able to position themselves in the marketplace, to make better decisions on strategic management. As in the current global economic economic recession recession with falling demand and uncertain economic recovery, recovery, the need for business to identify strategic issues becomes beco mes vital. This assists managers to review their strategies, to identify their core competence, competitive advantage and any sources of profit available to the business. In this effort, they are able to respond to change and overcome the situational difficulty and possibly achieve superior performance afterwards.

The report report outlin outlines es appropr appropriat iatee strate strategic gic option optionss for bus busine iness ss sus sustai tainabi nabili lity. ty. In the situat situation ion of uncert uncertain ain demand, demand, cost cost managem management ent needs needs to be effect effective ively ly execut executed. ed. Consolidation and concentration within alliances may also be necessary for reducing costs costs and and gaini gaining ng bene benefi fits ts.. Route Route rest restru ruct ctur urin ing g is neede needed d to focus focus on rout routes es of profitability. As to the case of Emirates, the company will continue to sustain and gain compet competiti itive ve advanta advantages ges forwar forwards, ds, conside considerin ring g that that strate strategic gic managem management ent take take full full advanta advantages ges of their their core core compet competenc ences, es, economi economies es of scale, scale, learni learning ng and experi experience ence curves gained throughout its life. Cost reduction is a long-term necessity for a capitalintensive airline. Thus, cost cutting in the value chain needs to be strictly considered. In view of shot-term shot-term effect of an economic downturn, strategic strategic objectives objectives for the situation situation should shou ld be emphas emphasis is on market market penetra penetrati tion on by cutti cutting ng price price in exist existing ing market marketss and competition on price basis when customers become be come price-sensitive nowadays.













1

INTRODUCTION

Aim

It is vital to review the progress of business, particularly in a circumstance of rapidly changing contexts. In this regard, there are core attempts that strategic management need to do in reviewing business performance. In order to respond to change effectively, the company company mus mustt access access its its effici efficiency ency in curren currentt develo developme pment nt direct direction ion.. They need to identify their competitive advantages, position themselves and find out how competitive they are in the marketplace. marketplace. As a result, management must redefine their business goals and set new strategic objectives to sustain in a dynamic environment.

Scope

This report uses Emirates Airline as the case study and develops business strategies using up-to-date information.

Company Background

From its humblest startup, Emirates flew its first routes out of Dubai with just two aircraft —a leased Boeing 737 and Airbus 300 B4 in 1985 (Stanik, Smith, Erakovic, 2007). Emirat Emirates es pursue pursuess its its focuse focused d differ different entiat iation ion in a legacy legacy airlin airlinee of luxury luxury,, hi-tec hi-tech, h, excellent excellent quality. It has been successful successful and is now the Gulf’s Gulf’s largest carrier, carrier, one of the world’s five best airlines, and expects to become the world’s largest airline by 2015 (Hugh, 2007). The success story of Emirates Airline is a phenomenon in terms of stable growth, continuous innovation and significant global expansion. Emirates has drawn out worthy lessons, even for major airlines.

However However,, the curren currentt global global economi economicc recess recession ion has enormou enormouss impact impact on busines business. s. Obviously such an economic downturn affects business sustainability in several aspects













Emirates, therefore, must take its core competences, competitive advantages to overcome such a situation and map out strategic objectives to sustain in the future.













2

STRATEGIC ANALYSIS

2.1 2.1

Rese Resear arch ch Meth Method odol olog ogy y

This report provides some exposure to practical review of the airline industry. It also looks into the case study business: b usiness: Emirates Airline to explore its business progress.

A macro environment analysis has been spotted to review various external influences on business and shed lights on future trends that may affect the industry. Analysis Analysis of Porter’s five five forc forces es will will help help under underst stan and d indus industr try y comp compet etit itio ion n and outl outlin inee infl influe uenc nces es on development of markets and business. Using this model helps the company build a strategy to keep ahead of these influences.

Further, the spotlight is on analyzing the internal environment. In reviewing the business performance and company’s strategies in place, key resources, a SWOT is essential. This is done in an effort to help strategic management assess how to capitalize on business strengths, minimize the effects of weaknesses, make the most of any opportunities and reduce the impact of any threats.

Various sources have been used to gather industrial data. Most of the data is from seconda secondary ry sou source rcess such such as databa database se search searches, es, indust industry ry report reports, s, indust industry ry confere conference nce agenda, news articles, journals, the World Wide Webs for business research websites: IBIS, Roy-Morgan, business website and competitors’ websites. Theory from textbooks is used to back up arguments in writing this report.















