PEST Analysis of the European Low Cost Airlines Industry - Research Paper Example

Budget Airlines Table of Contents Budget Airlines 1 Answer to the Question no 1 3 a) PEST analysis of the European Low cost Airlines Industry 3 British Airways and Virgin Airlines 5 b) Competitive Advantages of the industry players. 5 Answer to the Question no 2 7 a) Strategic issues in the low cost airline industry 7 b) The most significant issues prevailing in the budget airline industry 9 Answer to the question no 3 10 b) Porter’s generic Strategies: Applicability in the Airlines industry 11 c) The future strategy for Ryanair 13 Exploring the means to reduce the cost 16 4. Operators in four years time 16 Reference 18 Bibliography 20 Executive Summary The European airlines industry has seen a tough time in the recent recession. Despite of this, Ryanair has been able to fetch profit for the period. There have been certain changes in the political and environmental surroundings, which have come as operational barriers for the low fare airlines. There are a number of operators in this industry. Almost all of them have been following the same business model with some modifications in it, though each of them has certain competitive advantages over its competitors. Ryanair’s aim has been to establish itself as the leading budget scheduled passenger carrier through continual improvements and expansion of offering of its low fare airline industry. An ongoing focus on the cost reduction and operating efficiencies is of much significance in the Ryanair’s way of accomplishing activities. However there have been certain issues which Ryanair has to face regarding operation through the secondary airports. Still the organisation has been able to mark its sign and move to the leading position through proper cost reduction and fuel hedging. In future the company would need to connect more destinations, mainly the prospective unexplored ones. To maintain cost effectiveness while attaining a sustainable growth are the main two issues which must be taken care by Ryanair to shape up its strategies. “At a time when the traditional major airlines have struggled to remain viable, the low-cost carriers have become the major success story of the European airline industry” (University of Connecticut, 2010). Answer to the Question no 1 a) PEST analysis of the European Low cost Airlines Industry The whole airline industry had seen a troubled time in 2002. The blame was all put to the shock of 11 September, 2001. Even before that also, the whole industry figures had been deteriorating due to the decline in the passenger growth rates and over capacity, leading to declining yields and margins. However these events have flaunted the difference between the mainstream airlines and the low cost ones. The budget airlines continued to capture a rising share of the aviation market. More precisely, the budget airline operators are the only one to fetch profit in the troubled times. The following factors are supposed to put an impact on the European low cost airlines industry and hence must be taken into account. Political & Legal environment Back in 2003 the European parliament has decided to force the low cost airlines industry to pay £250 for each traveller for any overbooked or cancelled flight (Mayer, 2007). This can be a burden on the low cost carriers as they can badly impact their objective to trim down costs to offer cheap fares for their passengers. The European Union understood the benefits of privatisations and started shifting the ownership of the airlines to the private sectors, which means the airlines need to show their competence more to attract the shareholders (Stanford, n.d). At the same time government has decided not to provide aids to the ailed loss making low cost aviation companies, which means that financially trembled airlines can now fall in deep trouble as government is also not interested to pull them up. Deregulation is another factor which is affecting the players in the industry (Stanford, n.d). As the government has allowed the airlines from one member state to operate in another member state, the competition has just gone intensive with more players entering into the aviation sector of the respective regions. Economic Environment Europe is known for its well known holiday destinations. The recent crisis has put a bad impact on the economy of the Europe. However, the economic environment in the region is improving at a fast pace. In the recent times, despite of being in much trembled situation, the low fare airlines industry has seen an increase in the traveller rates. As the economy is improving, the budget airlines industry is expecting an improved situation. Following the recent economic downturn in the region, the government has relaxed the taxes, which can surely help the budget airline industry to trim down cost more effectively. Social and Environmental Position The social and environmental situation has been an influential factor to frame up the strategies of the airline industry. With an increase in the income, the social life style of the average people in Europe is supposed to enhance. As the life style would change in positive sides, more and more people would not mind to spend much on airlines, rather than going by train and road transportation. In the many regions of Europe, as the people have