Budgetary Fundamentals of Easy Jet - Essay Example

CONTENTS Page Q Is budget airline segment an attractive place to compete 2 Figure Porter's Five Forces 4 Q. 2. How can Easy Jetdeliver such low prices 6 Figure 2: Porter's Value Chain Model 7 Q. 3. How does Easy Jet create value for the customers 9 Figure 3: Consolidated cash flow statement (unaudited) 11 Q. 4.Should Stelios extend the Easy brand 13 Q.4.a. Will Stelios have the core competence to deliver the product successfully to the market 13 Q.4.b. What are the key success factors for each of these new businesses 14 Q.4.c. Will Stelios have the core competence to deliver the product successfully to the market 14 Table 1: EasyJet Financial Information 14 Table 2: EasyJet Balance Sheet 15 Table 3: Flights depart Bristol International Airport at 10:30 hours 16 and arrive at Newark Liberty Airport at 13:25 hours Table 4: Budgetary Fundamentals of Easy Jet - 1999 17 References 18 EASY JET (ONE BUDGET AIRLINE) Q. 1. Is budget airline segment an attractive place to compete Porter's Five Forces are of particular importance to understand Easy Jet's own strategic imperatives. Porter's Five Forces signify the contextual significance of supplier power, buyer power, competition, the threat of substitutes and the threat of new entrants into the market (Porter, 1980). Porter's Generic Value Chain can be applied to examine the firm's ability to connect primary value chain activities with support services (Porter, 1998). Easy Jet has made use of both strategies to better advantage in marketing its products. Outlined below are the Porter's Five Forces and their strategic weight on the Easy Jet's competition policy (Ibid Porter, 1980). - Supplier power - Buyer power - Competitive rivalry - Threat of substitutes - Threat of new entrants Supplier power refers to the degree of freedom that suppliers have over the firm which buys supplies from them. Easy Jet in particular and the budget airline industry in general have to procure supplies from suppliers in the open market where rules of competition might threaten Easy Jet's own strategic objectives as well as others. For example customer care practices require a host of supplier networks to coordinate every aspect of the marketing process from the time of inquiry to the end of the journey. How Easy Jet would respond and how would the rest of the industry respond to all this, depend on a number of other variables such as the concentration ratios in the supplier industries, the availability of and the degree of dependency on credit, macro-economic variables, e.g. interest and business tax rates and a host of other factors. In the airline industry it's an unwritten rule that the aggregation of strategic supplier networks across a range of ancillary services - e.g. handling customers' inquiries to the seat allocation process - would benefit only those airlines which place their products in strategic sub-segments appropriately and immediately. Buyer power is perhaps the most effective force with far reaching consequences for the business that the company has to face. For instance customers of short haul budget airlines carry such weight in the decision making process of the individual airline to such an extent that they can drive prices down if they happen to boycott a certain airline or airlines on the ground that their services are below their expectations. Buyer power has also been studied in the budget airline market segment with reference to price and income elasticities of demand. The European no-frills low cost airline market segment is ruled by the same economic principles but its qualitative shift has brought about a highly articulate population of consumers whose demand for the product at a given time is determined not only by the price and income but also by cross elasticity of demand based on comparative competitor advantage. Assuming a price elasticity of demand equal to one for the main operators, still Easy Jet has successively attracted more customers than others by cutting prices. Rivalry or competition in the budget airline market segment is almost intense because existing scale economies of individual competitors would serve as the stepping stone to a price cutting war. British Airways (BA), BMIbaby, Ryanair and Virgin Atlantic all have excess capacity and thus the slightest hint of cost and productivity benefits associated with the probable winning over of market shares of rivals would compel them to act quickly and decisively. As a corollary of the above, there is an ever increasing tendency among fairly big firms in technology-centric industries, to merge together to achieve quick returns. The recent acquisition of BMI by Lufthansa shows this trend. In the budget airline industry numerous substitutes exist in the form of price competition, i.e. X-firm's product which is almost identical to the Y-firm's product, is preferable if the former product's price is lower than the latter's. Easy Jet is not altogether impervious to this rule. Its current operations are highly dependent on EU-wide market regulations which seek to impose limits on divergent market behavior of airlines. Finally Porter's Fifth Force is about the threat of entry by new firms and it has a very negative impact on the existing firms in the industry. Here what matters is the cost of production. Those firms whose costs are higher will be compelled to shut down. Easy Jet's current efforts to cut costs would definitely be