Economics Paper on Gulf Aviation Economy

Gulf Aviation Economy

Gulf Airlines are currently global leaders in aircraft orders and are reported to be the heaviest investors in the aviation industry in reference to airport infrastructure (Martini, et al. 2016). Gulf Airlines are making significant movements towards playing a primary role in making the region a global hub considering the increase in destinations as well as mergers made by other smaller airlines (O’Connell & Williams, 2015). Additionally, of the top five highest rated airlines, three come from the region, namely Emirates Airlines, Etihad Airlines, and Qatar Airways. From the above facts, it is evident that the aviation industry in the Gulf region is growing at a rapid rate and holds significant capabilities of being a multibillion-dollar venture. Despite the growth, not all industry players have gone through a similarly successful path. Saudi Airways once highlighted as the number one aviation player in 2007, is currently the third on the revenue list and the forth in reference to consumer preference. This paper gives an in-depth analysis of the Gulf aviation industry. This will include the market structure, external market analysis as well as internal company (Saudi Airlines) analysis that would aid the company to change their economic side

Discussion

Background

For years, the Gulf region has always been known for its oil power; of late, the region’s conflicts have altered this long global perspective highlighting the Gulf as an unstable part of the world. However, according to the World Bank statistics article of 2015 the region’s economy was ranked below the Asian economic market (Muhammad, 2016). The report by the International Air Transport Association (IATA) indicated that the Gulf region is currently the heaviest investor in the airport and airport amenities assets since 2014 (Wensveen, 2015). Additionally, the airlines of the Gulf are the current leaders in aircraft orders and flying destinations globally.  It is evident that there is an increasing potential in the aviation business at the Gulf consequently highlighting on increased competition from all the existing airlines.

A company report of 2007 highlighted that Saudi Arabian Airlines (Saudi Airlines) which is the Kingdom of Saudi Arabia national airlines flew 12 billion passengers to different destinations globally (Burton, 2016). Consequently, Saudi Airlines at that time was recognized as the leading carrier in the Gulf region.  However, a 2016 report by Martini, et al. (2016), indicated that the company was the third in revenue earning behind Emirates and Qatar Airlines and under great threat from Etihad Airlines.

Source: Market Update: The Big Three Gulf Airlines.

Gulf Airline Market Structure

The Gulf region aviation industry structure may be described as an oligopolistic in nature; however, not purely. The Gulf is also known to host a number of airline companies both flying locally as well as internationally; however, currently the largest market shares are covered by four companies (O’Connell & Williams, 2015)., The airline industry is service  with prices remaining inelastic for most times of the year; nonetheless, value for money is acquired through extra service delivery. For instance, according to Wensveen (2015), the emergence of Emirates as the number one carrier in the region is associated with its service delivery. This is a strategy similarly adopted by both Etihad and Qatar Airlines, which have developed new products such as new lounges to increase customer satisfaction (Davies, 2016). Additionally, it is known that entering the Gulf market is hard not because of trade restrictions but due to the huge capital investment. When the current packages provided by the carriers are taken into consideration it is clear that for any new entrant to have a stake in the market share the capital required will be immensely high.

Market analysis

PEST analysis

In order to understand the external factors that affect an industry it apparent to comprehend the political, economic, social as well as economic factors that are prevailing in the region at the time.

Factors Leading To High Growth in the Gulf

Political

Deregulation

Gulf States are known for their propensity to come up with deals that leverage some economies of the market (Obay, 2013). For instance, the skies agreements have made it possible for the carriers to have particular privileges that allow them to offer better products than their rivals do.

Intra-Gulf competition

It is well known that the independent states co-operate with each other in several capacities through the GCC doctrine; however, much has been documented about their personal competition.  According to Taneja (2014), the competition and the varied levels of conservatism as well as economic enactment have led to the existence of a dynamic political connotation that have favored the strategies of every airline.

Economic

Access to cut-rate capital. According to Kassem and Habib (2013), Gulf nations have access to significant cash reserves derived from oil as well as gas sales that have been done for years now. This hallowed the states to directly influence the growth of the aviation industry through building airports as well as other infrastructure indirectly by offering reduced cost financial assistance to carriers.

