Does the Customer Really Matter - Case Study Example

International Business Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 Introduction 3 Impacts of Ryanair and Easyjet on laws and regulations 3 Key success factors for low cost airlines 5 Advantages and disadvantages 7 General analysis of airline industry and market 9 Low cost travels 9 Airport Location 10 Airline and airport market share and business models 11 Benefits from mergers 14 Comparison of Australian and United States airline industry trend 16 Works Cited 20 Introduction The growth of low cost carriers in the UK, the United States, and Australia as well as across the globe is the single-most important factor that has shaped the airline industry since the 1990s. While the expansion has been attributed to the increase in the number of passenger travelling by air in the last two decades, it has also been criticized for being the primary cause of the financial crisis for large or full service carriers (Dobruszkes 251). Indeed, these analogy forms the underlying argument in this essay. The essay examines the impacts of low cost carriers such as easyJet and Ryanair on laws and regulations in the UK and Europe. Their positive and negative impacts are also discussed. A general analysis of the UK airline industry and market synergy is further reviewed. Also discussed include the benefits of airline mergers and a comparison of Australian and US airline industries. Impacts of Ryanair and Easyjet on laws and regulations Ryanair and easyJet are the two major low cost carriers in the UK. The two airlines adopted cost-cutting models such as restricting the sale of connecting flights or provision of complimentary snacks onboard and failing to compensate passengers for loss of luggage. The basic points of such a business model include high aircraft utilization, charging for extra luggage and quick turnaround times (Dobruszkes 251; Sull 20-21). Certain factors in their practices have prompted change in airline industry regulations. In 2006 for instance, easyJet faced criticism for failing to refund tickets in time and forcing passengers to wait longer for reimbursement of expenses. This influenced the change of European Law on treatment and assistance to passengers, such as formulation of Regulation 261/2004 that deals with compensating passengers when the flights were cancelled, delayed or denied boarding (Lambert, Evans & Uren). Today, under the EU rules, airlines are obligated to compensate passengers for delayed or cancelled flight except in extreme circumstances when there are disasters such as hurricane, earth quake or volcanic eruptions. Initially, the regulation only covered denied boarding or cancellations, even as passengers were allowed to lodge complaints in cases of cancellations. Compensation now applies for delays of more than 3 hours (Lambert, Evans & Uren). In 2008, the Advertising Standards Authority (AS) condemned an advertising campaign by easyJet for misleading information that fronted its aircraft as making 22 percent fewer emissions than competitor airlines. ASA proclaimed that easyJet had broken advertising rules. These made ASA to tighten regulations on airline advertisement (Castiglioni). EasyJet and Reynair also scrapped last-minute fees on passengers who pay by debit card. This has changed the way airlines include debit card surcharges in the ticket price instead of at the end of booking. The new practice is attributed to a new legislation banning credit and debit card surcharges (Press Association). The regulation came after Office of Fair Trading (OFT) investigated Ryanair for unfair surcharges and lack of transparency in bookings (Castiglioni). Key success factors for low cost airlines UK’s airline industry has undergone massive growth in the last two decades. Consequently, the number of people flying from the UK using low cost airlines in 2006 alone was estimated at 260 million, in comparison to the 1980 statistic of 66 million people. Several experts have attributed this to the emergence of low cost airlines such as easyJet and Ryenair. Both airlines operate using South West model, who founded the low cost model in 1966. Analysis of the UK airline industry through the use of Porter’s 5 forces model and the theory of value chain reveals that the success of easyJet and Ryanair was due to its strategy of concentrating on pursuing purely a low cost strategy in addition to their ruthless and efficient management of value chain (Dobruszkes 251-253). First, the companies used point-to-point services, by eliminating services such as waiting for baggage and passenger transfer. Other strategies within this category included standardized fleet, by ensuring low training costs, low maintenance cost as well as low aircraft capital outlay. Additionally, the airlines used secondary airports that charge lower. easyJet and Ryanair also minimized advertisement costs by minimizing the use of travel agents in preference to