1. In an industry where profitable firms are scarce, Emirates has delivered solid growth and solid financial performance for years. Why? What is behind Emirates’ success?
Ṝecently, on May 20th 2014, the Air French – KLM announced their results showing record losses. The strategy of alliance between two struggling airlines is yet to prove its success. Meanwhile, in a complete contrast, The Emirates Airlines have passed a massive order of 32 Airbus 380 super jumbo jets at the Berlin Air show 2010. Today, Emirates has a total of 140 orders for the Airbus 38010 and is the largest operator of A380 crafts around the world. Emirates is an industry bellwether for aircraft purchases, having purchased a whopping 200 aircrafts in 2013 alone.
In over a period of 29 years, Emirates has grown to be one of the biggest players in the airlines industry. This solid growth and an impressive financial performance over the past years is the proof of an invincible business strategy adopted by the company. We can link its success to the leadership of the company and to the Dubai Government’s support.
The Emirates Airlines success has been the continuity of its management team, many of whom have been with the airline since its start of the company. The leadership team has 23 years of experience inside the company. HH Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive, Maurice Flanagan, Executive Vice Chairman and Tim Clark, President of the Emirates Airline.
The major contribution on each of the below mentioned fields has taken the
airline and the aviation industry, far from where it started.
– Realising the Advantages: The government-owned Dubai carrier has lower personnel costs than much of the industry, in part by drawing many workers from the nearby lowwage nations of Pakistan and India1. Emirates has other advantages that have placed it on a par with Singapore Airlines – the two are the world’s fastest-growing and most profitable jetliners- including its remarkable Dubai location within an eight-hour flight of more than half the world’s population2.
- Customer Service: In an industry characterized by decreased service amenities and increased discomfort to improve bottom lines, part of Emirates’ appeal to many passengers was its emphasis on a premium service experience. Differentiating itself through service not only enabled Emirates to build passenger loyalty and reap subsequent value, it also allowed the airline to avoid direct competition with low-cost competitors based on price.
– Small wings, Big dream – Capitalization of the Initial Fund: In contrast to other major Airline operators such as Air France and British Airways, who have often received huge bailout packages or debt reliefs from the government; The Dubai government had given the airline a total of just $18 million, including the start-up money.
– The leadership in the organisation were able to capitalize on this initial funding by the Dubai Royal Family and flew out of Dubai with just two aircrafts, leased Boeing 737 and an Airbus 300 B4 from the Pakistan International Airlines. The first flights connected to the neighbouring
cities of Karachi, Pakistan and Mumbai, India, and they soon started an operations to the capital of India, New Delhi.
– The Positioning1: The location is a strategic one – A well-oiled hub centred in a major catchment area. Emirates enjoy the low price of fuel and also the low cost labour in this region, which is more than just convenient for an Airline operator. Emirates moves passengers west-east, east-west, north-south and vice-versa and many of them only touch Dubai in transit.
Dubai benefited from relatively good weather; aside from occasional fog and the general heat, airport operations remained relatively free of the rain and snow storms that often caused delays in European and American airspaces.
– Global Base2: Given its global base and high number of transit passengers, connections at Emirates’ Dubai hub were essential for running its network effectively. Twice a day, once from 12 a.m.–2 a.m. and again from 6 a.m. – 8 a.m., a spike of passengers deplaned from points west for a two-hour window to connect to their east-bound flights. These spikes strained the airport’s capacity, but they were essential to allow connecting passengers the widest possible choice of connections from points east to west13. Emirates’ growth into new markets produced some additional peak-period hiccups.
– Strategic Expansion: The strategic move of placing a planning department to forecast major growth regions and placed orders for the number of new planes it expected to use. Once the planes were confirmed, the planning team examined the overall fleet, the available craft currently in use, and how many planes remained. This base was then used to determine whether to add capacity to existing routes or launch a new route. If case of the former option, Emirates determined whether to add new service to an existing route or to swap out a service’s existing plane with a larger and newer craft. Emirates relied on only three types of aircraft, because of which planes could be deployed onto existing routes to supply much more easily to match the demand. –
Strategic Alliances with Manufacturer: Existing plane models with Emirates in the end of 20th century, could only fly distances of up to 14 hours, due to which they were not able to connect to the key potential markets such as Los Angeles or Sao Paulo. To increase the range of the aircrafts, Emirates approached Boeing and Airbus and pushed the two airline manufacturers to develop ultra-long-range, wide-body aircraft that were better suited to Dubai’s longer routes13. They also assured the companies with a guaranteed buy from them.
