Strategic Management Practices of Etihad Airways - Case Study Example

Student Name Name of Instructor Name of Course Date of Submission STRATEGIC MANAGEMENT PRACTICES OF ETIHAD AIRWAYS TABLE OF CONTENTS 1 Introduction to the Study 3 3.2.3 Socio-cultural Factors 13 3.2.4 Technological Factors 13 3.2.5 Environmental Factors 14 3.2.6. Legal Factors 14 1 Introduction to the Study 1.1. Background of the Company Etihad Airways has been the national airline for the United Arab Emirates since its inception in 2003. It was established by Royal declaration in July 2003 and went further to commence commercial operations in November the same year, with its main business being global air transport. Etihad’s operations were launched on 5th November 2003 with a ceremonial flight to the Al Ain, while its pioneer commercial flight was in Beirut with only 60 passengers on board. The airline’s hub is situated in Abu Dhabi, which is the capital city of United Arab Emirates. It is the second largest airline in UAE after Emirates, the Dubai based airline, while in the entire Middle East, it is ranked fourth. As of February 2013, the airline has a fleet of 88 Airbus and Boeing aircraft in service, whose flights per week are in excess of 1, 000; there are more than 200 aircrafts in the process of delivery. The airline provides services to an international network of more than 95 cargo and passenger destinations in Africa, the Middle East, Asia, Europe, North America and Australia. The organization is presided over by a Board of Directors which is currently under the chairmanship of H.H. Sheikh Ahmed. The current Chief Executive Officer, James Hogan, was appointed in 2006 and continues to lead the organization to greater economic heights (Etihad.com). The year 2012 saw the airline carry a total of 10.3 million passengers, which was a 23 percent increase from the previous year’s figure. The revenues for the year totaled US$ 4.8 billion, with a net profit of US$ 42 million. The organization currently employs 16, 500 people globally (Gulfnews.com). 1.2. Industry in Which the Company Competes The main business of Etihad Airways is providing air transport for passengers to various destinations across the world. However, it also operates cargo services through its subsidiary Etihad Crystal cargo, which handles transportation of pets, goods and other forms of precious cargo internationally. Etihad Holidays handles tourism needs of customers, with the product portfolio of the various products being 60 percent for international transportation of passengers, 30 percent for the cargo services and 10 percent for Etihad Holiday (Etihad.com). 1.3. Market Position of the Company Over the years, Etihad Airlines has strived to reflect the finest of Arabian hospitality, which includes a service that is warm, generous, considerate and cultured. In addition, it has succeeded in enhancing the prestige of Abu Dhabi as a center of hospitality. This has made Etihad be one of the global leading airlines, a fact which has seen it receive numerous awards in its ten years of operation. As at 2012, Etihad had received the award of being the “World’s leading Airline” at the World Travel Awards for three consecutive years; being 2009, 2010 and 2011. In 2011, the company was awarded for having the “World’s Best First Class” at the Skytrax’s 2011 World Airline Awards. Besides that, the organization was awarded for being the “Best Long Haul Airlines” during the 2010 Business Travel awards while the 2009 Middle East Business Achievement Awards saw the company bag the “Best Marketing Strategy of the Year 2009” prize. All these are a clear indication that the organization has already carved a niche for itself in the aviation industry (Etihad.com). 2. Mission Statement of the Company 2.1. Mission of the Company Being the national carrier of United Arab Emirates, the mission statement of Etihad Airlines is to make Arabian hospitality closer and available to other parts of the world by creating a sense of cultured, considerate, warm and generous staff attitude and services (Etihad.com). 2.2. Vision of the Company The vision of Etihad Airlines is to be the best airline in the world (Etihad.com). 3. External Analysis of the Company The direct competition that Etihad Airways faces comes from organizations that offer the same products that Etihad offers, and are found in the same geographical location as the Etihad. They include Emirates Airlines, Air Arabia and Fly Dubai. Within the North African region and in the Middle East, the company’s competitors are those based in the U.A.E. and others such as Gulf Air, Qatar Airways, and Oman Air. However, the main competitor is Emirates Airlines, and therefore, Etihad uses it to benchmark itself in terms of performance, market share among other measurements. The value that customers gain from travelling with Emirates Airlines is just the same they would get from travelling with Etihad, though Emirates, having been in the industry for much longer delivers more value to its clients. Arab Air, on the other hand, is a low cost carrier providing the same services as Etihad, but at a lower cost. For this reason, customers would get more value in monetary terms by using Arab Air, as opposed to using Etihad. Indirect competitors include the Holiday Cruise Line Industry and the Telecom Industry. The Telecom Industry joins the competition of Etihad because of technological enhancement for instance video conferencing, which eliminates the necessity to travel to different parts of the world for business reasons. On the other hand, Holiday cruise lines such as Star Cruises and Carnival Cruise Lines could pose a threat because they not only transport people to different destinations, but they also provide hotel setting and a number of activities on board which makes it possible for passengers to spend a vacation onboard while travelling from one port to the other (Researchandmarkets.com). 