direct sales through the internet (Sull 20-21). Both airlines offer inexpensive and highly frequent point-to-point flights while strictly avoiding the hub system used extensively by most scheduled airlines. The airlines adhere strictly to the 15-minute turnaround at airports. This is helped by the choice of both airlines to use smaller and less congested airlines (Shrager 10). The airlines also go for secondary airports situated near major population or business centres. The choice of secondary and smaller airports allows the airlines to negotiate airport charges thus enabling them to charge low fares for flight. Secondly, since the smaller airports are at close proximity to major population centres or business districts than the larger airports, it was more attractive to passengers as the distance is more convenient (Shrager 26-28). Ensuring quick turnaround times at the gates reduced the time the aircrafts spent on ground. Additionally, maintaining high passenger load enables the airlines to spread costs and to increase productivity of staff as well as the overall profitability of the companies (Hanpobamorn 4-55). This ensured maximum utilization of the aircrafts, as well as maximized profits for both airlines. The less turnaround also allowed easyJet and Ryanair to keep their planes in the air for longer periods as well as earn more revenue. Additionally, by keeping their aircrafts away from major airport hubs, both airlines were able to increase their frequency of their flights, while managing to keep the number of aircrafts low (Malighetti, Palearia & Redondi 195-199). The airlines either eliminated or reduced particular services such as offering of free beverage and food. Additionally, seats were not assigned. At the same time the whole plane remained single class. More emphasis was shifted to high core standards such as customer support, safety and reliability (Shrager 26-28). Low cost airlines aim to meet the basic demands of their customers by conducting their business using certain value-based perspective, such “less for much,” while focusing their attention on a range of key success factors (Dobruszkes 251). In all, both airlines chose to adopt differentiation strategies made it possible to pursue low cost strategy at the outset (Sorensen 28). The perspective was that customers would not evaluate the services on quality. Rather, customers were more worried about the costs. In practical sense, air passengers in Britain would not view easyJet and Ryanair as cheap, and British Airways as expensive. Rather, the extra price difference could be justifiable in the eyes of the passengers from the additional utility gained through better travel experience provided by British Airways. Advantages and disadvantages Cost advantage allowed Ryanair and easyJet to offer the same kind of service like any other planes although at lower costs. The strategy enabled the airlines to achieve cost leadership in the British airline industry. Ryanair and easyJet are among the two leading players in the low cost airline services in the European market, accounting for some 50 percent of the seat capacity in the continent (Kupka and Jamak 7-10). Low prices charged allow passengers to benefit from flights at more affordable rates, thus enabling people to save (Dobruszkes 251). Relationship marketing also allowed the airlines to communicate to their customers effectively and affectively through their websites and social networking sites such as Facebook. It also enabled them to reach out to the potential and current customers thus getting better understanding of what was expected of both companies. Further, the two companies engaged in frequent promotions such as discounts for certain routes enabling customer loyalty and attracting more flights. Next, charging one-way ticket is convenient to passengers who value travelling on one way. Additionally, eayJet and Ryanair offer both off-peak flights and non-peak flights enabling passengers to travel at any convenient hour (Malighetti, Palearia & Redondi 195-199). However, putting much emphasis on low cost flights compromised the provision of high core service standards such as reliability and safety which are essential for customer satisfaction. For instance, the airlines became less punctual while at the same time luggage delivery became unreliable. These had particularly ill effects on low cost airline because of the trade-off between air travel reliability or safety and low prices (Dobruszkes 251). The hidden charges characterized in low cost flights such as taxes, hidden fees and insurance costs in addition to other expenses increased the cost over time. Hence, everything that is additional to the ticket is surcharged. Indeed, such a practice attracted heavy condemnation of easyJet and Ryanair, when the company surcharged on extra costs at the end of flight for travelling with hand luggage, thus making travelling inconvenient to their customers. Buying a one-way