Low Cost Carriers in Dubai

LOW COST CARRIERS IN DUBAI 3

LowCost Carriers in Dubai

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Dubaihas grown with time to become a global city and a business andcultural hub of the Middle East. It is also a major transport hub forpassengers and cargo. Although the history of Dubai’s economy washistorically built on oil, it now flourishes on the western stylemodel of business. Tourism, Real estate and Aviation sectors havecontributed substantially while oil only contributes 2%. As at August2013, it was named as one of the best place to live in the MiddleEast. It had a population of 2,174,000. Currently, it is home toexpatriates and local Emiratis at a ratio of 11 to 1. This indicatesthat majority of the residents are expatriates. Dubai over the yearshas become synonymous with luxury and expense it is the mostexpensive city in the Middle East. In December 2013, it was selectedto host Expo 2020 following the footprints of other cities such asLondon and Paris. It will be the first city in the Middle East tohold the event. The event is expected to create over 270,000 jobs andis expected to raise the GDP by 2%. Dubai’s growth has been due toits location, which has made it an important regional port and animportant international trading hub.

Theemergence of low cost carrier sector has greatly been attributed bythe economic downturn of the 21stcentury. However, in 2013, Dubai’s economy started showing signs ofgrowth and development. The year saw the opening of Dubai’s secondairport, Al Maktoum international. Further, there has been anincrease in the international traffic in terms of cargo andpassengers.

Thereis different business strategies aimed to pursue differentobjectives. However, the strategies do not work equally well in thesame environmental circumstances. Businesses have to evaluate themost appropriate business strategy for their environment (Chapter 11slide 2). The first strategy was the no-frills approach by the lowcost carriers. It was aimed at making the airlines to survive the21stcentury economic downturn by offering low cost services and productsthat were becoming popular amongst the travelers. The pricingdecisions by the companies considered were meant to facilitate cheapfares for basic short haul services. The low cost carriers grew to13.5% of all air travel in the region. It was the second highestgrowth globally after the Asian market. The newness of the model inthe Middle East might be the major reason for this growth.

Thecompanies SWOT analysis as presented below shows that the regulatoryenvironment within which the companies operate is quite tricky. Dubaiis ruled as a constitutional monarchy. The Air travel, Emirates isowned and influenced by the government. The government tends to placesome kind of protectionism on its owned companies. This tends to holdback the progress and limits the extent of fairness in competition.When competition is limited, it is hard for innovation in anyindustry. Further, government protectionism may place somerestrictions towards the entry of new market participants.

Thepower of the buyer comes into play when there is an economic downturn. A weak economy means that travelers increasingly view low costproducts and services as the sensible option. The travellers cansacrifice comfort in favor of their budget. In addition, holidaymakers look for destinations that are closer to home and that aremore affordable. This has led to the development of the low costcarriers. The premium airlines were forced to make harsh cuts thatincluded removing on board perks and taking away traditionallyinclusive extras. However, these were items that the low cost carrierhad already removed or reduced as a part of their no frills approach.

Accordingto Porter’s five forces, the Aviation companies just like any othercompanies, experience threat of new entrants. Given the expectedincrease in demand, bigger Aviation companies such as the BritishAirways and fly 540 might get interested in the market.

Further,there is competition between Fly Dubai, and Air Arabia, Saudi basedNasair and India’s Spice Jet. In addition, indigo also flies intothe region. The SWOT analysis is depicted in the table below:

Fly Dubai

Air Arabia

Dubai world central

Wizz Air

Aljazeera Air ways &amp Nasair

Strengths

  • Government support from government ownership.

  • Support from Emirates airlines.

  • Capital due to government backing.

  • Large market in middle and North Africa.

  • Good corporate image from an international corporate responsibility program.

