Operations Management: Easy Jet's Capacity Management - Term Paper Example

Contents Contents Capa management in Easy Jet Airline 3 Executive Summary: 3 Academic theories on capa management 3 Application of theoretical concepts on easy jet 6 Capacity Management: 7 Easy Jet’s Current Capacity: 7 Capacity Planning: 7 Forecast Demand: 8 Demand Variations: 8 Issues: 8 Reconcile Capacity and Demand: 8 Last Minute Cancellation: 9 Solutions: 9 Over Booking: 9 On the Spot Resale: 9 Issues: 9 Off Season Low Demand: 9 Solutions: 10 Rewards in Off Season: (Kim, Shi, Srinivasan, 2004) 10 Issues: 10 Business Class contradicts with low cost focused strategy: 10 Solutions: 10 Business plus Card Offer 10 Issues: 10 Business trips (Easy Jet plus Booking) are more profitable than Leisure: 10 Solutions: 11 Capacity Shifting 11 Issues: 11 Eleventh Hour Easy Jet Plus Booking: 11 Solutions: 11 Keep Seats for reserve in advance: 11 Capacity Management increases competitiveness: 11 Recommendations: 12 Go Green: 12 Fuel efficient engines: 12 Capacity Utilization: 12 Customer Loyalty: 12 References: 13 Capacity management in Easy Jet Airline Executive Summary: The report of Operations Management deals with the capacity management in the Easy Jet airline. Easy Jet is a United Kingdom based airline that started with the cost focus strategy. Although the airline started on a small scale but due to its dynamic model of offering such low fares that travelling has now become easily reachable for all classes who earlier could not find it affordable at all to travel in a plane. The report starts with theoretical literature review conducted in previous years on capacity management in airline industry by various scholars. Later those theoretical concepts were applied on the Easy Jet. Certain issues faced by easy jet were discussed and solutions that they followed to solve the problems. The report ends with few recommendations. Academic theories on capacity management “Capacity management is the ability to balance demand from customers and the capability of the service system to satisfy demand”. (Armistead and Clard, 1994, p. 6) Dana, Orlov (2008) sheds light on importance of demand shifting. The paper states that in business which does not charge all the customers equally should make use of demand shifting. Demand shifting is highly supported if the database of the customers is maintained. If demand is forecasted and in times of high demand all those passengers who prefer lower fares are given the option to shift their trips in seasons of lower demand. This is only possible if proper database of the customers are maintained and records are kept. All those customers who are particular in terms of time and even are willing to pay more to reach on time should be given preference in times of peak season. Shumski, Zhang (2008) states that capacity should be allocated before time after demand is forecasted. And in the case where capacity is exhausted, substitute capacity should be provided. It further adds that demand should not go unmet. The company can provide a better place to the customer. The company should also make sure that a very high class product is not provided to the low class customer. The paper further adds that the company should always ration some capacity to the high profile regular customers so that their demands should not go unmet in any circumstances no matter how late it arrives. Wang, Sun state that profit maximization is only possible if the appropriate product is provided to the right customer at the most appropriate price, no matter whatever the circumstances may be. This can also be known as revenue management. This negates charging of uniform price to all the customers and supports the strategy that every customer should be charged according the value the customer holds or should be charged as much as he or she is willing to pay. In order to maximize the revenues the businesses should allocate the capacity in advance so that any opportunity to satisfy the need of high class customer that might come any time should not go wasted. Curry, (1990) stated Capacities should be divided into different classes like high class middle class as well as low class. The best way is to keep filling the low class first and store the high as well as middle class for later usage at higher rates. The paper conducts an experiment to check for profits based on first come first serve as well as capacity allocation methods. After simulation it was proved that capacity allocation generates considerable higher profits as compared to first come first serve process. Pak, Daker, Kindervater, (2003) state that in industries such as airline industry earlier it was stated that they have fixed business as well as economy class seats but this paper negates the concept of limited number of seats and