BPL 5100 - Business Policy

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For each case analysis, you should answer the following questions about the focal company in the case. Be sure to use/apply relevant concepts or frameworks that have been covered thus far in the class. (a) What factors have enabled the company to deliver strong performance in the past? (b) What are some of the important issues confronting this company? What is/are the cause(s) of these issues? What external developments and/or internal actions might have caused these issues? (c) If you were taking over as CEO of the company at the end of the case, what courses of action would you pursue to address these issues? Explain how you would implement these, how they would address each issue, and what potential risks may exist. CASE 12 EMIRATES AIRLINE IN 2017* Within three decades, Emirates Airline went from a small start-up to one of the world's biggest carriers measured by international passenger mileage. Started in 1985, the airline deviated from the strategy of most other airlines to use its position between the U.S., Europe, Africa, and Asia to con- nect flights between distant pairs of cities such as New York and Shanghai or London and Nairobi. Tim Clark, the firm's president, referred to these as "strange city pairs." No air- line has grown like Emirates, whose expansion qualifies it to claim the crown of the freewheeling sultan of the skies. Its strategy of flying large number of passengers all around the world would have been difficult without the introduction of Boeing 777 long-range planes and Airbus 380 superjumbos. In particular, Emirates has managed over the years to radically redraw the map of the world, trans- ferring the hub of international travel from Europe to the Middle East. Dubai, the hub of Emirates, which currently handles over 80 million passengers each year, has become the world's busiest airport for international passengers. A new terminal, the largest in the world, was recently built at a cost of $4.5 billion just to accommodate the almost 240 Emirates aircraft that fly out to 145 destinations around the world (see Exhibit 1). Recent developments, however, such as the drop in bil prices and the growth in terrorist attacks have led to a decline in demand. Many companies, particularly in the Middle East, have been cutting back on travel for their employees, reducing the premium revenue that Emirates has been generating from first and business Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion. Copyright 2017 Jamal Shamsic and Alan B. Eisner. EXHIBIT 1 Top Global Airlines There are several rankings of the world's airlines, but a few have consistently been rated highest in service over the last five years. These are listed below in no particular order. Started Main Hub Destinations Fleet 108 SINGAPORE 1972 63 Singapore Hongkong CATHAY PACIFIC 1946 161 102 EMIRATES Dubai 1985 1960 THAI Bangkok ASIANA 1988 Seoul ETIHAD 2003 Abu Dhabi EVA 1989 Taipei AIR NEW ZEALAND 1940 Auckland 106 GARUDA 1949 Jakarta 119 QATAR 1994 Doha 146 ANA 1952 Tokyo 1934 Johannesburg SOUTH AFRICAN VIRGIN ATLANTIC 1984 London QANTAS 1920 Sydney 118 273 LUFTHANSA 1953 Frankfurt EXHIBIT 2 Performance Highlights Year Ended, 31 March Passengers Flown (thousands) Profit or Loss (AEDm) 2005 12,529 2,619 2006 14,498 2,652 2007 17,544 3,339 2008 21,229 4.451 2009 22,731 2,278 2010 27,454 3,565 class passengers. Growing fears about terrorism have led passengers to cut back on international travel and to reduce connecting through the Middle East. This has led Emirates to switch from the A380 to the smaller Boeing 777 on some routes. The largest U.S. airlines have alleged that Emirates, like others such as Etihad and Qatar, have received subsidies from their government. These subsidies have, according to these claims, provided Emirates with an unfair advantage. Tim Clark, the president, has responded to such charges by insisting that his carrier has never received government subsidies or obtained free or cheap fuel. The airline has always disclosed its finances, used international auditors, and posted regular quarterly profits (see Exhibits 2 to 5). In fact, according to its financial statements, Emirates has shown profits for the last 27 years. "We are confident that any allegation that Emirates has been subsidized is totally without grounds," Clark declared. In fact, Emirates claims that it has worked hard to achieve its leading position by offering onboard amenities, like bars and showers on its aircraft, which other carriers find frivolous (see Exhibit 6). Beyond this, it points to the high standards of service from its crew that speak many lan- guages and come from many countries. Emirates' service manager, Terry Daly, employs an inspiring quote: "I may not remember exactly what you said. I may not remember exactly what you did. I will always remember exactly how you made me feel." 2011 31,422 5,443 2012 1,813 33,981 39,391 2013 2,839 44,537 3,254 2014 2015 2016 5,893 49,292 51,853 8,330 Source: Emirates Airline. EXHIBIT 3 Income Statement (United Arab Emirates Dirham) ates Dirham Consolidated Income Statement for the year ended 31 March 2016 2015 Revenue 83,500 Other operating income 1,544 Operating costs Operating profit (76,714) 8,330 220 (1,329) 86,728 2,091 (82,926) 5,893 175 Finance income Finance costs (1,449) Share of results of investments accounted for using the equity method 142 152 Profit before income tax 7,363 4,771 Income tax