  • Large market in middle and north Africa

  • Large market in middle and north Africa

  • Large market in middle and north Africa

weaknesses

  • Poor management of the ,public sector

  • No government support

  • No government support

  • No government support

  • No government support

Opportunities

  • Expo 2020

  • Expected increase in passenger and cargo traffic

  • Increased technology due to smart city, Wi-Fi internet, M government initiatives to pay utility bills

  • Paying traffic fines by smart phones

  • Expo 2020

  • Expected increase in passenger and cargo traffic

  • Increased technology due to smart city, wifi internet, M government initiatives to pay utility bills

  • Paying traffic fines by smart phones

  • Expo 2020

  • Expected increase in passenger and cargo traffic

  • Increased technology due to smart city, wifi internet, M government initiatives to pay utility bills

  • Paying traffic fines by smart phones

  • Expo 2020

  • Success in the European markets

  • Expected increase in passenger and cargo traffic

  • Increased technology due to smart city, wifi internet, M government initiatives to pay utility bills

  • Paying traffic fines by smart phones

  • Expo 2020

  • Expected increase in passenger and cargo traffic

  • Increased technology due to smart city, wifi internet, M government initiatives to pay utility bills

  • Paying traffic fines by smart phones

Threats

  • Competition

  • Economic downturns

  • Government laws and regulations

  • Threats of new entrants

  • Competition

  • Licensing difficulties

  • Economic downturns

  • Government laws and regulation

  • Threats of new entrants

  • Competition

  • Economic downturns

  • Government laws and regulations

  • Threats of new entrants

  • Competition

  • Economic downturns

  • Government laws and regulations

  • Threats of new entrants

  • Competition

  • Economic downturns

  • Government laws and regulations

  • Threats of new entrants

Growthstrategies

Fly Dubai

Air Arabia

Dubai world central

Wizz Air

Aljazeera Air ways &amp Nasair

GROWTH STRATEGIES

Partnership with the government

New markets-Sharjah, united Arab emirates, Mohamed v International Airport,in Morocco and Alexandria airport in Egypt and other destinations in middle East, North Africa, Indian subcontinent and Europe.

Partnership with Dubai international airport

Partnerships with the European markets

New products- it was launching two weekly fights from Kuwait to DWC to complement its existing flights from dubai.

Low cost model

Low cost model

Low cost model

Low cost model

Mergers with emirates

New products through rebranding- reliability and safety. Corporate social responsibility in education and health care

New markets in Europe like Bucharest, Hungary, Kiev- it has launched an online visa application for the citizens of European countries travelling to UAE

Thereare two main directions for corporate growth. First, is the expansionof current businesses and activities and second is diversificationinto new businesses through internal business development oracquisition. (Chapter 2, slides 23-29). The Fly Dubai Company hasadapted to expanding its current businesses by ordering 50 of thevery latest Boeing 700 for 4 billion US Dollars. Five years later thecompany increased its flights to 800 a week, 300 pilots and 540 cabincrews. In addition, it has increased its destinations to more than 60across the region. It has also diversified into new business by theaddition of its business class services. Similarly, Air Arabia isrecorded to have grown significantly by increasing its flight size.It is also recorded to have spent 354 million US Dollars on a wholenew terminal on the sharjah international airport. The investmentwas to accommodate new business as a result of expected increase inpassenger traffic. In addition, it has also diversified by brandingits services as safe and reliable. Wizz Air growth strategy involvesexpansion of its operations to the European markets. This is also akind of diversification from the Middle East.

Accordingto the Boston Consulting Group growth share matrix, the companieswould fall into different segments of the matrix. The Fly Dubai wouldfall into the star segment. The segment is characterized with highgrowth rate and high relative market share. It is depicted by thecompany’s massive investment in new services and aircrafts. Similar is the Air Arabia, it has a substantial market share in theMiddle East, India and North Africa. In addition, it has a greataffinity for growth in terms of market share and fleet size. TheDubai world central is appropriate in the cash cow segment. Itsrevenues are used to fund other emerging markets. The company is usedto reduce pressure from its sister company the Dubai internationalAirport due to its expected increase in passengers (66 millionpassengers). The wizz Air could best fall into the question marksegment. It has used a lot of cash as an indicator that it is a highgrowth rate company however, its market share is not as big relativeto its competitors. The Jazeera Airways &amp Nasair best fits in thedogs section. The company has no indications of growth throughexpansion by investments. In addition, there is no indication that ithas a substantial market share relative to the competitors.

