Industrial Relations Pressures of Saudi Arabian Airlines - Case Study Example

Running head: INDUSTRIAL RELATION Name Course Date Instructor Industrial Relations Pressures of the Saudi Arabian Airlines Introduction Saudi Arabian Airlines is the biggest Middle East region carrier carrying over 20 million passengers per year. The airlines are a complex unit that serves the larger Saudi Arabian Kingdom with commercial and public service responsibility. It also caters for the demands related to Royal and VIP flights coupled with religious travel (Hajj and Ummrah) while at the same time operating on a global market network spanning about 90 destinations. In the early 2000s Saudi Arabian Airlines was chosen by the government for privatization in an effort to render support to the division of the Saudi’s airline into specific business areas. The government of Saudi Arabia also decided to transform the airline’s Information Technology system by Engaging partners such as KPMG in installing relevant methods that were workable to manage the entire portfolio of aligning infrastructure and business processes of the airline such as: Management of program issue, risk and scope, Management of Program Interdependency, Management of program Financial control and contract, Business quality assurance and Program Communications. Low cost air travel began in the region in 2003 when Air Arabia started its operations and other companies in the GCC followed suit. Saudi Arabia alone had two low cost/budget carriers then (nasair and Sama air) and considering the large presence of expatriates in the GCC there existed a great potential for low cost carriers which increased their market share value through an increase in passenger volumes from about 1% in 2003 to about 8 % in 2009. The same applied to the Saudi Arabian market which followed the same patterns of growth over the same period. Saudi Arabia airlines carried about 21.5 million passengers in 2010 with an estimated 22.5 million projection for 2012. Industry estimates are such that the markets share for low cost carriers has also risen significantly. When it comes to real volumes, nasair whose operations date back to 2007 was able to realized about 0.8 Million passengers in 2008. But despite the existence and growth of large numbers of passengers, the industry still faces lots of challenges today and will continue to do so for many years into the future; for instance in 2010, Sama air announced that it was going to suspend its operations having recorded substantial financial losses of an estimated $260million which made it impossible for the airline to maintain its fleet of six plane. Though the airlines operations were not large scale (about 160 flights a week to about 10 destinations, it had plans for the next three years of buying over 50 Airbuses. Industrial relations pressures The Saudi Arabia Kingdom has turned out to be a challenging one in as far as operations are concerned and due to a combination of factors from various quarters among them government agencies and private agencies. There exist regulatory issues coupled with operational costs which have led to hampered growth and profit. Low cost airlines have had issues of expanding internationally too due to traffic rights and other restrictions since the kingdom is yet to sign an open skies agreement with the EU (Group, 2010). Though Saudi Arabia has great oil resources, the country is facing the same challenges today as it faced in the early 20’s. There has been limited change. Labor markets have suffered due to over-dependence on foreign labor which is cheap which has affected productivity in most industries including the Airline industry. Governance indicators are still weak with accountability and the rule of law still low. The country increased in its public spending in the early 20’s in an effort to distribute their oil resources but the plan proved unsustainable due to volatility in oil prices. Monetary policies have remained a bit too conservative and are unable to make any lasting impression on the domestic front. According to Corby (1998), Saudi’s over dependence on oil had had diverse effects on its airlines. In the recent past, oil prices have loomed in the very shadows of this very industry and a recovery agenda seems to be more of a dream that a reality. The Middle East will take a long time to return to normality and there is sufficient anxiety since the situation seemed to be on the verge of being extended indefinitely. The tragedy however was that the situation tended to push the dollar higher causing even higher cost increases in most currencies. This led to jet fuels rising up close to a tipping point for airline profitability since the market was not able to sustain higher prices any longer. Therefore, on one side are high oil prices, which could be an advantage for an oil based economy like Saudi Arabia, while on the other hand are high jet fuel prices leading to higher fare prices in the airline industry causing a major relapse to the industry with slow business and tourism flows and less flight volumes (Corby, 1998). By December 2010, IATA had predicted a slipping trend in the industry’s profit volumes which was a reflection of weak traffic with an origin in the developed countries such as the US and Europe. Flexible jet fuel efficiency programmes are very crucial today with a central focus on the price factor. A lot more can also be done in relation to volume fuel consumption to aid in restoring the Saudi Arabia airlines industry’ glory. Changing oil prices especially of an upward trend can be met by a parallel shift in pricing since airlines tend to review their operational networks by reducing capacity or redirecting it, and even by completely cutting off some routes. And this is what has been happening in the Saudi Arabia Airlines Arena causing serious problems in the industry (Corby, 1998). It is clear that Saudi Arabia, cannot continue to lean on oil prices and should strive to develop an economy based on merit and this calls for a strong and steady commitment on the part of the government (diversifying their economies which tend to be extremely rigid, addressing low productivity and labor market setbacks, developing the non oil private sector which has been in its all time low from time immemorial and improving the capacity of the administrative and public sector institutions) without waiting for time when crisis arises like it has done in recent years. Saudi Arabia Airlines therefore face urgent pressures to reform their current economic and social model just like any other sector needs to, but this will take time since reform be they related to labor or measures of diversity will need