introduces the concepts of convertible seats. As per the current demand the economy class can be converted to business class or business class can be converted to economy class without losing the profits. Since airline industry is based on the model that all passengers are not charged uniformly and there is a limited capacity therefore instead of serving customers on the basis of first come first server if customers are dealt on the grounds that how much revenues they are generating then revenues can be increased. Initially curtains were moved to convert an economy class to business class or a business class to economy class which is now not preferred instead number of seats should be increased in business class to convert to economy class. Sylla, (2000) paper suggests that this is a good practice especially in times of higher seasonal demands. The paper also suggests that in order to make up for eleventh hour seat cancellation the airline should make prior over bookings. The paper proves that through convertible demand the profits can be increased by good amounts. Gothesson and Ryman (2004) stated that four factors are really important in dealing with capacity management that are how much capacity exist, how much change is possible, how fast the company should react as well as the costs that are involved in the process. Capacity management has been declared the most important tool in business with seasonal demands. Donaghy and Mc Dowell (1997) suggests that in industries like airline industry accurate data is really important to forecast future demand. Window dressed data or data full of show can be really harmful as it can never predict the accurate demand of the business in each and every season. Donaghy and Mc Dowell 1995, p.146 further suggests that there are two types of customers one who are leisure customers while the other are business customers. McAfee and Velde suggests that Business customers are difficult as well as a good source of revenue therefore capacity should be allocated for their eleventh hour urgent needs as they are unsure of their travel plans so most probably expected to come when all planes are already filled. While this is hardly the case with the leisure customers. A paper by Sun (2007) suggests that the worst thing for a business is surprise. The business should be proactive instead of reactive to anticipate upcoming increase in demands and allocate capacity accordingly. The paper further suggests that increasing the capacity always never helps. Bilotkach (2005) focuses that each and every customer in an industry like airline industry is different and has different needs so there is nothing wrong if they are charged differently according to revenue management system. The paper concludes that the variations in prices are negligible in case of leisure customers but immense in case of business customers. The paper also states that limited capacity is the most important factor that is why prices vary to such a high extent among business travelers. Lai. Ng, (2005) states that generally overbooking is preferred way to revenue maximization than on the spot resale of seats upon eleventh hour cancellations, but the writer suggest that the airlines should try on the spot resale of tickets at the eleventh hour cancellation of seats. This would generate high profits. Application of theoretical concepts on easy jet Easy Jet is a European airline that started few decades back but soon became a well known in the aviation industry. It is a business model based on web with a low cost service that has now extended from United Kingdom to mainland Europe. Easy Capacity Management: Capacity management is the method through which gap between demand and supply is eliminated. Capacity has to be managed in businesses that possess limited capacity or limited supply while demand varies differently according to the customer or on the basis of seasonality. In business where supply or capacity cannot be increased in short run or increasing capacity would incur huge cost, in such cases capacity management is the solution. Easy Jet’s Current Capacity: Easy Jet although possess 250,000 seats but still face huge demands though out the year which is not possible to meet if capacity management is not utilized. If first come first serve is applied then the company might lose huge revenues as it will have to let go high profile high class business seat customers who are willing to pay as much as demanded provided they get the seat at the eleventh hour. Capacity Planning: Capacity planning is managing capacity according to the demand. Easy jet follows the match strategy as it will follow lead strategy that is if it will increase supply than they will have to buy more aircrafts this would not only cost them the air plane charges but their cost of operations would