Emirates Airline: Penetrating the North American Market

Emirates Airline is known for going against conventional thinking when running its business. Thus far, this strategy has been profitable for the company. In November 2001, the airline announced that it would begin a 13 ? non-stop flight from Dubai to New York starting in June of 2003. However a postponement in the delivery of the Airbus A380-800 aircraft that would service the new route has caused a delay. This will be Emirates’ attempt at penetrating the North American market. In the current politically charged climate there is debate as to whether or not it will be profitable to expand service to this new route from Dubai to New York. Tensions between Washington and the Arab world create restraints as to when Emirates will be able to expand service. However, the main question currently facing Emirates is whether it should expand to New York at this point in time. Unlike many other airlines, Emirates sees no threat surrounding the tensions in the Middle East. The climate has been this politically charged for the past ten years. In fact, during the first Gulf War in 1991, Emirates Airlines was the only airline that did not cancel any of its flights. They continued flying to Kuwait when a majority of its competitors stopped. Emirates continued business as usual and picked up additional business from those airlines that downsized and stopped flights in the region. This strategy exemplifies how Emirates has gone against conventional thinking and come out ahead. Country Risk Analysis Middle East Region Overview The Middle Eastern region is characterized by economies that are over-dependent on oil; however, they differ on size, wealth, and political agendas. A few of the key players in this region include: Iran, Iraq, United Arab Emirates, Qatar, and Saudi Arabia. Of these countries, the United Arab Emirates is quite comparable in many aspects to its neighbors. The UAE and Qatar are not expected to suffer from as much government instability in the threat of war as the other countries. Iran and Iraq, however, have had their share of political unrest, which has drastically affected their oil exports and prices. To counterattack these effects, Iraq has put pressure on the other OPEC countries to increase oil prices and decrease oil exports to the US and Great Britain. As a result, the GDP of all Middle Eastern countries will decrease due to the heavy reliance of oil revenues in exports and as a percentage of GDP. While oil is what makes these countries wealthy, the UAE, Saudi Arabia, and Qatar enjoy higher GDP per capita over Iraq because of their political situations. Dictatorial governments in Iraq allocate funds to programs that will not necessarily aid the country in the long-run. Literacy rates of Saudi Arabia, Qatar, Iran, and the UAE have increased steadily over the past decade. This is mostly owed to government beliefs that educated citizens will 3 augment the status of the country in all aspects. All five countries export to and import from similar countries including; Japan, Italy, China and the US. The main export for these countries is oil and the main imports are machinery and equipment, chemicals and food. United Arab Emirates The United Arab Emirates (UAE) is located in the Middle East between Oman and Saudi Arabia, bordering the Gulf of Oman and the Persian Gulf. The country is slightly smaller than the state of Maine, which makes it a very small country within the Middle East region. The population of the UAE is approximately 3,480,000 people. The literacy rate for the UAE is 79. 2% for the total population above 15 years. When categorized by sex, men and women have comparable literacy rates, a rarity in the Middle East region. The population is predominantly Muslim (96%), with the remaining 4% of the population consists of Christians, Hindus and others. Although Arabic is the official language of the country, Persian, English, Hindi and Urdu are also spoken. The UAE is a federation state formed on December 2, 1971 and is composed of seven emirates. The emirates included in the UAE are Abu Dhabi, Dubai, Ajman, Fujairah, Sharjah, Ras AlKhaimah, and Umm Al-Qaiwain. Prior to the formation of the federation state, the UAE existed as the Trucial States that belonged to the British for the previous 150 years. The Rulers and the British signed a Perpetual Treaty of Maritime Truce in the 1850s that guarantees peace and protection from external threats. In exchange, the British had direct involvement in its foreign affairs and external defenses. When the British intended to withdraw from the Gulf in 1968, the rulers of the seven emirates came together and formed the federation state with hopes to increase their role in global politics. Economic Environment United Arab Emirates’ economy is heavily dependent on oil production. Abu Dhabi is the largest producer, followed by Dubai, and to a much lesser extent, the remaining emirates. Although oil’s contribution to GDP has been declining in the past few years, government revenue and the non-oil economy continue to be heavily reliant. GDP for the year ending 2001 was 67. 6(US$bn) and 21,000(US$bn) per capita, and 70% of government revenue resulted from oil production. Fluctuations in oil prices impact the growth and volatility of the UAE’s economy. The UAE is a member of the WTO, but has been slow to comply with its requirements for liberalizing trade and competition. The banking sector is closed to foreign investment and other ventures must be 51% owned by a local partner. The exceptions to these rules are in free zones, where 100% foreign ownership is permitted. The limitations on foreign direct investment deter the process of economic diversification. Abu Dhabi is the most resistant to opening its economy, but it has pursued private sector involvement to improve infrastructure regarding water and power. Dubai has chosen to focus its efforts on expanding its services sector by creating Dubai Internet City (DIC) and Dubai Media City (DMC), which are free zones where investors can retain 100% ownership. Dubai also allows foreign investors to own property and purchase shares in UAE listed companies. The UAE typically runs a budget deficit, and the 2002 budget projects one of Dh2. 17bn. Federal spending is expected to increase by 2. 2%, and revenue is expected to grow by 3%. Abu Dhabi, Dubai and the UAE Central Bank are the main contributors to the federal budget.