Success of Emirates - Essay Example

Emirates Emirates Introduction Emirates was incorporated in 1985 in Dubai. “Wholly owned by Dubai’s sovereign-wealth fund”, Emirates has become one of the world’s most influential airlines (The Economist, 2010). Because of it, Dubai has become a central point that aids in connecting the world through air travel (Negroni, 2011). It has been awarded the title “Airline of the Year 2011” by Air Transport World (Air Transport World, 2011). In 2010, Skytrax awarded 8th place to Emirates as the world’s best airline as per the passengers’ choice. Over the years it has shown tremendous growth so much that European Airlines have begun to see Emirates as a threat. Emirates’ president and Executive vice chairman are of the opinion that the reasons behind the success of Emirates are the central location (Dubai) and the favourable aviation policies of Dubai (The Economist, 2010). Etihad and Qatar Airways are two rivals of Emirates. Analysts are of the opinion that Qatar Airways is better than its competitors- including Emirates- at cost control. This could pose a huge threat for Emirates in the future (The Economist, 2010). Emirates owns one of the world’s largest fleet of aircrafts that constitutes the biggest aircrafts (e.g the Airbus A380). A common belief is that fares offered by Emirates are economical and the airline is a pioneer in offering low-cost tickets for longer flights (The Economist, 2011). Operational Characteristics Presently, Emirates caters to a world-wide market. It flies to more than a hundred destinations worldwide that cover six of the world’s continents (Emirates, 2012). One major reason for the success of Emirates is that in addition to connecting major airports (e.g London, New York etc.), it also has a strong presence in “secondary markets” that include Manchester, Seattle etc. (The Economist, 2010). Starting from this year, Emirates has added more destinations for its flights among these are Harare, Dallas and Rio de Janeiro. This has been done in order to expand the markets that Emirates caters (Emirates, 2011). In addition to expansion, some destination cities have been dropped off the route as well. Flights to Tripoli, Libya were suspended in 2011 due to political unrest (Emirates, 2011). Services for destinations for example Alexandria in Egypt have been terminated because of the rising fuel prices (AMEinfo, 2008). The Emirates Annual report 2010-2011 has claimed that the number of destinations in 2010-2011 is 111, whereas this figure was a mere 76 in 2004-2005. Every few years, Emirates doubled in size. This was mainly because of the lenient regulation in Dubai and the huge size of their airport (Super-duper-connectors from the Gulf, The economist, 2010). In 2010-2011, Emirates transported more than 30 million passengers (IATA, 2011). According to the Emirates annual report Emirates carried 31, 422,000 passengers in 2010-2011 alone. This number has risen over the years. In the previous year (2009-2010) this figure was about 27 million. In 2004-2005 emirates transported 12,529,000 passengers. As is evident, the number of passengers more than doubled in the 5 years tenure. European carriers face a growing threat in the form of Emirates, especially Lufthansa (Paul, 2010). But in the Middle East itself, both Etihad and Qatar Airways are a major threat to Emirates (The Economist, 2010). Qatar Airways, is one of the six airlines of the world to be given a five star ranking by Skytrax (it is a consultancy that is involved in market-research, specialized in aviation). As has been mentioned above, analysts believe that Qatar Airways is better at controlling costs than Emirates (and most other airlines). In 2009-2010, the number of passenger for Qatar airways increased by 20% to 14 million. This number is further expected to grow (Kingsley-Jones, 2010). What is even more challenging for Emirates is that for 2011, Qatar Airways was awarded the world’s best airline award by Skytrax. Qatar Airways was ranked no. 1 whilst Etihad and Emirates were ranked no. 6 and no. 10 respectively. Etihad, formed in 2003, is the youngest of the three Gulf airlines (Emirates and Qatar Airways, being the other two). Etihad strives to be known for the quality it offers in addition to its’ size. Despite the financial backing for Etihad, the biggest threat for it is Emirates and the new airport in Dubai (The Economist, 2010). Financial performance There are many reasons behind the success of Emirates. Its central location, based in Dubai is one of the key factors. Other factors include the unyielding support of the government of Dubai and the free-skies policy of the government. Emirates is said to be an airline that is most profitable. The financial year that ended in March 2010 saw net earnings of $963.5. The revenues amounted $ 11.8 billion and the operating profit for them was $ 970.9 million (Air Transport World, 2011). Emirates placed an order for more airplanes (15 Airbus A380, which are very expensive) despite its’ bad financial health. This move was criticized by many commentators. It has been insinuated by many that Emirates has been subsidised by the government of Dubai. However, President of Emirates, Tim Clark, has quashed such notions (Maier, 2005). Mr Clark stated that Emirates had a strong financial standing which was enough to tide the company over. 2008-2009 proved to be a difficult year for Emirates as they saw a sharp decline in profits. Profits dropped 80% as a result of high oil prices and the economic crises, which resulted in less people traveling (Kerr, 2009). 