3.1. Porters Five Forces Model The model depicting pure competition implies that risk adjusted rates of return must be consistent across industries and individual firms. In reality though, this does not happen as has been affirmed by vast economic studies. According to researchers, diverse industries are able to sustain different levels of profitability. In industries where market forces are intense, such as the airline industry, almost no firm in the industry earns attractive returns on investment, but where forces are benign, for instance in the toiletries industry, more firms attain high profitability (Porter, 56). Porter identified five major factors that together, are responsible for determining the nature of competition within an industry. They include the threat of new entrants into the market; bargaining power of suppliers; bargaining power of buyers (customers); threat of substitute products; and degree of competitive rivalry. The five factors shall be discussed further in light of Etihad Airways. 3.1.1. Threat of New Entrants With each passing day, joining the airline industry for new and existing players as a result of the changing trends, population increase, decreasing rates of inflation and the ever increasing attractiveness of the airline industry should be a concern for Etihad. Population increase comes with a resultant increase in the size of the market which eventually increases demand for airline services alongside other services. For this reason, new entrants are attracted to get into the market to tap the increased demand. In the same way, decreasing rates of inflation are attractive to investors because they decrease the chances of reduced returns. However, if inflation rates are high, they reduce the returns on investment which decreases the number of new investors into the market. The airline industry is an attractive business venture because of the lucrative nature of its operations. Bearing in mind the high transport charges that are levied for passenger and cargo, it is bound to be associated with higher revenues and returns. For this reason, any investor would be interesting into venturing into the airline industry, especially Abu Dhabi, where the prospects of increased business from the 40 million capacity terminal under construction. These factors have contributed to an increase in the number of airline companies in the market which eventually exposes stiff competition to Etihad. (Jones & Hill, 45). To curb the easy entry of new players, the existing organizations create barriers in a bid to discourage entry. The barriers may be in the form of capital or cost of investment which is extremely high and involves billions of dollars to conduct preliminary market surveys, leave alone the funds needed to set up the business. The second barrier is that of experience, where the degree of experience and learning for employees of the organization goes a long way in helping the organization. Etihad has overcome this by implementing a trainee program which trains their pilots, engineers and the management teams for a period of eighteen months after which the qualified ones are absorbed into the organization. Use of regulations and patents also comes in handy as a barrier, whereby the authority imposes them to regulate players and prevent new entrants. Etihad, being a national carrier, has been protected from government imposed regulations and sanctions, which make it harder for private organizations to join the industry and create competition for the existing players. 3.1.2. Threat of Substitutes For a firm in the air transport industry, substitute products comprise of other air transport firms, or other forms of travel including road, rail and water, which offer both direct and indirect competition. Examples include Air Arabia, Oman air and Jet Airways, which provide similar services, but at lower costs. Carnival Cruise Lines and Star Cruises provide water transport that also comes with cruise services that allow travelers to spend vacation on board. Due to the fact that all a customer needs is to move from one place to another, and in the most convenient manner, they will always seek for companies that are affordable and capable of meeting their needs at the same time. Therefore, if Etihad does not meet these requirements, then the customers will seek for more satisfaction elsewhere. As stated earlier, Emirates offers more value to their customers in terms of image, while low cost airlines like Arab Air are more attractive in terms of financial gains. For this reason, Etihad must go out of its way to ensure that despite the strengths of these other substitutes; customers choose to travel with them. The company would do this by offering fair rates for their flights and excellent services (Jones & Hill 46). 