"Emirates Airlines Swot Analysis"
BUSINESS ANALYSIS How Sustainable is Emirates’ Business Model? Dubai-based Emirates Airline, founded in 1985 with just 2 leased aircraft, is one of the fastest growing and most consistently profitable carriers in aviation history. On track to operate the world’s largest A380 and B777 fleets, it has also become Boeing’s and Airbus’ single most important customer. Finally, if historical growth trends persist, Emirates will become one of the world’s largest passenger and cargo airlines by the end of the next decade (at that time, Dubai might also boast the world largest airport). Nevertheless, there is a fair amount of skep- ticism with respect to the commercial viability and long-term sus- tainability of Emirates’ business model. Some critics, essentially the CEOs of its (European) competitors, hold that Emirates’ growth has simply been the result of subsidies. Others cite the political instability of the Middle East, or argue that the buildup of vast overcapacity in the Gulf region will dim the airline’s prospects. In this article, we will provide a SWOT analysis of Emirates’ business model that needs to be discussed in the broader context of Dubai’s overall growth and deve- lopment strategy into which it is firmly embedded. By Andreas Knorr and Alexander Eisenkopf A Brief History of Emirates from Pakistan International Airlines. turn, is only one element in a compre- In 1974, three years after independen- The rest is history: in 1987, Emirates hensive bundle of aviation-related ce, the rulers of the UAE decided to began to serve it first two European activities, all of which come under the establish a joint flag carrier: Gulf Air. destinations – London Gatwick and responsibility of Sheik Ahmed bin However, a tense relationship between Frankfurt –, from 1995, it has operated Saeed Al-Maktoum: (1) the Dubai the airline and the Dubai government an all widebody fleet, and in 2001, World Central Consortium (activity: to existed ever since its inception, as the 2003 and 2005 Emirates placed some build Jebel Ali Airport City including latter refused to give in to Gulf Air’s of the largest aircraft orders ever. As of Dubai’s new mega-airport); (2) Dubai’s demands to abandon its open-skies October 2007, Emirates’ route network Department of Civil Aviation (activi- policy. In reaction, Gulf Air reduced extends to 91 destinations on all conti- ties: all aviation-related regulatory fun- frequencies and capacities to and from nents. In its last business year, ending ctions, operator of DXB airport, of Dubai by more than two thirds between March 31st, 2007, the airline transpor- Dubai Duty Free and Dubai Cargo 1984 and 1985 without advance notice ted 17.5 million passengers and 1.2 Village) and (3) Dubai Aerospace (Wilson 2005). Since foreign carriers million tons of cargo on 102 aircraft. Enterprise (activities: aircraft leasing, proved unable or unwilling to fill the Currently, 118 aircraft are on firm order airport planning and management, con- gap, Dubai’s then ruler, Sheik (of which 20 will be all-freighters), sulting, maintenance and aviation-rela- Mohammed bin Rashid Al-Maktoum, including 55 A380 and 43 B777. ted education and training). convened a team of experts – headed by Maurice Flanagan and later joined The Emirates Group Emirates’ Business Model by Tim Clark and the ruler’s then 26- Emirates Airlines (including its cargo Emirates Airline (or rather the year old son, Sheik Ahmed bin Saeed subsidiary Emirates SkyCargo) is Emirates Group as a whole) is a cruci- Al-Maktoum – to devise an emergency only one division of the Emirates al element of Dubai’s growth and deve- plan. The group’s recommendation to Group, a state-owned globally active lopment strategy. Currently based on set up a home carrier for Dubai was travel and tourism conglomerate, the Dubai Strategic Plan 2015 (Dubai quickly accepted by the ruler, but he which provides a plethora of aviation- Government 2006), its objective is to imposed two conditions: The new airli- related ancillary services. Finally, the prepare the emirate for the post-oil era ne should meet the highest quality stan- Emirates Group owns 43.6 percent of by firmly establishing it as a leading dards and there would be no additional SriLankan Airlines. tourist destination (including trade capital injections from the government fairs and conferences), as a center for other than the agreed USD 10 million The Dubai Government’s aviati- financial, IT and professional services, start-up capital. On October 25th, on-Related Activities as a location for corporate headquarters 1985, Emirates’ first flight departed to Viewed from an even higher level of and light manufacturing, and, last but Karachi, using an A300, wet-leased aggregation, the Emirates Group, in not least, as a regional transportation, e-zine edition, Issue 38 1 logistics and distribution hub (“regio- (London, Frankfurt, Munich, Paris) for high labor productivity: According nal” refers to the area between long-distance flights. Typical destinati- to a recent study by UBS, a Swiss Singapore, Europe, Southern Africa). ons in this category include