Introduction
The success of any airline is determined by the market and economic conditions, as well as the strategies that an airline adopts to ensure competitive advantage (Doganis 2006). For example, the economic environment of the GCC region is reliant on oil price (Akoum et al. 2012). However, over the recent years, the price of oil has decreased considerably; a scenario that has had varying effects on the operations of many companies within the GCC region (Squalli 2014). One of the affected companies is the Emirates Airline, whose success and growth is attributable to the increase in the number of transit passengers and tourism within the country, as well as the growth of the region’s economy. The implication of this statement is that the decline in the region’s economic growth significantly impacts on the success of the airline in terms of reduced profit margins. On the other hand, the growth and development of the economy of UAE highly benefits the Emirates Airline. This is attributable to the fact that more passengers will travel; hence, high volume of sales will be achieved (Doganis 2006).
This essay provides an in-depth evaluation of the UAE’s national and international policy and planning issues in aviation with respect to the operations of Emirates Airline. More specifically, the paper highlights the strategies that the airline can adopt to reduce, as well as survive the impact of low oil costs.
Review of External Environment
The success of any business is greatly influenced by both the internal and external factors with regard to the concerned business and region (Squalli 2014). In this case, the focus is on how the drop in oil prices within the GCC affects the operations of Emirates Airline. Such influence can be understood through the examination of the potential change and PEST analysis.
Political
The United Arab Emirates has been politically stable for a long time. Such stability has been instrumental in the growth and development of the region given that people from various parts of the world and major financial institutions are attracted to carry out businesses in UAE (Akoum et al. 2012). The availability of a relationship-based system of banking in UAE plays a significant role in ensuring effective supply of funds to different businesses. In spite of this, the fall in the prices of oil, which is a major source of revenue in the country, would have detrimental effects on the political situation in the country. This is due to the fact that political interests resulting from the change in oil prices will affect the smooth operations of businesses instigated by the lack of enough money in circulation.
Economic
The economy of UAE has grown tremendously following the availability of various business opportunities in the region. Such growth has led to the development of job opportunities enabling over 60% of the population of UAE to be in employment. The country has a high level of Foreign Domestic Investment and advanced technology, which have been very instrumental in the growth of the country’s economy. One of the major contributors to economic growth in UAE is oil (Akoum et al. 2012). The decline in oil prices will have various impacts on the economic growth of the country. For example, industries that make use of oil in their production will highly benefit from reduced prices of oil. On the other hand, a decrease in the global oil prices can be highly influential in the reduction of the inflationary pressure associated with the importation of oil. However, in the case of UAE, which relies majorly on revenue from oil, such a scenario would have negative impacts on the country’s economic growth.
Social
The high economic growth in UAE has largely contributed to the citizens in this region having high spending power. For this reason, the region is open to various recreational activities such as sports, and tourism. UAE is multicultural which allows people from various parts of the world to work and live comfortably in the country. In addition, the region has been experiencing tremendous growth in population over the past years. Based on the current social state in UAE, reduced global oil prices will have significant impacts on the social aspects of the country (Ringbeck, Gautam & Pietsch 2009). Since UAE is an oil producing region, the decrease in oil prices will negatively affect the growth of the region’s economy; subsequently, the social aspects associated with the increasing population will strain the available resources.
Technological
The UAE has a large population that consists of mostly young individuals who are technologically knowledgeable. The Information and Technology industry in the region contributes greatly to the growth of the IT service sector, hotel and tourism industries. The rate of internet use in UAE is high in comparison to the case in Europe. Nevertheless, such conditions can change in the event of low oil prices due to the decreased level of the amount of income in circulation among the citizens (Ringbeck, Gautam & Pietsch 2009). This is attributable to the fact that the reduction in the price of oil has negative impacts on the growth of UAE’s economy.
With respect to the above review, it is evident that the decline in global oil prices will significantly affect a number of sectors in UAE (Akoum et al. 2012). The potential spiral effects associated with such changes include a decline in the growth and development of the region’s economy. In the case of the aviation industry, the reduction in oil prices will affect the interdependence of demand, supply and the industry’s growth capacity (Ringbeck, Gautam & Pietsch 2009). The supply of oil will be high following the reduction in its price, while the demand will be low. In spite of this, the aviation industry will be affected (Squalli 2014). For example, the reduction in oil prices will lead to the reduced cost of fuel implying that the aviation industry will have a high probability of growth. On the other hand, given the fact that low oil prices in UAE will adversely affect its economy, the aviation industry is likely to experience reduced sales volume.
Impact of the Fall in Oil Prices on Emirates Airlines
Volatile oil markets have negative impacts on the operations of airlines. For instance, if the prices of crude oil increase, the airline industry’s input cost gets lifted (He, Wang & Lai 2010; Ramcharran 2002). However, whenever the prices decrease, airlines experience a lot of problems. In the case of Emirates Airline, the change in the global oil prices is likely to have significant consequences. This is based on the fact that the success of Emirates Airline has been attributed to the growth and development of UAE’s economy (Doganis 2006). Reduced oil prices hinder the development of the region’s economy due to low revenue from the sales of oil. Such a scenario is instigated by the fact that oil production is a major contributor of UAE’s economy (Ramcharran 2002). Therefore, the profit margins of Emirates Airline will be affected by the reduction in the oil prices. However, the airline can benefit from the fall in the prices of oil because such a scenario will lead to reduced operational costs.