– Strategic decision to not be in an Alliance7: Emirates believed that the marketplace will be hindered when an airline will need a consensus from its Alliance partners. In 2000, however, the carrier briefly considered joining “Star Alliance”, but opted to remain independent of all the three major alliances in the industry. Emirates are currently not a member of any of the three global airline alliances.
– Younger & Limited number of Fleets3: Restricting its fleet to only three types allowed Emirates to optimize its pilot Deployment more effectively and serve its long-haul destinations. It also standardized the customer experience.
Emirates also maintained a younger fleet in the industry, with an average airplane age of 6.4 years, which enhanced the passenger experience and increased fuel efficiency.
Leadership at Emirates is considered as an influential and democratic. The aptitude and skills inspire as well as influence the subordinates to achieve a common goal. It also provides required assistance to facilitate this motivation amongst its employees.
Dubai Government Support
Role of the Dubai government has been exponential in building the Emirates Brand. The government maintained a strict arms-length financial relationship with the airline through its holding company, the Investment Corporation of Dubai (ICD). The UAE government supported Emirates’ entry into new markets by negotiating bilateral aviation agreements with foreign states whose markets Emirates wished to enter. Emirates also enjoyed subsidised fuel, no income tax, and strategic synergies with the Government at its principle hub which also aided the success of the airline.
Dubai’s government had worked hard to build up the city’s tourism base and establish it as a travel and logistics hub high-profile projects, along with close coordination with the hospitality industry. It helped create a strong pull that attracted business and leisure tourists alike. The Dubai government further facilitated incoming tourist flows by eliminating the majority of visa requirements and launching marketing campaigns. The government also sees Emirates to be one of the strong pillars in their economy, which has paid a total of $2.3 Billion in dividend since the royal family bankrolled the venture 28 years ago.
2. What is the role of Dubai in Emirates’ success?
In the initial years of Emirates, many potential customers in target markets were still largely unfamiliar with Dubai, and few saw it as a principal tourist destination. This view of Dubai hindered Emirates to be known as a popular brand in the aviation industry.
Though, Emirates was not able to change this face of its primary hub, the Government of Dubai invested a huge amount of money to change the global view of Dubai. High profile projects such as the Burj-al-Arab, the World and Palms development projects, and the Burj-Khalifa tower helped grow the city’s global renown, which in turn led to higher volumes of tourists. To lure tourists, Emirates partnered with local tourism organizations to promote the city of Dubai. Tourism packages offered events such as desert safaris, and the airline structured its bookings to allow short stopovers for little or no cost.
Dubai’s contribution in the success of Emirates Airlines is as mentioned below: –
Location2: The Dubai benefited from several inherent strategic advantages as a hub city. Dubai’s position on the Arabian Peninsula placed it at the nexus of global transit routes, a strategic location between Europe, Oceania, Asia, and Africa. This allowed Emirates to take maximum advantage of its connectivity.
– Resources: UAE being the major exporter of oil in the world meant that the major resource for the Emirates – the fuel – was available at a very low price
than many of its competitors. Emirates was capable of reducing their fixed cost, and the subsidies and Tax exemptions by the government fused many of the profits made by the company into its own development.
Due to the lower operation cost, Emirates was able to pass the benefits on to the customers which many of its competitors couldn’t afford to.
Air Traffic: Dubai’s relative distance from congested European airspace meant that aviation traffic was minimal and that flights could connect at almost any time of the day, allowing for twenty-four-hour operations.
For Emirates, the flexibility in operations meant covering trips to the entire world and having customers reach their destinations at the most preferable time.
– Weather: Dubai benefited from relatively good weather; aside from occasional fog and the general heat, airport operations remained relatively free of the rain and snow storms that often caused delays in European and American airspaces. The good weather conditions in Dubai meant that there was lesser factors for delays, as most of its operations are based on connecting to another flights using the hub as a gateway to the next travel13.