3.1.3. Bargaining Power of Suppliers Suppliers affect the price of products or services offered in the market; high supply with low demand forces suppliers to reduce their prices as a way of attracting more airlines to purchase their products. Suppliers of Etihad include providers of fuel, foodstuff, personal effects such as toiletries for use by passengers, fuel and advertising services among others. The major suppliers of aircrafts are Doulas, Boeing and Airbus. These suppliers are the only ones available globally, and bearing in mind the number of airline companies available, it is a situation of demand outweighing supply. Therefore, airline companies have little or no influence on the prices of aircraft. This is the same case with fuel whose prices have skyrocketed in the recent past as a result of depletion of fuel reserves and a rising demand for petroleum. OPEC nations are the major suppliers of petroleum, and being the owners of the majority oil reserves, they have reserved the rights to set prices. This leaves the buyers, such as the aviation industry, with no alternative but to follow their demands or risk shortages. Etihad is not disadvantaged totally because it is based in an OPEC nation, and is also a national carrier, a factor which puts it in a less disadvantaged position. Concerning the supply of other products in the FMCG category, the company has the advantage of seeking tenders and picking the one with the fairest prices so as to minimize on costs, while maximizing on profits (Jones & Hill 46). 3.1.4. Bargaining Power of Buyers This refers to situations where consumers combine forces and uses the unified forces to pressurize suppliers into reducing the price of products in the market. However, this price reduction must not cause a resultant decline in quality because consumers may be prompted to seek for quality and affordable products elsewhere. In the airline industry, customers have a wide variety of choices which include the use of technology to communicate instead of travelling, using cheaper airlines, using other modes of transport such as road, water and rail; therefore, Etihad must ensure that people choose to travel using them. From various market surveys done, Etihad has been able to prove that it offers the best price without compromising on hospitality and customer satisfaction. For instance, the Airline Service Quality Study carried out by Ethos Consultancy scored Etihad with 91.5 percent in terms of customer satisfaction. The study analyses the experience of customers from the time they book their flights to the final baggage claim (Kernchen 45). 3.1.5. Intensity of Competitive Rivalry Etihad faces both direct and indirect competition in its operations. The direct competition that Etihad Airways faces comes from organizations that offer the same products that Etihad offers, and are found in the same geographical location as Etihad. They include Emirates Airlines, Air Arabia and Fly Dubai. Within the North African region and in the Middle East, the company’s competitors are those based in the U.A.E. as well as Gulf Air, Qatar Airways, and Oman Air. The main competitor is Emirates Airlines because Etihad uses it to benchmark itself in terms of performance, market share among other measurements. The value that customers gain from travelling with Emirates Airlines is just the same they would get from travelling with Etihad, though Emirates, having been in the industry for much longer delivers more value in terms of image. Arab Air, on the other hand, is a low cost carrier providing the same services as Etihad at a lower cost. Indirect competition includes the Holiday Cruise Line Industry and the Telecom Industry. The Telecom Industry joins the competition of Etihad because of technological enhancement for instance video conferencing, which eliminates the necessity to travel to different parts of the world for business reasons. On the other hand, Holiday cruise lines such as Star Cruises and Carnival Cruise Lines could pose a threat because the not only transport people to different destinations, but they also provide hotel setting and a number of activities on board which makes it possible for passengers to spend a vacation onboard while travelling from one port to the other (Researchandmarkets.com). Etihad requires putting more effort to ensure that it is a preferred brand though from records, the firm has been working towards that. This is shown by the numerous awards that it has received since inception. In addition, they have constantly increased their fleet and have rather promising plans in fleet growth, which as at 2010 included six Airbus A330s by the end of 2011; 20 A320s between 2011 and 2015; 10 Airbus A380s from 2014; 25 A350s between 2017 and 2020; 35 Boeing 787s between 2014 and 2020; and 10 Boeing 777s between 2011 and 2013. A state-of-the-art terminal at the Abu Dhabi International Airport adds to the competitive advantage of the airline because it offers customers an enhanced experience which would only add to the growth and expansion in relation to the competition (Etihad.com). 3.2. PESTEL Analysis The external environment of an organization has a great impact, either negatively or positively. With this in mind, it is rather crucial that the environmental factors of the market are analyzed in order to determine the competitiveness of Etihad. 