a positive factor in contributing to its long term survival. But nevertheless the existing level of competition is further exacerbated by the threat of new entrants. Right now there are 50 odd budget airlines operating in Europe. Most of them are focused on home routes. Already some of them are planning to merge. There is a persistent threat to existing operators coming from possible alliances and re-alliances within the industry rather than from outside. While the level of competition in the European budget airline market segment has been determined by the strategic regulatory environment in addition to other variables, the regulatory regime has done more to prevent easy entry than to enable healthy competition. In fact idle scale economies in the industry have forced authorities to reorient competition towards achieving price-service-value synergies at the expense of undesirable outcomes associated with free entry. Against this backdrop Porter's (1998) Generic Value Chain analysis can be used to study Easy Jet's primary value chain activities and support services. As GVC implies Easy Jet has been placing emphasis on internal value creation thus passing the benefits to customers as the pioneer of "no-frills low cost short haul flying" in Europe. This unique corporate proposition is more likely to sustain it in the long run in this market segment. The relative attractiveness of a market segment depends on profit margins. Easy Jet so far has not incurred large scale losses that many of its rivals have suffered. This marketing cum financial outcome has helped the airline to overcome much of the competition on its current routes. Q. 2. How can Easy Jet deliver such low prices The Southwest Airline of the US has been a very good business model. Both Easy Jet and Ryanair in Europe adopted this model of not offering connecting flights and service on board. Value creation efforts across a number of market-centric variables including external value chain management by Easy Jet would enable it to achieve low operating costs. Thus market outcomes such as a persistent rise in sales volume would enable the firm to add incremental values to its product portfolio. While Easy Jet is not alone in the budget airline market segment in Europe, there are formidable constraints faced by its rivals in the evolving strategic regulatory and competitive environments. For instance Easy Jet's own formidable marketing machine has not been able to overcome some of the very difficult issues such as the market/customer orientation strategy of rivals. Above all the competitor orientation strategy of rivals has forced Easy Jet to bring down prices below a certain minimum. The following line has been taken from its website. "We promise our fares will be the lowest available on any route! If we're wrong, we'll refund you double the difference!" (www.easyjet.com). Porter's (1985) value chain analysis involves primary activities - inbound logistics, operations, outbound logistics, marketing and sales and service. Support activities include procurement, Human Resource Management (HRM), technology development and the firm's infrastructure. Porter placed equal emphasis on all activities though it's not a secret that different managers have different approaches to it. Some of them believe in only a few variables to bring about success while others adopt a holistic approach by encompassing all of them into a systemic equation. The above diagram, Figure 3, shows how Porter's Value Chain Model can be constructed to achieve an integrated whole in all relevant variables. Inbound logistics includes all materials delivered by suppliers. Easy Jet has successfully adopted a supply chain management network in which supplies are sourced within a certain geographical limit to minimize costs. Similarly they are procured from a core group of very competitive bidders. Operations management process at Easy Jet has acquired a greater significance in the light of European competitive environment. Low costs in operations at Easy Jet have particularly been associated with break-up of operations into manageably smaller sizes. Outbound logistics involve such activities as the delivery of the final product and associated processes. In other words, effectively outbound logistics involves selling tickets to potential customers and delivering service volumes. Marketing and sales have to be pitched higher in order to create awareness among potential customers. Easy Jet has done both remarkably well though its marketing and sales efforts have been lacking in regenerating sales within the shortest possible time gap. For instance the first traveler would have qualms about booking a flight on Easy Jet the second time. In other words marketing communication function at Easy Jet is cluttered with many rules that prevent potential customers from accessing its website to order a ticket online. This has in fact increased costs because it's essential to install sophisticated software to track click-and-give up customers. After sales services and associated services with product delivery at Easy Jet have gone a long way to reduce costs. For instance complaint handling system is well maintained though numerous complaints about Easy Jet's service quality are registered by customers on blogs. Actually it takes more money to process complaints than to put in place a mechanism to avoid them. Such complaints have been basically centered on its inability to carry out