Growth rate (cash use)

High

Stars

Fly Dubai, Air Arabia

Question marks

wizz Air

Low

Cash cows

Dubai world central

Dogs

Jazeera Airways

High

Low

Relative market share

Thereason for the growth strategies is that the companies haveidentified and forecasted the expected demand, calculated theirprices and established the profits due to the company after venturinginto each growth model. Some of the methods of estimating demandinvolve surveying a number of customers and asking them how much of aproduct they are able and willing to buy at any given time. A morerealistic approach involves estimating the price quantityrelationships, in store experiments or multiple test markets. Thegrowth strategies adopted by each Airline has taken intoconsideration competitors prices and costs. The managers to thesecompanies have tracked and learned the prices, cost and relativequality of each competitor. (Chapter 11 slide 10).

Productlife cycle (chapter 10, slide 41, 42)

stage

Fly Dubai

Air Arabia

Dubai world central

Wizz Air

Aljazeera Air ways &amp Nasair

High

High

High

High

High

Growth

High

High

Moderate to High

Moderate to High

Moderate to High

Shake out

High

High

Low to Moderate

Low to Moderate

Low to Moderate

Mature

High

High

Low to Moderate

Low to Moderate

Low to Moderate

Theproduct life cycle builds insights on how decision making for theproducts and other elements of the marketing mix are likely toevolve. Many products do not go through the complete product cyclebecause they are aborted after an unsatisfactory product period. Thevarious stages in the life cycle present the threats andopportunities that will face the firm. By understanding the majorchanges, the firm can do a better job of setting forth its objectivesand formulating its strategies as well as developing its actionplans. (Chapter 10 slide 42).

Theaviation industries Brand strategies involves putting into practice anumber of brand decision-making strategies. Although the majorservice decisions by the companies is ‘low cost carrier’ the FlyDubai aviation company has broken away from the low budget model andintroduced its ownbusiness class service. It offers more personalflying experience. The company has branded its services intodelivering a unique passenger experience. The business class modelaims to develop customer experience before, during and after flying.It provides premium services from booking to priority check in,choosing meals and entertainment, assigning seats, priority luggagedrop off and collection, fast track through immigration, security,and boarding.

Thepricing strategies adopted vary from firm to firm. Fly Dubai hasapplied the skimming strategy. It involves setting high prices thatwill appeal to price insensitive customers. In September 2013, thecompany broke away from the traditional low cost budget to offer apremium service. The premium service was to attract the priceinsensitive customers. The barriers that surround the company give itthe advantage to pursue such a strategy. This involves theassociation with the government. It gives it the advantage of capitalto sustain the strategy. For example, the business class cabin isdescribed to be comprised of 12 spacious and comfortable recliningseats, made of Italian leather and a seat pitch of 42 inches. It alsohas a revolutionary in-flight entertainment system with a highdefinition touch screen of 12.1 inches. Further, the company was toreceive three new aircrafts fitted with business class by the end of2013. Wizz Air has adopted a similar strategy. It has establishedonline visa application for European customers as a way of promotingits services.

AirArabia has adopted the penetration pricing strategy. It hasestablished a differentiated defender strategy through branding itsservices as reliable and safe. This strategy is used to buy time inorder to make adjustments. Air Arabia’s vision is to become one ofthe world’s leading budget airlines in terms of profit margin,innovation, reputation and operational excellence.

ASimilar strategy is used by Dubai world central. Although there is nomuch promotion carried out. The pricing is designed to maximizeprofits that are used to fund other markets. It is said to berelieving off pressure from its sister company, the Dubaiinternational airport that expected 66 million passengers in 2013. Jazeera Airways and Nasair apply a similar strategy (Chapter 11,slide 6).

Researchershave identified various general competitive strategies, which arebased on the overall patterns, purpose, practice and performance indifferent businesses.According to Michael porter, the strategies togain and maintain competitive advantages include overall costleadership, differentiation and focus (Chapter 9, slide 4-8).

FlyDubai is using the cost leadership strategy, which is enhanced bysubsidies from the government. As a result, it can afford to providebusiness class services and buy extra aircrafts. Air Arabia uses adifferentiated cost strategy by building its brand to be related withreliability and safety. Wizz Air has applied the focus strategy. Ithas concentrated on the European markets by launching the online visaapplication to assist the travelers.