3.2.1. Political Factors United Arab Emirates is politically stable, and regulations put in place regarding the airline encourage investors to venture into the market. Etihad Airways has been successful because these factors have favored it. In addition, being the national carrier, the company is owned by the state, and therefore, enjoys the political benefits that come with being a state corporation. 3.2.2 Economic Factors The economic environment of a place includes such aspects as inflation, exchange rate and the stock market. How businesses are conducted both locally and internationally, are also affected by these factors. The success of airlines can be attributed to the improvement of the inflation rates which have allowed customers to afford air travels. The market has also become favorable in terms of the high currency value, better currency exchange rate as well as the improved stock market. Etihad Airways has been keen on keeping track of market demographic changes to ensure increased air travels, flexible travel hours, price adjustment and provision of comfort needed by customers. As stated earlier, the country of origin of Etihad is UAE, a member of the OPEC. As such, its economical placement is well above average, and as such, the market is available for the services that it offers. In addition, the UAE has been known to attract a lot of investors from all over the globe, a factor which has contributed to the growth of the company as it provides direct services of transport. 3.2.3 Socio-cultural Factors The airline industry serves people of different socio-cultural backgrounds; students, holiday goers and business people. For this reason, the people traveling at different times of the year tend to depend on the season at hand. Between June and September, a lot of passengers are going for holiday while September to June involves mainly those who are going to school or for business. Vacationers and those traveling for business are more than those going to schools, and therefore, this will make the firm to make some adjustments to meet the needs of their clientele. For instance, increasing the number of staff and services offered to customers as well as using affordable flight rates will ensure more travels and with the company being capable of accommodating the high number. 3.2.4 Technological Factors Technological factors for an airline firm have both negative and positive effects. In order to move with the times and be in the same level playing field with the competition, Etihad has embraced technology in carrying out its operations. On a positive note, advanced technologies such as the company website and social media have been used in advertising the product and for customers to find all the relevant information for the product. However on a negative note, technology may cause a decrease in the business of the firm as potential travelers opt to communicate through advanced technology instead of traveling. In the recent times, virtual learning, use of Skype, emails and chats has taken the place of business meetings and physical classes such that people are able to communicate from their homes or offices without having to meet physically. 3.2.5 Environmental Factors In line with global rules and regulations regarding the environment, Etihad has got a CSR (Community Service) department, whose functions include conservation of the environment in its various operations. Emissions by aircrafts have been associated with a significant amount of causing global warming and as such, Etihad has taken upon itself the duty of preserving the environment by putting in place regulations in regards to air emissions, water and soil. These regulations not only help the firm to avoid strict penalties by law, they also help to conserve the environment for the present and future generations. 3.2.6. Legal Factors Etihad has made a point of complying with all legal requirements that are required for any business venture. These include payment of taxes, registration of the organization with all relevant bodies and following of all laws that govern all their stakeholders be it customers, employees, shareholders and competitors. 3.3. External Threats to the Company Threats refer to any external factors that may hinder the firm from achieving its objectives by hampering growth and success. The major threats that Etihad faces include security challenges, highly competitive market, fluctuating fuel prices and consolidation in the airline industry. Security is a global challenge affecting all and sundry. In recent years, terrorism has been on the increase and thus posed concern among many people. As such, a lot of them fear to travel and choose to remain in their home countries, a factor which causes a decrease in revenues. In addition, Etihad is of Arabic origin, and therefore, potential customers may stereotype it with Islamic, which has been more or less associated with terrorism affairs. For this reason, the company may face rejection and eventually loss of business. Fuel prices in the world market have been fluctuating over time owing to political and economic factors. With the fluctuations, particularly escalating prices, the firm’s costs of operations increase and profitability decreases. This may also lead to increased prices for customers, which eventually turns away customers as they seek more affordable services from low cost airlines such as Arabia Air. The highly competitive market occurs as a result of new entrants into the market, and with this saturated market, airlines tend to consolidate their services so as to fight for a larger market share by reaching out to more destinations. This leaves single airlines at a disadvantage because consolidation offers economies of scale to the partners (Researchandmarkets.com). 