increase drastically. Huge capital would also be needed in this case. If they would follow lag strategy that is in spite of heavy demand if they would not change the supply that is seats then they would loss huge revenue which is not advisable as no business would like to lose such opportunity to make profits. In this case they would not be able t o make up for their costs of operation. Therefore Easy Jet is trying to match the supply side with the demand side. Forecast Demand: The company can only manage capacity if they know their actual almost accurate demand in the different seasons. Mostly companies try to window dress their data hiding the actual picture and showing the investors and financers that their products are in huge demand. But in this case Easy Jet keeps in mind that this strategy would affect their business badly in the long run. Easy jet can only manage capacity if the actual records of demand are maintained. Information t5echnology as well as marketing department maintain historical accurate demands of the Easy jet and the information software forecasts the future demands in different seasons on the basis of previous years’ demands. Easy jet uses computer based software that uses statistical analysis to forecast future demand based on historic data. Easy jet makes sure that they keep margins to satisfy the demands in short as well as long run. Demand Variations: Easy Jet deals with two types of customers. Leisure trip customers as well as business trip customers. So much variations in the demands of leisure trip customers are not found as leisure trips are highly in demand in times of vacations as well as they are willing to adjust if given any discount or reward. Business trip customers are on the other hand possess higher variations in demands as their trips are unpredictable throughout the year. Secondly they are reluctant to earlier booking. Thirdly they are not willing to make any changes to their programs. But in the airline industry, business class visitors are high profile visitors, as they are willing to pay as much as demanded. Issues: Reconcile Capacity and Demand: Easy jet follows the strategy of being cost focused. In order to charge lower from their customer it is very important for Easy Jet to keep their costs as low as possible. For this purpose they cannot afford to fly with empty seats or last minute cancellations. For this purpose they follow the following strategies: Last Minute Cancellation: The major problem faced by almost every airline operating is that the customers cancel the seat few hours or even minutes before takeoff. Since Easy Jet is cost focused airline so flying with empty seats incur them huge losses. Larger number of empty seats even unable Easy Jet to cover their fixed operating costs. Solutions: Over Booking: The issue has been resolved by over booking that is Easy Jet always keeps a certain number of customers in case if any confirmed customer cancels the seat, it goes automatically to the customer in the over booking list. The number of overbooking is also forecasted by the system on the basis of historical data through statistical information system software. On the Spot Resale: Another solution to the issue of last minute cancellation by the customer at the eleventh hour is resale of the tickets. If there is still any seat left over after over booking that seat is still sold to the interested customer in the waiting. This helps the Easy Jet to maximize the revenues that could have been lost if the air plane had been flying with the empty seats. Issues: Off Season Low Demand: Since airline industry is based on seasonality therefore there are times in the year when air planes are fully loaded with the customers such as vacations, events such as Christmas or any sports world cup, mega event etc. similarly there are seasons when the bookings are the lowest and planes fly with empty seats. In off peak seasons Easy Jets profits are reduced by huge extends and at time it hardly reaches breakeven incurring huge operating costs. Solutions: Rewards in Off Season: (Kim, Shi, Srinivasan, 2004) The solutions to off peak season less bookings is that the customers are offered rewards such as lower costs or extra complimentary flying time incase if they delay the trip from peak season to off peak seasons. In this manner Easy Jets maximizes it revenues by holding the customer for the off peak seasons Issues: Business Class contradicts with low cost focused strategy: Usually business class is revenue gaining area in an airline industry over economy class or luxury class customers. But since Easy Jet follows low Cost focused strategy therefore it is not possible to introduce high charging business class for business travelers in their planes. At the same time such a revenue sector of business travelers cannot be