The airline industry is affected by environmental, economic, political, and social factors. These factors dictate the expenditure of the airline, the spending power of the passengers, legal, and policy issues that determine the overall operations of different carriers. Many operational dynamics have to be addressed at regional, global, and airlines’ management levels if success is to be realized. Taking into consideration the different factors, this paper evaluates the national and international policies and planning issues in Emirates Airline and their implication on the profitability of the company. Therefore, the paper centers on the macro factors that affect the aviation industry.
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Change and impact on PEST Analysis
For any business to succeed, it has to put in place strategies that will ensure that the internal and external environment does not curtail operations. Therefore, in relation to the case of Emirates Airline, the evaluation of the external environment focuses on political, environmental, social, and technological factors (PEST).
The UAE has been politically stable for a long time, which has resulted in an excellent business environment that favors the aviation industry. Besides, Emirates Airline plays a great role in the economic development of Dubai. For instance, it is crucial to market the region as a destination point for tourists. As a result, the policies of the UAE have been in such a way that they do not affect the airline’s operations negatively. However, due to business dynamics, the main contributor to the region’s GDP, which is the oil revenue, has drastically reduced, and it is likely to influence fiscal policies of Dubai; hence, changes take place in the economic outlook that may negatively affect the operations of the airline. For example, the need for sustained government functions may lead to increased taxation and levies at the airports that will have both a direct and indirect effect on the airline’s performance.
Economic factors dictate the nature of business operations at any given time. (Team FME 2013). In the case of the travel sector, a good economy both at domestic and international levels implies that many people will have disposable income that they can use for leisure, such as touring the world. In the case of the UAE, there has been considerable economic growth, mainly supported by oil export and increasing the number of tourists visiting the country. This presents a mixed scenario on the operations of the airline. For example, there have been reductions in the prices of oil, which means that the operational expenses of the company have declined. However, the oil drop implies a possible economic downturn in the region that will likely affect the number of domestic passengers willing to travel (Clark 2015). Therefore, the management of the company needs to put in place a plan to overcome such eventualities.
Social factors entail the lifestyles and the general demographic characteristics of a community (Team FME 2013). These factors depend on the economic and political set up of the country. Dubai has had a stable economy, and many citizens are categorized belonging to the middle class; hence, they have surplus income to spend on leisure and traveling. Being the recognized national carrier, Emirates Airline taps into this group of citizens who are willing to spend. Also, the rise in the economy and political stability has attracted many companies to set regional offices in Abu Dhabi. The employees of the companies who comprise the locals and expatriates form a big customer base for the airline. However, economic and political changes will have a direct effect on the airline. For example, with the economy experiencing pressures from the reduced oil prices, the lifestyles of citizens are likely to change. For instance, potential passengers will face economic difficulties, which may lead to cost-cutting measures such as reduced travel time.
In contemporary society, technology has become a critical issue in the running of the business. It has been pointed out that a company that assumes or relegates technology from its key operations it is likely to fail (Team FME 2013). Technology can be used to enhance the passenger’s experience; for example, through entertainment and on-time communication. In the UAE and other parts of the world, many people use the internet. Therefore, the airline is placed at an advantage to exploit technology to gain a competitive edge. For example, it is increasing interaction with the customers in order to retain them. Policy changes that touch on the use of IT will affect the success of the company.
Based on the PEST analysis, it is evident that there are many consequences dictated by the prevailing economic, social, economic, and technological factors that affect operations the airline. Altering any of the factors will imply changes in performance. For example, economic and political changes that are likely to increase taxation will likely lead to reduced returns on income. The spiral effect will be felt at the regional and international levels.
Potential Risks and Costs for the Region, Country (as a GDP) and Businesses in the event of Change in External Environment
An Economic downturn will imply that the airline sales volume will decrease since the growth of the Emirates Airline is directly related to the financial performance of the UAE. On the other hand, the aviation sector creates a lot of benefits to the region. For instance, it has established connections between cities and markets across the globe; hence, becoming a valuable asset for the region. It has led to direct foreign investments and skilled labor, which have consequently led to a spillover impact on the UAE’s economy. For instance, Frontier Economics (2015) estimated that the ‘connectivity benefits’ of the airlines inject 2.5 billion USD to the GDP of Dubai (Oxford Economics 2011). Travel and tourism also contribute to the economy of Dubai. Having become a center for leisure and an international business hub, the aviation industry supports Dubai’s growth by bringing visitors. It is estimated that the aviation sector supports almost 134, 000 jobs and injects approximately 7.9 billion to the GDP. Therefore, the combined benefits of the aviation industry in Dubai are that over 250,000 jobs are credited to the industry, and over 22 billion USD injected into the GDP (Oxford Economics 2011).
It is important to note that Emirates is the leading airline in Dubai and enjoys a significant market share. Therefore, changes in the external environment will reduce productivity. Also, a reduction in the number of passengers will imply the need to stop flying to some destinations, and hence, reduce connectivity benefits brought to the region (Frontier Economics 2015). A case in point, Dubai is poised to lose a big chunk of its GDP, and many jobs will be lost in case the airline fails.
Potential Knock on Spiral Effects
As pointed out, the region has, for a long time, depending on oil exports as the principal source of income. Even though there have been diversifications such as tourism and other economic activities, oil remains to be a key factor supporting the region’s economy. With the reducing prices, the implication is that there will be a spiral effect that will affect the operations of many businesses. The aviation industry is usually driven by a good economic status of regions and the global markets (Hansman et al. 2014). Thus, the economy is likely to suffer a major decline. Also, with a declining economy, the attractiveness of the region will reduce; therefore, airlines will subsequently reduce flights to the region. The airport’s retail activities will decrease, and there will be massive job cuts.