to visit less to reach at the holiday destinations, people would rather prefer to travel by their cars or the trains. In such a situation, the local carriers fall into trouble to match up their costs with such substitute options. The EU environmental laws demand less emission from the airlines. This can only happen when the airlines would less time on the sky. However this has been a problem for the low cost, small hauled airlines. As these airlines travel small distances they need to fly more times than the traditional ones, who connect the short haul destinations with the long ones and thus cover those in a single fly. As a matter, the low cost airlines are more responsible for the emission than the mainstream airlines. Technological Environment The airlines industry is a high technology oriented industry. Europe is quite known for its technological enrichment. So surely the technological environment is favourable for the industry. There are a number of local and international airlines operating in this industry. To name a few, Ryanair, easyJet and flybe. British Airways and Virgin Airlines There is a rivalry between British airways and Virgin Atlantic, since its inception. British Airlines had been the single airline from Britain to serve the long haul routes. The two airlines have been in rivalry on the routes to Australia. The passengers even looked for some decline in the flight fares as both the airlines were into acrimonious battle on the routes to Australia (Guardian, 2004). b) Competitive Advantages of the industry players. Ryanair This airline has introduced a cost effective model to operate in the budget airlines industry. Cost effectiveness is one of the major competitive advantages of this operator which has enabled them to be one of the leading carriers in this industry. Ryanair has introduced a number of competitive advantages to achieve the cost effectiveness. The airline has been into point to point flying. The flights fly to the secondary airports to reduce the airport charges. Ryanair operates with one class and does not offer any luxury services offering to the passengers. Booking of the tickets are done through internet with no refunds; hence the service cost is much lower. The marketing of the organisation is done in house to reduce the marketing cost. Another advantage of this organisation is that the company has reduced their turnaround times to serve the passengers better. At the international airports, to trim down the cost, the airline has been outsourcing the services at the international airports. All these have been the competitive advantages of this airline, through which it has been able to fetch one of the leading position in the budget airlines. easyJet The airline company uses a different low cost model in comparison to Ryanair. The operator operates through the major centrally located airports. Although, in this way the organisation would incur higher airport charges, still they can manage to cater more business travellers. These travellers would not mind to spend few more cash to catch the scheduled flights. That is why easyJet can keep it price a bit high, in comparison to Ryanair. The airline has been trimming down its costs by cutting down the unnecessary frills as well as the no value added services. Flybe In the year 2002, the British European Airways had restyled itself and emerged as Flybe. Its competitive advantages include the changes in booking system. The company has been doing almost 80 % of its booking through the internet. Hence Flybe was cutting on the costs on the agent fees. Agent commission was reduced from 10 percent to 1 percent. They offer on board services; however the passengers have to pay for the same. Flybe has been increasing its revenue through taking charges on the changes of itinerary, bookings through credit cards. They do not offer any refunds on the cancellation of tickets. Apart from all these, the company has framed up their networking to have more focus on the leisure type destinations. With this they offer certain services which are not so available in the other low cost airlines. The carrier offers economy plus product offering with frequent flyer points, priority check in, lounge service and complimentary on board service. They offer all these alongside their standard products. These have been the competitive advantage of this company. The company has achieved its advantage through differentiating their products and services from the other ones. Answer to the Question no 2 a) Strategic issues in the low cost airline industry “The dominant players in the European budget airline market rely on low fares to pack their aircraft, wringing profits out of passengers by charging for add-ons such as luggage check-in and hotel bookings” (Milmo, 2008). The very first issue in this industry is definitely to maintain the sustainability of the cost effectiveness. Almost all the airlines, operating in this industry, follow a certain business model. Most of these airlines have started selling air tickets through internet. In this way they are able to cut on their agency costs. It would enable these airlines to offer more reasonable pricing to their passengers. Most of these airlines offer service on only one class. This can be an issue for the carriers as the business travellers may like to have some more services on