Read the case on “Emirates: Connecting the Unconnected” and explain:

1.       The concept of Economies of Scale & Scope.

2.       How this has created competitive advantages partially shaped by the location where a firm is born?

3.       How a firm can enhance its original competitive advantage by carefully choosing new locations?

Ans 1-Economies of scale it is the decrease in average per unit cost of goods produced as number of goods produced increases.-

When Emirates used a plane like A380 on routes where traffic volume was increasing , according to cube square law increase in surface area leads to more than proportional increase in volume. So instead of plying two smaller boeing planes it used one big A380 to get people to the hub ie dubai and then transfer them to their various flights. What a bigger plane like A380 allowed emirates to do was lower flight specific fixed costs , fuel costs and increase its load factor thereby lowering its cost per revenue passenger miles . A 300 seat aircraft flying a given distance would be less than twice as costly as 150 seat aircraft for the same load factor , thus conferring economies of scale.

Economies of scope exist when when firm achieves savings as it increases the variety of goods and services it produces.

When the smaller planes( boeing 767 , boeing 737) were replaced By a380 on various routes , the smaller planes were freed up for use on other routes thereby emirates was able to increase the number of routes thereby allowing it to further decrease fixed costs associated with operations by increasing frequency of flights or opening up new routes .

Code sharing agreements with Jetblue in the US with a hub at New York jfk airport helped it build a feeder network and get passengers from states it would not have been able to serve and therby triple daily DUBAI-JFK services.

Cargo services being offered can help dubai become hub for goods and people alike using existing resources.

Economies of scale and scope in case of emirates arise due to various other factors-

a) Extent of market-Since emirates is based on the hub and spoke model with Dubai being the hub. Dubai’s proximity to population centres with one third of world population living within four hour range of the city and two thirds of the world population living within eight hour range of the city. This kind of location allows it to have significant cost savings arising due to greater geographic density of customers.

b) Economics of density-Economics of density occur because of spreading of flight specific fixed costs or it is economies of scale along a given route .The cube –square rule states that if volume of vessel increases by a given proportion the surface area increases by less than this proportion. In the case of emirates use of planes with large load factors like A380 allowed it to achieve lower cost per revenue passenger mile because capacity was expanded without comparable increase in costs. For example in airports such as London Heathrow with allocation of five daily landing and departure slots a380 was used to maximize passenger traffic.

c) Purchasing power- Its ability to influence Boeing by guaranteeing demand for new aircraft allowed it to get extended range aircraft to cater to entire set of new cities. Due to its purchasing power it was better positioned to be able to get Boeing 777 and a380 aircraft before its competitors due to it receiving industry discounts for bulk orders. This also allowed Boeing which kept three kinds of aircraft to ramp up supply to relatively untested routes .Whenever it wanted to increase capacity it replaced a330 for a 777-330 ER freeing the a330 for a new destination. This route management where it kept adding new services to existing routes which was possible due to availability of aircraft helped it disperse fixed costs for existing operations.

d) Advertising- emirates sponsored sports teams of sports most popular in the countries they wanted to target .It thus enjoys lower advertising costs due to higher advertising reach .

Ans 2- The economies of scale and scope coupled with location where firm is born i.e Dubai confers certain comparative advantages to emirates-

1. Dubai’s location in the Arabian Peninsula between Europe, Oceania, Asia and Africa placed it at the nexus of global transit routes.

2. One third of the world’s population lives within 4 hour flight of the city and two thirds of the world population lives within 8 hour flight of the city. This left emirates based in Dubai better placed to tap untapped BRICS markets.

3. Relative distance from congested airspace allowed it to connect flights at any time of the day allowing for 24 hour operations.

4. Relatively Good weather (although plagued with occasional fog and general heat) as compared to European counterparts where rain and snowstorms caused delays in American and European airspaces.

5. Favourable weather conditions such as jet streams when taken advantage of by Flex Tracks an in air routing system helped reduce over 3800 tons of fuel on emirates daily flights.

Ans 3-

Its original strategy of expanding routes by testing for demand had worked out well and should be done by keeping in mind the routes complementarity to the hub and spoke network which had conferred it a competitive advantage .The new locations need to be such that it provides the company with a first mover advantage and identify new network potential to feed into the hub system , thereby allowing it to operate in environments where there are fixed demand for international travel and thereby capture steady growth. The company should also not hesitate in making larger investments(A380) in areas which can confer it economies of scale and scope as it will in the long run help in penetrating markets. Regulatory approvals and traffic rights to countries with restrictive aviation policies would also be critical factor in its expansion.

To continue tapping undeserved markets, Emirates needs to continue to focus on market research and emerging markets. As the global economic powerhouses shift fuelled by

demographic changes, patterns of trade, continuous updating of data regarding opportunities in the emerging countries is a must .It has to emphasis on aggregating demand from various macroeconomic trends and gain from structural changes arising from shifts in flows of exports and imports between countries.

In order to help improve the congestion arising from high footprints at Dubai airport, it needs to find strategic ways to expand and develop a new airport base for smooth service.