Analysis of UAE Aviation Industry

Introduction

The United Arab Emirates (UAE) aviation industry occupies a highly valuable and respectable position in the global platform due to its high quality and effective service delivery to the diverse customers. It is the best among all the airline companies of the world and gives a tough competition to the United States (US) (Rapoza). The long-term economic growth of the country is largely dependent on the successful operations of the UAE based aviation companies (“Aviation is vital for UAE’s future.”). The aviation industry estimates to contribute nearly $53 billion to the UAE economy by the end of 2020 by emerging as a tough competitor to the leading aviation nations of the China and the US (“UAE aviation industry to contribute $53b by 2020.”).

The following section provides a detailed analysis of the UAE aviation industry. It has highlighted how the airlines operational activities got affected due to the varying economic and political conditions prevailing in the country. Moreover, it aims to determine the effectiveness of the present business model concerning the formation of strategic alliances as well as merger and acquisitions largely adopted by the leading players of the industry. 

Open Skies Agreement

The Open Skies Agreement in the UAE aviation sector helped in the development of competitive scenario thereby providing more service delivery options to the operating carrier companies. Moreover, it enhanced the overall flying destination of the UAE airline companies all over the world along with competitive pricing strategy. The agreement is highly considered for the development of Low Cost and Hybrid Airline Business in the aviation sector and a huge range of options for the passengers to select. It paved the growth of the aviation sector with an increased preference of consumer towards travel and tourism. The increased demand for air travel resulted in the adoption of innovative business principles by the operating carriers to earn significant competitive advantage over its counterparts. Innovation and creativity is widely witnessed in incorporation of technological advancements in ticket booking system as well as in providing services to the passengers. The Open Skies Agreement boosted the UAE airline sector with an increased preference towards serving the international passengers. The ME3 carriers of UAE has been identified as customer focused with the primary objective of serving the key and highly potential market place of sub-Asian and BRICS countries. The agreement helped in developing a model for political air service negotiations, which in turn helped the UAE carrier companies to explore themselves in the international space.

Big 3 Middle East Carriers Growth Strategy

The Big 3 Middle East Carriers commonly known as ME3 comprises of the three well-known aviation companies of the country. It comprises of Dubai based Airline Company Emirates, Etihad Airways of Abu Dhabi and the Qatar Airways originated in Qatar (The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). To overcome the perceived challenges currently being faced in the carrier industry the ME3 carriers have focused on leveraging partnership business relationships as a part of their disruptive growth strategy (The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). The Qatar Airlines has occupied a relative stake percentage from both the Latin America based LATAM Airlines Group and the IAG airline group of London. Moreover, it has also acquired nearly 49% of the Meridiana shares, an Italian based airline company (The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”).

The Abu Dhabi based Etihad invested vigorously to occupy a 22% stake over Virgin Australia (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). The sole objective of Etihad in this regard was to strengthen and retain its existing foothold over the American passengers through codeshare agreements with the leading airline service providers comprising of Colombia based Avianca and Air Canada. While both Etihad and Qatar Airways were busy in acquiring relative shares of the well-known aviation service providers of Europe and the US, Emirates incorporated several changes to its relative capacity deployment power all along its established network base. It had also entered into a codeshare agreement with the Panama based Copa Airlines. Emirates have also established partnership agreements with the Canadian low-cost airline service provider WestJet and the Malaysian Airlines (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”).

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The establishment of business relationships with a diversified range of airline service providers ensured breakneck growth opportunities to each of the ME3 carriers of UAE. The growth aspect of the airline service providers is largely due to their worldwide expansion to the global aviation marketplace (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). The growth strategy of the carriers has been identified as a two-fold aspect comprising of both inorganic and organic strategies. The organic growth strategy highlighted how the ME3 carriers expanded its service to a large number of destination countries through the adoption of competitive pricing policy and luxurious services over its foreign counterparts (Powley and Kerr). The inorganic aspect of the growth encompasses establishment of a large number of business partnership relationships in the global aviation marketplace. It comprises of establishing codeshare and interline business agreements with small sized airline service providers.

The growth strategy of the UAE operational ME3 carriers also entered into establishing higher order business relationships comprising of strategic business agreements, joint venture, merger and acquisition as well as several financial and equity investments with the primary aim of accelerating expansion initiatives (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). Emirates followed a selective approach in deciding its airlines business partners, Qatar has embedded itself within the airline ecosystem while the dense network developed by Etihad aims to overcome the relative discrepancies with the international firms (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”).

Factors Affecting UAE Aviation Industry

The UAE aviation industry predominated by the ME3 carriers faced severe economic, business and political crisis that emerged as a significant factor of hindrance to its uninterrupted global expansion. The economic instability due to the downfall of oil prices and the increased political instability due to war along with the travel ban for people from Muslim dominating countries of Middle East by the government of the US highly affected the flourishing aviation sector of UAE (Reed).