Newcastle, bank, Emirates’ unit costs are around Obviously, Dubai’s (and, as a result, Manchester, Birmingham, Glasgow, 40 percent lower than KLM’s Emirates’) spectacular growth in recent Düsseldorf, and Hamburg in its (Horth/Alwyn 2005), a cost advantage years – on average, GDP increased by European network as well as Kochin, that is likely to even increase after the 13.4 percent per year since 2000, and Kolkata, Thiruvananthapuram, and introduction of its A380 fleet; and its population is set to grow from Ahmedabad in India, to name just a today’s 1.45 million to around 5.4 mil- few. Emirates’ competitive advantage no alliance membership: In the lion by 2015 (1968: 6,000!) –, has been in these markets is enhanced by the words of Tim Clark: “If we take the helped by two complementary factors: fact that it, unlike the competition, long-term view, then alliances offer a sound politics and its very favorable does not have to deploy a fleet of rather sure-fire way of achieving mediocrity geographical location. The former small and, hence, inefficient short-haul and reduced profitability” (as quoted include its uniquely liberal (by regional and even regional aircrafts for feeder by Horth/Alwyn (2005)). However, standards), cosmopolitan environment, flights to its hub, but can offer long- select codesharing agreements are in political stability, free-trade agree- haul service standards instead (moreo- place. ments with most of the booming Asian ver, given its much longer average economies, world-class infrastructure, stage length, Emirates is not subject to SWOT Analysis efficient public services, and very low competition from low-cost carriers eit- Strengths to non-existent corporate and income her); Many of Emirates strengths come from taxes. The latter point reflects the fact the right decisions taken at its founda- no major agglomeration on the globe is tion, and from its unique organizational further than 8,000 nautical miles away structure. Not only does the carrier from DXB. As a result, any two major benefit from having been created from cities on earth can be connected via scratch only 22 years ago, resulting in Dubai with only one stop. flat hierarchies and essentially no legacy costs, but, more importantly, the It is against this backdrop that central role of aviation in Dubai’s Emirates’ business model must be ana- development strategy also guarantees lyzed. First and foremost, the airline – Emirates a very favorable political plus the next to 140 carriers which environment. First and foremost, the serve DXB – provides excellent air strong presence in markets that overall responsibility of Sheik Ahmed links worldwide, not only for the bene- have been largely unconnected to the Bin Saeed Al-Maktoum for all aviati- fit of Dubai’s thriving tourist industry, global air transport network, and espe- on-related activities in Dubai and the but also of its rapidly expanding local cially to the Middle East, to India, lack of a “NIMBY-culture” with res- business community (including the Southeast Asia and/or Africa, for lack pect to airport expansion or new airport thousands of foreign companies that of a (potent) local flag carrier. This projects ensure that the airline will not have set up their regional presence holds not only true for the vast majori- in decades face infrastructure bott- there). To be more specific, Emirates’ ty of Emirates’ 15 destinations in North lenecks (which increasingly stifle the business model is built on the follo- and Sub-Sahara Africa (Emirates’ CEO growth prospects of its principal wing features: Tim Clark recently observed in an European competitors). interview with the online edition of A well-balanced mix of O&D- and German weekly magazine SPIEGEL, Second, Emirates profits from the very transfer traffic in its passenger business that “Africa is a ripe fruit which only low charges at its home airport. While (currently 50:50, although the intro- needs to be picked”). It also includes landing fees are by and large identical duction of the A380 fleet is likely to cities like Moscow, Brisbane, Perth, to those at major European airports, no increase the transfer passenger share to São Paulo, New York, and Houston; airline flying into DXB has to pay any 60 percent); additional charges (such as noise char- high frequencies: The mid-term ges, ATC charges, security charges a very strong focus on cargo traffic, objective is to serve most destinations etc.). This is because the airport infra- which generates 20 percent of at least twice daily. Currently structure and all related services are Emirates’ revenues – one of the highest Emirates’ operates three waves at provided by Dubai’s government and percentages in the airline industry (to DXB, a fourth is being gradually pha- fully financed from the state budget. It the authors’ knowledge, only LAN sed in; is a hotly debated issue whether this Chile tops Emirates in this segment, particular fee regime is a form of indi- achieving a 40 percent turnover share); high-quality service in all classes rect subsidy to Emirates. Judged onboard and on the ground including against the EU’s state aid