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Assignment Research Paper

Course of study: International Tourism & Marketing

Topic: Singapores and Dubais aviation-based transformation: Singapore Airlines & Emirates growth models

Submitted by: Working period: Deadline for Submission: Lecturer:

Judith Kloeg 3rd Semester 06/12/2013 Dr. Anita Zehrer

Article Key Findings

According to Lohmann et al. (2009) deregulation and the growth of air transport networks allowed former low-populated places such as Dubai and Singapore to become major international tourism destinations. Singapore as well as Dubai have used vertically integrated strategies to transform their aviation hubs: they coordinate the activities of their airlines, airports, tourism enterprises and authorities to provide incentives for passengers to visit and have thus become established as major tourist destinations.(Lohmann et al. 2091, p. 205). Lohmann et al. (2009) analyzed the interactions of the airlines, airports, governments and tourism authorities of both Dubai and Singapore. According to Lohmann et al. (2009) Singapore and Dubai developed their destinations with a special emphasis on the air transport related institutions and actions. Three critical institutions involved in any air transport centered development are airlines, their airports, and national governments. Both destinations represent incorporated approaches to tourism strategy through leveraging their geographical location and growing their air transport infrastructure. This is supported by Tugores-Garca (2008, p. 106), stating local government and corporations might promote the growth of airlines operating the airport as a hub in order to ensure a service with higher frequency and lower travel time.

1.1

Singapore

According to Lohmann et al. (2009) Singapores government structure is characterized by high involvement in many companies through shareholdings. This highly centralized control structure was reinforced by a web of interlocking directorships (p. 211). Although the government started to partly privatize its holdings, a slow cautious privatization process takes place. This is due to the economic success of its state owned companies, their instrumental character and their strategic importance. Singapore Changi Airport is the countrys only civil airport and has the capacity to serve approximately 64 million passengers yearly. This modern airport provides facilities for efficient operations for SIA. Noteworthy is that of all revenues, 60% is accounted for by non-aeronautical businesses indicating the shift to more consumer2

based tourism sectors. Since then, the airport has intensified its efforts to set up attractions and commercial activities. Furthermore, Changi airport and Singapore Visitor Centres cooperate to encourage transit passengers to spend time in the city.

Lohmann et al. (2009) propose several aspects which enable and support the growth of SIA. Firstly, its advantageous location is mentioned as an major enabling factor. Due to this, high travel demand is ensured through residents nationals from neighboring countries such as China, Malaysia and India (p. 210). In other words, its proximity to large source markets. Next to that, an increasing number of guest workers and foreign experts made Singapore their home. All of the before ensure the stability of travel demand on many routes. Furthermore, Lohmann et al. (2009) mention SIAs monopoly position, providing further opportunities for growth. In several important markets to and from SIA home base, SIA has a monopoly position. Currently, SIA operates up to 36.2% of all flights at Changi Airport. Out of the 161 destinations connected to Changi Airport, SIA serves 57 and has a monopoly on 23 of them.

Further, SIA is an early adopter regarding new technologies and innovation. For instance, the early adoption of the Airbus A380 which allows SIA to grow its passenger numbers. The successful execution of SIA with regard to its corporate product differentiation strategy, guaranteeing high quality standards and service, further enabled growth. Finally, Lohmann et al. (2009) mention SIA is a member of global airline alliance Star Alliance, as part of their growth strategy. Star Alliance is the world's first and largest global airline alliance, currently consisting of 28 members. SIA continuously attempts to expand its route network. 1.2 Dubai

Dubai is a sheikhdom ruled by the Maktoum family (Lohmann et al. 2009, p. 209). Within the United Arab Emirates, it is the second largest emirate. As oil is forecasted to be exhausted in approximately 20 years, Dubai is actively developing its travel and tourism industry to compensate for this. Lohmann et al. (2009, p. 209) argues key to understanding the economy in the Gulf region is its Islamic history and culture as well as the status and role of the Maktoum family. The design and realization of long term

projects is enabled through the absence of a fully democratic system, which results in continuity of governance.

According to Lohmann (2009) Dubai International Airport (DXB) operates in a highly competitive environment with regard to transfer as well as local traffic. Nonetheless, DXB is one of the worlds leading airports. Current capacity equals 22 million passengers a year, but this number is growing fast. Similar to Changi Airport, DXB has followed a strategy of supporting its home carrier by establishing a strong market position htrough providing a comprehensive and reliable service quality (p. 210). Importantly, Lohmann et al. (2009) notices the difference in the amount of transit passengers and non-transit passengers is increasing, whereby the former is stable. This reflects the growing importance of Dubai as a destination, rather than a transit point or hub (p. 210).

Lohmann et al. (2009) propose several aspects enabling and supporting the growth of Emirates Airline. First of all, in the start-up phase, Emirates received an one-off payment through government funding. As a result, the addition of two aircrafts per year for the next 15 years could be realized. This acceleration of fleet expansion was a major factor in enabling EK to grow. A further aspect enabling Emirates to continuously grow significantly is its low operation costs. First of all, labor costs are slightly more than half of other carriers due to cheap guest workers employed in ground handling, maintenance and catering. Secondly, fuel, being the major cost element of all carriers, can be slightly cheaper acquired due to proximity to oil production and refining facilities.

