Analysis of Dubai Aviation Model - Case Study Example

 Analysis of Dubai Aviation Model In the past decade, Dubai has caught the attention of the world through many innovative large construction projects and sports events. One of their top attractions is the Burj Khalifa, now the tallest building in the world with a height of 2,717 feet. The second largest emirate of the seven emirates that comprises the United Arab Emirates, Dubai today according to Wikipedia “has emerged as a global city and a business hub”. With tourism as their main revenue source, the government invested heavily on expansion of the airports and airlines. Dubai International Airport is now one of the world’s fastest growing airports in terms of infrastructure and airline destination. It is a major aviation hub in the Middle East, and is the main airport of Dubai, the second largest city of United Arab Emirates. Since the launching of Emirates, the national flag carrier of United Arab Emirates, in March 1985, according to Business Analysis, “Dubai-based Emirates Airline,. . . is one of the fastest growing and most consistently profitable carriers in aviation history”. With a start-up capital of $10 million and 2 leased airplanes from Pakistan International Airlines, which were subsequently returned in 1987, the airline has now grown to more than 148 fleets and still plans to have 320 by 2018 and 400 by 2020. Dubai International Airport is the home base of Emirates and is operated by the Department of Civil Aviation, a government owned company. Emirates by the way is managed by The Emirates Group under the holdings of Investment Corporation of Dubai, an investment arm of the government of Dubai. Based on the foregoing information, it is clear that the government of Dubai plays an important role in the success of the said entities. These two entities are crucial elements of Dubai’s growth and development. With Dubai Strategic Plan 2015 established in 2006 by Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum, as the guiding principles in their strategies and decisions, goals and targets were accomplished accordingly. It is a preparation for Dubai for the post-oil era by firmly establishing it as a leading destination not only for tourists but also for trade fairs and conferences and other revenue generating centers such as professional services, financial, and logistics and distribution hub. This paper will explain the factors that account for the success of Dubai’s aviation sector. FACTORS THAT ACCOUNT FOR THE SUCCESS OF DUBAI’S AVIATION SECTOR The Oxford Economics report that Dubai‘s aviation model works because of a combination of factors, including a national appreciation of the importance of the industry and the efficient operating practices. According to Oxford Economics ”The success of Dubai aviation sector derives from a number of strengths. These strengths include: an awareness of aviation’s economic importance on the part of the government of Dubai; openness; a consensus based approach to investment; a focus on growth and linking underserved markets; and efficient operations. Added to these is Dubai’s favorable location at the intersection of Europe, Asia and Africa.” Government awareness The government knows very well that without the support of aviation sector their economic development will be slowed down. The consensus-based partnership between The Emirates Group and the Department of Civil Aviation worked effectively since important decisions were made promptly and implemented immediately. Openness Dubai allows over 150 airlines to operate in their International Airport debunking rumors that there is unfair competition. The Oxford Economics found no evidence of the unfair competition or governmental support that has been cited by some carriers. Actually, Dubai’s Civil Aviation Authority urges for greater access for all airlines to enable them to operate freely without undue restrictions on their commercial decisions. No airline flying into the airport has to pay any additional charges (such as noise charges, ATC charges, security charges, etc.). This is because the airport infrastructure and all related services are provided by the government and fully financed from the state budget. Furthermore, they wanted an improvement in the air access rights in other international airports worldwide. With stiff competition among top 100 international airports regarding airport charges, Dubai ranks in the middle with an average charge of $26.6 per passenger similar to that of Bangkok, Incheon and Shanghai airports as compared to $55.5 per passenger charge by other airports. A consensus based approach to investment The prioritization given to the transport infrastructure in Dubai’s Strategic Plan benefited the aviation sector, which comprises the Airport Operator, Dubai Airports, Ground Handling Company and the Passenger and Cargo Services. Investments poured in that eventually helped Dubai Airports and The Emirates Group expand together. In the end, the investments paid off since the aviation sector is now the major contributor of Dubai’s economy. A focus on growth and underserved markets The growing demand from passengers in Asia and Africa necessitated Dubai to invest more on the aviation sector thereby upgrading its facilities. From a capacity of 22 million passengers in 2000, Dubai International Airport can now handle 60 million passengers. Dubai International Airport has been ranked the world’s fourth largest international passenger and cargo airport. In the past five years, international passenger figures have doubled, from 24.8 million passengers in 2005, surging to 47.2 million passengers in 2010. Meanwhile, Emirates has increased its fleet almost four-fold to accommodate the passenger demand which has increased six-fold in the past decade. Emirates has been ranked the world’s largest airline. Efficient operations It is perceived that a government-run Company will not earn profits, but Dubai Airports and Emirates are some of the exceptions. Though owned by the government, Emirates is run on a commercial basis without funding from the government. Dubai will not earn its well-known status if not for the Emirates’ excellent performance. Its award-winning service in all classes is only matched by a few other carriers. Its average labor cost of $49,510 is much lower compared to European and North American airlines and some Asian airlines which have an average labor cost of $94,575. Their fleets are young and modern which translates to lower maintenance and fuel consumption. Its profits are enough to pay