time for their impact to surface and they are also very painful in terms of investment and compromise. Meanwhile Saudi Arabia Airlines continue to struggle with issues of policy within and without and barely struggles to get by (Corby, 1998). Public spending has been expanding in Saudi Arabia and has been used over the years to maintain a social contact between the state and the society in most oil depended economies Saudi Arabia being one of them. It has been a basic tool in influencing economic performance rather than taxation policy. It is the main channel of distribution in the Kingdom of Saudi Arabia. With decline in oil prices in the 1990’s there was an increase in budget deficits which crippled the government’s ability to face major social problems and unemployment rates soared high: 15% in Saudi Arabia. (Ibrahim, 2009)The airlines and the governments in general found themselves in a spiral to reduce budget deficits thus public spending increasing pressure to rethink their economic policies. But then domestic spending delayed some reforms in the economic sectors such as the airline business sector and increased domestic taxation, opening up of some sectors and implementing policies that were directed towards employment in the private sector directly affected the Saudi Arabia Airlines. This mode of fiscal policy reflected in a minimal taxation since Saudi Arabia and most GCC countries have very narrow bases of taxation and considering the foreign reserves that these countries have accumulated, it is very likely that taxation as a mode of revenue accumulation will not be utilized in the near future, even with the recent drop in oil prices and this continues to be a challenge since it is a minimalist taxation policy where governments choose not to tax their citizens and in return citizens don’t play any significant role in decision making but enjoy proceeds from oil. This lack of participation has diverse effects on transparency and good governance and hence a poor policymaking base which trickles down all the way to other sectors of the economy, affecting even the private sector among them Airlines. There is also the issue of constrained monetary policy due to the tight link between the GCC countries and the US economy through the attachment of their currency to the US Dollar which is a good thing however in cases where the dollar declines sharply against the euro and other major currencies the appropriateness of such a monetary policy since it causes a major strain and inflationary pressure to all sectors of the economy such as Saudi Arabia Airlines whose revenue relies heavily on foreign currencies. In sum, Saudi Arabia Airlines suffer greatly due to the monetary policies of the country from extremely serious limitations in their ability to influence business decisions makers such as banks and also the inability to control inflation and issues relating to the labor market coupled with a lack of sustainable development goal setting (Ibrahim, 2009). They are mostly internal rather that external but the question that begs is what measures should Saudi Arabia Airlines put in place to pressure for change in the systems and policies in their country? Two main challenges still abound; structures and labor, the second being of a policy nature and is related to inflation issues and governance, and having four main characteristics namely; limited role of the private sector to generate employment opportunities and the status of foreign labor which is expensive. More efforts are also required in order to stimulate diversity of the product base. Saudi Arabia Airline has a two-way approach; 1. Fixing the old 2. Creating a new Minimizing industrial relation pressures Privatization of the Airlines has already taken place but there is a need for further deregulation. It is quite evident that privatizing of airlines will enhance competition which will call for adaptation of favorable industrial relation for the Saudi airlines. Privatization of the Saudi airlines will ensure that there is minimal government involvement in the airline thus the pressures that arises from government indicators on the Saudi airlines will be minimized especially with the weak accountability displayed in the Saudi rule of law (Corby, 1998). It is quite evident that privatizing the industry will ensure that the burden of oil dependency is minimized and thus allowing the government concentrates in other sectors such as education and health. Further, it is quite evident that privatizing the airline industry will ensure that the various monetary policies that have been viewed to be too conservative due to government involvement are able to be adjusted thus making a positive impression on the country domestic font. Privatizing the Saudi airlines will ensure that the governments have minimal or no powers to suppress outline industrial relations thus enhancing the industry independency. Another rising challenge is how to create and sustain a balance in the emerging dual system without further widening the gap and worsening income and regional differences since the problem of regional inequality is a serious issue in the Saudi Arabia (Corby, 1998). Saudi Arabia Airlines also needs to build a market niche and explore further opportunities outside of their own borders in order to address domestic market issues. With today globalization, world airline companies are sorting to merge so as to ensure they are able to develop a stronger competitive advantage so as to remain on top in today competitive business environment. Creating a stronger market niche as well as exploring further opportunities will enable the Saudi airline to develop good industrial relations not only with the Saudi boundaries but also across the globe (Corby, 1998). Having to merge with other world renowned airlines such as the American and British airlines, the Saudi airline will be able to borrow some of strategies that can be of significant help in their domestic market thus facilitating good industrial relation within the country. Opportunities displayed outside the Saudi airlines will enable the organization to install a more relevant and working methodology that will manage the overall implementation of a highly as well as complex interdependent portfolio that support the country infrastructure which is a benefit to the country as well as the Saudi airline industry. According to Wacjman (2000), Saudi airlines need to highly combine observation as well as theoretic reasoning on development of international and private markets which can only be facilitated by adopting a model of industrial relation that is broke decisively with adversarial paradigm. Here, relation between the airline