3.4. External Opportunities for the Company Opportunities are the chances that enable a firm to enhance its performance in the market and accomplish its objectives. Etihad’s opportunities include new partnerships, positive long term passenger outlook and the open-skies policy (Researchandmarkets.com). New partnerships are always available and as stated earlier, they assist the firm in offering a wider network of destinations for their guests, thus enhancing convenience. For instance, Etihad is able to offer services to cover destinations in excess of 325 worldwide. It has partnered with airlines such as Aer Lingus, Air Sychelles, Airberlin, Airfrance, Alitalia, Jet Airways and Virgin Australia among others. Positive customer outlook for the firm comes about from the customer satisfaction that customers derive from travelling with Etihad. Earlier in the report, a customer satisfaction survey conducted by Ethos Consultancy was quoted as awarding Etihad with 91.5 percent in 2010 for customer satisfaction. This, together with the numerous awards indicates that the firm is well equipped to attract more customers, and this offers opportunities for growth for the firm. In addition to the above is the open-skies policy which allows air carriers unlimited market access to partner markets as well as providing maximum operational flexibility for airline alliances. With globalization, Etihad enjoys massive open-skies policy owing to the large number of alliances it has partnered with over time. This gives the firm an opportunity for growth because it is able to offer clients a wide range of choices in terms of destinations in all the six continents (Etihad.com). 4. Internal Analysis of the Market 4.1. Resources and Capabilities of the Company Etihad enjoys a wide range of resources and capabilities which are crucial for it to meet the needs and requirements of the market it serves. To start with, the company is governed by a Board of Directors and a CEO. Under the governorship of these is the most important resource for any organization; human resource. Etihad has a capable team of staff both on air and on the ground. The staffs are well educated and trained to handle customers, and this is evident from the 2010 Ethos Consultancy survey where Etihad garnered a whopping 91.5 percent in customer satisfaction. They have been trained to be helpful and courteous to all the demands and needs of their customers, while aggressive training on company products and industry processes and procedures ensures that they are informative and knowledgeable. This includes staff in all other departments be it engineering, pilots and administrators. The large fleet of more than sixty five powerful and large capacity aircrafts adds to the resources of the firm, and the firm continues to acquire more in order to alleviate their capability to serve customers more appropriately. This is evidenced by their 2010 plan which showed that Etihad planned to acquire six Airbus A330s by the end of 2011; 20 A320s between 2011 and 2015; 10 Airbus A380s from 2014; 25 A350s between 2017 and 2020; 35 Boeing 787s between 2014 and 2020; and 10 Boeing 777s between 2011 and 2013 (Etihad.com). 4.2. Competencies of the Company Etihad is based in Abu Dhabi, the capital city of The United Arab Emirates, and therefore, it is referred to as the only airline situated in the country which can be termed as the national carrier. Being strategically placed in the city, it enjoys owning a terminal that helps it in attracting a lot of in-transit passengers who happen to be connecting from east to the west or from any other part of the world. The firm also has a competency in that it is owned by the government of U.A.E., therefore, enjoys all the benefits that come with being a state-owned organization, such as funding to allow for growth and investment in new strategies (Etihad.com). 4.3. Competitive Advantages of the Company In addition to excellent customer service that attracts customers and ensures that they remain loyal to the airline, Etihad enjoys some competitive advantage over its main competitors. To begin with, the recognition that the airline has attracted over the short period that it has been n existence gives it an edge over other companies. This is because customers always yearn to sample the award winning services, thereby offering a business opportunity for Etihad. Unlike other major airlines, Etihad offers a range of ground services to their flight clients. These include Etihad Chauffer, a premium limousine service that is available at more than 24 destinations globally, as well as premium lounges n London, Manchester, Abu Dhabi, Frankfurt and Dublin. Etihad also offers a loyalty program to its guests, which offers members an opportunity to accumulate Etihad Guest Miles. These can then be redeemed against a vast selection of more then 1, 800 flight and non flight rewards from partners who are in excess of 200 (Etihad.com). 