expense (45) (43) 4,728 Profit for the year 7,318 193 Profit attributable to non-controlling interests 173 Profit attributable to Emirates' Owner 7,125 4,555 EXHIBIT 4 Balance Sheet (United Arab Emirates Dirham 2016 2015 ASSETS Non-current assets 82.836 80,554 U17 522 Property, plant and equipment Intangible assets Investments accounted for using the equity method Advance lease rentals Loans and other receivables Derivative financial instruments Deferred income tax asset 2,580 494 87.752 83,627 Current assets Inventories 2,106 9.321 Trade and other receivables Derivative financial instruments 1,919 8.589 342 3.488 97 Short term bank deposits Cash and cash equivalents 7,823 12,165 31.427 119,179 27,735 111,362 Total assets EQUITY AND LIABILITIES Capital and reserves Capital 801 801 16 Other reserves Retained earnings Attributable to Emirates' Owner (1.179) 32,287 31,909 27.253 27.886 Non-controlling interests 496 32,405 28.286 Total equity Non-current Babes Trade and other payables Borrowings and lease abilities 202 12.06 Deferred revenue Deferred credits Derivative financial instruments Provisions Deferred income tax liability 513 40,345 1.596 1090 440 3,762 1650 207 521 1589 48.250 R1595 EXHIBIT 4 Continued 2016 2015 Current liabilities Trade and other payables 27,037 27,770 Income tax liabilities 35 Borrowings and lease liabilities 9,260 5.382 Deferred revenue Deferred credits 1,316 139 737 1,244 49 2 Derivative financial instruments 38,524 Total liabilities 86,774 34,481 83,076 111,362 Total equity and liabilities 119,179 EXHIBIT 5 Cash Flow Statement (United Arab Emirates Dirham) 2016 2015 Operating activities Profit before income tax 7.363 4,771 Adjustments for: Depreciation and amortisation 8,000 Finance costs - net 7.446 1,274 (132) (152) (Gain) / loss on sale of property, plant and equipment 1,109 (367) (142) 21 733 Share of results of investments accounted for using the equity method Net provision for impairment of trade receivables Provision for employee benefits Net movement on derivative financial instruments Gain on sale of investments accounted for using the equity method Employee benefit payments (534) Income tax paid (12) (585) (62) (168) (2,234) 454 Change in inventories (68) (213) 194 Change in receivables and advance lease rentals 14,105 13,265 Change in provisions, payables, deferred credits and deferred revenue Net cash generated from operating activities Investing activities Proceeds from sale of property, plant and equipment 6,535 3.478 2016 Additions to intangible assets 2015 (157) (10,269) Additions to property, plant and equipment Investments in associates and joint ventures (12) Acquisition of a subsidiary, net of cash acquired (374) 19,504) (19) (23) 665 231 128 (2,361) Movement in short term bank deposits Finance income 266 168 115 (6,411) Dividends from investments accounted for using the equity method Net cash used in investing activities Financing activities Proceeds from loans 1.213 Repayment of bonds and loans Aircraft finance lease costs Other finance costs Repayment of lease liabilities Dividend paid to Emirates' Owner Dividend paid to non-controlling interests (1,703) 1918) (294) (4,055) (2.100) (118) (7,975) 2.215 (622) (951) (341) (5,628) (869) (68) (6,264) Net cash used in financing activities Net change in cash and cash equivalents 590 3,7696 8,393 Cash and cash equivalents at beginning of year 7,800 Effects of exchange rate changes Cash and cash equivalents at end of year 12,165 8,393 EXHIBIT 6 Service For Premium Passengers On Emirates A380 Offer 1,600 channels of in-seat entertainment Serve Cuvee Dom Perignon, 2000 champagne Serve Iranian caviar Serve gourmet cuisine prepared by chefs of 47 nationalities Offer largest selection of premium wines Use bone china by Royal Doulton Use specially made cutlery by British design house Robert Welch Provide Bulgari-designed amenity kits Feature a stand-up bar Offer two on-board walnut and marble design showers Launching a Dream The roots of Emirates can be traced back to Gulf Air, which was a formidable airline owned by the governments of Bahrain, Abu Dhabi, Qatar, and Oman. In the early 1980s. the young sheikh of Dubai, Sheikh Mohammed bin Rashid al Maktoum, was upset by the decision of Gulf Air to cut Flights into and out of Dubai. He responded by resolving to start his own airline that would help build Dubai into a center of business and tourism, given the emirates lack of significant oil resources. The sheikh recruited British Airways veteran Sir Maurice Flanagan to lay the groundwork for the new air- line, which he bankrolled with $10 million in royal funding He placed a member of his royal family. Sheikh Ahmed bin Saeed al Maktoum, to the top post. At 26 years old, Ahmed bin Saeed had just graduated from the University of Denver in the US. Since he had not held a job before, the young Only for first-class passengers. Source: Emirates Airline. sheikh looked to Flanagan in order to figure out how to run pioneered the concept la suite in first class with its launch the airline. of the A340 back in 2003. With its SO AS , the world However, the speculator growth of Emirates can be attrib bireestjeiner, Emirates is able to offer 14 dclausite uted to Sir Tim Clark, who was handed the critical task of each with a vanity table, closet. 