Travel Prohibition by Government of United States

The US government under the leadership of President Donald Trump had banned people from the seven Muslim dominating countries. Because of the imposed restrictions, Emirates Airlines had to change its usual rosters that consist of the pilots and flight attendants travelling to the US (Cornwell). Moreover, travelers were uncertain regarding their travel decisions, which was a direct threat to the revenue earning capacity of the airline company. The administration and operational units of Emirates were at stake due to the complexities faced in re-planning the entire program for the flights travelling to the US (Cornwell). The travel ban initiated by government of the US witnessed a severe downfall in the Emirates flight bookings by nearly 35% (Reed).

The travel ban resulted in the Abu Dhabi based Etihad Airways to refund a large number of passengers who planned to travel to the US (Townsend). To ensure that the flight operations are not affected by the travel ban, Etihad ensured that they complied with all the regulations imposed by the US. It allowed travel permits to those people from the banned countries to the US, who had a valid passport. Therefore, the company was restricting in offering its carrier services to a limited group of people from the seven banned countries by the US (Townsend).

Political Instability due to War in Syria and Iraq

The politically unstable situations due to the continuous war going in Syria and Iraq area serious matter of concern for the aviation industry Malek). The airline companies operating within and around the war zones are severely affected, the notable ones being the ME3 carrier of UAE. The UAE aviation industry felt the urgent need to re-route the travel path and avoid going over any war prone zones to ensure safety and security of the passengers on board. The airline companies are looking for new routes adjacent to the conflict zones with the primary objective of redesigning and enhancing the Middle East airspace services. However, it is difficult and costly to re-route the travel path. The airline companies were exposed to heavy traffic; moreover, the ticket prices took a significant leap. The airline industry felt an urgent need to increase the number of flights operating to avoid delays caused due to huge traffic to the passengers (Malek). Dubai based Emirates had to ensure that at least two flights operate within a time difference of an hour. Therefore, the war has largely affected the UAE aviation services because of which they had to remodel the entire operational modes to ensure safety and security of its passengers along with a high degree of service satisfaction (Malek).

Present Economic Condition

Seven years after the global economic breakdown has taken place, UAE is still concerned about its economic viability. The country believes that they are still in an unstable economic environment, which is one of the major factors identified to decline the oil prices. The subdued outlook towards the future economic prospects is widening the fiscal deficit in UAE to a significant extent (Maceda). The economic uncertainty prevailing among the country’s population is one of the factors for its retarded growth expansion. Moreover, the country is experiencing signs of economic uncertainty with the decreased oil prices. The consumers have cut down on their daily expenses with a purchase index of about 53.( Bouyamourn).

The economic conditions of UAE will therefore result in citizens looking for cheaper and inexpensive services with the primary objective to save money in response to adverse economic uncertainties in future. This makes it essential for the aviation firms to cut down their prices to ensure high degree of service attainment by the population of the country. This is because people will have a high tendency of getting attracted towards cheap products and services (Maceda). 

Instability in Oil Prices

The gradual decline in the oil prices caused a very minute impact on the Middle Eastern countries of Saudi Arabia and UAE (Diaa). The UAE based national oil manufacturing companies went on making profitable investments at lower oil price with a very few adjustments in their operational activities. Although the decrease in oil prices affected the supplier base of UAE, the national companies operated in full swing. 

The significant decrease in the oil costs has resulted in creating growth opportunities for the UAE aviation industry. It has been identified to decrease the overall airline overhead to nearly 20% (“Falling oil prices mean cheaper air fares.”). The ticket prices saw a significant decline, which resulted in opening avenues for the UAE based air carriers to emerge as a consumer-friendly service provider. The cash-trapped industry was gradually progressing towards gaining record-breaking profit with the decline in the fuel price by nearly two-third (“Falling oil prices mean cheaper air fares.”). The high fares associated with air travel saw a gradual decline due to the intense competition among the airline operating firms to occupy the highest percentage of customer attention and loyalty. The domestic airline travelers of UAE experienced a price drop of 14% in the fares (“Falling oil prices mean cheaper air fares.”).

The decline in oil prices is a major factor contributing to the upliftment of the low-cost carriers in UAE to operate both internationally and domestically amidst severe competitive forces in the aviation sector. The passengers enjoyed a high bargained flight fares while travelling to the popular US destinations of Chicago, San Francisco, Los Angeles and New York, where the competition is relatively stiff (“Falling oil prices mean cheaper air fares.”). Moreover, the reduced oil prices helped several airline companies of UAE to reduce their present debt and reinvest in upgrading service delivery infrastructures.