Next to that, Emirates has a very strong negotiation position with its suppliers, Airbus and Boeing. As aircraft deliveries usually take a long time, an airline is truly advantaged by guaranteed rapid deliveries. Emirates is enabled to grow by the outperforming its competitors on this aspect. Same holds for Emirates monopoly position on twenty-five out of the total of seventy-five flights it operates. Another aspect enabling the growth of Emirates according to Lohmann et al. (2009) is the fact that EKs owners also own DXB airport and govern the regional aviation policy. Therefore, policies concern aviation can be easily bended or created in a way that suits Emirates. Besides, landing charges are extremely low just like traffic control
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charges, reported to be less than 50% of their major European rivals. Further, EK grows their the adherence of a product differentiation strategy, aiming at the top end of the market. The corporate strategy of product differentiation entails a company offering unique products that are widely valued by customers (Bakiev, 2012). EK stands out through its high level of service and innovativeness, highly valued by its customers.

Furthermore, the geographical position of its base airport, DXB, provided EK with great growth opportunities. According to Lohmann et al. (2009) Dubais hub is well positioned for Europe-Asia travel being equidistant between Northern Europe and Southern Asia. Above all, its geographical position allows Emirates to grow through adhering to a aggressive expansion strategy. Originally focusing on West-East traffic patterns, EK extended towards the South-East including destinations in Australia and New Zealand. Next to that, EK connected to Africa, ending up having a leading position in many African markets. EK continues to expand heavily, currently expanding to the west, including New York, Houston, Toronto and Sao Paulo in its route network. This expansion strategy is an market development strategy. According to OConnell (2011) Emirates has been pushing into new markets whi le expanding its existing operations.

An important aspect of this strategy is the typical build-up pattern of a destination. Lohmann et al. (2009, p. 210) explains EK always enters the market with one daily flight, and through increased demand builds up the route with larger aircrafts (A330s to B777s) and then higher frequencies. The increased frequency is necessary to attract higher yield business travelers. This orchestrated approach of EK is enabled through its technological possibilities and Dubais geographical location. It is now able to reach every point in the world non-stop, benefiting and actively leveraging the very open bilateral regimes in its home country (Lohmann et al. 2009, p. 210). Their hub-and-spoke (HS) network structure allows them to grow in this manner.

Growth Strategies

The aim of this paper is to discuss the findings of the article in relation to current growth theories. The research paper analyses and described three institutions airlines, their airports and national governments- and their inter-relations. However, it does so to be able to explain so-called air transport-centered development. Therefore, this paper elaborates on the growth of airlines. Growth strategies instead of growth models are featured in this paper due to the small amount of details available concerning the development of the featured airlines disabling the use of growth models. A growth strategy is defined as an organization expands the number of markets served or products offered through its current business or in terms of new businesses (Bakiev 2012, p.12). Possible outcomes of a growth strategy may be for example be an increase in market share, profit or company size.

2.1

Singapore Airlines: Alliance Formation

An airline alliance is defined as any collaborative arrangement between two or more carriers involving joint operations with the declared intention of improving competitiveness and thereby enhancing overall performance (Morrish and Hamilton 2002, p. 401). Joint operations usually covers the routes, code sharing, shareholding and franchising. Alliance formation is an viewed as on inorganic or external growth option and can be seen as an merger and acquisition activity (Morrish, Hamilton, 2002). Strategic alliances are increasingly perceived as strategic weapons for competing within a firm's core business (Harrigan, 1987). According to Ortiz (2004, p. 12), the purpose of strategic alliances is to gain access to the capacity and/or capability of another firm for purposes of extending products, markets, processes, of function served. In other words, it provides a mechanism for extending scope. Global alliances are a strategy for the development of international airline networks and network growth often pursued by legacy carriers. An international strategic alliance provides its members with a rich international route portfolio at a marginal costs that would be difficult to reach through organic growth (Morrish and Hamilton 2002, p. 403). The growth of airlines international networks, and the use of collaborative strategies for this purpose, has to be interpreted as a strategy of airlines to improve their profitability to by exploiting new revenue sources while reducing
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marginal costs (Tugores-Garca 2008 p. 44). Hence, Oum, Park and Zhang (2000) argue incentives that propel airline alliances are among others expansion of seamless service networks, increased frequency of service and increased market power. The economies of scale allow a decrease in unit costs and a increase in network size (Tugores-Garca, 2008). Airline alliances mainly comprise type I and type III carriers within a global growth strategy, type I being a medium costdifferentiated service level carrier with global geographical coverage and a hub and spoke network, like SIA (Augusdinata and de Klein, 2002). Furthermore, Global Airline Alliances provide members with a opportunity to build a diversified portfolio of destinations. Augusdinata and de Klein, (2002) outline the benefits by emphasizing the flexibility of this organizational form, its rapid growth potential and the assurance to provide a world-wide network within which member airlines can offer seamless global service. However, Tugores-Garca (2008) also argues although alliances can contribute to develop code shares in an airlines network, joining an alliance might be a restraint for pursuing growth strategies, a view subscribed by the Gulfs global connecters, including Emirates. Namely, an increasing number of members will increase the probability of network overlapping and therefore some airlines might be faced with constraints to growing their business. Additionally, an negative effect of global airline alliances as a growth strategy is the fact its growth is determined by the regulatory frameworks and competitive issues in the countries where allied carriers are based (Tugores-Garcia 2008, p. 87). Nevertheless, according to Morrish and Hamilton (2002) strategic alliances are seen as a strategy for growth since global expansion is constrained by restrictive air services agreements. Moreover, currently, out of the 20 largest airline groups in the world, 18 are member of one of the three Global Airline Alliances, SkyTeam, oneworld and Star Alliance, and this amount is growing (Tugores-Garca, 2008).

