The European Airline Industry - Term Paper Example

1. Introduction The European airline industry has historically been heavily regulated by individual countries in a bid to protect their own carriers(Sull, 1999). As flag-carriers started accumulated losses, deregulation and liberalization opened the way for many low-cost start-up carriers. easyJet started operations in 1995 from London’s Luton airport with two aircrafts that were leased in and with 16 teenagers as reservation agents. The airline took basically because of the promotional fares they offered. Their fares were a fraction of the price charged by British Airways for the same sector, and it was even significantly cheaper than rail fares. Its low cost strategy supported by point-to-point short haul flights, no in-flight meals, short-turnarounds and very high aircraft utilization, in addition to direct sales and extensive sub-contracting, was responsible for the rapid growth of the airline. easyJet has consistently outperformed its competitors ever since its inception (Pate & Beaumont, 2006). In addition to low costs, it promotes safety, customer care and convenience, which differentiates it from Ryanair. easyJet uses the internet to reduce the distribution cost and relies on human resource for maximizing its aircraft utility. It uses the Southwest model for human resource practices. It uses value-based selection and cross-functional performance measures to promote systems thinking. It has flexible job boundaries and uses captains as leaders for flight departure process. Because of its labor management practices, easyJet has been able to provide job security and consistent promotion. Even though easyJet was heavily dependent on subcontractors, it managed to meet its operational targets, 20 minutes turnaround, safety and punctuality. The four competitors – Ryanair, Virgin Express, Debonair and easyJet – avoided competition with each other on routes. All offered low-cost fares but most destinations were served by only one airline. easyJet’s strong brand recognition and momentum allowed it to capture share of the growing market for low-cost airlines (Sull, 1999). Its growth has been phenomenal and it is one of the few airlines that registered profits in 2009 despite recession (easy Jet plc 2009). They now boast of improved network quality and lower cost deals with key suppliers. With massive fleet extension plans, it expects to grow its share in the European short-haul market from around 7% to 10 percent. To what extent they need to alter their strategy would be recommended based on the environmental analysis. 2. External environment analysis (based on PESTEL) The political factors have low impact because easyJet operates within Europe and Europe is stable politically. The economic factors too have low impact because the economy in Europe is stable and the consumers also have stable income. Euro as the common denomination of currency used all over Europe, contributes towards economic stability. Aviation fuel tax and airport charges being steep, could hit the low-cist segment (Smith, 2005). Low cost services are restricted to most big continental European cities where the Continental European Governments would try to protect their flagship carriers. easyJet has found it difficult to obtain slots at Paris airports. Low cost carriers face stiff competition in Germany where the carriers are vying for market share and not focusing on profits. Consumer demographics and consumer preferences keep changing and hence the social factor has high impact. Because of heavy competition in the industry, customer loyalty is on the decrease because customer can be lured away by a small price difference. However, low cost trarvelk is not as widespread in Europe as in the US (Smith, 2005). Technologically also the impact is low because earlier easyJet would use a unified fleet but has now invested and own its own A319s Airbus (Gillen & Lall, 2004). The legal impact is high as they have been accused of breaking labor laws in France, which is likely to set a precedent for future disputes in the low-cost sector (Irish, 2010). Environmental impact is high as jet aircrafts have been found to be damaging the environment. Airlines are being urged to go ‘green’, and easyJet claims that discomfort to passengers in terms of leg space and no food on board, is only to make the flight less carbon-intensive (Snowcarbon, 2009). In addition, the flagship carriers are replicating the low-cost model. BMI has adopted an economy class structure and BA is also attempting to copy the easyJet pricing structure (Smith, 2005). Competition is high in the industry with Ryanair offering strongest competition. Many low-cost airlines have failed (Smith, 2005) and the competition now lies between Ryanair and easyJet. easyJet focuses on building frequency while Ryanair builds its network. Most low-cost airlines focused on the leisure segment including easyJet, but over time easyJet included the business travelers (Mason, 2001). They thus created a new market for the airline by diverting passengers from the flagship carriers. However, the bargaining power of the airline is low, because of competition in the sector. Both Ryanair and easyJet follow the same business model of no frills and direct sales. Both operate from secondary airports and attract the leisure segment but easyjet has started attracting the business segment also (Gillen & Lall, 2004). The external environment for easyJet appears to be fairly stable as they operate in a politically and economically stable environment. They have invested in technology and are making attempts to keep the environmental impact to the minimum. However, competition being intense in the industry, they have to be customer-focused because the consumer preferences and demands keep changing. Marketing would have to adopt a customer-focused approach. 