Nations within the Gulf region (GCC) rely heavily on oil to sustain their economies. Recently, the prices of oil have been spiraling down, causing panic among policymakers. The drop in oil prices is projected to affect the economies of GCC countries in various ways. Emirates Airline is a carrier that is based in Dubai in the United Arab Emirates (UAE). This company has been affected by changing oil prices. Going forward, the effects are anticipated to increase even further.
Emirates Airline relies greatly on tourism in the region, as well as transit through the region. The drop in oil prices has hit these two sectors, hence affecting the company’s prospects. This paper will examine the impact that the falling oil prices will exert on the airline and the GCC region at large. Particular focus will be given to the short-term and long-term developments of the changing oil market. The possible strategic measures to navigate the impact will be suggested.
Review of the External Environment
Change and Impact
The GCC countries have attained steady progress within the last three decades to become significant global stakeholders in both the economic and political fields. Politically, the UAE particularly maintains strong political ties with more than 60 countries across Asia and Europe. The country is considered a leading force in the Gulf region and the Arab League. The UAE’s decision to back the US-led forces during the war between the US and Iraq also fostered the country’s position in the world’s political arena.
In terms of the country’s economy, the extremely robust financial growth witnessed until 2008 was occasioned by the balanced demand for oil in the world. Under the rule of President Sheikh Zayed, the country emerged from extensive poverty to become largely developed and prosperous. After Zayed’s death in 2004, his son, Sheikh Khalifa, followed in his father’s footsteps to maintain the country’s economic progress. The GCC economies are largely sustained by oil.
The recent drop in oil prices, accompanied by the global economic recession has had a significant impact on the political, economic, social, and technological environment of these countries. The fall in oil prices is expected to affect the geopolitics of the Gulf region. The strong ties that GCC members have with countries outside the Middle East depend on the need for oil. As oil prices fall, these countries may become less committed to their ties with the Middle East (Pappé 2014). This situation will likely weaken the influence of GCC countries in the global arena.
The social climate of the GCC has also been affected by falling oil prices. The increasing unemployment among educated youths has been linked to the recent uprising in the Middle East (Binzel 2011). In 2011, Bahrain, a member of GCC, experienced one of the most organized rebellions in the region.
While the nation is not a democracy, the current regime remains committed to supporting business progress through technology. However, the number of IT startup companies has decreased because businesses are experiencing difficulties raising capital due to the worsening economic environment. Overall, the IT sector, in particular, has been thriving, with numerous IT firms being set up. The UAE is one of the leading nations in the world regarding the number of IT startup businesses (Pappé 2014).
Businesses that operate in this region have also had to brace the difficult economic times, a situation that has led to low-profit margins or losses in some cases. In the height of the recession, Saudi Arabia responded by cutting its domestic spending from 21 percent to 15 percent of the GDP (Gause 2016). Other countries responded with similar measures. The UAE’s economy is more diversified (El Mallakh 2014).
It relies less on oil compared to other GCC countries. Nevertheless, the country’s fiscal status has suffered considerably from dropping oil prices. This trend is expected to continue into 2017 (El Mallakh 2014). One of the effects brought about by the ensuing oil market situation is the weakening of the UAE’s external environment. The country may encounter difficulties financing its fiscal deficits. Gause (2016) reveals that the Purchasing Managers’ Index in the UAE has recently gone down by two points. Nevertheless, the country’s economy is still expanding regarding other sectors such as manufacturing.
Potential Risks and Costs for the Region, Country, and Businesses in the Event of Change in the External Environment
Unemployment has been occasioned by falling oil prices. Many companies are not hiring new employees. Instead, they are choosing to speculate on oil prices. According to Gause (2016), Monster Employment Index (MEI) showed that employment rates in the UAE had dropped from 24 percent to 10 percent in the two months between September and November 2015. The trend is similar across all sectors of the economy.
The finding, which is not limited to the oil and gas sector, indicates the influence that oil prices have on the economy of the UAE. The financial sector has also suffered a major blow from the drop in oil prices. Kadhim (2013) asserts that UAE banks are experiencing a decline in profits. As banks register lower profits, they are likely to raise their lending rates to offer the high cost of funding their investments (Kadhim 2013). On the other hand, high lending rates imply that companies will avoid borrowing capital from banks, a situation that will lead to low investment rates. The net effect of these factors will be a slump in economic growth, which will cause further unemployment.