23 inch TV screen and cleo route planning. He recognized that about two-thirds of the tronic doces that seal shut for to u s world's population was within eight hours of Dubai, but the first class passengers also have access to two con Tirm lacked the aircraft to take advantage of its location. This mous spa showers a first in the industry. An cuntas began to change with the arrival of more advanced mat her who w first dass id "To walk to the A3 , to beginning with the introduction of the Boeing 777 in 1996, have an average size bathroom, a seven minute shower, full on to the Airbus A380 in 2008. The long range of these ai Size hath towels and your own attendant is pretty ama craft allowed Emirates to develop routes that could ink any ing. All premium class passengers both in first and two points in the world with one stop in Dubai business class have access to a hig, circular lounge with From serving 12 destinations in 1988, Emirates was able horseshoe shaped standup her in the center for which to expand at an amazing rate, particularly after it started Emirates forfeited a number of business class seats dding Boeing 777s to its feet after 1996. The carrier con tinued to grow even through the recession that started in Grooming a Special Employee 2008, taking possession of more new aircraft than any other competitor. "We operated normally. We put on more aircraft Each year, Emirates holds Open Days in more than 140 We carried more passengers," said Mohammed H. Maar cities across 70 countries for the purpose of attracting new Senior vice president of the carrier's airport services. recruits to join its elite force of 18,000 flight attendants from 140 nationalities who speak more than 50 languages. They are not attracted by the starting salary, which is only about Providing the Ultimate Experience $30,000 per year, or to the free room and board that comes Emirates strives to provide the best possible experience to with it. They are excited about the possibility of joining an its passengers in all sections of its aircraft. It was the first conic brand which encompasses people around the world airline to offer in-flight viewing in the back of every seat. The airline offers a vast noexpenses pared crew train That seems pretty normal for long haul airlines now, but ing program, where for seven weeks, each new recruit moves It wasn't then," said Terry Daly. A caravan of flight atten through different departments with specialists in various dants, who are fluent in a dozen languages, pass up and areas. Emirates carefully trains all its employees, from those down the aisles, providing service with a smile. Daly, who who check in passengers to those who serve them on their maintains the highest standards for all in-flight services, is planes. Only about 5 percent of the applicants make it through known for having once fired eight service supervisors on the selection process. The low acceptance rate pushes people Mingle day when he discovered that the flight attendants that with diverse backgrounds to compete in an American Idol they had supervised had deviated from his precise instruc style brainsand beauty contest for a chance to travel around Lions on how to respond to requests from passengers. the world as a member of an Emirates cabine From its start, Emirates has also been known for the qual. The exterior of the Emirates' stateoftheart training lity and selection of food that the airline provides, even totacility resembles the fuselage of a liner Inside, everyone passengers in the back of the aircraft. The catering division pays particular attention to the flight attendants, who must is one of the world's biggest, a multifloor mane of monorails, make sure that everyone on the aircraft receives the highest cameras, vast warehouses of wines and liquors, multinational level of service on every single flight. This is particularly chefs slaving over steaming pans, kettles, grills, stretching as important for a carrier whose flights are of long duration Tar as the eye can see along with the latest in robotics, all because they serve destinations across all continents which del maltrato Emirates planes cach By the end of their training the newcomers have been day. It's about making sure the culinary offering is abso Instructed in aspects of posture, etiquette, safety and evac utely first class across the airplane." said Daly tion. There are strict Standards for the color of the lipstick But Emirates has always tried to push further and fun the shade of the hair and even the style of the lingerie, ther on the service and amenities that it provides to its According to a recent report, the crew, who are 75 percent premium-class passengers. Included with a Business Class women have an average age of 26 years, compared with ficket is a limousine ride to and from the airport, personal an age of over 40 at US airlines. Their weight is carefully Assistance with the check in process, and use of one of its monitored their makeup mandatory reapplied regularly 30 worldwide lounges. One of 600 multinational and mult and wed pregnancy is not allowed. Everything musta lingual members of a welcome team called Marhah, Arabic well with the pinstripe khaki uniform, the color of sand with for welcome," help all first and business-class passengers White scarfs billowing like enoties Women must adhere Llear all formalities upon departure and arrival to certain hairstyles that the crowning Hooded hat Over the years, as Emirates has moved to larger and work with. "When walking through an airport terminal Jarger aircraft, it has found ways to enhance the exper sually a Call Me If You Can movie moment with passen ence of its premium