This report has focused on the analysis of the European low-cost airline industry. The European low-cost airline industry emerged after the deregulation of aviation was executed in the 1990’s. This, in result, made a wider array of clienteles to afford flights and posed a significant threat to the traditional carriers. Since then, the low cost airlines have obtained increased demand, especially from private persons (leisure travellers) with an average yearly growth rate of 9.4 percent between the years 1996 and 2003, thus, experiencing speedy growth. The strategic issues related to the airline industry and analyzed in this report encompass the fierce competition, high fuel prices, high treat of new entrants in the market, and substantial losses experienced by the airline industry.
The European low cost airline industry has various players, including the British Company Easy Jet that was established in 1995, the Irish airline Ryanair that was established in 1990, Air Berlin, and German Wings amongst others. Most of these players are employing their strengths in order to continue to be competitive in the market. Such strengths encompass operating at low costs, offering excellent customer service, employing such services as customer relationship management systems; some, like Ryanair, operate on one way pricing policy; and commitment to quality maintenance and safety. Easy Jet is one of the biggest players in the European low cost airline industry. The company has employed various strategies, including customer relationship management, in order to remain competitive in the market. Reflecting on the trends of growth in the European low cost airline industry in the past, it is apparent that there will be a surge in the number of players in the European low cost carriers in the next five years. In the future, the European low cost airline industry may consider operating as a high cost airline, as this will give it an opportunity to compete with other larger airlines, such as the British Airways.
In the United States, the market for low cost airlines developed in 1949 with the Pacific Southwest Airlines. On the other hand, the European low cost airline industry emerged after the deregulation of aviation was executed in the 1990’s (Smith 2002, p. 6). This, in result, made a wider array of clienteles to afford flights and posed a serious threat to the traditional carriers. Since then, the low cost airlines have obtained increased demand, especially from private persons (leisure travellers) with an average yearly growth rate of 9.4 percent between the years 1996 and 2003, thus, experiencing speedy growth (Furlong and Hannon 2005, p. 5). Some of the most notable budget airlines include the British Company Easy Jet that was established in 1995, the Irish airline Ryanair that was established in 1990, Air Berlin, and German Wings, and this airlines have been capable of shaping the European market (Furlong and Hannon 2005, p. 14).
The low cost airlines have also posed serious threats to the major airlines in Europe, as most customers, especially leisure and business travellers prefer using the former due to their low prices. As a result, the leading airlines have been forced to change their rigid business models in order to match the challenge posed by low cost carriers. This report will analyze the strategic issues related to the European low cost airline industry; analyze the players in the low cost airline industry, evaluate the competitive rivalry in the industry and the relative competitive strength of four identified players; evaluate the competitive strategy of Easy Jet using the porters generic strategies and propose a future strategy for the Easy Jet; and offer an overview of the likely number of players within the industry sector in the next five years.
Strategic Issues Related To the European Low Cost Airline Industry
Strategic issues are challenges and policy questions which affect the values of an organization, the mission, vision, in addition to the managements, mandates, users, clients and the service level. Every organization is faced with various strategic issues, and it is upon the management to identify such issues and implement strategies to act. Some of the approaches that can be used to identify strategic issues in organizations include direct approach, indirect approach, goals approach, action oriented strategy mapping approach, the system analysis, the alignment approach, and the issue tension approach (Capon 2008, p. 3). The management should know which approach to use in the identification of the strategic issues in their respective organizations.
Since the initiation, the European low cost airline industry has been faced by various strategic issues which pose a serious threat to the operations of the industry. One of the main issues is competition. Certainly, the European airline deregulation procedure has brought about many start-up entries and, as a result, severe price competition on most route legs (Schneiderbauer and Feinsilber 2002, p. 23). As a result, this has increasingly pushed majority of the earlier flag carriers into fierce competition resulting to financial crises. Furthermore, low cost airlines require charging extremely low prices to ensure success and due to this, competition amongst the low cost carriers is exceptionally strong (Furlong and Hannon 2005, p. 10; Gernot 2004, p. 49). Besides, combining forces with the bargaining power of the clienteles makes up the prevailing force reducing the profit margins.