all obligations and in fact paid out annual dividends to the government of Dubai amounting to US$1.6 billion since 2002. And its strategic location Dubai’s favorable location greatly contributed to the aviation sector. It is situated in a unique geographic position that allows it to link directly with virtually any port on the globe. Some 3.5 billion people live within eight hours flight. Moreover, Dubai is placed right at the crossroads of some major passenger and cargo flow, like Asia-Arica, Europe-Southeast Asia, Europe-Australia/New Zealand, India-North America. It has become a major and frequently time-saving– connecting point for passengers (and cargo) traveling from secondary cities, especially is western Europe, en route to Australasia and even Africa. BENEFITS CONTRIBUTED BY THE AVIATION SECTOR TO DUBAI’S ECONOMY Regarding the benefits that the aviation sector contributed to the Dubai economy, The Oxford Economics, in their Executive Summary, categorized them into: Economic Footprint Direct benefits These are the contributions to Dubai’s GDP (Gross Domestic Product) and employment that are directly involved to the aviation sector. Wikipedia refers GDP as “the market value of all final goods and services produced in a country in a given period. GDP per capita is often considered an indicator of a country’s standard of living. In terms of employment in 2010, the total number of people employed totalled 58,200 jobs. While the total amount contributed by the aviation sector to Dubai’s GDP amounted to US$6.2 billion. People employed in the aviation sector were paid an average of US$93,700, almost 60% above the average of the workforce for the entire economy. These are mostly engineers, pilots and other skilled workers who are paid commensurate to their skills. Indirect benefits These are the contributions to Dubai’s GDP and employment generated through aviation’s supply chains. The supply chains are the firms that supply goods and services to the aviation sector. In 2010, Oxford Economics calculated the amount of US$3.5 billion contributed to the Dubai’s GDP and supported a total of 43,000 jobs along is supply chain. Induced effect These are the expenses spent in goods and services by the workers in the aviation sector as well as its supply chain. The beneficiaries of these goods and services are those in retail, restaurants, leisure and other businesses. It is estimated at about US$2 billion is contributed to Dubai’s GDP and supported 23,900 jobs. Catalytic benefits Tourism benefits A major beneficiary from the aviation sector is the tourism and travel sector, with a vast majority of foreign visitors who come to Dubai arrive by air. Dubai is one of the top tourists’ destinations in the world. According to Wikipedia, “Dubai ranks 8th among the world’s top 10 most visited cities by international tourists in 2010”. Dubai is expected to attract 15 million tourists from all around the world in 2015. Most of the visitors shop at their largest retail stores such as Dubai Mall and Dubai Duty Free, and this is a big development for an additional revenue source. It is estimated that tourism contributed about US$7.9 billion and supported around 133,900 jobs. Wider connectivity benefits Dubai’s position at the junction of Europe, Asia and Africa, placing it within an 8 hour flight of two-thirds of the world’s population is the key why more than 150 airlines are operating nonstop services to 220 destinations around the world. This advantage in aviation calls them ‘connectivity’ just like the internet ‘easy access’. Increased connectivity reduces time spent by passengers in transit, a shorter waiting times and a better flight schedule. With an enhanced connectivity domestic markets have greater access to foreign markets thereby promoting exports. Oxford Economics estimated based on their research that Dubai’s connectivity has contributed US$2.5 billion to the GDP. CONTINUED GROWTH Adrian Cooper, CEO of Oxford Institute of Economic Research said: “Dubai’s aviation industry, thanks to efficient and high quality services and consequently the growing global tourism and trade. Dubai has surpassed the economic benefits of aviation industry” (Wang, “Oxford Institute for Economic Research: Understanding Dubai aviation industry’s success”). The report made Oxford Economics regarding the economic impact of the aviation sector on Dubai by 2020, expected to contribute 32% to the GDP or US$44.5 billion and about 22% or 372,900 jobs PROPOSED RECOMMENDATIONS Airports/ Ground Handling/Passenger and Cargo Services With two major airports (Al Maktoum International Airport, opened last June 27, 2010) now operating in Dubai, it has now become apparent that the 2 airports should synergize to maximize the full potential of both airports, not to compete with each other but to complement with each other’s strengths and weaknesses . A synchronize operational strategy should be put in place in order to be cost effective. Develop and implement strategies for innovation and diffusion to maintain its image as a first-mover advantage. Optimize resourcing strategies to fully utilize the new technology in place. Develop core competences to the workforce to hone their skills and achieve competitive advantage. Airlines Effective flight scheduling by accurate forecasting and data mining will maximize yield and traffic and marginal services will be sustained. Develop a comprehensive fleet plan strategy to optimize fleet capacities. Implement a hybrid strategy on specially designed package tours. Tourism Good marketing strategies to cater the needs of the Arab and Indian sub-continent visitors. Dr. Cedwyn Fernandez said “the elasticity of demand for tourism from Arab countries was highly income elastic and proper marketing strategies should be put in place to increase the number of tourists from these countries” (Sambidge, “Dubai can achieve 15m(illion) tourist target by 2015-expert”. Works Cited Dubai’s aviation model “Oxford Economics: Explaining Dubai’s Aviation Model” June 2011 emirates.com. n.p. Web. 06 Aug. 2011 Knorr, Andreas Eisenkopf, Alexander “How Sustainable is Emirates’ Business Model?” Business Analysis Aerlines Magazine e-zine edition, Issue 38 n.p. n.d. Web. 06 Aug 2011 Sambidge, Andy “Dubai can achieve 15m tourist target by 2015-expert” Arabianbusiness.com n.p. n.d. Web. 06 Aug. 2011 Wang, Pang “Oxford Institute for Economics Research: Understanding Dubai aviation industry’s success” Aviation News auairs.com n.p. 11 Jun 2011 Web. 06 Aug. 2011 Wikipedia.org Cite this as airports.org (website of ACI) Read More