checks and investigations about the complaints immediately. Next there are the support activities. Procurement of supplies involves a lot of planning. Easy Jet has successfully been procuring quality supplies at much lower prices for a long time though rivals are not far behind. BA for instance has not failed to realize the potential of lower costs in procuring supplies. However, it's the HRM function which occupies a very important place in the whole value chain management process. Easy Jet has been careful enough not to strain its staff at each level of operations, including pilots and flight attendants. On-the-job Training and Development of skills at Easy Jet is one of the highest in quality and the scheme has produced some of the finest people in the industry. An efficient staff reduces costs. Easy Jet's competitive advantage has been sustained through good HRM practices. Technology matters not only in service delivery but also in communications. Easy Jet has the biggest fleet of Airbus A319, i.e. 135 in service and a further fleet of 65 on order by the beginning of 2009. These spacious aircraft allow more leg-room and comfort to the passenger. Easy Jet is a super brand with technology as the basis of service provision. The average of its fleet is just 3.5 years. Technology advantage of Easy Jet lies in this strength and the company has acquired a good reputation for it. Finally its infrastructural facilities such as corporate governance capabilities, financial management, planning and control procedures and processes and corporate strategy are all well managed and coordinated though some shortcomings still persist. Q. 3. How does Easy Jet create value for the customers Cost related strategic value chain management advantages at Easy Jet can be examined with reference to its own management or leadership style. Easy Jet's democratic management style allows its lower layers down the hierarchy to take decisions as and when such decisions have to be made. This in turn allows Easy Jet to create value for customers. Cost cutting exercises related to proportionate reductions in quality are not going to help the business. Strategic innovation is defined as "a new and fundamentally different way of competing in an existing industry" (Charitou and Markides, 2003). The delivery of service in the Low Cost Carrier market is centered on the following three dimensions. (a). Low cost (b). No-frills (c). Point-to-point Unlike Full Service Carriers (FSC) LCCs are able to deliver the service with the least cost at the most desirable end of the market. The latter is a reference to the current attitude towards flying by people in Europe and North America. Till Easy Jet and Ryanair started their low cost service in the domestic sector in Europe this idea was not taken seriously. Low cost dimension was incorporated into the existing service delivery model by these two airlines at a time when the FSCs were operating full-scale encumbering the customer from the point of booking to the point of disembarkation. Europeans for the first time had a taste of the Southwest Airlines practices in North America in the mid 1990's. Low cost or low budget airlines deliver their services with a proportionate quality dimension too. Customers saw value in it. It was value for money. No-frills refers to air travel minus food and drinks. On a short haul flight no sensible customer would expect to snack on a variety of food; neither would they want to drink juices and liquor while travelling from one destination to the other lasting a few minutes. European customers saw value in it. Again value for money principle is in operation. The average passenger does not seem to bother about food because while in air there is very little desire for food. Easy Jet cut down on these additional costs and created value for the customer. The customer in turn began to look at the whole experience of travelling by air as a new one with more to gain by not travelling by FSCs. The cost burden of FSCs was not well understood until this new development. Simply all frills on short hauls ought to be eliminated. Strategic innovation also involves a series of other sub-services to be brought below the industry standard, e.g. on-line booking does not need sophisticated computers, though it needs sophisticated software. An airline has to cut down on costs associated with these core services which require only the sophisticated staff. Easy Jet has been doing just that. On the aftermath of its launch people were amazed as to how an airline could operate at such lower cost. Things have been looking up since then at Easy Jet while some industry experts were predicting a total revolution in the industry. There are many factors that have to be improved above the level of the industry standard. In the first place quality of service has never been ok at any airline. Easy Jet has just been the exception but not always. Service quality matters to a greater extent both in the industry and for the individual airline. Further existing infrastructures ought to be further raised above their standards. Not only the in-flight facilities such as passenger care in times of emergency but also arrival and departure schedules and terminals must be improved. Hassle-free embarkation has never been the norm at European airports so far. Finally the average age of the fleet must be reduced so that the fleet's age would come below the industry standard thus rendering it safer