4.4. Strengths of the Company The strengths of a firm refer to those aspects that enable it to perform exceedingly well, and therefore, achieve a competitive edge over its rivals. For Etihad, they include a strong operational base which advocates for adoption of the latest technology, awards and recognitions, motivated workforce and strategic agreements. A strong operational base ensures that the firm is able to meet the needs and expectations of its clients by offering the most competitive service at reasonable pricing. In addition, offering up-to-date services using the latest technology makes it convenient for customers to book flights and even check-in. As a result, the firm is able to grow its customer base, thus translating to more sales and ultimately high profitability. The awards and recognition that Etihad has received in its short span of business also attracts customers who would like to get a taste of the award winning services and product. Satisfied customers create a strong brand loyalty (Kernchen, 45). 4.5. Weaknesses of the Company The weaknesses of a firm refer to those aspects that create a shortcoming towards the growth of the firm. For Etihad, they include high air charges, high employee turnover and proneness to negative publicity. High air charges would force customers to seek services from more affordable airlines because as sated earlier, low cost airlines are a major competition for Etihad. High employee turnover is harmful because it gives rise to increased costs due to recruitment and training costs when hiring replacements for the ones who leave the firm. The above factors are detrimental to the growth of the firm because they tend to eat into the resources available for growth and expansion (Researchandmarkets.com). 5. SWOT Analysis Etihad has a positive opportunity for growth, and this is made possible by the fact that the strengths and opportunities that the firm has could be used to counter its weaknesses and threats. To begin with, Etihad could use the strong operational base that has to curb the high air charges and employee turnover. This could be done by stabilizing their air fares to balance with those of the market by compensating for them using other cost cutting measures. To curb high employee turnover, the management could introduce more incentives that are compatible with those available by competitors. Such motivators would ensure that employees retain their loyalty to the company, and at the same, work towards the growth of Etihad (Jones & Hill 43). Forming new partnerships could be useful in countering the high competitive market and consolidation in the airline industry, while fluctuating fuel prices could be countered by using new partnerships because they would share such increasing fuel costs (Porter 105). 6. Conclusion and Recommendations From the facts and figures discussed, Etihad has potential for growth, but only if the management makes strategic decisions in regards to the configuration of available resources and the changing environment in order to fulfill the expectations of stakeholders. From the SWOT analysis and Porter’s fie forces analysis done, Etihad requires some form of alignment that will see it realize its long term objectives. Introduction of additional unique products could put Etihad in a much higher platform in comparison to the competition. For instance, they could introduce an unaccompanied minor program or door-to-door pick up for passengers and cargo, which would ensure that passengers travel to the airport, is made easier. This could play a part in attracting more customers and creating a wide customer base. As discussed earlier, Etihad has a vast range of awards and recognition, and this can only mean that the firm’s services are of high standards. In essence, Etihad is in the same league as British airways and Emirates Airlines, and for this, it should increase its prices by an average margin of 10percent. This would ensure that its revenues are increased, and at the same time, people would start classifying it as belonging to the higher-league airlines like Emirates, as opposed to being branded as a low value brand. Being part of the service industry, Etihad could invest more into training and development of its service staff. Introduction of new affordable and accessible products do not mean anything to customers if they receive bad service, and they will always tend to go back to the airline that offered helpful and courteous services. Employees act as the primary marketers of an organization and may make or break the firm. Regarding promotions, the firm could invest more in creating awareness about their services by carrying out aggressive promotions through sales promotion, direct marketing, advertising, and sponsorship. They could make use of the internet through social media, which is the most effective form of advertising. When carried out effectively, the above strategies would go a long way in helping Etihad Airways reach its next phase (Jones & Hill, 40-100). Works Cited Etihad Airways. Overview. Web. 14th December 2013. Etihad Airways. Strategic SWOT Analysis Review. Web. 14th December 2013. Jones, Gareth and Hill, Charles. Strategic Management-Theory: An Integrated Approach. Cengage Brain.2010. Kernchen, Nils. Marketing Differences between Traditional Airlines and Low Cost Airlines in Europe. Munich: Grin Verlag Publishers. 2007. Porter, M.E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Simon and Schuster Publishers. 2008. Read More