industry and union greatly need to shift from a state which is adversarial to one of co-operation as this will enable the industry address the issue of competitive pressure as well as harness the skills, knowledge and commitment of the work force to the designed imperatives of the new competition within the airline industry (Wacjman, 2000). These imperative largely include accepting both process and product innovation, the willingness to train as well as retrain specific routines and skills to ensure that industrial relation are used to benefit the airline more. Further, there is need for the Saudi Arabia to have a new vision towards its industrial relation which should be different from the weakly institutionalized, long arm length collective bargaining and dual system in Saudi Arabia whose cooperation is greatly channeled through work councils often controlled by unions. Wacjman (2000) assert that, training is an essential part towards minimizing Saudi airline industrial pressures. The industry need to understand that training is not something to be tolerated or endorsed during emergencies rather it should be something that should be carried out within the industry operations. The Saudi airline industry needs to recognize that neither economic system nor individual can continue without effective training. It is important to train new policy makers that will ensure that policies implemented based on industrial relation are effective and up to date with the emerging new technology (Wacjman, 2000). This will ensure that the Saudi Arabia airline management will realize that training is a vital element that will ensure the above industrial relation pressures are minimized. The country union should not be left out in this training process since enhance industrial relation cannot be effective if the unions do not receive proper training. In addition, the industry needs to focus its attention on the mutual dependence of both its employees and employers to minimize existing conflicts. Additionally, the Saudi aviation industry needs to identify the reality of change and become flexible in their operations. It is vital for the industry to create innovative practices that will enable it build its brand through appropriate and novel strategies. The firm is to identify new and innovative advertising and marketing strategies which are effective in having the firm attain and maintain a competitive advantage over its business competitors. This will include the adoption of an information system that will guide the firm in identifying the needs and trends of their clients. The firm is to use the feedback from its clients to develop and have new airline client packages that have value for their money (McCracken, 2008). Moreover, the airline firm is to adopt appropriate methodologies and strategies that will have it enhance the staff relations. This will include the adoption of mechanisms that are aimed at identifying the motivational levels of the employees and identifying novel ideas that will enhance the same and build a conducive working environment. This includes the adoption of appropriate methodology that aims at enhancing organizational accountability. The building of staff relations will go a long way in the in enabling the employees to work towards a common goal. The creation of positive staff relations will enable the workers to have no or limited negative competition and work towards complementing each other (Shaw, 2007). Diversification of the business will enable the business to decrease its industrial pressure as it will identify the business functions that are core against those that are non core and thus be able to give full priority to the functions that are meaningful to the company. This will enable the firm to act decisively and make rational decisions that would have positive effects to the firm. Through this, the airline firm will be able to build partnerships with likeminded companies and thus diversify their business operations to other destinations. This will have the firm to maintain a high catchment on customers as it will be able to cover more flight routes as compared to its competitors. Broadly, this will eliminate duplication of services and zero in on those that have more return value to the company (Gladwell, 2002). The company will be customer oriented and thus will aim at achieving satisfaction of the customers as its main priority. This will enable the firm to update its airline systems for them to be in line with the customers’ needs and attain internationally accepted standards. The customers will thus be getting value from what they pay for (Quelch, 2008). Conclusion Regulatory issues coupled with operational costs which have led to hampered growth and profit. Low cost airlines have had issues of expanding internationally too due to traffic rights and other restrictions. Labor markets have suffered due to over-dependence on foreign labor which is cheap thus affected productivity in most industries including the Airline industry. Governance indicators are still weak with accountability and the rule of law still low. Monetary policies have remained a bit too conservative and are unable to make any lasting impression on the domestic front. The firm has to avert the challenges by inventing novel ways that aim at reducing future costs and excessive use of capital. Additionally, the firm is to innovate and enhance new ways that increase efficiency. The firm is also to give priority to business control issues and partnership. Lastly, the firm has to ensure it eliminates lack of participation that has diverse effects on transparency and good governance and hence a poor policymaking base which trickles down all the way to other sectors of the economy, affecting even the private sector among them Airlines References Corby, S. (1998).‘Industrial Relations in Civil Service Agencies: Transition or Transformation’, Industrial Relations Journal, 29: 194-206. Gladwell, M. (2002). The Tipping Point: How Little Things Can Make a Big Difference, Back Bay Books. Group, O. B. (2010). the report: SaudiArabia Airlines 2010. Oxford: amazon. Ibrahim, S. (2009). The oil boom in the GCC countries 2002-2008-old cahllenges old dynamics. Carnegie papers , 10-11. McCracken, G. (2008). Transformations: Identity Construction in Contemporary Culture, Indiana University Publishing Press. Quelch, J. (2008). Marketing Your Way Through a Recession, Harvard Business School Working Knowledge, 2008. Shaw, S. (2007). Airline Marketing and Management Sixth Edition, Ashgate Publishing. Wacjman, J. (2000). Feminism facing industrial relations in Britain. British Journal of Industrial Relations, Vol. 38, No. 2, pp. 183-201 Read More