Potential Knock-on Effects
As observed earlier, the low prices of oil are already affecting the aspects of employment in the UAE. Companies are currently hiring fewer employees compared to how the situation was before the oil crisis. As the oil situation worsens, companies will need to cut their spending by laying off some of their employees regardless of the workload. Recruitment activities in the UAE have not been impressive in the past years. The situation is expected to become worse with the ongoing oil crisis (Pappé 2014). Hiring below the demand will affect productivity in many companies, including Emirates Airline, leading to even lower profit margins. As the economic environment shrinks further, some companies may be driven out of business or forced to relocate to other parts of the world.
The current oil situation has diminished tourism and the transit sectors. Tourism in the UAE depends on a thriving oil environment because many Emirati people work in the oil sector. As their wages become less, they will have less money to spend on tourism. A considerable number of employees will also lose their jobs, further compounding the situation. Overall, less money will be used for tourism. As a result, the country’s GDP will be negatively affected, leading to further unemployment in the tourism sector.
The tourism sector is a major revenue earner for the country that has a thriving hotel business environment. According to Pappé (2014), tourism is an important source of diversification for the economies of the GCC countries, particularly the UAE. Currently, tourism constitutes about 10.4 percent of the country’s GDP (Pappé 2014). Therefore, it stands alongside other major non-oil areas of the economy. Diversification is important for GCC countries. It is commonly understood that oil deposits in these countries will become depleted at some point in the future. Because these countries use revenue obtained from the oil trade to diversify in other economies, a drop in oil prices will mean less diversification, a situation that will open up the countries to economic uncertainties going forward.
The Aviation Industry
The UAE’s airline industry is partly funded by the government. As the government’s spending power diminishes due to the falling oil prices, this industry will experience underfunding. Underfunding will affect the operations of Emirates Airline, which has been distinguished as a luxury carrier (Wilson, Eckhardt & Belk 2015). Additionally, the spending power of people will be negatively affected at a personal level, thus forcing them to reduce their traveling expenses. In turn, this situation will reduce the demand for the airline’s services. The tourism sector in the country is also projected to experience reduced growth, thus negatively affecting Emirates Airline’s growth capacity.
Impact on Emirates as an Airline with Change in Environment
Point of View
The drop in oil prices will have various effects on the health of the airline industry, particularly, Emirates Airline. The airline is a government-owned institution, meaning that it gets financial backing from the UAE administration. A drop in oil prices will reduce the number of funds that the government extends to the airline. Emirates Airline has built its brand around delivering luxury services to its passengers. Such services require a large amount of money to sustain.
Therefore, a decrease in government funding will mean that Emirates Airline must rely on its profits to sustain its operations. Alternatively, the company may be forced to lay off its luxury services, which will then expose it to fierce competition from other airlines. Morrison and de Wit (2016) argue that without government backing, Emirates Airline would lose the competitive advantage it enjoys over other airlines.
One of the short-term impacts will be a reduction in the number of passengers who board the Emirates Airline. The decrease will be occasioned by deliberate efforts by customers to cut their spending. As a result, Emirates Airline’s profits will fall temporarily. The stalling of growth in the tourism sector will also be reflected in the low growth capacity in the airline industry. As a result, Emirates Airline’s profits will fall temporarily. The airline relies heavily on tourists, both domestic and those from the surrounding Gulf region, for its expansion. As more people cut their spending, the tourism sector will suffer a slow growth in the short run. This effect will then be transferred to Emirates Airline, which will experience a considerable drop in the number of passengers.
One of the long-term impacts will be a drop in profitability for the company. The drop will result from the reduction in business operations due to the dropping number of passengers coupled with the shrinking tourism sector. Consequently, Emirates Airline will have to cut the scale of its operations by reducing the number of employees. A smaller workforce would mean more workload for employees who are left behind. This situation will result in workplace fatigue.