Lower operating costs

As stated above, Gulf airlines have access to low-cost capital as well as lower workforce costs than their rivals. Other than low-cost capital, there are reports such as that of Wensveen (2015), which indicate that the carriers receive fuel discounts. This goes hand in hand with tax exemptions, regressive labor laws, as well as growing workforce from government training institutions.

Geographic location

The Gulf region is well-placed to link up primary global population hubs. According to Martini, et al. (2016) the Gulf is located at the crossing point between Europe, Asia as well as Asia, and it links today producers and markets considering the growth of each of the aforementioned regions.

Social

Emerging market demand

The population in the Gulf that consists inclusive of the locals as well as foreign technocrats is increasing rapidly in reference to attaining sustainable middle class financial positions. Additionally, the region is strategically placed between emerging economic markets such as Africa, South East Asia, India as well as China and mature markets of Europe (Hanke, 2016). These factors highlight the increased number of clients that provide ample profit margins.

Technology

Aircraft technology

The newly developed aircrafts have made it possible for the Gulf hubs such as Saudi Arabia, Dubai as well as Abu Dhabi to compete directly the incumbent household name airlines. Davies (2016), states that the A380 airbus as well as the Boeing 777-300ER have reduced the cost per seat against the Boeing 747-400, a factor that is used by the Gulf airlines against their rivals.

Saudi Airlines recommendations.  

Below is an internal analysis of Saudi Airlines that provides an avenue to offer the best recommendation in order to change their financial positions.

SWOT Analysis

Strength. The company has along heritage that is linked to quality. In order to increase its competitive advantage it is necessary for its administration to use this heritage introducing new customer satisfaction products.

Weakness. According to Burton, (2016), one of the reasons why Saudi Airlines have lagged in the field is the increased bureaucratic management system. Additionally, the funding from the government is incomparable to the other lines such as Abu Dhabi or Qatar. There is an increased need to change the management to reduce bureaucracy as well as capital input through privatization.

Opportunities. The launch of a low cost subsidiary sister company in 2013 gave Saudi Airlines new opportunities for the incumbent company. There is the need to increase the amount of capital in the subsidiary consequently this will increase market share domination.

Threat. The biggest threat facing Saudi Airlines is in the form of rivalry with Emirates, Etihad, and Qatar Airlines. In order to eliminate this threat there is the need to increase the fleet with new generation aircrafts such as the A380 airbus and the Boeing 777-300ER.

 

 

Conclusion

The Gulf region has for years been known for its oil powers but recently it is associated with an unstable part of the world due to increased conflicts. However, the region’s economy has grown stability and has been highly successful over the years where other economies have crumbled. One of the successful branches of industry is airlines considering that three of the best five companies in the world are from the Gulf region. Despite this, Saudi Airlines that were considered to be the biggest player is currently the third in the region and may be considered under threat from Etihad airways. The subsequent cause is the variations in the environment in political, economic, social as well as technological aspects. For the company to grow, it is essential that the management should consider strengths, weaknesses, opportunities as well as the threats that face the company.

 

References

Burton, E. (2016). Business and entrepreneurship in Saudi Arabia: Opportunities for partnering and investing in emerging businesses. John Wiley & Sons Inc.

Davies, R. E. G. (2016).  Airlines of the jet age: a History. Washington:  Smithsonian Institution.

Hanke, M. (2016).  Airline e-commerce: Log on. Take off. Routledge.

Kassem, M. S., & Habib, G. M. (2009). Strategic management of services in the Arab Gulf states: Company and industry cases. Berlin: W. de Gruyter.

Martini, J., Wasser, B., Kaye, D. D., Egel, D., & Ogletree, C. (2016). The outlook for Arab Gulf cooperation. Santa Monica, Calif.: RAND Corporation.

Muhammad, A. A. M. A. B. (2016). Islamic finance and Africa’s economic resurgence: Promoting diverse and localized investment. Cham: Springer International Publishing.

Obay, L. A. (2013). Corporate governance & business ethics: A Dubai-based survey. Journal of Legal, Ethical and Regulatory Issues12(2), 29.

O’Connell, J. F., & Williams, G. (Eds.). (2015). Air transport in the 21st century: key strategic developments. Ashgate Publishing, Ltd.

Taneja, N. K. (2014). The international airline industry: Trends, issues, and challenges. Lexington, Mass: Lexington Books.

Wensveen, J. G. (2015). Air transportation: A management perspective. Farnham, Surrey, England; Burlington, VT: Ashgate.