Alliances and Key Mergers in UAE Aviation Industry

The UAE aviation industry has adopted the strategy of forming alliances with foreign airline companies to overcome the adverse effects of the global recession that took place in 2009 and thus proceed towards a sluggish recovery stage (Durgahee). The aviation industry witnessed emergence of a large number of code share agreements and mergers. The airline companies of UAE have formed alliances with almost all the major and notable carrier firms of Europe. Qatar Airways was the first airline company from Middle East to join an alliance with Oneworld, the conglomeration of the leading airline service providers of the world. This alliance resulted in the development of a highly competitive business environment in UAE with Emirates and Etihad also proceeding towards the alliance business strategy (Durgahee). Dubai based Emirates has entered into a code share agreement with Australian flagship carrier Qantas and has developed business ties with TAP Air Portugal, a Star Alliance member of Oneworld. Etihad, the Abu Dhabi based second largest carrier company of UAE has established business partnership relationship with Air Berlin and holds a ownership percentage of 29% in the alliance (Durgahee). Etihad has entered into an acquisition business relation with Air Seychelles with a 40% share (Khan). The foreign airline companies were highly attracted towards the development of alliance business relationships due to the strategic geographical locations favoring air traffic flow both within and outside the Gulf region.

Perceived Benefits of Alliances and Merger in the Aviation Industry

The UAE based carrier companies have developed substantial transfer capabilities due to the strategic alliance business relationships with the leading airline companies of the world. This largely helped the airline companies of the UAE as well as their hubs to emerge as the key players in the global scenario in terms of both industrial development and future consolidation. The business tie-up between Etihad and Air Seychelles resulted in the government of both the countries to invest $20 million to the development of carrier services (Khan). Moreover, Etihad was selected as a business partner to uplift the carrier service of Air Seychelles in the coming years. This helped the UAE based airline carrier Etihad to occupy a relatively significant position in the global aviation marketplace. Moreover, the company’s ally with Air berlin was boosted when Etihad witnessed an increase in its stake holding capacity from only 3% to a significant 29% (Khan).

The business alliance of Qatar with the European carriers helped it to occupy a stake of nearly 35% over the leading all-time cargo operator, Cargolux (Khan). This resulted in the opening of many new and high potential business acquisitions to Qatar in Europe. Moreover, the decision taken by Qatar to enhance its existing stake by 10% in the Latin American (LATAM) Airlines Group and the 49% shares over Meridiana contributed to the significant increase in the company’s initial stake by 20% in the International Airlines Group(IAG) (“The Big Three Gulf airlines are leveraging partnerships for growth and disruption.”). The development of strategic alliance, merger and acquisition business relationship also helped Emirates to remodify its deployment capacity across its present network and helped in opening several new routes along with Copa Airlines, WestJet and Malaysian Airlines all over the world. The merger, acquisition and alliance business model has been identified as the significant contributor to the success of the ME3 carrier companies in UAE and in the global aviation sector. 

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Relativeness of the Merger and Acquisition Business Model

The UAE aviation industry is largely known for its merger and acquisition business strategy, which helped them in occupying a relatively larger portion of the global marketplace. The high competitive forces prevailing in the aviation sector results in imposing complicated transactions and massive implications of the global marketplace when a firm opts for establishing merger and acquisition business relationship with foreign carrier companies (Khan). However, the airline companies enjoy a substantial benefit from the complicated business transactions. The merger and acquisition business strategy followed extensively by the leading ME3 carriers of UAE resulted in providing them access to an already established marketplace in the foreign countries without getting much involved in starting from the scratch. Moreover, it helped the airline companies to achieve high operating margin, which resulted in boosting its overall revenue earning capacity.  

The business model followed by ME3 carriers of UAE in establishing merger and acquisition largely helped them in strengthening its power in the global aviation marketplace and exerted high competitive forces to the high-profile aviation companies of Europe and the US (Khan). The UAE aviation sector slowly upsurged its western counterparts in ensuring high quality service and satisfaction among the global passengers. Therefore, it is highly feasible for these UAE based carrier companies to follow the merger and acquisition strategy with the primary objective of occupying a leading position in the global aviation industry over the international airline competitors. An acquisition business relationship largely helped the carrier companies in getting access to many valuable assets like slots at busy and congested foreign airports. It would have been nearly impossible for the UAE based carriers to enjoy the privileges without establishing business relationships with the foreign carrier companies. Moreover, the merger relationship helped the UAE based carriers to emerge as a stronger and financially capable service provider to invest rigorously in uplifting fleets and service infrastructure (Khan). This business model is highly valued as it helped the carrier companies to establish its leadership position in the global business environment. The benefits experienced by ME3 carriers of UAE with their merger and acquisition business strategy highly favors the business model in the aviation sector.

Conclusion

The UAE aviation industry is of prime importance for the country’s economic upliftment. The country is predominated by the major ME3 carriers comprising of Emirates, Qatar and Etihad. All the three carrier companies of UAE are highly valued in the global aviation industry. They have contributed significantly to the development of highly competitive environment for the western counterparts. The UAE aviation sector is affected by a large number of factors, notable being the travel ban by the US government, present economic conditions and the decline in fuel prices. However, the alliance business strategy along with merger and acquisition with the leading international carriers has been significant to the country’s aviation service upliftment.

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