2.2 External Environment

2.2.1 Macro Environment Analysis

Economic forces

For airline industry, demand for travel depends enormously on economic conditions. Pride, Pride, Elliot Elliot,, RundleRundle-Thi Thiele ele,, Waller Waller,, Paladi Paladino no & Ferrel Ferrell, l, (2006, (2006, p. 61) contend contend that that “curren “currentt economi economicc condit condition ionss and changes changes in the economy economy have have a broad broad impact impact on succes successs of organi organizat zation ions’ s’ market marketing ing strate strategie gies”. s”. Emirat Emirates es grew grew and develop developed ed its business in The United Arab Emirates which has a strong economy (World Fact Book, 2009). The markets where it selected to operate in are also powerful economies of stable growth (Appendix 1 shows country GDP). Indisputably, stable economic growth is a springboard to success of an airline’s development due to increasing demand in air travel by high-income people for business and leisure. Emirates recorded an increase in passenger numbers of more than 15 per cent annually (Stanik, et al, 2007).

Recent economic downturn has significant impact on the industry. Air travel demand has fallen fallen dramatical dramatically. ly. Several Several major airlines airlines will cut domestic domestic and internationa internationall capacity capacity further in 2009 due to a falloff of about 25 – 30% over the last quarter of 2008 (New York News, 2009). Bisignani (2009) argues that the state of the airline industry today is grim Demand has deteriorate deteriorated d much more rapidl in the

ic slowdown. slowdown. IATA,













Weismen (1990) agrees most governments have strict regulations on foreign carriers to operate certain routes in their home countries to protect the national or designated airline. In the case of Emirates Airlines, however, Dubai is an unprotected market. Its open skies policy helped Emirates to become a carrier that can compete with the world’s largest airlin airlines es (Stani (Stanik k et al, 2007). Emirat Emirates es has grown in scale scale and statur staturee not through through protectionism but through competition - competition with the ever-growing number of international carriers that take advantage of Dubai’s open-skies policy (Stanik et al, 2007) 200 7).. Em Emir irate atess has enjo enjoye yed d the the bene benefi fits ts of glob global al mark market et shar shares es from from enter enterin ing g international destinations such as America, New Zealand and Australia due to recent agreements on full traffic rights from the two governments (Stanik et al, 2007). Aviation deregulation has boosted airlines to develop for open route entry, exit of air carriers, competitive fares, service frequency (Goetz and Sutton, 1997). Further liberalization in the industry is unstoppably increasing. Hence, the playfield competition becomes more intense.

Social and cultural

Social and cultural factors have influences on development strategies. Both domestic and international markets where Emirates operates have culture diversity. Dubai, Australia, Canada, U.S.A and U.K are multi-cultural countries. Benefits come from a variety of consume consumers’ rs’ trends trends in accorda accordance nce to their their values values,, attitu attitudes des,, educat education ion,, religi religion on and lifestyles. As a fact, stable incomers make holidays annually. Another example shows, in U.S.A, three quarters of high-income people take an air trip each year (Hanlon, 1999). It













differenti differentiation ation in the 5-star standard standard airline. airline. Emirates’ Emirates’ current order-book order-book stands stands at 244 aircrafts of the newest Boeing and Airbus, with a total value of approximately US$60 billion. It is already the youngest and an d will be one of the most modern fleets in worldwide commercial commercial aviation (Emirates, (Emirates, n.d.). It aims to be a pioneer in technological technological advances, Emir Em irat ates es sign signed ed in-f in-fli light ght mo mobi bile le phon phonee cover coverage age agre agreem ement ent with with Aero Aero Mo Mobi bile, le, developing the use of mobile phones onboard (M2 Communications Ltd., 2006 ). For many years, Emirates Emirates has been awarded numerous awards such as the world’s airline airline of technological advances, Best Global Airline Website, Best in-flight Entertainment, Best IT developer in in-flight entertainment etc. (Emirates, n.d).

Sustainability

Rosenthal (2008) states that high fuel prices and increasing shortage of natural resources are facing facing manufa manufactu cturer rerss to make make sm small aller, er, more more eco-fr eco-frien iendly dly vehicl vehicles. es. Furthe Further, r, the environment has been degraded by global warming and climate change and the airline indust industry ry has been a factor factor to a faster faster-gr -growi owing ng sou source rce of greenh greenhous ousee gas emissi emissions ons (Rosenthal, 2008). For years, airlines have countered pressure from environmentalists with denials and public relations about their green credentials (Rosenthal, 2008). In recent years, airlines are working hard to develop biofuel for their jets. It is high time that airlines need to enter an environmental partnership with aircraft builders for eco-friendly aircrafts, quieter takeoffs and landings, substantially reducing environmental impacts.













