About Air Arabia LLC
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Air Arabia LLC was established as a fully fledged commercial airline of the United Arab Emirates on 3rd February 2003 by an Ameeri decree issued by His Highness Dr. Sheikh Sultan Bin Mohamed Al Qassimi, the Ruler of Sharjah and Member of the Supreme Council of the UAE. The Air Arabia fleet consists of two modern A320 aircraft, flying directly to the following destinations: Bahrain, Egypt, Iran, Kuwait, Lebanon, Oman, Qatar, Sri Lanka and Syria. This year Air Arabia plans to expand its fleet to four Airbus A320 aircraft, flying to more destinations.
In this case study (report) I will go throw the external environment to assess the viability of this operation using the Porter’s five-force analysis, as an advice manager for this company I have to use the forces influencing the decisions of the Air Arabia airline to enter the UAE Market with a unique strategy. Porter’s framework, known as the Five-Forces model, focuses on five forces that shape competition within an industry:
* The risk of entry by potential competitors.
* The degree of rivalry among established companies within an industry.
* The bargaining power of buyers.
* The bargaining power of suppliers.
* The threat of substitute products.
1. The risk of entry by potential competitors.
As we know that potential competitors are companies that are not in the market and may enter the UAE market which may have a big impact in the market. On the other hand, companies which are already operating in the market, which they will try not to loss their market share.
As we know that the UAE has stable market, and that was proven after the September 11 attack. Even more UAE market has dramatically growing in the tourism specially due to the festivals held during the year, and constructional development. In addition the huge number of expatriate working in the country, they use airplanes as their transport from and to UAE.
Some analysts expressed concerns about the UAE airline market being crowded with Emirates, Etihad, Air Arabia, Gulf, and others. Which defiantly will have a very high competitions between these airlines, but the Air Arabia situation is different because they are supported by the Ruler of Sharjah which is Member of the Supreme Council of the UAE.
Air Arabia has innovated new idea of very low operating budget (compared to other airlines) and low ticket price, which created a big share for them in the market at the time they started.
The Air Arabia company should maintain that using the same strategy (low price), but they have to finding ways to reduce the operating budget, more over the company have to introduce other and more services to the customer (coaches, snakes,…etc). In addition they have to continue to investing in advertisement in all kind of media domestic and worldwide.
So, I think that there is a very low risk, even that the UAE government regulations is allowing any business to be opened. Thus, does not mean the company do not need to study and analyses the market and the current operating companies because there is a lot could be learned from their experience in the market.
2. The degree of rivalry among established companies within an industry.
The degree of rivalry is low in UAE market, specially with the low price ticket strategy, other companies have an opportunity to raise prices and earn greater profits (income) but they are not willing to lower their prices.
So, that way Air Arabia airline has an advantage over other airlines because some of Air Arabia ticket price is around 10% of the other airlines ticket price. Which shows that there is no rivalry for Air Arabia in that category, but the lower price is lower profit for the company because low cost ticket does reduce the profit margin to minimum which mean in the long term the company will have problem in explanation, serves their airplanes, and even issuing shears to customer (because no ROI) which is a disadvantage.
In addition there are no exiting barriers for Air Arabia, which shows that the degree of rivalries are also low. So, I think that, the company should revise the ticket price and just increase it little by little until they reach reasonable price which is beneficial for both the customer and the company. Which mean the company should maintain the low price ticket because there is a big demand for low price ticket in UAE market. In addition there are some economic, strategic, and emotional factors that keep companies competing in an industry even when returns (profit) are low which this leads to excess capacity and price wars until one of the companies quit.
More over the company should do some research & development and market forecast for the customer demand and the excepted price before doing any further investment.
3. The bargaining power of buyers.
Customer (buyer) can be viewed as a competitive risk when they are in a position to demand lower prices from the company which may cause an increase in the operating costs.
Air Arabia has strategy is totally different and unique (low-cost ticket strategy), which is a good strategy because the number of expatriate in UAE is around 80% from the population where around 90% they use airplanes as their transport and most of these expatriate the have a low income which they defiantly will look for the cheapest air fear. So, I think that there is not a high risk of entry by potential competitors represents a threat to the profitability of established companies even throw that the government regulations is allowing to open any business in UAE but as we state that the Air Arabia is supported by the government of Sharjah (advantage).