2.2

Emirates: Market Development

The Ansoff matrix (1957) defines four main corporate growth strategies under which market development, as shown in figure 2. Market development is an internal or organic growth strategy and entails taking existing products or services and selling them in new markets. The objective of this strategy is to cultivate new market
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segments

(demographic,

geographic,

psychographic)

for

existing

products.

Concerning the scope, the numbers and type of markets served increase (Ortiz, 2004). Ansoff does not make an distinction between regarding new market between customer segment or geographical expansion, argues Nlke (2009). In the case of the airline industry, the factor new market constitutes rather geographical expansion.

Airlines pursue international expansion through market development as a means to diversify risk, seek for larger returns than their domestic market offers, and benefit from economies of scale and density (Tugores-Garca, 2008). The creation of diverse routes by airlines between disparate points constitutes a strategy to manage possible adverse circumstances in a specific location. Geographical expansion, or a strategy of internationalization, facilitates this diversification as it means that a company is not dependent on a sole market for its survival. There is a reduced risk of financial distress as their exposure to economic downturn in a a particular region or economy is limited (Tugores-Garca, 2008). According to the CEO of Emirates Airline & Group, Sheikh Ahmed bin Saeed Al Maktoum, Emirates is currentl y in a concentrated and sustained period of global expansion, announcing the launch of nine new destinations in 2012 (Routes Online, 2012). Emirates continuous to set ambitious growth targets concerning passenger traffic, size of fleet, seat occupancy and destinations (Aviation Consulting, 2006).

The way in which geographical expansion is conducted, depends on the network strategy adopted. Airlines may adopt either fully-connected (FC) or hub-and-spoke (HS) network structures (Flores-Fillol, 2007). The network strategy that Emirates adopted is the latter. Network strategy is an integral component of an airline strategy (Gillen 2005, p. 49). The choice of network will reflect the business model the carrier has chosen. (Gillen 2005, p. 50). EK adheres to the hub-and-spoke network configuration as it satisfies the product values of its main target group, business travelers (Gillen, 2005).

List of References

Agusdinata, B., de Klein, W. (2002) The Dynamics of Airline Alliances. Journal of Air Transport Management, vol. 8(4), pp. 201-211 Bakiev, E. (2012). Strategic Management Chapter 9. Zirve University. Retrieved from http://erlanbakiev.weebly.com/ [November 18] Brtzel, C. (2006) Aviation Consulting. The impacts of Emirates Growth Strategy on the Europe-Asia Market. Retrieved from www.bruetzel.com/bruetzelams2006.pdf [November 18] Flores-Fillol, R. (2007) Airline Competition and Network Structure. Retrieved from http://www.webmeets.com/files/papers/EARIE/2007/339/Networkpaper.pdf [18 November] Gillen, D. (2005) The Evolution of Networks with Changes in Industry Structure and Strategy: Connectivity, Hub-and-Spoke and Alliances. Research in Transportation Economics. vol. 13, pp. 49-73 Harrigan, K. (1987) Strategic alliances: Their new role in global competition. Columbia Journal of World Business, vol. 22 (2), pp. 6769 Morrish, S.C., & Hamilton, R.T. (2002). Airline alliance who benefits? Journal of Air Transport Management, 8, 401-407. OConnell, J. (2011). The Rise of the Arabian Gulf carriers: An insight into the business model of Emirates Airline. Journal of Air Transport Management. Vol. 17, 339-346 Ortiz, L. (2004) Chapter 4 Business Strategy Formulation and Implementation. Retrieved from www.drluisortiz.com/PPT/smch04.ppt [18 November] Oum, T., Park, J., Zhang, A. (2000) Globalisation and Strategic Alliances the Case of the Airline Industry. Elsevier Science, London. Routes Online (2012) Emirates Airline Reveals Network Expansion and Route Capacity Growth. Retrieved from
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http://www.routesonline.com/news/29/breaking-news/155570/emirates-airlinereveals-network-expansion-and-route-capacity-growth/ [18 November] Tugores-Garca, A. (2012). Analysis of Global Airline Alliances as a Strategy for International Network Development. Massachusetts Institute of Technology. Retrieved from http://dspace.mit.edu/bitstream/handle/1721.1/75853/821869736.pdf?sequence =1 [18 November]

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