flight. It is not possible for these low carriers to start luxury services, but still they can offer on board services on payment to attract more business flyers. A number of budget air flights fly through the secondary airports. In such way they trim down the cost incurred in the airport charges. In many regions of European countries, people have to cross just a few miles to reach at some sunny beaches or some holiday places. Most of them, so, prefer to pack their bags and move with their car or else take the trains. So, the local flights face the threat of substitutes from the trains and other road transportations. As the flights operate through the secondary airports, they somehow miss the opportunities to cater the business flyers. Ryanair follow this model and flies through the secondary airports, while easyJet prefers the primary airports to carry on their operation. That is why they are able to cater a number of business flyers. Another issue with the airlines industry is that the companies are not frequent flyer. This means that the traditional airlines operate more frequently than the low budget ones. Business travellers do not mind to board a budget flight as long as the flight is quite frequent and hence fits their busy business schedules. Most of the low cost airlines do not offer frequent services and hence loose out on this issue. Some issues have been emerged up due to some of the government rules and regulation. The European Union has made it clear that government aids would not be allowed to subsidise the ailed, loss making airline companies. Even in some cases government has identified the benefits of shifting the ownership of the airlines to the private sector. The airlines now need to show their efficiency and competitiveness more to lure the investors. Deregulation is another step of the government which has led to increased competition within the industry. European Union has allowed an airline from any member state to service the passengers in another member state. This has intensified the competition with new entrance in a respective region. b) The most significant issues prevailing in the budget airline industry Sustaining the cost effective environment is the need of the hour. As the traditional airlines are launching their own low cost airline subsidiaries, the number of the players in this industry is going up. These airlines must be new entrants, but still have the experience of the big established players operating in the industry. Although there have been some unsuccessful launches, companies are still interested to launch new line of low cost airline business. Another issue, which can come up significantly in the recent times, is the threat from the train and other road transportations. Many people now prefer speedy trains to travel from one place to another. As the facilities in the trains are getting more enhanced, they are emerging as substitutes for the air flights, mainly the low cost local flights. The air fare for the fights need to be reduced in alignment with the fare of high speed trains to attract more and more passengers towards it. So in near future reducing cost is going to be a huge challenge for the budget airlines (Stanford, n.d). Airlines industry has to face an increase in its cost regarding oil squeeze in the market. Such an incidence happened in the year 2008. Due to the oil squeeze, a number of airlines went bankrupted. This can be a very serious issue for the airlines, mainly for the low cost budget carriers. So it is high time to hedge the risk, merged from the high fuel prices (Milmo, 2008). Hence an increase in the oil price would not be so devastating for the airline industries. It is very much necessary in this ever changing business environment to make profits while operating successfully. Having a sustainable growth can be the biggest issue in this competitive global environment. Answer to the question no 3 a) Competitive Strategy of Ryanair : Five Force Analysis of the company An effort has been put forward to analyse the forces, influencing Ryanair to shape up its decisions, using the Porter’s five force analysis. The model has identified five factors which are supposed to impact on the industrial activities in the competitive business environment. The threat of Entry As the airlines industry is a capital intensive industry and demands a high investment to be put in, it will not be wrong to say that the threat of new entry in this industry is much higher (Solvay Business School, 2004). However, as the traditional established airlines are introducing new players in this low cost airlines industry, the number of players is rising high. However investment is not the only barrier for the new entrants; matching up to the low cost of the established players in this industry is going to be tough for the new operators. Power of Suppliers The suppliers in the airlines industry are comprised of big names like Boeing and Airbus (Investopedia, 2010). As the whole airline industry is quite in a trembled situation, it is much obvious that the suppliers would also get the hit. As a consequence the suppliers’ power in this industry is quite low. Power of Buyers The bargaining power of the buyers or passengers in this industry is quite low. Passengers would incur high shifting cost while shifting from low cost airlines to the traditional ones (Investopedia, 2010). That is why the passengers are not much choosy in this industry. Threat of Substitutes Most of the European cities are mostly well connected on roads or through trains. In the many regions of locations, people would need to travel less to reach at some holiday destinations. In these locations, enough probability is there that people would like to move in their private cars or may like to catch up a speedy train. So there is threat of substitutes, specifically by the trains; although the intensity may be different for local and international carriers. The local flights would face more threat of substitutes than the global ones. Competitive Rivalry As the players in this industry have many things to worry about, the rivalry among them is much more. The players are battling for cost effectiveness, access to the airports, frequency of flights and expansion of the business. To increase the respective market shares, the airlines are battling in each and every operational aspect. The pattern of competition in this industry does favour the early entrants. The new entrants eventually lose money in this business and as a consequence taken over. The early entrants, though, do not have to meet such consequences. The competitive rivalry between Go and Ryanair can be illustrated by an instance. Ryanair had flights connecting Dublin and Glasgow. Go had introduced flights joining Dublin with two cities, Edinburgh and Glasgow. As a consequence the former one introduced new flights connecting Edinburgh and at the same time reduced the flight fares to Glasgow. It was close to impossible for Go to match that fare tariffs. b) Porter’s generic Strategies: Applicability in the Airlines industry In the year of 1985, in the book ‘Competitive Advantage: Creating and Sustaining Superior Performance’, Porter identified generic strategies like ‘Cost Leadership’, ‘Differentiation’ and ‘Focus’. The cost leadership means operating with no frills. Organisations, operating on the differentiation would introduce products and services which would be different from the other products and services of their competitors. ‘Differentiating’ here means attaining sustainable advantages through the creation of product or service differentiation. A number of organisations offer products or services in a niche market. The generic strategy is named as ‘focus’. This strategy has been subdivided further in two sub strategies named as ‘Cost Focus ‘ and ‘Differentiation focus’. Cost focus means emphasising minimisation of costs within a focused market. ‘Differentiation focus’ demand the organisations to pursue strategic differentiation within a specific focused market. For an example, Ryanair operates on the ‘cost leadership’. The organisation accomplishes a number of activities to reach at the ‘cost leadership’. Ryanair has operated in the budget airlines with no frills. It has been targeting the secondary airports to fly in different destinations. Apart from that online booking, operating with one class, low turnaround time, introducing point to point booking, reduced operating cost and aircraft equipment cost are the other reasons to help the organisation to save on costs and pass on the same to offer cheap air fares to the customers. Ryanair’s low fares are intended to boost demand, predominantly from the fare conscious leisure and business travellers. In absence of the low cost airlines, these travellers would have opted for train or other road transportation. As per the Ryanair management, the operating cost is lowest among the scheduled passenger flights in Europe. Ryanair strives to lessen the costs by controlling the significant primary expenses. These costs would include aircraft equipment cost, customer service cost, personal productivity and airport handling and access cost (Ryanair, n.d.). Flybe, on the other hand, operates on the generic strategy of ‘differentiation’. The organisation offers on board services available on payment. Apart from that, they also offer lounge facilities, priority check in and complimentary on board services in addition to the standard products. The generic strategy of this organisation can also be named as ‘differentiation focus’. They offer differentiation in their services with focussing on the specific group of price conscious passengers. They do not cater the business class passengers, but does provide certain facilities for the people who would not mind to spend few more cash to get access those facilities. c) The future strategy for Ryanair Ryanair has won the best managed airlines. The dynamic chief executive of this company, Michael has given the whole credit to his management team. However the responsibility has been lying with the chief executive himself. Even, Financial Times has identified this organisation as one of the business starts who are supposed to bring the difference in near future. The carrier has carried out many activities to sustain its leading position in the cost effectiveness. However as the organisation uses secondary airports, it is loosing on the business passengers. Business passengers would prefer to fly through the airlines which are frequent and connects the major cities through primary airports. This is not the case with Ryanair. They operate through the secondary cities, where people prefer to move in cars or catch up trains to reach