In the short run (3 to 5 years), the reduction in the prices of oil will have enormous effects on the operations of Emirates Airline. For example, the airline is likely to suffer some losses as a result of decreased demand within the aviation industry following a declining growth in UAE’s economy (He, Wang & Lai 2010). Significantly, over the short term, the airline will be forced to lower its airfares in line with the percentage decrease in the oil prices. Nevertheless, Emirates Airline will experience a huge boost in savings due to the low charges on fuel. In spite of this, there is a high expectation of competition in terms of fare in the long run following a fall in the oil prices. Such competition and the decrease in the prices of fuel will likely attract new players into the market; hence, increase the level of competition (Ringbeck, Gautam & Pietsch 2009). Overly, Emirates will suffer from the pressure to adjust its pricing structure, as well as the need to gain competitive advantage.
Proactive Steps that Emirates Airlines can Take to Minimize the Impact
As pointed out earlier, decreased oil prices will have adverse impacts on the operations and profitability of Emirates Airline. For this reason, the airline will be required to adopt effective strategies to minimise, as well as survive the impact.
One of the important steps for Emirates Airline to take is to reduce its fares; such an approach will be inevitable for the purpose of attracting passengers from different parts. This is based on the fact that reduced oil prices will have negative effects on the economy of UAE, as well as the living standards of its citizens (Elhiraika & Hamed 2002). In addition, Emirates Airline can introduce special fares to particular destinations according to the magnitude of the impacts brought about by the reduced oil prices.
Implications due to the Change in International and Regional Demand
The reduction in global oil prices will have significant effect on the demand for oil both regionally and internationally. Internationally, such reduction will be favourable for oil importing countries since they will obtain oil at reduced prices. However, oil producing countries will negatively suffer from such a decrease. As noted earlier, UAE is an oil producing region; thus, it will experience adverse implications following reduced oil prices (He, Wang & Lai 2010). Such impacts include high demand implying that the region will have low revenue from the sale of oil in comparison to previous years. Since the price of oil is expected to fall globally, UAE will experience a stiff competition from other oil producing countries, which would put pressure on the region to lower its prices further.
A review of the international state of affairs following reduced oil prices indicates that there is a low demand for oil brought about by the increase in the amount of oil produced globally. Such a case has forced many international oil producers to reduce their production schedules, as evident in the case of the U.S. shale producers. Reduced demand has negatively affected UAE’s demand, production capacity, and sale both regionally and internationally (He, Wang & Lai 2010). This has forced the region to adopt countermeasures aimed at lessening its high dependency on the revenue from oil. Based on this scenario, the performance of Emirates Airline will differ internationally and regionally. Internationally, the airline will be in a position to make high profits (Elhiraika & Hamed 2002). This is attributable to the fact that most non-producing countries will largely benefit from the drop in the oil prices. In addition, such drop will lead to high economic growth implying that the living standards of people in such countries will improve. In addition, international businesses and transportation sectors are likely to grow and develop.
Opportunities for Emirates Airline
The decrease in the prices of oil has had various impacts on critical aspects of the world. In addition, such scenario has greatly affected the operations of major companies including Emirates Airline (Elhiraika & Hamed 2002). In spite of the negative implications associated with decreased prices of oil, the airline has a number of opportunities to exploit for the purpose of reducing the negative impacts.
First, the income per capita in United Arab Emirates has been growing over the recent years despite the fall in oil prices. This is attributable to the diversification in the region in terms of revenue sources. As such, Emirates Airline can maximize its revenue by capitalizing on the growing income per capita in the region.
Secondly, several investment projects have been planned and initiated by the UAE’s government as evident in the development of Abu Dhabi and Dubai airports. Such projects are not only significant in attracting business people to the region but can also act as a suitable approach to increase the amount of money in circulation.
Thirdly, over the past years, the population of the world and that of UAE has grown tremendously. Such growth is a suitable opportunity for Emirates Airline and it comes at a time when there is a high expectation that the population of tourists in UAE will increase. For this reason, Emirates Airline has a resourceful target group in the midst of the turmoil brought about by the decrease in the global oil prices (Elhiraika & Hamed 2002). In addition, there are numerous aviation events that have been very instrumental in promoting the Middle East airlines. Such events have popularised the aviation industry of Middle East and the Emirates Airline in general.
Conclusion
According to the discussion above, it is evident that the change in the prices of oil will have significant consequences for UAE and the operations of Emirates Airline. It is expected that such a scenario would weaken the economy of UAE, reduce the demand of its oil and subsequently reduce the living standards of its citizens. In spite of this, Emirates Airline can survive the impacts of reduced oil prices by capitalising on available opportunities such as the aviation events in the region, growth in world’s and UAE’s population, as well as the rising per capita income in the region.
References
Akoum, I, Graham, M, Kivihaho, J, Nikkinen, J & Omran, M 2012, ‘Co-movement of oil and stock prices in the GCC region: A wavelet analysis’, The Quarterly Review of Economics and Finance, vol. 52, no. 4, pp.385-394.
Doganis, R 2006, The airline business, Psychology Press.
Elhiraika, A & Hamed, A 2002, Explaining growth in an oil‐dependent economy: The case of the United Arab Emirates, Rio de Janeiro, Brazil.
He, Y, Wang, S & Lai, K 2010, ‘Global economic activity and crude oil prices: A co-integration analysis’, Energy Economics, vol. 32, no. 4, pp.868-876.
Ramcharran, H 2002, ‘Oil production responses to price changes: an empirical application of the competitive model to OPEC and non-OPEC countries’, Energy economics, vol. 24, no. 2, pp. 97-106.
Ringbeck, J, Gautam, A & Pietsch, T 2009, ‘Endangered growth: How the price of oil challenges international travel & tourism growth’, In World Economic Forum, The Travel and Tourism Competitive Report, pp. 39-47.
Squalli, J 2014, ‘Airline Passenger traffic openness and the performance of Emirates Airline’, The Quarterly Review of Economics and Finance, vol. 54, no. 1, pp. 138-145.