– Connectivity: Dubai’s small size was not seen as a deterrent by the Emirates. Over one-third of the planet’s seven billion citizens lived within a four-hour flight of Dubai, and over two-thirds lived within an eight-hour flight. The connectivity option made Emirates push to reach many destinations as possible. For customers, it also served as the fastest way to connect to their destinations, where in other major carriers offered a zigzag path.
– Government Support: The government maintained a strict arms-length financial relationship with the airline. The UAE government supported Emirates’ entry into new markets by negotiating bilateral aviation agreements with foreign states whose markets Emirates wished to enter. Emirates also enjoyed subsidised fuel, no income tax, and strategic synergies with the Government at its principle hub which also aided the success of the airline.
– Dubai’s Tourism: Dubai’s government had worked hard to build up the city’s tourism base and establish it as a travel and logistics hub high-profile projects, along with close coordination with the hospitality industry. It helped create a strong pull that attracted business and leisure tourists alike.
The Dubai government further facilitated incoming tourist flows by eliminating the majority of visa requirements and launching marketing campaigns.
- Dubai’s Open-Air: In order to tap these new markets and fill its network, however, Emirates needed regulatory approval to fly to new destinations. While some nations such as the UAE, the US and the Netherlands have open skies agreements with other nations permitting unrestricted access to their markets by any foreign carrier, many countries continue to regulate the level of access. The UAE government supported Emirates’ entry into new markets by negotiating bilateral aviation agreements with foreign states whose markets Emirates wished to enter.
– Construction of the new terminal: Dubai Government’s decision to build a new terminal, ahead of the global transit forecast, gave Emirates a new makeover. The hub created by the government of Dubai with an infusion of huge investment gave Emirates more reasons to increase its fleets. The new Terminal had become a new face of the Emirates airlines and one more reason for the customer to fly Emirates.
3. Is Emirates’ strategy sustainable? Why?
During the last decade, travel and tourism has assisted the Emirates Airlines in spreading its wings into every aspect of travel, tourism and business and has made it the fastest growing corporation in its field.
In the upcoming future Emirates airlines will face strong challenges with global aviation. The overall growth aspiration of the region demands a high-performing aviation system – including airlines, airports, and air traffic control – that in 20 years must successfully serve more than four times the passengers it serves today. International benchmarks illustrate that even today’s aviation system does not fulfil current demand. Middle East aviation markets, especially United Arab Emirates, have set the level for reforming their aviation systems and have started encouraging trading and deregulation of airlines rules. In addition, the Middle airline sector plays a smart role in developing a world-class airline services, such as Emirates Group, with above average profitability4 & Qatar Airways, which has a five-star Skytrax ranking14.
Emirates has always been precise with its strategies, and has always enjoyed it benefits. But, in the upcoming future few of the factors which Emirates enjoy today will start to deteriorate such as
– Etihad Airways: Emirates has enjoyed the subsidised fuel offered by the UAE region. While other airlines such as Lufthansa, Singapore Airlines have struggled to bring their operating cost 6 down, Emirates has always been able to work under at the lowest possible operating cost 6, providing its customers with the benefit and grabbing a huge market share.
The invasion of Etihad Airways, the national airline of the UAE, is an in house competitor for Emirates. Etihad, which enjoys all the exclusive facilities like Emirates, such as the subsidised fuel, exemption from the Income Tax, Free-Air initiatives from the government has structured a similar business model for itself. It also accesses to be the gateway to major cities around the world and is the hub of the UAE tourism at the Abu Dhabi International Airport, few kilometres away from Dubai.
With the youngest fleet3 amongst any other players in the industry, it has grown at a humungous rate within a decade of its operation. It has learnt from the mistakes done by the Emirates and has tried to imitate the same to improve its quality and to be one of the best airlines in the world at the age of 10. Etihad has also shaped its airlines to be the cheaper of the two in many of the common destinations, taking away Emirates’ customers. Emirates’ lower operating cost, and the premium services had brought huge profitability to the company, but Etihad by dropping down the premium services one-step below has been successful in attracting more customers at a lower price tag.