ticket makes it expensive for customers looking to travel back (Dobruszkes 251). Generally, low cost airline are unwilling to allow for refunds or to compensate for luggage loss or flight cancellations. These have made the two airlines to be criticized heavily for their ruthless policing making them to lose their marketshare. Additionally, there are many restrictions on certain kinds of luggage the passengers should carry, as the low cost model operates on the strategy that every space should be optimized for profit. Further, since seats are not assigned, getting a good seat may be a hassle as each passenger struggles to occupy the best seat. Increased competition due to the attractiveness of low cost airline niche, made the area of operation less profitable (Malighetti, Palearia & Redondi 195-199). General analysis of airline industry and market Despite its relatively small area, the UK has a large number of airports operating scheduled passenger services. As of 2007, the UK has some 40 airports. Concerning the number of passengers, the sizes of UK airports are bimodal. For large airports have a capacity of up to 20 million passengers, while the remaining has less than 10 million passengers. Low cost travels Over the last two decades, the UK airline industry has undergone dramatic changes. In a 1999 survey of 19,000 passengers in Britain, it was revealed that a high proportion of the passengers preferred low cost carriers, such as easyJet than schedules carriers such as British Airways. The increased preference for low cost airlines indeed characterizes the UK airline industry. In the 1990s, the passengers using the low cost airlines were disturbingly low, at averagely 3 million. The figure was even upsetting, with 17 million using low cost carriers in 1999. Recent statistics however indicate that, while low cost carriers across Europe carried around 6 percent passengers in 2004 for short haul flights, the figure was much higher in the UK with more than 20 percent. This indicates that the UK airline industry is strongly established for low cost airline flights through low-fare services. Indeed, the industry pursues a policy that encourages low fares to passengers. For instance, the UK policy for smaller regional or secondary airports for airlines is targeted at reducing costs. It however also means less congestion of passengers to the airports, as well as less chance of delays. Airport Location Generally, the UK has a large number of airports that operate commercial passenger flights. Some researchers have attributed this to the country’s history of developing commercial airports on sites that were originally military airfields and its island geography. In areas with concentrated populations such as North West and South East of England, the airports are characteristically closely situated to each other as indicated by (Fig 1). Figure 1: Major UK airports (Mapsofworld.com). The concentration of the airports shows that in highly concentrated areas, there is high airport density. This also shows that a high ratio of UK residents can access at least a major airport within a considerable travel time. In fact, some studies indicate that some 70 percent of people living in UK can access a major airport within one hour, while 75 percent can reach more than 3 airports in a time span of two hours (CAA 2-10). These provide a picture of the exiting situation of the airline industry. It is estimated that more airports may enter the market to serves commercial passenger flights. However, because of the high degree of infrastructural and capital requirements associated with building airports, this may be rare. However, some analysis have provided evidence that such may occur in the foreseeable future because of the growing number of passengers seeking low cost flights, and the number of airlines entering the market. In general, the UK airline industry is served by a comparatively large number of airports that are situated at close proximity. This provides passengers a high degree of choice. It also implies that low cost passenger flights have a range of airports to choose from and an upper hand in negotiating airport fees. Airline and airport market share and business models Over the past three decades, the number of air passengers in UK has increased from 104 million in 1990 to reach 213 million in 2010. This is after a decline was recorded in 2007 due to the global financial crisis. While Heathrow remains UK’s largest airport, having served over 30 percent of the air passengers in UK as of 2010, it has lost some 20 percent of its market share over the last two decades. This has been as a result of the increasing number of airports in UK. Gatwick is the second, serving 25 percent of the passengers (CAA 2-10). In defining the business models, the type of airline model affect the airline’s ability to relocate aircraft among different airports in UK. This affects how the airports compete. Indeed, the