EasyJets Management Decisions and Separation of the Companys Operations - Case Study Example

The Impact of Brexit on the Airline Industry: The Case of EasyJet’s Management Decisions and Separation of the Company’s Operations Introduction The United Kingdom voted to leave the European Union. This phenomenon, now commonly referred to as Brexit, will have far-reaching effects on the aviation industry. In the recent past, EasyJet, one of the leading low-cost airlines based in the United Kingdom, announced that it is planning to create a separate entity to operate at the continental level and retain its current operations in the United Kingdom (BBC News, 2016). This essay examines the impact of Brexit on the aviation industry in general and the management decisions that are made in the case of EasyJet in particular. The impact of Brexit on the aviation industry is examined in terms of the possible changes that are likely to occur in the regulatory, economic and other external factors of the environment of the industry. The impact of Brexit on the management decisions of EasyJet is evaluated in terms of how the decision by EasyJet’s management to split the company’s operations will help the company address new challenges and take advantage of new opportunities. The Impact of Brexit on Airline Industry The decision made by the United Kingdom to leave the European Union is likely to affect the airline industry in several ways. In the first place, the departure of the United Kingdom from the European Union will affect the aviation agreements that the UK is currently a party to (Little 2016, p. 2). For example, the UK is part of the longstanding ‘open skies’ aviation agreement among the members of the EU (Gillespie 2001, p. 17). Under the ‘open skies’ aviation agreement, airlines from different countries that are members of the EU have rights to move across the member countries freely. Therefore, the EU aviation agreements grant airlines access to all the member countries without stringent regulations. As a result of Brexit, the UK will lose its rights as a member of the EU and, by effect, a party to the agreements. Therefore, the UK will have to negotiate for new aviation agreements with the remaining EU countries (Little 2016, p. 3). Developing new EU-UK aviation agreements will be necessary to help the local EU airline industry. Furthermore, the need to enter into new negotiations with the remaining member states of the EU will present new challenges (HFW 2016, p. 1). Essentially, the UK will be economically weaker as a non-member of the EU (Deloitte 2016, p. 3). Hence, the country may be in a weak position when negotiating for aviation agreements with the remainder of the EU. The second impact of Brexit on the aviation industry will be seen in the form of regulatory changes involving the United States. Currently, the United States and the entire EU are parties to the EU-US aviation agreement. The EU-US agreement grants US and EU flights access to the EU countries and the US respectively (Abeyratne 2012, p. 338). Given that the United Kingdom will now not be a member of the EU, it will be necessary for the UK to develop new aviation agreements with the US. The US is an important partner to the EU as well as the UK as a non-member of the EU for various reasons. At the most basic level, the US is one of the most important trading partners of the United Kingdom. Therefore, for the United Kingdom to counter the possible negative effect that may arise from the implementation of its decision to leave the EU, it will have to negotiate for a new UK-US open skies agreement (Clyde & Co 2016, p. 2). It has also been observed that Brexit will terminate the membership of UK in the European Aviation Safety Agency (EASA) (Belobaba, Odoni & Barnhart 2015, p. 43). EASA plays a leading role in the European aviation industry by regulating safety standards. Therefore, when the UK formally exits the EU, it will have to develop new regulations to govern the operations of its aviation industry. The third impact of Brexit on the aviation industry will be felt in the form of changes in demand for services and how airline companies will respond to the changes (Cancian 2016). Fundamentally, Brexit will have a direct effect on tourism. Currently, tourists from the other countries that form the EU can travel to and out of the United Kingdom with relative ease. Currently, the number of visitors to the United Kingdom who originate from countries that are members of the EU form 44% of the total number of visitors to the UK (IATA 2016, p. 3). Visitors from the EU as well as other countries are a core component of the United Kingdom’s tourism industry. However, following Brexit, visitors to the United Kingdom are likely to face more stringent restrictions in the EU region as it is the case for visitors from non-EU countries. This is likely to have a direct impact on the aviation industry because the number of visitors who are travelling to and from the United Kingdom is likely to reduce. How Brexit will affect EasyJet in regard to management decision-making Primarily, it can be seen that Brexit will affect airlines at four distinct levels: operational, strategic, economic