rules, this strong presence in those secondary up to 600 entertainment channels in all would clearly not be the case since markets that are underserved by classes and limousine service (pick-up Dubai operates an open-skies policy Emirates’ competitors such as BA, LH, and drop-off) for first and business and all airlines are subject to the same and AF which focus on their own hubs class passengers; non-discriminatory treatment. From an e-zine edition, Issue 38 2 economic perspective, the lower over- Brazil to Japan (1.2 million Brazilians ting factor to Emirates’ success, and a all level of charges at DXB might are of Japanese descent). On this route, huge opportunity for future growth, is result from a variety of reasons: cost three almost equidistant itineraries – Dubai’s very favorable location. Some savings due to higher factor productivi- via the USA, Europe and DXB are 3.5 billion people live within eight ty, the non-existence of a double mark- available, one of which – via the USA flight hours. Moreover, Dubai is placed up (as a result of the central manage- – requires a transit visa. Another exam- right at the crossroads of some major ment of Dubai’s aviation interests by ple would be the UK’s restrictive and passenger and cargo flows, e.g. Asia Sheik Ahmed bin Saeed Al-Maktoum), complicated transit regulations for resi- (China/India)-Africa, Europe- monopoly rents enjoyed by other hub dents of some Asian countries en route Southeast Asia, Europe-Australia/New airports at the disadvantage of their air- to the USA even if they do not leave Zealand, India-North America, the line clientele, and lower marginal the airport while in transit. economic importance of which is set to damage costs of noise pollution in grow in parallel with the rise of the Dubai (because of different ecological Fifth, another of Emirates’ strong point near-by emerging economies. In additi- preferences). is its award-winning service in all clas- on, DXB has become a major – and ses, which is matched or exceeded only frequently time-saving – connecting Third, Emirates – like all other compa- by very few other carriers such as point for passengers (and cargo) trave- nies doing business in Dubai or, for Singapore Airlines. Sixth, clever mar- ling from secondary cities, especially that matter, in most Gulf states – bene- keting – for example, Emirates, not in Western Europe, en route to fits from Dubai’s low tax regime, Lufthansa – was named official carrier Australasia and even Africa. In fact, for which only subjects subsidiaries of for- of the 2006 FIFA World Cup hosted by passengers flying from, say, Hamburg eign banks and energy companies to Germany – has created a very strong to Sydney, Emirates offers a one-stop corporate tax. Obviously, this is an brand awareness worldwide. Finally, connection instead of at least two stops advantage as long as the company since the UAE’s currency is firmly on almost all Oneworld, Skyteam or remains profitable. As ordinary citi- pegged to the US dollar, Emirates has Star Alliance routings. And for flights zens including expats do not pay inco- benefited, at least in recent years, from to Asia, Emirates offers the same one- me tax either, and enjoy generous an additional devaluation-related cost stop service as its European rivals, but government-financed social benefits, advantage, especially vis-à-vis its to a larger number of destinations). too, Emirates is a very attractive Eurozone-based rivals. employer paying above average net What is more, not only has the UAE’s wages although gross wages are lower Weaknesses government has been very successful than in Western countries. It is almost impossible for outsiders to in negotiating free-trade agreements discern any relevant weakness. with all major economies from the Fourth, Dubai’s immigration laws are However, although notoriously unre- USA to the emerging markets of Asia quite generous by international stan- liable as a source, some posters on tra- (though not with a reluctant EU), dards. This does not only hold for for- vel-related internet blogs are complai- which are very likely to further increa- eign experts who may be easily recrui- ning about (allegedly) slipping service se demand for air travel to and from the ted by local firms. It also applies to standards in general and lack of consi- UAE. What is more, the entire Arabian transit passengers who do not have to stency in service quality in particular. peninsula has been one of the fastest clear immigration at DBX when chan- Indeed, Emirates was less successful growing regions worldwide. Since ging planes. While this might appear to recently in winning Skytraxx and other many neighboring countries, including be a negligible fact at first sight, it awards for outstanding service quality. the most populous one, Saudi Arabia, greatly improves Emirates’ competiti- have embarked on a progressive libera- ve position on quite a few routes. A Opportunities lization of their air transport markets, good example would be trips from Clearly the most important contribu- new opportunities for growth exist for Emirates also in its home region. Finally, Emirates’ decision to operate a huge fleet of A380 aircraft will enable the airline to continue to grow at all slot-constrained airports it serves, too – including all of its European competi- tors’ main hubs. Threats From the point of view of most for- eign, in particular North American, observers, the (alleged) political insta- bility of the Middle East, poses by far the biggest threat to Emirates’ growth. However, this perception is clearly not based on hard facts with respect to e-zine edition, Issue 38 3 visionary development master plan. Nor is it unique. In many respects, strong similarities exist between Emirates’ approach and Singapore Airlines’ rise from a small regional player to a global powerhouse in the airline industry only a few decades ago. It therefore seems reasonably safe to conclude that Emirates is writing another of the very few success stories in the history of civil aviation. References Dubai Government (2006), Dubai Strategic Plan 2015. Highlights, Dubai. (http://egov.dubai.ae/opt/CMSContent/Act ive/CORP/en/Documents/DSPE.pdf) Horth, D., and T. Alwyn (2005), The next low-cost threat. What does Emirates mean for Europe?, UBS Investment Research Q- Series, January 13th, 2005, Zurich. (http://www.airneth.nl/serve_file.php?dTy pe=dDocument&id=157) Wilson, G. (2005), Emirates. The Airline of the Gulf states, and recent history tells 57 aircraft with another 113 on firm the Future, London and Dubai. a different story as well. Although order, and Etihad’s fleet comprises 25 also affected by severe regional politi- widebodies (plus 21 aircraft on order). About the Authors cal crises even early in its start-up While Qatar Airways’ catch-up stra- Professor Dr. Andreas Knorr, c/o German period – Iraq’s invasion of Kuwait and tegy with Emirates seems to rely large- University of Administrative Sciences, Chair for Economic Policy, Freiherr-vom- the latter’s liberation soon after cross ly on undercutting its competitor while Stein-Str. 2, 67346 Speyer, Germany, one’s mind –, but also by more recent offering similar product quality, email@example.com (Corresponding events like the wars in Afghanistan Etihad’s expansion might prevent author) and Iraq, as well as the outbreak of Emirates from obtaining much needed SARS, Emirates has so far proven its traffic rights to countries that do not Professor Dr. Alexander Eisenkopf, c/o robustness. pursue an open-skies policy (note that Zeppelin University, Chair for Business both Emirates and Etihad are UAE- Administration and Mobility Management, A much more likely threat is the based carriers). What is more, both the Am Seemoser Horn 20, 88045 increasing lobbying by some of its Qatari and Abu Dhabi’s governments Friedrichshafen, Germany, aeisenkopf@Zeppelin-University.de competitors in core markets such as (i.e. ruling families) have devoted huge Australia, France and Germany, as well budgets to the expansion of their local Footnote as in largely untapped ones like airport facilities. By 2008, Doha’s air- 1 It is noteworthy that the term “stated- Canada, for legal protection against port will be able to handle 50 million owned” has a different meaning the con- Emirates’ expansion on their “home passengers (compared to today’s 6 mil- text of Gulf societies compared to the West turf”. For instance, Lufthansa is vigo- lion), while Abu Dhabi’s airport will be because many assets are owned by the rul- rously campaigning against Emirates’ upgraded to 40 million pax (9 million ing families. This, in turn, means that plans to serve Berlin and Stuttgart even today) – in addition to a substantial “state-owned” companies there are more though the operators of these two air- expansion of cargo facilities. It remains similar to Western-style family businesses ports have long attempted to attract to be seen whether this unprecedented than to Western-style state corporations. more intercontinental services which buildup of capacity by two (still) Moreover, and again in clear contrast to Western practices, most of Dubai’s “state- Lufthansa has been unwilling to provi- unprofitable regional competitors (and owned” enterprises must operate in open, de, or, in the case of Berlin, has been their government owners) will have a competitive markets on commercial terms. unable to provide profitably. negative impact on Emirates in the Their profits and dividend payments – long-run. instead of taxes – are also the main source Nevertheless, it is the very aggressive of income in Dubai’s state budget. growth plans of some other Gulf-based Conclusion 2 In 2006, with 6.5m guests, Dubai’s hotels carriers, most notably of Qatar Emirates’ success is clearly not built (occupancy rate of 86%) accommodated Airways and Abu Dhabi-based Etihad on sand. In fact, it is based on a hard- more visitors than Australia. Airways, that might pose the most to-emulate mix of an excellent geogra- serious future threat to Emirates. Qatar phic location and outstanding manage- Pictures Airways currently operates a fleet of ment, embedded in an ambitious, All photos used in this article are cour- tesy by Emirates Airlines. Aerlines Magazine e-zine edition, Issue 38 4