3. Internal environmental analysis (Based on SWOT) Each low-cost airline is unique in the industry and each follows its own strategy. easyJet adopted the cost-leadership strategy of the three strategies identified by Porter to gain competitive advantage (SD, 2006). It offers no frills, offers point-to-point strategy and has its own distribution system. Distribution is a major factor in the airline industry. Its closest rival, Ryanair uses the services of travel agents to distribute its products but until its merger with GO in 2002, easyJet did not sell through travel agents (Lawton & Solomko, 2005). Even then it had a differentiation strategy. In addition to the general website for customers, it created a unique website meant for members of the travel trade. They did not pay commission to the travel agents but this strategy brought them closer to the travel trade. Hence their attempts have been to have close relationship with the travel trade. Their simple pricing strategy and point-to-point service is responsible for their strategic advantage and operational effectiveness (Gillen & Lall, 2004). Its strength lies in its own fleet, short turnaround times, no frills, standardized process and direct sales, which means direct contact with the customers. easyJet’s weakness lies in its outsourcing strategy as it has outsourced many functions. This means dealing with subcontractors who may not share the goals as the company. This may impact the service leading to poor customer satisfaction. Opportunities exist in the sector as consumers’ purchasing power is going up and the middle-class group is potential passengers. However, as flagship or traditional carriers entering the low-cost segments, competition intensifies. Moreover, there is demand by the government to levy a ‘climate protection charge’ which could impact the overall pricing strategy of the airline. Barriers to entry have been lowered due to deregulation. This implies that more airlines could enter the segment and make competition more intensive. All these suggest that competition being high, easyJet has to intensify its marketing function. 4. Current marketing promotional tactics To reach their customers directly, easyJet has eliminated the travel agents as distribution centres. To raise the awareness among potential consumers, they rely on alternative marketing channels (Gillen & Lall, 2004). In its effort to reach the customers directly, easyJet spent 8% of its revenue on newspaper, magazines and radio advertising. They even sponsored special promotions to attract the attention of potential consumers. One such promotion was providing the telephone line for fans of London’s Tottenham Hotspur football (soccer) team. They do not miss out an opportunity to enhance their public relations and their image. They emphasize about their record for on-time departures. They live up to their slogan, ‘we make limited promises but we make sure we consistently deliver on them’. They have positioned their product as per customer needs and they understand the values of the target audience. They have thus found that a link between a product and the consumers’ value system is essential to positioning (Long & Schiffman, 2000). Their initial advertising campaign was ‘Fly to Scotland for the price of a pair of jeans!’ This was meant to catch the attention of the segment that was not yet airline customers. They could attract the price conscious customers of the traditional carriers as well. They have defined their target segment and their claim they cater to ‘people who pay for their travel from their own pocket’ (Gillen & Lall, 2004). They cater to the visiting friends and relatives (VFR) as well as to entrepreneurs and managers working for small firms. By catering to the business segment they ensure that their flights are full during the weekdays as well (Smith, 2005). To attract the online users, they go in for banner advertising on the website. They use technology to identify and record individual’s exposure to their brand and their activities when they visit the easyJet website (Long & Schiffman, 2000). easyJet constantly monitors and analyzes its marketing campaigns and make changes as necessary. In addition, they do not spend advertising even when there is no immediate response. Though they have a simple pricing structure, one of the marketing promotional tactic they use is differential pricing strategy. They sell their lowest fares first and as the departure time approaches, the fares increase (Mason, 2001). The price increase as the seats gets sold on every flight (Koenigsberg, Muller & Vilcassim 2004). A single fare is quoted for all seats on a given flight at any point of time without any restrictions. When flights are empty or the journey time is inconvenient, the fares could be very low (Lindgreen, Palmer & Vanhamme, 2004). This facilitates the business travelers to book one way cheap fares much in advance. However, as the capacity fills, the price could rise and even match or exceed the fares offered by flagship carriers. 5. Recommendations for promotional strategies Most traditional carriers use the Frequent Flyer Programs (FFP) that was launched by American Airlines in 1981. How this model has not been replicated by the low-cost airlines in Europe (Klophaus, 2005). In fact, the European low-cost carriers have not introduced any loyalty programs. Any loyalty program is based on the assumption that changing from one offering customer loyalty would be costly for customers. Since the FFP involves costs, it has been ignored by the low-cost carriers. However, in the service industry relationship marketing is important because it has been recognized that it is cost effective to maintain long-term relationships with the existing customers than creating new customers every now and then (Long & Schiffman, 2000). Loyalty programs and relationship marketing would leading to more loyal customers would ultimately lower costs per customer. easyJet should apply this strategy and introduce loyalty programs to build and maintain long-term relationship with their existing customers. As of now easyJet claims to be reducing the environmental pollution which is why they have reduced leg space and no food offered on their flights. They may have to reconsider this strategy because consumers want comfort and convenience. More legroom, free in-flight catering and pre-arranged seating should be added as part of enhancement of customer service. Travel agents contribute about 13% of the total business and this can be enhanced if some form of commissions could be worked out with travel agents. Travel agents would offer credit to customers which airlines directly would not. easyJet might be losing come customers that are looking for short-term credits which agents can provide. If the agents could be given incentives such as a percentage based on business volume, it could serve to motivate the agents who would then exert extra efforts to promote the airline. With these few promotional strategies, perhaps the airline could further strengthen its position in the sector and offer strong competition to Ryanair. 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