significant growth of air passengers over the past three decades is heavily attributable to the different airline business models aimed at consolidating market shares. Basically, three models are used in the UK. These include low cost carriers (LCC), charter planes and full service. Within this perspective, the growth of the number of people travelling by air in the UK is attributable to the Liberalization of the aviation market by EU in the 1990s, to include low cost carriers, which focus mainly on point-to-point travel at low costs. Figure 2: UK airports' passenger airline types As indicated in Fig 2, the number of passengers using the low cost carriers has increased dramatically since the 1990s. It is further indicate that low cost carriers have accounted for almost all the growth, in addition to accumulating demands from full service and charter carriers. For instance, in 2010, low cost carriers accounted for around 42 percent of the air passengers travelling from UK airports. It remained stable at this point over the three previous years, after it quadrupled from a mere 14 percent in 2000 (CAA 12-14). Further analysis indicates that UK airports are distinguishable by the major type of airline business model served. For instance, while full service carriers are dominant at London City and Heathrow airport, the London airports experience a great share of growth in the LCC segment (Fig 3). Across the major airports, low cost carriers served some 71 percent of the passengers in 2011. Figure 3: Passengers by airline type across Gatwick, Stansted and Luton Across Luton, Gatwick and Luton airports, low cost charters served 71 percent of passengers in 2010 from as low as 26 percent in 2000 (Fig 3). In terms of the top airlines operating in UK, while British Airways (full service carrier) was the largest airline over the past two decades, its market share declined substantially, from 26 percent in 1990 to 16 percent in 2010. Over the same period, Ryanair and easyJet increased their market share from 5 percent in 1990, to 14 percent and 15 percent respectively in 2000. They are currently the largest airlines in UK (CAA 14). Others such as Thomson and Thomas Cook retained their market shares by averagely between 4 percent and 7 percent (Fig 4). Figure 4: UK airline passengers at selected airports Benefits from mergers Current airline trends show that more and more airlines are considering mergers or acquisition of other airlines to consolidate their financial sustainability and profitability. However, most airlines tend to weight the potential advantages of merging against the challenges and operational costs (Fleming 1; Carlton, Landes and Posner 65-67). In all, several synergies can be created through mergers (Hansson, Neilson & Belin 10). Mergers have the potential to substantially reduce competition and to promote the quality of services offered to customers. Indeed, airline mergers can restrict competition and improve market power, particularly with regard to non-stop routes to the airport hubs or from the hubs (OECD 9). Airline mergers have the potential to enable airlines to reduce the flight costs and to increase demand by capitalizing on combined networks. This is since through the mergers, airlines are able to seize fast wins in airport operations, procurement and customer systems. In this way, saving on operation cost is more achievable. Additionally, it also impacts the bottom-line instantaneously (Hansson, Neilson & Belin 10). Here, the importance of economies of scale is put into perspective. Additionally, interlining passengers are able to benefit from lower fares when they need to fly beyond international hub airports across small cities, and who need two airlines to finish their trip. When airlines that serve such passengers are aligned, the fare setting process will be consistently at reduced rates. Low flight costs enable airlines to increase their customer base (Kim & Singal 549). Despite the fact that economies of scale may be restricted in the airline industry, it can be achieved through combining used assets, whereby denser passenger flows are created by increasing seat utilization and allowing the use of larger and low unit cost aircraft (IATA 10). Indeed, there are significant economies of scale and scope within the airline industry. Since passengers often prefer frequent service. Absence of loyalty initiatives such as frequent-flyer programs make them to prefer networking which serves large number of destinations. Airline mergers in the hub could capitalize on cost of economies to offer seamless connections, wide range of destinations as well as more frequent service. This has the potential to make their networks more attractive to customers, specifically full-fare paying ones. Studies by OECD (18) have indicated that airlines will often have significant cost advantage, both full service and low cost carriers, when they are able to compete with larger networks through