Thereare different targeting strategies designed to meet differentopportunities. Fly Arabia has applied the niche market strategy tomeet the needs of business class travelers. The business classservice is suited with luxurious fittings to meet specialized needsof comfort and entertainment. However, all the Aviation companieshave used the mass-market strategy mix of the low cost budget. It isa single service that is aimed to appeal to the largest number ofcustomers who care more about the budget of their travel. Thestrategy is also used during economic recessions when the travelersdo not care much about specialized servies. Wizz Air Company hasapplied the growth market strategy. The European market is a fastgrowth economy although currently, it is not very large. Wizz airaims to capitalize the European market as it grows. Through researchand development, it has identified the problems faced by the Europeantravelers in applying for visa. As a result, it has designed theonline visa application program to solve the problem and make iteasier. (Chapter 7, slide 5-9)

Inunderstanding the companies at the micro level, the opportunities dueto the companies are attractive when First, the company is able topossess something proprietary that other companies cannot easilyduplicate or imitate. The Fly Dubai’s association with thegovernment is a good example of such a phenomenon. By being connectedto the government, the company is shielded in many ways including thelack of capital. In the process of understanding marketopportunities, investors are advised to ask themselves whether theyhave people who can best execute whatever it takes to be successfulin the industry. The other question is whether they have the rightconnections. A connection with the government is the best partnershipespecially in dealing with such a sensitive industry. Further, on theissue of government, it argues that it is all about whom you know andnot what you know. This explains the importance of having the rightconnections in business. In addition, the chapter adds that thepeople who are best connected will be the ones who are best placed tochange strategy well before others know, the winds will have changed.Further, that having a well-connected team in place enhances theattractiveness of the opportunity. Besides, the company cannot belimited by licensing requirements as with other companies (chapter 3slides 11-18).

Second,the business has to develop superior organizational processes,capabilities, or resources that others will find difficult to imitateor duplicate. For example, the Air Arabia has established newservices that are branded with safety and reliability. This is partof perceptual positioning where by the company has influenced whatothers think about their services. In order to distinguish theirservices, the company has established corporate responsibilityactivities in education and healthcare. Through corporateresponsibility, the company is able to physically appeal to potentialcustomers. The current customers also view the company’s effort asa way to give back to the company and take a positive image towardsthe company. As a result, they become loyal to the company’sservices.

Inaddition, the Wizz air has new markets in Europe such as Bucharest,Hungary and, Kiev. It further has established online Visaapplications for the citizens of the European countries that arevisiting the UAE. These are processes that even if are not hard toduplicate, they are not easy either. The company will hence have anupper hand to the customers. Its growth into Europe is also asuperior business process that gives it an advantage over the othercompanies (Chapter 10 slide 33).

Theservice design decisions have implications on the levels for theservices. The aviation companies have the low cost budget as the corebenefit. However, they are differentiated with specialized additionsto the low cost budget feature. The Fly Dubai has augmented itsservices through the use of the business class service forspecialized needs of business traveler. Air Arabia has augmented theservices through branding. It has established the services as safeand reliable. The Dubai World Centralhas not augmented its servicessimilar to Jazeera and Nasair. The Wizz air services have beenaugmented to meet the travelers from Europe. Its main aim is flyinginto non-primary and less congested airports.

Similarto products, the various services can be described as convenience,shopping, specialty or unsought. The low cost budget service is aconvenience service. It is designed in such a way that it isaffordable by the average traveler. It has the highest number interms of sales and it is quite affordable by majority of thetraveler. This feature is used by all the aviation companies in thepursuit of tapping the increased traffic of cargo and personel ansspecifically into Dubai. However, the Fly Dubai Company has addedspecialty services. They are targeted to the luxury travelers. Theyinclude business people and dignitaries who have a taste of comfortand entertainment during their travel. Similar the Air Arabia hasbranded their services to specialty level by making them to beassociated with safety and reliability. Wizz air has specialized itsservices to include flights to less congested airports. Moreover, ithas improved the traveling needs for the Europeans by making theirvisa applications to be done online (chapter 10 slides 13- 19).