and securer. Services like medical attention have been offered on-flight but it has never been extended to an in-house hospital service at the airport. People must have the assurance that their life will not be in danger in times of an accident. By the time the airport ambulance takes the patient to the nearest hospital his life would be in danger. Similarly there must be a greater amount of new technologies to avoid air disasters, e.g. birds and skyjacking. Customers look at these extras as value creators. They need such value creators to identify themselves with a particular airline. Or else all airlines become common stock in their eyes. Q. 4.Should Stelios extend the Easy brand Easy Jet brand is already a super brand in the budget airline market segment. However its strengths are limited by the very nature of its strategic environment. In the first place Stelios did not anticipate the amount of strategic competition to be this intense. His business proposition was based on the same business philosophy of the US low cost Southwest Airline. An extension beyond the current operating routes into further corners of Europe, Asia, the Middle East and North America would definitely be advantageous. But nevertheless such expansion cannot be carried out without a proper open skies policy being agreed upon by all countries involved. If it comes into agreements with such airlines as the United in the US to carry out the connecting flight business, chances are that it would have to increase prices, in the first place. That would be tantamount to going back in its ideals. Q.4 a. Is Stelios trying to do too much too fast Still there is a way out without doing too much too fast, i.e. competing on one-to-one basis on each route rather than clustering the rivals into a conventional model of competition. Very rarely, has a CEO or a President studied the strengths of individual rivals in the light of the individual company's background. It has always been the industry backdrop that has been studied to understand rivals' strengths. Q. 4. b. What are the key success factors for each of these new businesses Key success factors include what Stelios has already got, viz. the strategic vision of the changing mission statement of Easy Jet. His vision for Easy Jet has to be limited to what it is capable of doing right now, i.e. seeking to integrate different market segments into a manageable one. Secondly, its current position in Europe as the second largest airline behind BA must be consolidated. More Airbus and more contented staff will do the trick. Q.4.c. Will Stelios have the core competence to deliver the product successfully to the market Finally the possession of core competencies or capabilities - benefits to the customer, VRIO (value, rarity, inimitability, and organization) and the leveraging freedom to many market segments and into products. Easy Jet possesses these critical competencies but nevertheless its current position in the market with resource-based (VRIO) first rank as the uncopiable leader is not a clear strategic advantage. Rivals might soon catch up. Table: 1 Easy Jet Financial Information 2007 2006 2005 Revenue ($mil.) 3,678.30 2,786.60 2,364.20 Gross Profit ($mil.) -- -- 308.4 Operating Income ($mil.) -- -- 86.2 Total Net Income ($mil.) -- 176.2 75.1 Diluted EPS (NetIncome) -- -- -- www.hoovers.com. Table: 2 Easy Jet Balance Sheet Assets Sep2007 Sep2006 Sep2005 Current Assets Cash -- -- 1,225.80 Net Receivables -- -- 347.6 Inventories -- -- 0.0 Other Current Assets -- -- 0.0 Total Current Assets -- -- 1,573.40 Net Fixed Assets -- -- 750.5 Other Noncurrent Assets -- -- 515.4 Total Assets -- 3,975.80 2,839.20 Liabilities and Shareholder's Equity Sep2007 Sep2006 Sep2005 Current Liabilities Accounts Payable -- -- 11.6 Short-Term Debt -- -- 28.7 Other Current Liabilities -- -- 660.4 Total Current Liabilities -- -- 700.8 Long-Term Debt -- -- 354.3 Other Noncurrent Liabilities -- -- 304.2 Total Liabilities -- -- 1,359.20 Shareholder's Equity Preferred Stock Equity -- -- 0.0 Common Stock Equity -- -- 1,480.00 Total Equity -- -- 1,480.00 Shares Outstanding (mil.) 0.0 0.0 0.0 www.hoovers.com. Table 4: Budgetary Fundamentals of Easy Jet - 1999 Year Ending Revenue (m) Pre-tax (m) EPS P/E PEG EPS Grth. Div Yield 30-Sep-04 a1,091.00 a62.20 14.64p 8.7 0.6 15% n/a 0.00% 30-Sep-05 1,341.40 82.6 14.78p 19.8 19.8 1% n/a 0.00% 30-Sep-06 1,619.70 129.2 23.18p 21 0.4 57% n/a 0.00% 30-Sep-07 1,797.20 201.9 34.80p 15.1 0.3 50% n/a 0.00% 30-Sep-08 2,362.80 110.2 22.10p 14.3 n/a -36% n/a 0.00% www.thisismoney.co.uk REFERENCES 1. Charitou, Constantinos, D. and Markides Constantinos C. Responses to Disruptive Strategic innovation. MIT Sloan Management Review Vol.44, No2 (2003): pp.55-63. 2. EasyJet Financial Statements.2009. www.hoovers.com. 3. Porter, Michael, E. Competitive Strategy. New York: Free Press. 1998. 4. Porter, Michael, E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press, 1980. 5. Porter, Michael. E. Competitive Advantage of Nations. New York: Free Press, 1990. 6. Porter, Michael. E. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press, 1998. 7. Porter, Michael. E. Porter's Value Chain Model: An Analytical Framework for Intermediation www.personal.umich.edu. 8. Porter's Five Forces: Assessing the Balance of Power in a Business Situation. www.mindtools.com. 9. We're turning Europe Orange: Consolidated cash flow statement. 2008. www.easyjet.com. 10. www.thisismoney.co.uk. Read More