mergers. Mergers can increase an airline’s network scope, hence increasing its routes. Under this perspective, the rationale for seeking a merger for an airline is the economics of running a network as well as the demands of customers (Kim & Singal 549). Naturally, consumers are looking for network scope and depth. The economics of providing network and scope may not be possible for an airline, specifically while it operates cross-border merger. Such network scope will be particularly beneficial for business travelers who travel through several destinations (IATA 3). To the consumer, a major benefit includes provision of quality services through the merger. Under a code share agreement, high quality service is offered to the consumers. Here, the marketing airline sets the code of its ticket on connecting flights that is operated by the partner airline. Consequently, the airlines in the code share agreement are able to offer customers seamless services through coordinated scheduling, lounge access, consistent flier programs and close proximity to gates. Yet again, although there may be no agreement on pricing with a code share agreement, fares may be lowered considerably through the impact of economies of scale through dense passenger flow. Comparison of Australian and United States airline industry trend Both Australian and United States airline industry have faced great turbulence over the last one decade. They have both been faced with a distinct decline in international tourism following the September 2001 terrorist attacks in the United States. In the 2000s, the loss in traffic has been attributed to the Iraq War and the SARS outbreaks in Canada and Asia (Parliament of Australia 2003). However, a marked trend in both Australia and the United States is the growth of low cost carriers. This is unquestionably the single-most important factor that has shaped the airline industry in both countries. The low cost carriers were estimated at 7 percent in the US domestic passengers in 1990. Additionally, their geographic scope was fairly restricted. They were also associated with single carriers, specifically SouthWest Airlines. In 2002, they collectively accounted for some 25 percent of all domestic destinations and origin passengers (Ito & Lee 2). In Australia, such upheavals are represented by major structural changes since the late 1990s. In regards to the major routes, also known as domestic trunk routes, only two airlines operate instead of the initial four. In 2000, Ansett Australia and Qantas Airways dominated the domestic trunk routes, with new entrants such as Impulse Airlines and Virgin Blue coming up in the niche markets (Parliament of Australia 2003). However, both countries have experienced a growth in the number of low cost carrier airlines. In the United States for instance, a number of other low cost carriers such as JetBlue, AitTran, Ata and Frontier now operate (Forbes and Lederman 2-3). Like the United States, Australia has also experienced rapid growth of low cost carriers, with two Australian carriers being established in the recent times to meet the needs of the growing market. Major entrants include Freedom Air and Australian Airlines (Parliament of Australia 2003). However, unlike the United States where SouthWest that operates as low-cost international airlines are independently-owned, the low cost carriers in Australia are not independent. Additionally, they are stand-alone divisions of major carriers such as Air New Zealand and Qantas. Further, the scope of low cost service that was in the 1990s limited to some major cities now operate across the country. The same trend is noticeable in Australia. In both Australia and the United States, the regional airlines that operate short and medium haul scheduled airline service connect smaller communities with metropolitan cities. Additionally, nearly all regional airlines operate under a code and share agreement with one or two full service carriers. Under such agreements, the regional airlines operate on behalf of the full service carriers, who in turn market and ticket the flights under their own two-letter flight designators code (Forbes and Lederman 2-3). In addition, the rapid growth of low cost carriers in both countries have been criticized for being the primary cause of the financial crisis that face the full service carriers. In the United States for instance, competition from low cost carriers has recently made large full service carriers such as Delta and United to shift to low-cost models. More specifically, the continued growth and low cost carriers and the reduced dominance of the full service network in the market signify trends in the airline industry deregulation that dates back to 1978 in the United States and 1989 in Australia. In Australia, the level of competition varies extensively in the industry. For instance, in the domestic trunk airline sector, the stiff competition that initially existed between