Business Strategy Analysis: Emirates Airlines

Introduction

The current airline industry is growing according to projections. However, there are challenges, both internal and external which must be assessed and addressed by managers from various industry players. It is thus imperative that organisational managers develop strategies that are not only customised to their organisations but also responsive to the dynamic global business environment (O’Connell, 2006). This paper presents a group project on the strategic analysis of Emirates Airlines. The paper provides an internal and external environment analysis of the Airline. Strategic management models such as SWOT analysis will be used to put the case study in perspective.

Current Mission, Objectives and Strategies

Emirates Airlines, an Arabian airline company, was founded in 1985 (O’Connell, 2006). The company has experienced significant growth over its course and has dominated the Asian and some European airline markets. The continued success of the airline can be linked to the company’s mission and strategic objectives. According to the company reports, Emirates Airlines strives to excel in the airlines’ industry by using the available resources. Therefore the goal of the company is:

“To reach on top by excelling at what we do” (Emirates Airlines, 2012).

Therefore, the company strives to conquer the airlines’ industry by tailoring its services to the existing market, as well as attracting new markets.

The mission statement for the company reads:

“We exist to deliver the world’s best in-flight experience” (Emirates Airlines, 2012).

The mission statement for the company outlines the framework through which the company will achieve its goals. The vision statement for the airline is:

“To make civil aviation safe, leading and sustainable” (Emirates Airlines, 2012).

The mission and vision statements of an organisation provide a basis for developing strategic objectives. Strategic objectives are guidelines for obtaining the goals of an organisation.

Emirate Airline’s Current Objectives

The current strategic objectives for Emirates Airlines are highlighted below:

1. To retain the current and improve the acquisition of frequent business class market share.
2. To increase the market share for the company by 25-40% by the end of 2015.
3. To tap into the low-cost market in order to improve the company’s returns and tame competition from this sector.
4. To promote domestic tourism activities by marketing Dubai as a tourist destination. This will, in turn, increase the inflow of traffic and thus increase the market for Emirates Airlines (Emirates Airlines, 2012).

Emirate’s Current Financial Position

The financial health of an organisation is assessed based on its operating activities. In order to assess the financial health of the company, we need to conduct profitability and liquidity analyses.

Profitability Ratios

Profitability ratios are used to evaluate the performance of an organisation in terms of what percentage of sale contributes to the net returns on invested resources (Nobes, 2006). The profitability of a company is measured using net operating margin, return on equity, and return on assets. The health of the company shall be analysed using the recent three years of operation: 2010, 2011, and 2012. The net operating margin for a company is the most accurate profitability index that can be used to establish the actual profits that the company have made over a given operating period (Revsine, Collins, Johnson, Collins, & Johnson, 1999)

The ratio is determined by dividing the net income (loss) made by the company for the period by its gross sales. The following table presents the company’s net operating margin over the focus period:

According to the table, the Airline’s net operating margin ratio has not been stable over the focus period. The dramatic fall in the profits from 2010 to 2011 is a cause for alarm.

Return on Assets

This ratio is used to measure the efficiency with which an organisation utilises its resources (assets) in generating revenues. Return on Asset (ROA) is calculated using the formula:

ROA= Net Income + After-tax Interest Expense)/ Average Total Assets

The ROA ratios for the periods 2010 through 2012 for Emirates Airlines are presented in the table below.

Similar to net operating margin, the return on assets ratio for the company dwindled over years and was barely recovered in 2012.

Liquidity ratios

Liquidity ratios are indicators used to establish whether a company is in a position to cover its short-term financial obligations (Revsine et al., 1999). Liquidity ratios include current ratios and quick ratios. The current ratio is calculated by dividing current assets by current liabilities. The following table represents the current ratios for the airline between 2010 and 2012.

Quick ratio

The quick ratio is a more accurate measure of the liquidity of a business organisation. The ratio is a tougher measure of liquidity because it eliminates those assets that might be hard to liquidate when current liabilities become due. The quick ratio is computed by:

The current and quick ratio analyses for the company indicate that Emirates experienced waning financial stability over the focus period. The current ratio declined from 1.03 to 0.98, while the quick ratio dropped by 3 points. This implies that the company is becoming financially unstable and creditors may file for bankruptcy.

Environmental Analysis: SWOT Analysis

The external and internal environments of an organisation can be analysed using the SWOT model. SWOT analysis allows a manager to establish the internally-generated strengths and weaknesses of a company, and the externally-determined opportunities and threats (Cravens & Piercy, 2008).

Opportunities and Threats

Opportunities and threats are externally-generates factors that can either propel the business to the success of accelerating its collapse.

Opportunities

1. Increase in growth of per capita of UAE economy – The increased growth of per capita income means that more people are becoming able to use airlines services. This means that the company can increase its domestic market share.
2. Increase in information technology – The increase in information and communications technology is an opportunity for the airline.
3. Growth in global population – The growth in the population of the world brings an opportunity for the airline s increased capital mobility requires the use of airline travel.
4. High investment plan by the government – The plan by the government to invest in the development of airports will enhance the company’s operations.

Threats

Threats are externally-determined factors that increase the susceptibility of a company to failure.