at the holiday destinations. In such a case, the carrier even needs to compete with the road and train transportation to fetch more passengers. In the last few years, airlines industry has seen tough times; a part of which is due to the financial downturn. It was during the period that oil squeeze increased the oil prices; a number of companies went bankrupted showing trembled financial and operating conditions. So no doubt, it is going to be difficult for any airline organisation to have profitable financials while sustaining the cost effectiveness. “To have the largest amount of routes and the lowest fares of any European Airline without compromising the business model; to outperform every other carrier on all fronts including quality of service. Ryanair also aspires to uphold a high level of growth” (Solvay Business School, 2004). Ryanair’s outstanding performance has been partly due to the fast pace of growth in the industry. As the market is not expected to show the same pace in the next few years, Ryanair must approach some other means to expand and sustain their leading performance. Some of the avenues are discussed below. Increase the frequency of flights in the existing routes The budget carrier market is yet to get exhausted. At the moment, the no of daily flights of Ryanair is much less than the EasyJet and traditional carriers. This would enable the carrier to serve the passengers better, who require more flexible frequent flights. If they can introduce some new flights to the existing destinations, they can surely fetch some more customers from the other airlines. Introduce some new routes in Europe There are a number of feasible routes yet to be served by the budget carriers. A viable route must have a certain number of passengers per year. Researches must be done before finding out the un-served viable routes. Ryanair can look after the routes which are only served by the traditional carriers. Introducing the cost effective flights is supposed to attract more passengers from the traditional ones, as they would offer cheaper flights, no frill options at the same routes. In the year of 2002, only one third of the routes were still served by single low cost carrier (Solvay Business School, 2004). Developing smaller continental bases There are certain places, apart from London, like Dublin, Hahn, and Brussels etc which can be thought of developed operating bases. Although these air bases do not have the same demand as in London, still they can offer increased demand in near future to fetch a sizeable profit. Expansion into different regions Following the continual expansion of the European Union, eastern part of the Europe has started becoming for the leisure and business travellers. Ryanair does not have much access to these destinations. Although a number of airlines have already developed their bases over there, still a number of avenues are still open for Ryanair. The organisation needs to explore this opportunity by developing bases in the prospective regions of Europe. Seeking market shares from the Charter Market The charter market constitutes a significant part of European traffic. Ryanair must seek market shares from this market by aggressively promoting the ‘do it yourself’ holidays rather than going for package tours. As the booking through internet is gaining more popularity, this market should not be overlooked. Ryanair has already started to offer small holiday packages, but they must boost this market with more enthusiasm (Solvay Business School, 2004). Customer service Ryanair always had good track record in many aspects of customer service like punctuality, completion etc. However they are quite strict in their rues and regulations and do not look after the ‘softer side’ of the customer service. The carrier needs to adjust in few areas, if required (Solvay Business School, 2004). Exploring the means to reduce the cost Ryanair has already explored a number of ways to have sustainable cost leadership in the respective industry. The company must try to explore more into this avenue. One of the avenues is that the carrier continues using the internet as the primary point of booking. So that, over the next few years, the organisation would have 100 % of its booking through online; hence eradicating the cost of expensive call centres (Solvay Business School, 2004). In this ever changing business environment, the company must change its strategies as per the changes in the industrial as well as competitors’ environment. 4. Operators in four years time There is a number of operators in this low cost airline industry, Ryanair, EasyJet, Virgin Express, Bmibaby, Flybe, MyTravelLite and Airlingus. A number of light weight new entrants and low cost carriers including Volare Web, Slovakia’s Sky Europe, Scandinavia’s Sterling, Air Berlin, Germanwings are part of this industry. Adding to it, deregulation has opened the door to many airlines from a member state to enter into the market of another member state. Hence the intensity of the competition would be increased. British airways and GSM have seen losses, after they introduced their own fleet of low cost carriers. Despite of these facts, more and more traditional carriers are coming forward to tap the market through the introduction of new flights in this segment. 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