Asia Pacific region is an example of a dynamic market where inbound tourism enjoys increasing growth of 7.9% and outbound with 25% by 2010 (WTO, 2008). All airlines, operating in the region before the current financial crisis, were having high profits: Qantas’ profit after tax: $618 million in 2007 (Qantas report, 2007); Cathay Pacific of HK$7,023 million in 2007 (Cathay Pacific, 2007). Consequently, Emirates, together with other players, have thrived to exploit new regional markets for high profitability as demand is growing.

Rivalry among established companies:

Emirates competes with Air France-KLM and Lufthansa, the two largest carriers in Europe; with Cathay Pacific in Asia Pacific region; and with United Airlines in the Americas (Hoovers, 2008). These well-established network carriers operate within the same same dest destin inat atio ions ns such such as NZ, NZ, UK, Hong Hong Kong Kong and and Am Amer eric ica. a. Th Thee compet competit itio ion n is aggressive as the global industry is witnessing boosting growth of low-cost airlines (Hofmann, 2007).

Bargaining power of buyers:

Competition between companies is intense. Emirates may face a threat now and in future when customers nowadays have an ability to make demands on their products, in term of lower prices, higher service or product quality. Therefore, Emirates is unlikely to exhibit high rates of turnover over time due to price reducing, and investing more in product innovation (Hill et al., 2007).













Substitute products:

Most airlines offer products of similar features: low price, good quality and excellent servic service. e. In the region region,, for example example,, other other direct direct sub substi stitut tutee product productss to Em Emira irates tes are Qantas, Qantas, Cathay Pacific, and Singapore Singapore Airlines. Airlines. Therefore, Therefore, Emirates Emirates will experience experience challen challenges ges when mos mostt player playerss become become competi competitiv tivee enough enough to launch launch new produc products ts global globally. ly. An example example is Virgin Virgin Blue, Blue, which which launch launched ed V-Aust V-Austral ralia ia for TransTrans-Paci Pacific fic services in 2008 (Virgin Blue, n.d). Customers benefit from a wider choice for their products of cheaper price but higher quality.

Strategic Groups

There are obviously strategic groups existing in the industry in similar markets. Examples are named: Cathay Pacific, Qantas, Air France-KLM and Lufthansa. These major players offer offer simil similar ar product productss in terms terms of luxury luxury passen passenger ger package package,, you young ng flyers flyers,, in-fli in-flight ght entertainment etc. This signifies that Emirates is aggressively competing with others.

Key Success Factors

Cost competitiveness:

This is vital for a capital-intensive industry such as airlines (Oum, Yu, 1999). It is critical that good managers can run operation costs at minimum level to increase highest profits.















access to global markets with greater geographical coverage. Thus, this creates a high barrier to other entrants due to high costs and scope of business.

Brand loyalty and product quality:

Emirates has built up its brand and image significantly within the last two decades. More customers have become loyal and chosen Emirates when travelling from the Middle East and Europe or NZ (Stanik et al, 2007) because of high quality, product innovation and excellent service.

Appropriate strategy:

Emirates is differentiated as a legacy airline where advanced technology, staff skills and ancillary services are the main drivers for success. Therefore, Emirates is aware of the need for continu continuous ous innova innovatio tions, ns, not only in fleet fleet and staff staff expansi expansion on but also also in premium services. Emirates has been renowned for technology development and skilled staff of multi-culture backgrounds (Stanik et al, 2007).













2.3 2.3

Inte nternal nal Anal nalysis ysis

This section will explore Emirates’ key resources in an effort to identify its SWOT and outlines outlines how the business’s business’s value chain is structure structured; d; what strategie strategiess it has pursued pursued and how competitive it is, compared to competitors.

2.3. 2.3.1 1

Tang Tangib ible le reso resour urce cess

In light of latest technology and excellent service strategies, Emirates is in the forefront of the industry, owning the most modern fleet of 113 aircrafts, global markets of 100 desti destina nati tion onss in 62 coun countr trie ies, s, over over 12,80 12,800 0 high highly ly-sk -skil ille led d staf stafff of mo more re than than 100 nationalities and significant market share (see Appendix 4). It is undeniable that these resources resources are vital to Emirates’ Emirates’ success. success. Emirates Emirates has highly-developed highly-developed infrastruct infrastructure ure such such as hom home-b e-bas asee airp airpor ort, t, excl exclus usiv ivee term termin inal al,, supp suppor orti ting ng serv servic ices es.. Furth Further er,, the the company’s finance is highly stable. All of these contribute to competitive advantages over competitors.













