Introduction
The Emirates Group boasts of the fastest growing and one of the most profitable airlines in the global aviation industry. The Dubai-based airline has doubled its fleet in the last decade. Besides, the number of passengers travelling by the airline doubled over the same period. In the 2010/2011 financial year, the firm reported a net profit of 1.5 billion US dollars.
It also employees 55,000 workers and continues to fly one of youngest fleets. Despite the intense competition and difficult trading conditions in the industry, the firm continues to be profitable. This is reflected in its aggressive expansion plan. In order to meet its current and future demand, the firm has ordered about 200 new aircrafts of which 90 are A380s.
Due to its rapid expansion, Emirates’ competitors especially, European airlines are considering it a major threat in the industry. This paper analyzes the competitive environment of Emirates Airline and how it can survive the competition. It also sheds light on the strategies adopted by European Airlines to outperform Emirates in the industry.
Porter’s Five Forces Analysis
Threat of New Entrants
New entrants are the new firms which are likely to join the industry thereby posing the threat of reducing the market shares of the incumbent firms. In Dubai’s aviation industry and the greater global aviation industry, most airlines enjoy economies of scale by expanding their operations.
For example, Emirates is able to reduce its unit costs by flying new large aircrafts. Besides, it enjoys access to low cost high quality infrastructure at Dubai International Airport. Product differentiation is also very high as major airlines like Emirates provide tailor made services to retain their customers.
The capital requirement for joining the industry is very high. This is attributed to the fact that aviation industry is capital intensive and requires significant investments in modern technology and infrastructure. The incumbent firms have great control over the distribution channel. Since most airlines are co-owned by their respective governments, legislations are used to restrict competition by limiting air access rights of foreign firms.
Similarly, most airlines are normally supported by their governments through capital injections or subsidies. In Dubai, the Emirates Airline has formed a partnership with the government to facilitate efficiency and reduction in costs. In conclusion, these trends indicate that the threat of new entrants is low in the industry. This means that it is difficult for new firms to join the industry and thus the incumbent firms can retain their market shares.
Power of the Buyers
The power of the buyers refers to the effect that customers have on the industry. The aviation industry is characterized by a low concentration of buyers as compared to the sellers. This means that there are very many travelers as compared to airlines. The travelers’ switching costs are low due to the fact that they can easily move from one airline to another at low costs. The level of product differentiation is high as airlines try to meet their customers’ expectations.
The threat of backward integration is very low since it is very rare to find travelers buying their own private jets from aircraft manufacturers. With the exception of low concentration of buyers, the other trends indicate that buyers have a low bargaining power in the industry. We can thus conclude that the competitiveness of Emirates and other airlines can not be compromised by the travelers’ bargaining power.
Threat of Substitute Products
Threat of substitutes is the competition a product faces as a result of the existence of alternative products in another industry. At the domestic level, the Emirates and European airlines face competition from buses, trains and personal cars. However, the differentiation of these alternative modes of transportation is not differentiated.
Besides, cars and buses are relatively slow thus being more expensive in the long run. At the international level, there is no alternative for air transportation. This leads to the conclusion that the threat of substitute products is low in the industry. Thus airlines can increase their services at the international level thereby increasing their earnings due to lack of alternative transportation services.
Power of Suppliers
The power of the suppliers refers to the influence of the manufacturers of aircrafts and the suppliers of key inputs such as fuel. There are many buyers (airlines) as compared to suppliers (aircraft manufacturers). The availability of substitutes is also low since there are no alternative means of air transport other than aircrafts. The suppliers’ products are highly differentiated since most aircrafts are built according to the needs of the buyer.
The airlines’ switching costs are also very high. This based on the fact that the supply of aircrafts involves long-term contracts with financial penalties. Besides, benefits such as export financing are limited to airlines who order their aircrafts from specific countries.
However, the buyers (airlines) remain very important to the manufacturers since they are the main customers of the later. In conclusion, the power of the suppliers remains high in the industry. This means that the suppliers can possibly exploit the airlines through high prices or delays in deliveries.
Competitive Rivalry
This refers to the intensity of competition among airlines. The industry is characterized by a very large number of competitors. For instance, over 150 airlines operate from Dubai International Airport thereby increasing competition in Dubai’s aviation industry. The fixed costs are very high since most firms have to employ thousands of workers to sustain their operations. The aviation industry at the global level is mature and thus its growth rate is slow.
Every firm focuses on high level of product differentiation in order to improve its competitiveness. The exit barriers are very high in the industry. This is attributed to the high regulation on acquisitions and mergers of airlines especially in Europe. The strategic stakes remain high as some European airlines like British Airways lose their market positions due to inefficiencies while the Emirates’ potential of gaining a greater market share through rapid expansion increases.
These trends lead to the conclusion that the “intensity of competitive rivalry” is very high in the industry. The high intensity of competition is likely to have a negative impact on firms which are not able to maintain their competitiveness through cost efficiency, innovation and expansion.