Additionally, the company may be forced to minimize spending on employees’ bonuses and social security, thus leading to reduced employee morale. This state of affairs will then lead to underperformance, which will open up the airline to competition from other players in the industry. Emirates Airline also gets funding from listing its equity in the stock market. Low business operations may affect the price of its shares, thus leading to difficulties in raising capital. This case may be worsened by the fact that banks’ lending rates may be unfavorable, implying that Emirates Airline will have difficulty raising capital.
The overall impact is that the ongoing drop in oil prices will negatively affect the financial position of Emirates Airline. As a result, the company’s profit margin will drop, causing it to operate at thin profits or even losses. The government will not be in a position to reimburse the airline. This possibility means that it will have to resolve the crises on its own. One of the probable solutions would be to lay off some of the employees, regardless of the size of the workload.
Additionally, the company may need to reduce the number of airplanes making flights to different destinations as a way of cutting costs. As the airline’s position in the market weakens, other airlines, especially from Europe and America, will seize the opportunity to increase their operations in the region. The UAE is part of the Open Skies Treaty that allows unrestricted passage of airplanes into and out of territories of the signatory nations. Therefore, a weakening Emirates Airline would attract competitors to increase operations in the Gulf region.
Steps, which the Airline Company may take to minimize the Effects of Each Scenario
In creating an effective risk-management strategy, the first step is to comprehend the qualitative distinctions regarding the type of risks that organizations encounter (Hill, Jones & Schilling 2014). External risks emanate from the outside environment. Such risks are usually beyond the control of the organization. In this case, the drop in oil prices is an external risk for Emirates Airline. The approach required in managing external risks involves the identification of such potential risk, followed by efforts to mitigate them (Hill, Jones & Schilling 2014). Therefore, external risk management is concerned with determining what would be the worst-case scenario if the risk occurs.
One way that Emirates Airline can mitigate losses occasioned by the drop in oil prices is through investing in diverse industries. Diversification is a technique used by many companies operating in risky environments to safeguard their portfolio against potential risks. For instance, Emirates Airline may invest in the real estate sector, which has been experiencing dynamic growth in the UAE (Wilson, Eckhardt & Belk 2015). The airline should also adopt new routes to mitigate the expected loss of customers in its home country. Thirdly, the company should look for ways to minimize fuel consumption by its flights. This strategy will reduce the cost of operations, thus protecting the company from incurring losses.
Implications due to the Change in Demand
At the international level, the company will face stiff competition. For instance, without financial backing from the government, it will be unable to sustain its luxury style that has characterized its flights. This situation will expose it to challenges by competitors. At the regional level, the company will experience a slump in business operations amid a stunted growth in the tourism industry. Nevertheless, in terms of airline performance, the company will likely not experience competition from other regional players such as Qatar Airways and Etihad because these airlines will be battling with a similar scenario as Emirates airline.
Opportunities for the Airline
The fall in oil prices may present opportunities for different players. The airline itself may benefit from this drop since expenses on fuel will go down. Hence, the company can attract customers by lowering fare prices. Customers for their part will benefit from these lowered prices, thus enabling them to travel more in terms of their capacity. The tourism sector may also experience benefits since flight prices will be lower. As a result, more people will be able to travel. However, at the national level, no meaningful benefit would be achieved by the falling oil prices.
The UAE, just like all other GCC economies, relies on oil to sustain the economy. The recent drop in the prices of oil in the world market is affecting the UAE’s GDP negatively. Emirates Airline, which is an asset of the UAE administration, is also suffering from the new developments in the oil sector since the government has reduced its spending on the airline. The slow growth in the tourism sector due to the falling oil prices is also translating into low business for the airline. Nevertheless, the company may benefit from the drop in oil prices since it is likely to reduce its fuel expenses.
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Morrison, W & de Wit, J 2016, The inevitability of an unlevel playing field in civil aviation (in the US and elsewhere). Web.
Pappé, I 2014, The modern Middle East: A social and cultural history, Routledge, London.
Wilson, J, Eckhardt, G & Belk, R 2015, ‘Luxury branding below the radar’, Harvard Business Review, vol. 1, no. 1, pp. 26-27.