ignored. Solutions: Business plus Card Offer It is not advisable neither affordable to ignore business travelers, therefore Easy Jet has introduced Business Plus card which is for business trip customers who can get their seats confirmed even at the eleventh hour. Business Plus card customers are offered certain privileges such as easy and convenient boarding etc. Issues: Business trips (Easy Jet plus Booking) are more profitable than Leisure: As it is well known for airline industry that business trip customers are more profitable then leisure trip customers, as they travel throughout the year while leisure trip customers mostly travel in vacations, therefore Easy Jet cannot think of letting go their business trip customers over leisure trip customers. Solutions: Capacity Shifting Business plus customers are allocated more probability in capacity than usual customers. Issues: Eleventh Hour Easy Jet Plus Booking: Since Business trip customer plans are decided at the eleventh are so they are often reluctant to eleventh hour booking. They often are ahead of schedule or at times late therefore they have no option but to go for eleventh hour booking. Solutions: Keep Seats for reserve in advance: In the usual case of late bookings by business plus customers if first come first serve strategy is followed then no seat would be left for business plus customers as leisure trip customers mostly book flights ahead of schedule. As a result a business trip customer is lost resulting into loss of revenue. In this case the best strategy is to keep seats reserved for business plus card customers. As forecasted by the software the number of seats are already allocated or reserved for the business card plus customers. Capacity Management increases competitiveness: Better capacity management would provide better seats as customers would not face refusal due to lack of capacity. Similarly better capacity management would reduce operating costs especially the fixed costs as planes would not fly with empty seats. Recommendations: Go Green: The airline should focus on sustainable development that is should go green. Fuel efficient engines: Fuel efficient engines should be used. Normal planes should be replaced with fuel efficient engines as this would save fuel. Capacity Utilization: The airline should further try to capture more airports and extend its capacity In long run and fully utilize it to maximize their revenues. Customer Loyalty: The airline should retain and maintain customer loyalty by maintaining lower fares and providing more incentives. References: Armistead and Clard, 1994, [Online]. Available at: [Accessed 24 May 2011]. Bilotkach, Volodymyr (2005) Understanding Price Dispersion in the Airline Industry: Capacity Constraints and Consumer Heterogeneity. Available at: [Accessed 24 May 2011]. Curry, R. E. 1990. Optimal airline seat allocation with fare classes nested by origins and destinations. Transportation Research 24(3)193-204. Dana, James D. Jr. Orlov, Eugene (2008), Internet Penetration and Capacity Utilization Available at: [Accessed 24 May 2011]. Donaghy, K., McMahon, U. and McDowell, D. (1997) Implementing Yield Management : Lesson from the Hotel Sector, International Journal of Contemporary Hospitality Management., 9 (2), pp. 50-54. Donaghy, K., McMahon, U. and McDowell, D. (1995) Yield Management: An Overview, International Journal of Hospitality Management, 14 (2), pp. 139-150. Gothesson, Leyla and Ryman, Susanna (2004) revenue management within Swedish Hotels. Available at: [Accessed 24 May 2011]. Kim, Pak. Byung-Do. Shi, Mengze. Kannan, Srinivasan, 2004, Managing Capacity through Reward Programs [online]. Available at: [Accessed 24 May 2011]. Lai, K. Ng, W. 2005, “A Stochastic Approach to Revenue Optimization”. Computers & Operations Research, Volume 32, Issue 5, May 2005, pp. 1059-1072. McAfee, R. Preston. Velde, Verate. Dynamic Pricing in the Airline Industry [online]. Available at: [Accessed 24 May 2011]. Pak, Kevi., Dekker, Rommert. Kindervater, Gerard. (2003), Airline Revenue Management with Shifting Capacity Available at: < papers.ssrn.com/sol3/papers.cfm?abstract_id=483854 > [Accessed 24 May 2011]. Shumski, Robert A. Zhang, Fuqiang (2008) Dynamic Capacity Management with Substitution Available at: < apps.olin.wustl.edu/faculty/zhang/Zhang-Journal/substitution.pdf > [Accessed 24 May 2011]. Sun Microsystems (2007), Best-Practice recommendations Capacity Management and Financial Performance [Online]. Available at: < http://www.sun.com/emrkt/sunspectrum/capacitymanagement.pdf> [Accessed 24 May 2011]. Sylla, Abdoul, 2000, Operations Research in the Airline Industry [online]. Available at: [Accessed 24 May 2011]. Wang, Qiwen. Sherry Xiaoyun, Sun. Marginal Revenue-Based Capacity ManagementModels and Benchmark. Available at: [Accessed 24 May 2011]. Read More