Ways in which Emirates Airline can add Value
Given the threat posed to European airlines by the rapid expansion of the Emirates Airline, the former have launched pressures to reduce the influence of the later in the industry. In order to survive the pressure from European airlines, the Emirates can continue to add value through the following ways.
First, the Emirates should maintain its current rapid expansion rate. Most network airlines from Europe are currently experiencing a slow growth rate due to challenges such as high fuel costs, increased capacity and unstable macroeconomic environment in Europe. Thus the Emirates can take advantage of the European airlines’ slow growth rate and increase its profitability by serving the markets that can not be served by the network airlines.
Second, the Emirates can add value by deploying its capacity in routes in which it enjoys maximum competitive advantage. It should particularly take advantage of the strategic geographical location of Dubai which is just eight hours of flight from most parts of the world.
Since Dubai is a major connection point for most international flights, the Emirates can “focus its growth in traffic flow linking India, China, Africa and Mid East”. Dubai plays an important role as a connection hub in these routes. Due to the high traffic flow associated with these routes, the Emirates will enjoy economies of scale by serving them.
Third, the Emirates should focus in offering competitive prices. Due to the difficult economic situation in most parts of the world, most customers are price sensitive. Thus low prices will enable it to attract more customers. The firm should also maintain its low operating costs in order to sustain the low prices. Finally, the firm should distinguish itself in the market as the best provider of customer services.
Pressure from European Airlines in Terms of International Laws and Policies
In the context of international law and policies, the European airlines can increase the pressure on Emirates by limiting its air access rights. This means that the European airlines are likely to lobby their governments to limit Emirates’ access to their domestic markets.
Some European analysts consider the Emirates’ rapid expansion a “genuine business plan that will limit growth in businesses and jobs in Europe”. Some analysts however, consider the expansion to be excess and is thus meant to dump excess capacity in Europe. Consequently, the airlines are likely to put pressure on their governments and industry regulators to limit Emirates access to their markets.
The Current and Future Strategy for European Airlines
Current Strategies
The European airlines have attacked some aspects of the cost advantages enjoyed by Gulf airlines. In particular, they are opposed to the provision of export financing facilities to the Gulf airlines. The European airlines believe that they should also be allowed to access credit facilities from Export Credit Agency. Second, they are also opposed to the low cost of using Gulf airports “despite the high investments undertaken at these airports”. Finally, some carriers such as Lufthansa are focusing on restricting Emirates’ access to their markets.
Future Strategy
The European airlines are focusing on forming alliances around the Gulf hub in order to boost their competitiveness. This includes forming partnerships with Kenya’s Skyteam and Ethiopia’s Star alliance.
Some European airlines are also considering forming partnerships with other Gulf airlines such as Qatar in order to realize the network strengths enjoyed by Emirates. Finally, the European airlines are considering strengthening their positions in the markets in which they have competitive advantages over the Gulf airlines such as Emirates.
Fleet and Network Review
Currently, the Emirates’ fleet is characterized by wide bodied aircrafts since it mainly serves the long-haul routes. The company has a policy of replacing its aircrafts at the age of 12 years. Thus in the next decade most of its aircrafts will be retired. This means that the aircrafts currently on order will be used to replace the old ones by 2020. Due the increase in average aircraft size, Emirates’ seat capacity is expected to increase by 6.6% CAGR by 2020.
This would allow the company to meet the increasing demand for its services. The total number of aircrafts owned by the firm is expected to increase from 155 to 249 by 2020. Such an increase will enable the firm to serve more routes and customers. Even though the delivery of the aircrafts on order is expected to end by 2020, it is also possible that the firm could order more aircrafts to meet its expansion needs in the next decade.
Strategy for Operating the 90 A380s
First, since the A380s are very large aircrafts, it would be in the interest of the firm to deploy them on long-haul routes. This would enable the firm to enjoy economies of scale and reduced unit costs. Second, due to the large size of the order, Emirates should focus on introducing new routes in its network. Increasing the number of routes will enable it to fully utilize its capacity thereby reducing costs and increasing profits.
Finally, some of the A380s should be used to replace the old aircrafts. The new aircrafts are more efficient in fuel consumption, are safer and equipped with modern technologies such as broadband internet connection. Hence their use will enable the firm to improve customers’ travel experiences and satisfaction. These strategies should be implemented within the framework of a cost leadership strategy. This means that the firm should focus on maintaining the lowest cost in the industry as it launches the use of the 90 A380s.
Conclusion
The Emirates is one of the fastest growing airlines in the global aviation industry. Currently, the airline has an ambitious expansion plan in which it intends to acquire 90 A380s among other smaller aircrafts by 2020. The expansion plan is expected to help the airline gain a significant market share in the industry.
Consequently, most European airlines consider Emirates a threat to their competitiveness. In response to Emirates’ expansion plan, the European airlines are considering adopting protectionist policies and forming alliances with the competitors of Emirates. In order to survive the continued lobbing by the European airlines, the Emirates should focus on a cost leadership strategy as it launches its new aircrafts.
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