Absolute cost advantages

Emirat Emirates es actual actually ly obtain obtained ed advanta advantages ges from from Dubai’ Dubai’ss ultraultra-eff effici icient ent airpor airport, t, tax-fr tax-free ee environment and especially low-labor costs, less than 20 per cent of its total costs while competitors struggled with that up to 35 to 40 per cent (Stanik et al, 2007).

Brand loyalty

Emirates has built up its brand significantly within the last two decades. More customers have become become loyal loyal and chosen chosen Emirat Emirates es when when travel travelli ling ng from from the Middle Middle East East and Europe to New Zealand and Australia (Stanik et al, 2007) in terms of high product quality, product innovation and excellent service.

Economies of Scale

As outlined in ‘Key Success Factors’

2.3.3 Established Value Chain













over over comp compet etit itor ors, s, in term termss of prod produc ucti tivi vity ty,, cost cost effi effici cienc ency y and entr entrep epre rene neur uria iall management.

2.3. 2.3.4 4

Key Ke y stra strate tegi gies es emp emplo loye yed d

Reviewing the company’s business-level strategies, its focused differentiation as a 5-star standard airline, underlines product development in terms of luxury, excellent quality and service. Emirates has proven to be a successful company exploiting this market segment with high profitability.

Considering Considering its capabiliti capabilities, es, competences, competences, competitive competitive advantages advantages and economies economies of scale, Emirates has decided to expand global markets on its own. Explaining to the direction of not joining a major alliance, Maurice Flanagan, Vice-Chairman, answered the company had examined and could not see any business case for it (Stanik et al, 2007). Explicitly, this indicates how strategic the management are as they consider possible impact of entering major alliances with strong competitors of similar-level economies of













2.3 2.3.5

SWO WOT T Ana Anallysi ysis

A SWOT SWOT analy analysis sis,, enclos enclosed ed as Appendi Appendix x 3, provid provides es a clear clear basis basis for examinin examining g Emirates Emirates business business performance performance and prospects. prospects. It helps management review its strategic strategic direction in response to changing contexts.

The thorou thorough gh analy analysis sis of extern external al and intern internal al environ environmen ments ts disclo discloses ses signif significa icant nt implication implications. s. The company is able to review its strengths, strengths, weaknesses weaknesses in the contextual environments. Strategic management are those who are able to identify future trends for the business and respond to changes, particularly in the current economic downturn. Appendix 2 details future challenges and trends.















2.4

Strat Strategi egicc Opti Options ons for for an an Econo Economic mic Reces Recessio sion n

Outline of Industry Issues

The airline industry is experiencing hard time ever in the financial crisis, facing the prevailing issues: •

Slowing down in key economies such as US, Japan, China and EU.













•

Consolidati Consolidation on and concentrati concentration on within within alliances, alliances, (Brueckner, 2001) result result in effici efficient ent operat operation ionss and cost cost reduct reduction ion while while compani companies es still still benefi benefitt from from profitability.

Strategic options for Emirates Airlines

It needs to consider that cost reduction is vital as long-term necessity when demand is currently uncertain.

Internal resources and organization structure are the keys to consideration for strategic













3

CONC CONCLU LUSI SION ON AND AND RECO RECOMM MMEN ENDA DATI TION ONS S

From analyzing external and internal environments, it is worth that Emirates management identify its capabilities and competitive advantages and access how competitive it is in the field. From such an analysis, there are implications requiring Emirates to respond to change in changing contexts such as political, technological and particularly current economic downturn. Management must be aware of issues and develop new strategies accordingly in order to sustain.













decline in profitability. By going into strategic alliances, Emirates will cut down significant costs, and obviously still gain marketing benefits of large size and network spread and reduce competition on duopolistic routes, (Brueckner, 2001). •

From From compet competit itiv ivee advan advanta tage gess and and econo economi mies es of scal scale, e, Em Emir irat ates es can can also also strengthen or expand the function of Emirates cargo flights to existing markets to gain profitability p rofitability..













REFERENCES

ANZ ANZ McCa McCaug ugha han n and and Fors Forsyt yth, h, P. 1990 1990,, Australian Airlines: Implications of Deregulation and Privatisation Privatisation, Monograph

Bisignani, G 2009 World's airlines seen losing billions this year , news, retrieved 20/04/2009,















Hanlon, Hanlon, P. 1999, 1999, Global Global Airlin Airlines: es: compet competiti ition on in a transn transnati ationa onall indust industry ry, 2ndedn. Butterworth Heinemann, Linacre House, Oxford.













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APPENDICES

Appendix 1:













Appendix 2: Implications from External and Internal Analysis

From analyzing the macro and industry environments, it is worth identifying strategic













Appendix 3:

Emirates Airlines SWOT Analysis Strengths

Weaknesses















Strategic Analysis on Emirate Airlines

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