Strategic Management in the Airline Industry - Assignment Example

EasyJet- Strategic Management The Airline Industry Air travel is one of the world's largest industries having generated more over $300 trillion into revenues in 2001 alone. The airline industry was traditionally serviced by the full service large airlines that fly the hub and spoke network and power international travel. The full fare players constitute American Airlines, United, Delta, Northwest, Air France KLM, and British Airways among others. They try to satisfy the network needs of various long haul and short haul travellers establishing large global routes, fly a mix of long haul and short haul aircraft, and are generally expensive to fly. Low Cost Airlines In the last couple of decades, the advent of low-cost carriers has reinvented the airline industry. These efficient carriers offer no-frills service to travellers flying point-to-point short haul routes utilising efficient ticket distribution through direct internet offerings and utilise standardised short haul aircraft with quick gate turnaround times to maximise aircraft utilisation. South West Airlines is the pioneer in this segment in the US and EasyJet is the industry leader in this segment in Europe. Other significant players in this segment include Jet Blue in the US and Ryan Air in Europe. The 9/11 tragedy, did cause a slump in the airline industry, but also gave valuable lessons. All the major airlines slowly woke up to the inefficiencies in their models and started drastic cost cutting measures translating into better operational efficiencies and improved margins in order to avoid slide into bankruptcy. The low cost airlines were the only ones that were able to manage the downturn due to their business models. The major overhaul in the restructuring has gone a long way in changing the face of the aviation industry. Deregulation opened up the skies and brought in more players increasing the competition many fold. Consolidation is the name of the game and slowly the industry will consolidate into three or four major players and their improved synergies will end up contributing to a stronger airline. This focus on regional traffic will allow low-cost carriers to focus on their niche markets and improve their market share. The low-cost market is less mature in the Europe than the U.S.A, therefore there is more scope for newer routes to be opened up, and newer destinations charted out for a few years before the restructuring and consolidations occur. From the legacy days of large airline companies monopolising the market place, the airline industry has fast become a price-sensitive industry. In the post September 11 era, the airline offerings are more commodity-like, with players who offer the lowest price and efficient services being the most profitable survivors. Most large full service airlines have been facing the brunt of the decline and are fighting for survival, trying to get out of multi-billion dollar losses and bankruptcies. (Source from website: http://www.findarticles.com/p/articles/mi_qa3884/is_200509/ai_n15613234) In this changed landscape emerged the no frills airlines segment, which have achieved rapid growth in market share into the short haul European market. EasyJet, brainchild of Stelios Haji Ioannou, the son of a Greek shipping magnate who founded the company, based on the low cost, no-frills model of the US carrier Southwest, started in 1995. EasyJet is based on short haul air transport in a price in-elastic target segment and based on the concept that is that if prices are reduced, more people will fly. EasyJet flies to 33 locations in Europe with a fleet of over 120 aircraft and sells over 95% of its tickets through the Internet. It's the leading player in the low cost market after the acquisition of "GO"(A no frills subsidiary of BA), closely followed on its heels by rival Ryanair which has now acquired "Buzz" (a subsidiary of KLM) and expanding as well. Virgin Express of Virgin airlines and British Midland's BMI baby are all competitors in the "no-frills" sector. (Source: Case study EasyJet-The spectacular growth of low cost airlines) Key drivers of Change Political Factors: The advent of the European Union and more and more countries joining the union will open up newer markets and more viable and profitable routes. Globalisation should continue to boost traffic in the long-term confirming predictions about the growth of the travel industry. The threat of terrorism, especially the aftermath of 9/11, looms high and has opened concerns and new agendas related to security. This may translate in to higher insurance costs and added security measures that may increase prices. The threat of a war in the in the Middle East may also slow down air travel. Economic factors: Europe being integrated under the umbrella of a single currency will definitely bring more business due to the merging efficiencies. With no currency conversion to worry about, online ticketing is so much easier and favours low cost players who do more than 90% of their bookings online. Aviation fuel is one of the major contributors of the percentage of the cost. The price of aviation fuel is directly dependent on the surge and fall of the oil prices. When these prices go up, the airlines have no control this entity that will result in an increase in the fares. This may result in a loss of advantage by the low cost carriers. In addition, increasing air-traffic congestion and environmental concerns may result in restrictions that may pose a challenge to the airline industry. Recessive nature of the economies may cause travellers to tighten their purse strings and slow down travel. Social factors: While Internet bookings have increased the prospects of the low cost airline industry, there are still a huge percentage of people out there who are not Internet savvy and deeply mistrust putting their credit card numbers on the Internet due to security concerns and fraudulent activity issues. For these people, Internet booking is not a great option. Being unable to add these people to its customer base will disadvantage low cost airlines. In reality, when published low cost fares are only available for specific days and specific flights people may lose faith in these and feel annoyed at being misled. Technological factors: Another major expenditure for the airlines is the cost of their Airplanes. With technological advances occurring consistently, increase in the manufacturing cost of the airplane will impact the cost structure of the airline industry players. To remain competitive, close perusal of the manufacturing costs are necessary. Technology has also concentrated on fuel-efficient aircrafts being developed and these will be able to add value in the airline industry. While the volume of Internet transactions grow, costs associated with the volumes will also need to be taken into consideration. A lot of pressure is put on upward prices and costs due to these synergies. Critical success factors influencing the low cost airline industry The rapid growth of low