1. Political instability – Emirates airlines are operating within a region that has been characterised by political instability for the past four years. The Arab Spring revolution threatens the operation of such airlines.
2. Increased operational costs – The increased insecurity and political instability increases the operational costs for the airline, which hurts its bottom line.
3. Increased fuel prices – The increase in jet fuel and other petroleum products increases the costs of operations for airline businesses.
4. Increased natural calamities – The increase in the prevalence of disasters such as volcanic eruptions, hurricanes, flooding and earthquakes reduces the market share for airline companies.

Strengths and Weaknesses

Strengths and weaknesses are internal factors that can either allow a company to take advantage of opportunities in the external environment or succumb to the threats presented by the industry (Cravens & Piercy, 2008).

Strengths

1. Arab Alliance membership – The Airline has joined the Arab Airline alliance, known as the Arab Air Carriers Organisation. This will facilitate the company’s operations and reduce operational costs (Emirates Airlines, 2012).
2. Improved check-in system – The airline prides itself on its self-check-in system, which will further reduce operational costs.
3. Increase in hubs – The airline has increased new hubs and travel destinations. The increase in travel destinations in the USA provides a competitive edge for the company.
4. The high number of aircraft – Emirates airline is the biggest purchaser of new airlines. Therefore, this provides a positive review of the company amongst travellers.

Weaknesses

A company’s weaknesses are internal inefficiencies that expose it to threats from the external environment. The following weaknesses are inherent to the company.

1. High operational costs – the strength of purchasing many aircraft presents weaknesses for the company. There are high operational costs especially those associated with servicing and maintaining these aircraft.
2. High prices – Emirates airlines provide its services at high prices relative to other airlines. This may erode the market share as new and budget airlines enter the market.
3. Non-membership – Although Emirates airline is a member of the Arab Airline team, it has not formed a partnership with other international flying teams such as One Team and Sky Team.
4. Young Age – The Airline was established in 1985, which is relatively closer than most airlines that have decades of experience.

SWOT Analysis Matrix

Revised Mission, Objectives and Strategies

After the comprehensive analysis of the company’s internal operations and the environment in which it operates, it is evident the company needs a review of its mission and strategies. The review of these dimensions will allow the company to compete effectively in the airlines business.

Mission Statement

The revised mission statement for the company should be:

“To provide the safest, affordable air travel for sustainable development.”

This mission statement will incorporate the price aspect of the company, which is one of the weaknesses highlighted in the analysis. In order to achieve this mission, the company will need to implement the following strategies:

1. Reduce the prices charged to customers by 12% to wage a competitive war with other airlines that operate budget services. A reduction in price charges will allow the airline to appeal to the low-end customers who still require business or premium services, and thus facilitate the affordable clause of the mission.
2. Minimise its operational costs by outsourcing its repair and maintenance services.
3. Increase its market share by venturing into the low-cost airline business. Many airlines are investing in the low-cost market, and the company should consider following suit. There is growing household income in many markets frequented by the airline, and thus low-cost services would increase the company’s sustainable development.
4. Increase branding and marketing efforts. Company rebranding will re-energise its presence in the existing market and provide opportunities to enter new markets.

Specific Actions

Price Reduction

Reducing the prices charged to customers will definitely erode the company’s revenues in the short-run (Cravens & Piercy, 2008). However, in the long run, the company will benefit from economies of scale since the increased market share will allow the company to realise high revenues. It is important to note that the company will not implement a generic price reduction strategy as this might be detrimental to the bottom line. The marketing department will play a crucial role in segmenting the market and establishing those that will absorb price reduction.

Cost minimisation

The finance department will play an essential role in the cost minimisation strategy. The main objective for the company is to minimize operational costs by 25% within the next 12 months of operations. However, this will be maintained at 10 per cent per year after the first year. Costs can be minimised through outsourcing of the company’s operational activities, including maintenance operations, hub human resources and marketing activities. However, care should be taken so that critical company information is not given out to outsourcing partners.

Entry into Low-cost market

The low-cost market has potential and can contribute to the company’s margin significantly. This is a long-term strategy that will require heavy initial capital investment. However, the returns promise to be worth investing in. Investing in the budget airline market will boost the company’s revenues by 32%, which is significant enough to sustain the operations of the segment and realize net returns.

Procedures for Strategy Review and Evaluation

Strategies implemented by the company must be evaluated on a periodic basis. A strategy review and evaluation allow the management to establish whether the company is on its course to achieving short and long-term objectives (Cravens & Piercy, 2008). In order to review and evaluate the aforementioned strategies, the company will use a balanced scorecard. To maintain the company’s focus on short-term financial flows and long-term strategy viability, the following balanced scorecard should be implemented.

The balanced scorecard will be used to evaluate the progress of strategies and implement corrective measures whenever there is a shortfall in any operational activity.

References

Cravens, D., & Piercy, N. F. (2008). Strategic marketing. New York: McGraw-Hill Irwin.

Emirates Airlines. (2012). Annual Financial Report: Financial Year 2011/12. Web.

Nobes, C. W. (2006). A judgmental international classification of financial reporting practices. Journal of Business Finance & Accounting, 10(1), 1-19.

O’Connell, J. F. (2006). The changing dynamics of the Arab Gulf-based airlines and an investigation into the strategies that are making Emirates a global challenger. World Review of Intermodal Transportation Research, 1(1), 94-114.

Revsine, L., Collins, D. W., Johnson, W. B., Collins, D. W., & Johnson, W. B. (1999). Financial reporting & analysis. New York: Prentice-Hall.