2010, marked improvement in terms of profits despite the financial crunch worldwide. Emirates saw an increase in traffic of passengers in 2010. Despite the financial crunch, Emirates followed an aggressive expansion strategy and introduced more destinations, Baghdad, for example. (Murphy, 2010). Despite a better performance, President of Emirates, Tim Clark dubbed this year as the “toughest year”. In the second half of 2011 Emirates claimed that their profits had declined alongside Singapore Airlines. Rising fuel profits has been given as the reason for this. Emirates was to follow a cost cutting strategy in order to turn the tables on the declining figures (Delmar-Morgan, Raghuvanshi and Nicas, 2011). The profits summed up to $225 million in the first half of the year. The decrease was quite sharp when compared with the first half of the year. That year, despite declining profits, the capacity of Emirates increased by 8.2% as more carriers were added. This increased the size of Emirates’ fleet to 161. The growth was reported after a pause of 6 months. The rising fuel prices are still a major issue for Emirates. In order to respond to this issue, Emirates hoped to cut various costs. In addition to rising fuel costs another issue was the depreciation in the values of the Pound Sterling and the Euro (Delmar-Morgan, Raghuvanshi and Nicas, 2011). As a whole, 2011 proved to be a good year for Emirates. According to Sleiman and Cameron (2011) Emirates saw a rise in profits (51%) as the number of business travellers soared again. According to the Emirates Annual Report 2010-2011, the year proved to be their best regardless of the many problems they faced. These issues included the huge ash cloud that spread over most of Europe which caused disruption in flight times all across the continent, the tsunami in Japan and political unrest in many countries. Competitive situation Airline Alliances Airline alliances have paved the path for individual airlines to expand their destinations served by other airlines (Sharkey, 2011). Oneworld, Star Alliance and Sky Team are three large airline alliances that rule the aviation industry. These aligned members have the benefit of setting prices, protection from criminal and civil sanctions and jointly harmonize their capacity. All of this is because of joining one of these alliances. Together, these alliances hold a market share of 68% (Emirates, 2011). Emirates has never been a part of any alliance neither has it planned to do so in the future. They have argued that by remaining non-aligned, Emirates is offering customers a choice (Emirates, 2011). Competitors Formed in 1985, Emirates is still a young player in the market. Some of the biggest competitors for Emirates in the past were Lufthansa, British Airways etc. Now however, by providing low-cost long haul transportation, Emirates poses a threat for those airlines (Paul, 2010). However, for Emirates, the threat is closer to home. Qatar Airways and Etihad have unseated Emirates from its perch. The three of these airlines offer almost similar services, in terms of distance and price (The Economist, 2010). Emirates was the World’s Best Airline (Skytrax) for two years, running in 2001 and 2002. However, Emirates has been knocked off this perch. It lags behind both, Qatar Airways and Etihad. Both of these have better ranking in the rankings (Skytrax, 2011). Further threat lies in the form of Sky Team’s Saudi Airlines and Middle East Airlines (Lebanon). Sky Team plans to counter Emirates in their own region by using these two airlines (Mouawad, 2011). Competitive strategy According to the chief executive of Air France, Emirates follows an aggressive strategy as it is destroying the customer base of European carriers by siphoning off passenger at major airports in Europe (Mouawad, 2011). . Price is a strong factor. Emirates offers low prices for long distance flights. Other major airlines fail to offer passengers this perk (The Economist, 2010) According to Knorr and Eisenkopf, Dubai’s central location and their government policies with respect to their open skies policy and a lower tax rate have been advantageous for Emirates. In addition, the lenient immigration laws have also proved to be beneficial. Many passengers pick Emirates, just because transit is quick and easy at the Dubai airport. What made Emirates different from others was that it offered passengers value added services that include a chauffeur service. In addition they are also offering separate “suites” in the first class. In coach, they have provided screens for individual passengers. This strategy has been imitated by others as well (Mouawad, 2011). What makes Emirates unique is that Emirates has a strong focus on cargo (Skycargo). Moreover, their strong presence in secondary markets has given Emirates a good hold. “High frequency” is another benefit for Emirates (Knorr and Eisenkopf). Because of lesser costs for Emirates, it is difficult for other airlines to bridge the gap. Emirates has the unrelenting support of the government (The Economist, 2010). Conclusion Emirates, with its short history, has been an influential player in the airline business for over 25 years. The low price it offers is its key profit-making factor. Because Dubai airport does not have very high fees, Emirates is easily able to cut its costs, thus providing lower prices on its long distance flights. Another helping fact is that Dubai imposes little tax; this is also another cost cutting factor for the airline. The government of Dubai has lenient immigration laws that enable quick and easy transit for passengers. This is another reason for selection of Emirates over other airlines (Knorr and Eisenkopf). The biggest factor that has helped Emirates is the location. Dubai is a centre of the world and connects the whole world. Emirates has been a longstanding favourite of the people as well. It has achieved many awards for its performance in various sectors (Skytrax, being one of them). Emirates is in an influential position and is strong enough to prove to be a challenge for most European carriers. However, Qatar Airways and Etihad have posed serious threats to Emirates. This is because both the airlines follow a similar model. They are able to compete Emirates’ low price strategy and thus prove to be serious threats. Emirates has been under pressure from the three alliances of the industry (Oneworld, Sky Team and Star Alliace), yet, Emirates remains aloof. They have justified themselves by stating that if the entire industry becomes consolidated, passengers will not have any choice with respect to price and other factors as well. 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