passengers during flight. The airline pers all turning their heads said one of the execut Like everything else, Emirates goes over the top in what Chasing Tomorrow? it calls N ow, the Arabic word for stars, by including moti- Even as Emirates has been trying to set itself apart from vational team building exercises in its training program Travel writer Christine Negroni, who participated in one of other carriers by enhancing the customer experience, it is these, described the experience that the new recruits typi facing new challenges. It is trying to attract tourists to Dubai to replace some of the connecting passengers that it is losing cally go through. It is a combination of a customer service because of the wars in the Middle East and terrorism there experience and a come to Jesus rally, highly produced like a Hollywood spectacular. If you had told me that Disney pro and elsewhere. It is cutting back on its additional orders for duced it, I wouldn't doubt it. By the end of the day, they are the Airbus 380 at least until passenger levels rise again whipped into a frenzy of feeling What can I do for Emirates At the same time, many of its competitors have been trying to improve on their offerings, particularly for passen gers who are willing to pay a little more Airlines are fight Communicating to the Masses ing with each other to attract this more upscale segmentas In spite of the extra touches and amenities that Emirates the higher fares allow them to increase their profits without can provide for its passengers the carrier discovered having to add capacity. Singapore Airlines, for emple, from focus groups that their name was not well known in trying to beat all competitors by providing a truly enhanced many parts of the world where they were expanding the premium economy section will offer wider seats with realized that they needed to create a message the could more recline, a cocktail the more d age space and use to develop their brand among consumers that would sleek 13.3inch high definition screen the largest in its inform them what to expect from Emirates. This mes class Passengers will be offered stateoftheart b ecame sage could also be used to motivate existing and potential celling headsets and hundreds of channels of entertainment employees to rally behind the airline and work to deliver and they will be offered more options on a menu that will on its promise be designed specifically for the premium economy class In its usual style of pushing for the best, Emirates sum, Emirates faces its biggest challenge from its other moned the world's top 10 advertising agencies to Dubai UAE-based rival. Etihad, which announced an improve to compete for a massive international advertising cam- ment to the first class site that Emirates pioneered 12 years paign contract. Strawberry Frog. an advertising agency ago. Etihad introduced with grand bravado, a three-room, that had recently started operations in New York City, was $21,000 one-way Residence and nine $16,000 one way one one of the firms vying for the contract. Its founder. Scott room First Apartments, complete with Savoy Academy Goodson, had read an interview with Tim Clark, the presid trained butter and private chefs, on its A380 flights. First dent of Emirates, shortly before this gathering of the adven offered on flights between Dubai and London, the service tising agencies. "And in that article, he was talking about is to be expanded to fight between Dubai and New York his vision, that he wanted Emirates to be a global company and Dubai and Sydney and wanted to make the world a smaller place by bringing Some industry analysts have questioned the ability of people together," said Goodson." Emirates to deal with these challenges. Joe Brancatelli, a These comments inspired Goodson to come up with business travel writer, recently stated "I could make the the idea of "Hello Tomorrow, which allowed his firm to case that Emirates moment has passed Emirates was the clinch the contract with Emirates. These words became no trendy airline three or four years ago. In a recent meeting just the theme for and campaign but a new way to think to announce the latest performance figures for the line about the airline. Through the use of powerful storytelling Emirates Chairman and CEO Mis Highness Sheikh Ahmed Images, and music, the message portrayed Emirates not just bin Saeed Al Maktoum brushed way these concerns asa carrier that delivered a superior experience but asa ca over the years we have maped to come up with alyst for connecting a new global culture of shared aspira new products, the young chairman responded. tions, values, enthusiasm, and dreams. In his conversation with Tim Clark, Goodson said: "Ad campaigns are feeting! ENDNOTES The power of a movement is that it can change habits and L Mail Seal y metothem ...whi le rally millions." Summer 2014 The Strawberry Frog team spent 18 month at Emirates headquarters educating employees, making them foot sol mal March 2015 diers in this movement or campaign. In the early spring Summer 2014 of 2012, the "Hello Tomorrow" brand was launched, a un IN .277 I . p. 277 versal message in myriad languages in 150 countries. In 16 .11. television ads, an Emirates steward pushes his drink cart 7. I . p. 277 as a mammoth A380 airplane seems to be literally built Ind.. around him, its various parts and personnel coming from Ind.p.27. countries spanning the globe, providing proof that the air line is a truly global enterprise ILI