In addition the Air Arabia could improve their service because UAE market have manly three type of customers Government, local (UAE nationals), and expatriate (non-local) which expatriate is the target of the Air Arabia. But the company could serve all the type of three customer, which they could speared the airplane to two level first economic class and economic class, thus because some customer (UAE nationals) would like to pay a little high price with some specialty in service offered to them (they like to be different). So, that insure a higher market share and a higher profit margin.
4. The bargaining power of suppliers.
Suppliers (airport services, fuel, cleaning, food, …etc) can be a threat when they are able to force up the price that a company must pay for its inputs or reduce the quality of the inputs they supply or delay the work for it, thereby reduce the company’s profitability. But in the case of the Air Arabia as we knew that the company is supported by the government of Sharjah, which mean there is not high risk form the suppliers because the company is owned by the ruler of the Sharjah, more over the Sharjah airport is will know by it service in the last 20 years and it the airport is servicing similar type of these airplanes which are use by Air Arabia (A320). In addition there are two near by major airport which could service these can of airplanes (Abu-Dhabi and Dubai).
5. The threat of substitute service.
Substitute services are those of industries that serve consumer’s needs in away that is similar to those being served.
Air Arabia as a supplier they have low treat of substitute service because they are the only company providing this kind of service at very low price which it is very difficult for companies to copy cat them, and in the long term there are not any intention for companies demotic and world wide going to try that kind of strategy until Air Arabia prove that this strategy is beneficial in the log term.
I conclude and recommend after going throw the five-forces model that the shape of the competition within the UAE airlines market, which give me a clear picture of the current and future situation of the Air Arabia, which I advice the management, to follow the strategy which they are planning to go with the UAE market.
Air Arabia has many advantages over other airline company, which could mean that the company could succeed in the business which the strategy they are implementing. The company should be aware of some disadvantage of this strategy because they will have a low profit margin which mean in the lone term they will have some problems in financing their operation.
So, the company should stick to the same strategy but modify some part of it, which is the company should rise the price in order to give a reasonable profit margin. In other hand the company should introduce other services to the customer, other destination, and improve the current services in order to attract other type of customer. In addition the company is currently having only two airplanes which they have to get fund to have an extra airplanes. Thus to increase the company (Air Arabia) profit margin because when a company have low price for a product or a service they have to sell them in a big quantity in order to have a high profit margin.
Finally, the Air Arabia company should think a lot and always about their prices, budget, operating expense and the future expansion?.
Important questions should be in mined wiled doing the research:
* What are the historical origins of the industry?
* What are the distribution channels?
* How dependent is the industry on other industries?
* How has the emergence of information technology (IT) changed the structure, membership, and economics of the industry?
* What kind of market structures prevail in the industry?
* Number and size of firms?
* Market share and concentration?
* Degree of conglomeration?
* Competition for customers?
* Price, product attributes?
* Ease or difficulty of entry?
* Explicit barriers to entry?
* Degree of service differentiation?
* How do firms react to one another in this industry?
* Rivalry, non-rivalry?
* Price Stability or Volatility?
* How fast do prices converge among firms?
* What markets do they serve (Local, regional, national, international)?
* How is IT used for linkages upstream (suppliers) and downstream (customers)?
* Do these IT-enabled arrangements constitute barriers to entry?
* What levels of research and development are required to be in this market?
* What are the typical debt levels in this industry?
* Is this industry characterized by margin or volume in terms of profitability?
* How is IT used to run the internals of the business?
* Do these internal applications provide competitive differentiation among industry members?
* What is marketing like in this industry?
* Outline demand and supply conditions in the industry?
* How stable is demand in this industry?
* Price Elasticity (short run and long run)?
* What does this imply for total revenues if the industry raises prices or lowers prices?
* What are the ramifications for marketing/advertising?
* Where should the industry be advertising?
* What are the effects of major substitutes and complements on your market?
* Supply Elasticity (Short-run and Long-run)?
* Stability of input flows? Stability of input prices?
* Course material (EMGT453).
Hamad Nasser Al-Rasebi 940002019 EMGT 453