Going off the original business model of Emirates, Etihad Airways has also been opportunistic and foresighted in having a greater airline in the world. It has not just increased its fleet size, but has also held stakes8 in many major airlines around the world such as Alitalia, Air Serbia and Jet Airways. Etihad has agreed to be in code-shares9 with some of the major players in the industry.
Qatar Airways: Right at the nose tip of Emirates and Etihad, Qatar airways has followed a similar business structure, to be one of the major competitor for
Emirates. Qatar, being one of the major oil sources in the gulf has allowed Qatar airways to enjoy similar facilities as its competitors. Qatar Airways soon realised the lack of tourist for its primary hub, contrast to that of Emirates/Etihad, and have modified its business model to suite its transit customers. Doha Airport, Qatar airlines’ primary hub has reported to have more than 90% of its arrivals customers to be in transit for their next flight11.
Qatar airlines, capitalizing on the above figures, has reduced its waiting time significantly, gaining customers attention who are in longer routes. With a Five-Star Skytrax rating14, Qatar Airways has differentiated itself from the Emirates to be higher premium brand of the two. Emirates, which was in-turn knows for its high quality service is facing serious threats from Qatar Airways, which has renounced itself to have the best in class air experience. Qatar airlines has also joined the One-World air alliance15, providing customers with a greater value in the any of the seating class and helping them earn frequent flyer points.
– Pacific Sector2: Emirates has been very successful in connecting eastern and western worlds. But, when it comes to the pacific travels, they have no existence. Today, even though a greater number of population are in Emirate’s reach, a majority of those population is still under the middle-class level. The rich population between the pacific is out of the emirate’s reach. With huge number of population traveling between the European and the American (South/North) regions, there is nothing much Emirates can do to attract these customers.
The location of Emirates’ primary hub does not allow it to take any advantage of people traveling from Europe to Americas. Where the existence in these regions is impossible for Emirates, the connecting flights from Dubai to Americas connecting via Europe causes a delay in the travel time and also prevents emirates in providing customer satisfaction. Thus by missing this route, Emirates has a significant part of the global traveling sector out of its reach.
– Increasing Income1: In the Middle Eastern regions (UAE), where most of the Emirates’ man force comes from have showed major improvement in its growth. Adding on to this, the lower labour population of Emirates, which comes from Asia Pacific regions of India, Sri Lanka and Pakistan have also showed improvements in their average per-capita income These factors will force Emirates to rethink its cost structure. The lower labour which Emirates have enjoyed over the past decade will be one of the major factor shaping the future of Emirates as the leader of aviation industry.
International Competitors: Strategic competitors such as Singapore Airlines and Turkish Airlines have also been able to mark themselves as a hub in connecting different parts of the world. Most of the Asian and Australian population traveling to Americas find it easier to travel via Singapore Airlines which has a lower travel time, such as Sydney to California; Others traveling from developing regions of china find it convenient to fly to European regions with Turkish airlines. The gateway created by Emirates, has no upper hand in these unfortunate situations as their hub will take a longer flight time.
– Lower Cost Airlines: With increased number of lower cost airlines in the recent years, there is a huge trend of population, especially from the developing regions who prefer to travel at a lower cost than having a premium service. Emirates, will have to make some strategic moves either to have their airlines positioned to be an average cost airline with premium services, to have a fair trade-off with its customers and gain the depreciating markets from low cost airlines.
– Air Traffic: In the past decade Emirates has gained advantage with its lower air traffic levels, helping it to have its customers arrive the hub on time to connect to their respective flights. But with the increased air traffic by Emirates itself, having being forecasted to carry twice as capacity soon in future. This air traffic increase will be also aided by the next door airline Etihad, being in almost the same region. Emirates will have to position itself to manage this nasty situation, since most of its passengers cannot afford to be delayed in reaching the hub.
– Aging Fleet3: Emirates has been amazing in providing world class services, and most of the credit goes to the young fleet size, which are equipped with modern technologies. But with the aging fleets, Emirates will have to either face difficulty in pleasing its customers with an outdated technology or spend a fortune on new fleets to maintain customer experience.