Ansett, Qantas and new low cost carriers that recently emerged, newer airlines have come and collapsed due to financial crisis since the industry’s deregulation in 1989 (Forsyth 15-17). This has prompted a more restrained competition between Virgin Blue and Qantas, since the latter is the only service provider of full service nationwide flights. Indeed, this has been the single-most success factor for the two major airlines in Australia (Cento 15-18). The same critical success factor of Australian Airlines can be replicated in the United States, if full-service carriers come up with own divisions that operate low cost carrier airlines. Qantas has defended its market share against low cost carriers through launching CityFlyer services on key trunk routes. On the other hand, Virgin Blue has concentrated on operating in high density routes, instead of operating nationwide network. In all, their key success factors in the Australian Airline industry are expansion, where they have both increased their fleet capacity. Conclusion The growth of low cost carriers in the UK, the United States, and Australia has impacted the airline industry since the 1990s. In addition to being credited for the increase in number of passenger travelling by air in the last two decades, it has also been the primary cause of financial crisis for large or full service carriers. Current airline trends show that more and more airlines are considering mergers or acquisition of other airlines to consolidate their financial sustainability and profitability. In the UK, Ryanair and easyJet are the two major low cost airlines. Their key success factors included high aircraft utilization, charging for extra luggage and quick turnaround times. Certain factors in their practices have prompted change in airline industry regulations such as formulation of Regulation 261/2004 concerned with compensating passengers when the flights were cancelled, delayed or denied boarding. Works Cited CAA. UK Airports Market - General Context. Civil Aviation Authority Working Paper, 2011. Carlton, Dennis, William Landes and Richard Posner. "Benefits and Costs of Airline Mergers: A Case Study." The Bell Journal of Economics 11.1 (1980): 65-83 Castiglioni, Roberto. Easyjet Changes Ru,les For Transport of Disabled Passengers. Reduced Mobility Rights, 2012. 13 Dec 2013, Cento, A. The Airline Industry: Challenges in the 21st Century. Springer-Verlag Berlin Heidelberg, 2009. Dobruszkes, Frederic. "An analysis of European low-cost airlines and their networks." Journal of Transport Geography 14 (2006): 249–264 Fleming, Susan. Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines: Congressional Testimony. Diane Publishing, 2010. Forbes, Silke & Lederman, Mara. The Role of Regional Airlines in the U.S. Airline Industry, 2006. 14 Dec 2013, Forsyth, Peter. Low Cost Carriers in Australia: Experiences and Impacts. Paper presented at the Air Transport Research Society Conference, Seattle, July14-16, 2002. Hansson, Tom, Neilson Gary & Belin Soren. Airline Merger Integration: Take Off Checklist, 2001. 13 Dec 2013. Kim, Han & Singal, Vijay. "Mergers and Market Power: Evidence from the Airline Industry." The American Economic Review 83.3 (1993): 549-569 Lambert, Simon, Tara Evans & Adam Uren. Why a three-hour flight delay could now get you £500: How to claim compensation after couple's landmark court victory. This Money, 2013. 14 Dec 2013. Lee, Darin & Ito, Harumi. Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and Future, 2003. 14 Dec 2013, Malighetti, Paolo, Stefano Palearia & Renato Redondi. "Pricing strategies of low-cost airlines: The Ryanair case study." Journal of Air Transport Management 15 (2009): 195-203 Mapsofworld.com. UK Airports - A Guide to Top Class Airports in UK, 2013. 13 Dec 2013. Shrager, James. The Success of easyJet and Other Low Cost Airlines is Due to Their Focus on Pursuing A Pure Low Cost Strategy and the Subsequent Ruthless and Effective Management of their Value Chain. University of Nottingham: Nottingham, 2007 Sull, Don. "Case Study easyJet’s $500 Million Gamble." European Management Journal 17.1 (1999): 20–38 Hanpobamorn, Saijai. Low-cost and Traditional Airlines: Ratio Analysis and Equity Valuation by the Residual Earnings Model, 2007. 13 Dec 2013, IATA, The Economic Benefits Generated By Alliances and Joint Ventures, 2012. 13 Dec 2013, Kupka, Stefanie & Jamart, Thierry. Does the Customer Really Matter? The Achievement of Sustainable Competitive Advantage Through Relationship Marketing, 2009. 13 Dec 2013, OECD. Airline Margers and Alliances, 1999. 13 Dec 2013, Parliament of Australia 2003. Australian Airline Industry. Aircraft and Aerospace Magazine (2003). 14 Dec 2013, Press Association. 12 airlines agree to scrap last-minute debit card fees after OFT investigation. The Guardian, 5 July 2012. 13 Dec 2013. Sorensen, Thomas. An analysis of the European low fare airline industry-with focus on Ryanair, 2005. 13 Dec 2013, Read More