cost airline industry may be attributed to several factors that served as drivers of low cost airlines. The business environment was favourable facilitating stupendous growth in relatively short time. Deregulation of the European Airline Industry: In December 1992, the deregulation of the airline industry in Europe opened up the skies to the passenger airlines to fly to any destination, and more importantly gave them access to landing slots. Due to the increase in the number of players, competition increased and fares were drastically reduced. The bigger players who had so long monopolised the industry, were now severely disadvantaged and their high cost structures were no longer viable. In order to survive, they were forced to re-look at their cost structures or slide towards bankruptcy. However, the low cost no frills airlines were enormously benefited by their business models due to their ability to enter and compete in the market. Without de-regulation it is unlikely that low cost airlines would have been able to penetrate the market since the barrier of entry was high and presence of strong competitors would have been a deterrent. (Source: http://www.bized.ac.uk/current/leisure/2003_4/010304.htm) Increases in levels of disposable income and leisure time: An improving economy has put in more disposable income into the hands of the travellers. Technological advances creeping into homes have also put more leisure time at their disposal. The number of mandatory holidays has increased as well. This has encouraged more people to indulge in vacations and holidays. UK tourism has been rapidly growing and short break holidays have become exceedingly popular. The proportion of individuals taking two or more holidays overseas each year has risen from 15% in 1971 to 25% by 1998. Low cost airlines have had enormous appeal for short vacations due to the low cost compatibility in budgeting a holiday. Growth of the Internet: Recent industry research shows that over 64% of the population comprising over 38 million people in the UK became Internet users as of 2005. Over eighty per cent of the adult population in this country has now visited the World Wide Web. These figures put the Internet usage in the UK and penetration percentages equivalent to key market like the US, where web users now represent over 80 per cent of the adult population, and ahead of Germany and France in Europe. (Source:http://www.internetworldstats.com/stats4.htm ) Technology has penetrated homes in the form of mobile phones as well and there are more than 60 million active mobile phone handsets in the UK, and at least one is owned by 85% of the country's households. Lastminute.com reports travel purchases of around 4,000 via such devices with average sales totally at least 200 per transaction. (Source:http://www.responsesource.com/releases/rel_display.phprelid=24305&hilite=) Business strategy of the company over the last five years Michael Porter suggested that for an organisation to be successful and obtain a competitive advantage they should follow either one of three generic strategies of Cost leadership, Differentiation or have Niche strategies. (Porter, 1980) No strategy, no matter how well formulated, can achieve long-term success if not properly implemented. (Schermerhorn, 2001) This requires not only willingness to exercise control and operational modifications to adapt to changing needs. EasyJet has undoubtedly pursued the strategy of cost leadership, by being the lowest cost producer within their industry. Keeping costs low is the primary strategy and this is enabled by lowest sourcing and costs and aiming at a wide market, so sufficient sales can cover costs. EasyJet started off with a trend setting no frills fares taking a page out of the history of SouthWest Airlines books. Its business model that has built-in efficiencies has held it in good stead. Its sole aim is to keep costs low and anything that can contribute to an increased cost structure is dealt with aggressively and if necessary, unconventionally as well. It has hacked away costs incurred by traditional players while at the same time ensuring quality not expected from a low cost airline. It does have great competition, but it has kept a stringent watch over its overheads thereby committing itself in maintaining its advantage. It flies modern 737 aircraft because while fuel efficiencies are high due to improved technology, its maintenance costs are low as well. It tries to achieve the lowest cost per seat model, good enough to compete with the rival airlines. There are no agents and therefore no agent commissions, and while reservations over the telephones are encouraged, web online bookings are given a better discount rate and 95% of its bookings are done online. It has made the Internet its core business tool. Seats are sold low on first come first served basis, and price increases as the accordingly. Seat prices start off very low, with the price increasing as more seats are sold at the same time making every airline haul profitable and the passenger is always guaranteed the lowest price. There is no paper ticket and lesser administrative, storage and handling costs. The fares do not include any food or beverages (though passengers can buy it onboard for a cost) and this reduces costs associated with extra cabin crew as well. It uses remote airports for landing slots and minimises landing fees, its quick turn around time keeps it more in the air flying, for better utilisation that translates into efficiencies. It also flies highly competitive routes being more profitable and avoids waiting times by avoiding congested airports. It operates in orange protocabins, out sources maintenance activities and pays by the hour, and advertises by painting its phone number on the body of the plane, an unmistakable" think outside the box" strategy that works for it! Overall all, it does everything it can to pursue its strategy of acquiring low cost but at the same time is unerringly on the mark since everything is analysed and boldly pursued. (Sources: Case study EasyJet-The spectacular growth of low cost airlines, http://www.lboro.ac.uk/gawc/rb/rb174.html)) Initially a private company, EasyJet floated on the Stock Exchange in November 2000 when 63,000,000 shares, representing 25.1% (of the total of 250.5M) shares were offered at 310p. A further 11-12% were reserved for staff. The airline raised 195.3 million valuing EasyJet at 777 million on flotation. The sale to financial investors was over subscribed, resulting in the further sale of 9.45 million shares at 310p bringing the EasyJet public offering to 224.6 million. EasyJet announced its first profit in 1998 to the tune of 5.9 million. It has been profitable and grown well. (Appendix 1) However in 2003, "after eight years of double-digit growth, it seems EasyJet's days of easy money are coming to an end. On May 7, Europe's biggest discount airline announced losses of $79 million for the six months ended Mar. 31." (Source from website Read More

 

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