and regulatory. Therefore, companies that operate in the industry have to respond to changes in the four aforementioned areas by developing and initiating strategies that they can use to tackle challenges and take advantage of the opportunities effectively. To understand how Brexit will affect the management and strategic decisions of EasyJet, it is important to consider the business model that the airline uses. EasyJet is one of the leading low-cost airlines in the world. Low-cost airline models emphasise on the need to cut down operational costs as opposed to using the full-service model of conventional carriers (Cento 2008, p. 9). Because the carriers manage to reduce their overall costs of operation, they gain cost advantages over the conventional carriers (Koch 2010, p. 157). It has been based on this model that low-cost carriers have managed to thrive in the airline industry over the years, managing to overcome the low margins that characterise the industry (Doganis 2006, p. 7). Strategically, EasyJet emphasises the following aspects: cost advantage, effective capital utilisation, growth and the need to constantly innovate (EasyJet Plc 2015, p. 10). It is based upon these values that the company has managed to build its current business based on the European market. However, Brexit is likely to disrupt this business model. Brexit will create challenges as well as opportunities for the various aspects of the business model of EasyJet. Therefore, the company has to alter its strategies and operations in light of changes in the regulatory and business environment that will arise as a result of Brexit. For example, the decision by the company to create a separate division to operate at the continental level is informed by various factors. On the one hand, the company has been taking advantage of rapid growth of low-cost carrier services within Europe over the years. For the 2015 financial year, the company registered a 3.5% increase in revenue and 6.0% increase in the volume of passengers (EasyJet Plc 2015, p. 9). According to IATA (2015), the market for passenger air travel in Europe is expected to continue growing steadily over the next two decades. Similarly, EuroActiv (2015) predicts that the European aviation market is expected to grow in terms of the number of flights across countries and the volume of passengers who travel across the European countries. On the other hand, EasyJet is facing a rapidly expanding domestic market in the UK (EasyJet Plc 2015, p. 10). Predictions indicate that demand in the UK aviation industry is likely to remain stable over the long-term (Trend 2016). Therefore, it is necessary for EasyJet to take advantage of the predicted growth in demand in the UK market as well as across Europe. However, Brexit means that the UK market will be distinct from that of the other EU countries. Differences in these two markets will be clearly seen concerning regulations and other economic and environmental aspects. For example, the UK, as a non-member of the EU, will play a diminished role in the policy formulation process of the EASA (Erkelens et al. 2016). Furthermore, changes in the regulatory environment following Brexit will cause a degree of uncertainty in the local aviation market in the UK as well as in the entire Europe (Forbes 2016; Norton Rose Fulbright 2016, p. 3). Therefore, the management of EasyJet has to make strategic as well as operational changes to ensure that the business maintains its performance in the post-Brexit environment. To achieve this objective, it is necessary to separate the operations of the business. Conclusion In conclusion, Brexit affects the airline industry in terms of changes in the regulatory environment as well as economic and operational factors. Brexit means that there will be changes in the regulatory environment governing the local UK aviation market. Furthermore, changes will be seen in terms of the demand for passenger air travel services within the UK. These changes will disrupt the business model of EasyJet which, up to now, has heavily relied on cost leadership, innovation and operational efficiency to grow as a leading low-cost European carrier. It is based on the need to address the challenges and take advantage of the opportunities arising from Brexit that the EasyJet management is creating a new entity for the continental market. In essence, the current entity will concentrate on the domestic market. This change in the strategic objectives of the company will help it effectively address the uncertainties arising from Brexit. References Abeyratne, R 2012, Strategic issues in air transport: Legal, economic and technical aspects, Springer, Cologne. Belobaba,P, Odoni, A & Barnhart, C 2015, The global airline industry, John Wiley & Sons, Mason. BBC News 2016, EasyJet to set up continental-based airline, viewed 8 December 2016, via . Cancian, D 2016, UK aviation industry faces post-Brexit challenges despite likely increase of tourists, International Business Times, 19 July, viewed 7 December 2016, . Cento, A 2008, The airline industry: challenges in the 21st century, Springer, Heidelberg. 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