Aviation Industry: Interdependent Elements
As the prices of oil drop, the operational cost of the regional airlines will reduce (PwC 2015). This may imply a reduction in air tickets, and hence, more passengers. However, this may not be the case as the income of the passengers is also negatively influenced by the reduction in traveling demand and a fall in the revenues for the airline.
Reduction in passengers due to economic reasons will result in the airline cutting the number of destinations and cancellation of some scheduled flights (Clark 2015). This signifies the demand for the fuel will reduce. Suppliers of jet fuel will face a decline in sales. Similarly, the aircraft suppliers will have to scale down their manufacturing operations as the region, which has become a hub for aviation companies, will not need the many aircraft.
The Growth Capacity
The combination of the factors denotes a stagnated growth for the airlines. Studies have shown that the aviation industry is very sensitive to changes in policy, economic, and political processes. The factors affect the demand for traveling and consequently influence supply and growth of capacity of the aircraft.
Impact on Emirates as an Airline with Change in Environment
Points of view
The airline industry is very sensitive to changes in the economy. The decline in the prices of oil will lead to the stagnated economic growth of the region. As a result, the attractiveness of the region will also reduce and consequently result in Emirates Airline sales plummeting as both domestic and international customers will reduce their travels.
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Short Term Ramifications
The slowed economic development in the region due to the fall in oil prices will, in the short run, force the airline to reduce the number of flights. Also, in order to manage its fixed operational costs, the company will require retrenching some of the employees to avoid redundancy. Customers will also expect declines in fares to match the reducing oil price.
In the case of the persistent reduction in oil prices and economic growth, Emirates Airline may be forced to ground the big aircraft and shift to use of the small capacity airlines. This will be due to the need for cost-effective measures.
Overall, there will be both regional and international ramifications. Emirates Airline supports many businesses globally. Continued pressures on the airline will thus lead to reduced economic growth and job losses in the major countries of operations.
In order to overcome the external challenge, there are internal measures that the management of Emirates Airline can take in order to stay competitive and profitable. One of the key strategies is a policy change that will allow the adoption of a new business model. This will include the introduction of reduced airfares as means for price-based competition. As a result, it will attract passengers from other companies. It will also need to come up with an enhanced loyalty bonus as a way of retaining its existing passengers and attracting new. Also, the new business model will need to be based on reduced operational costs.
Implications Due to Change in Demand
The change in demand will affect different businesses. For example, the connectivity benefits the global markets get from the airline will diminish. Also, other sectors of the economy, such as aircraft suppliers and maintenance companies, will be negative affected.
The airline has direct, indirect, catalytic, and induced benefits to the regional economy. The direct effects relate to the contribution in GDP growth. Indirect benefits relate to the riffle effect that arises due to expenditures from the airline. For example, most of goods and services used in Emirates’ operations are domestically produced. Therefore, it indirectly supports jobs along the supply and value chain. Catalytic and induced benefits arise from connectivity benefits brought about by the airline (Oxford Economics 2011). Hence, reduced demands imply that the regional economy will be negatively affected and jobs lost.
On Airline Performance
The key to profitability in any airline business is having many passengers. With the reduced demand, the returns on investment will reduce as the key sources of income are the customers. Besides, profitability is used to enhance the competitiveness of business by fostering confidence to the passengers. With reduced demand, profitability will decrease, and competitive edge of the company will be adversely affected.
Opportunities Which Exist for the Airline
The reduction in the fuel prices is just one of the factors that contribute to the development of the region (Frontier Economics 2015). As noted, there have been diversification measures to ensure that the UAE’s economy can still grow amidst the low revenues from the oil sector. By adopting strategic management, there are many opportunities that the Emirates Airline can exploit. First, with the growing number of middle-class citizens, the airline stands a chance to maintain its capacity if the management has good strategies to target and attract the group. Dubai has become a gateway to the larger Arab market. This has seen many multinational enterprises set regional offices in Abu Dhabi and other key towns. Most the employees are expatriates who need frequent travels to their countries. The management can aggressively market the airline to such employees to become their preferred career. Being a leading airline brand in the world, it will be easy to capture the market. Finally, 40% of the airline’s expenditures are on fuel. With the decreasing prices of the commodity, the airline will be in a position to cut the operational expenses by a significant margin. This can be transferred to airfare and use it as a point of price competition.
From the evaluation of various factors, it is evident that the changes in the external environment have a considerable economic impact on the region internationally, and on the airline. At the regional level, there is the need for policy changes in order to cushion the airline from the potential risks and costs associated with declining economic growth. A failure in policy will imply reduced GDP and job losses. Similarly, at the international level, there is the need for countries to put in place strategies that will ensure that amidst economic turmoil, airlines are protected as they play a critical role in their economic growth. This can be done through policies such as open air space for some selected airlines. Finally, for the Emirates Airline, it needs to put in place internal measures and plan for the possible changes in order to exploit the existing opportunities.
Clark, N 2015, ‘Falling oil prices, a boon to airlines, pose a challenge for Airbus and Boeing’, New York Times, Web.
Frontier Economics 2015, Emirates’ economic impact in Europe, Web.
Hansman , J, Elke, M, Li, T & Trani, A 2014, The impact of oil prices on the air transportation industry, Web.
Oxford Economics 2011, Explaining Dubai’s aviation model, Web.
Team FME 2013, PESTLE analysis: strategy skills, Web.