In this case, only an extremely small number of the major low cost carriers in Europe provide European-wide flights and, moreover, are in direct competition with one another (Schneiderbauer and Feinsilber 2002, p. 16). In addition to this, there exist many regional European low cost carriers which compete only in their local markets (Gernot 2004, p. 2). This implies that, a new idea or cost advantages for enhanced operations may normally simply be copied by other players. In the low cost airline industry, the driving force for increased sales is low prices for ticket; nevertheless, little momentum has been produced via positive differentiation on reservation procedures and service industry amongst other essential factors. In particular, the high volume routes to the European main cities offer the market for the low cost airlines, and this has stiffened competition as a result (Kangis and O´Reilly 2003, p. 4).
In addition, an entry into the airline industry currently does not necessitate high capital investment. The European low cost airline industry has been faced with this threat; in order to survive in the market and remain competitive; airlines require ensuring a high degree of efficiency (Gernot Sieg 2004, p. 45). Besides, studies have proven that the European skies are highly congested; therefore, resulting to fierce competition on flight permission and on airport slots (Furlong and Hannon 2005, p. 87). This implies that if a new competitor decides to serve on a subsisting route, there normally arises a pricing war, and this affects the companies’ profitability greatly.
Evidently, the European low cost airlines operate in a country that is characterized by many employees who often demand high reimbursement (Furlong and Hannon 2005, p. 17). Comparing states in the European continent with countries in the Asia Pacific (United Arab Emirates), it is evident that there is considerable variation in the costs of labor, as the former employs approximately 38% of its operating expenses as workers remuneration, whilst the latter (UAE) uses only 8% of its operating expenses for the same (Schneiderbauer and Feinsilber 2002, p. 10). This means that the low cost airline in Europe has to use effective strategies in order to be successful in the market (Kangis and O´Reilly 2003, p. 9). Such a strategy is the fact that it is one of low cost airlines, thus, it attracts more people and tourists to travel with it.
The other strategic issue faced by the European low cost airlines is increasing prices of fuel. This, in fact, is a significant issue that is affecting the entire airline industry throughout the world and specifically the low cost carriers. Certainly, the markets for fuel are volatile and are vastly swayed by geopolitical factors. The volatility of fuel markets implies that there is a high probability of change of oil prices (increase or decrease), and this may pose a significant negative impact on the low cost carriers. For instance, an increase in the oil prices may force the airlines to either increase their ticket prices or otherwise reduce their profitability or operate on losses. As a result, effective financial management of fuel reserves encompassing trading with futures and options is becoming more and more significant with an aim of keeping the fuels prices down, as this will ensure continued competition in the airline industry (Kangis and O´Reilly 2003, p. 9).
Studies have revealed that in the last five years, the airline industry in Europe has been signed by extensive losses, which are mostly suffered by the leading low cost carriers, and collapse of some carriers including Swissair in 2002 and Sabena in 2001 confirm this (Schneiderbauer and Feinsilber 2002, p. 15). These are national and leading carriers in Europe, but are not low cost carriers. In spite of the construction of these airlines, Swissair persisted to operate on losses until 2005 when it was acquired by Lufthansa. For the majority of low costs carriers in Europe, volatility of prices, especially fuel ones, pushes the airlines to operate in losses. Because of being low cost carriers, such airlines cannot increase their ticket prices beyond certain level, as doing so will match their prices with the high cost carriers, and this is of immense disadvantage to them. As a result, most low cost carriers prefer to operate in losses at certain periods of time instead of increasing their fares in order to retain their customers and continue to operate as low cost airlines.
The European Low Cost Airline Industry and the Players
It is apparent that the low cost airlines have remarkably transformed the European air travel as from the mid 1990’s. The deregulation by the European Union gave rise to new carriers that saw the subsidies which had propped up inefficient national airlines for decades (Furlong and Hannon 2005, p. 11). The new airlines, commonly referred to as the low cost carriers (LCC’s), have had their inspiration from the United States’ company Southwest Airlines, which, since the 1970’s, had continuously grown strong and, particularly, after the 1980s deregulation of the United States air travel. Evidently, the value proposition of the Southwest was essentially simple (Schneiderbauer and Feinsilber 2002, p.33). It is apparent that the travellers were pleased by the much less service offered as compared to that of other key players in the industry. For instance, no reserved seating, no connecting reservation between flights, no on board meals and much more in exchange of low costs.
Clearly, the low prices did not only steal the passengers from the full service airlines. Besides, it also retained, as well as attracted new customers who would have otherwise travelled by other means such as train, car, bus, or those who would have not travelled at all. This was an opportunity that was particularly essential for the journeys between pairs of smaller cities that were previously not being served by direct airline routes. The Southwest enhanced the demand by providing frequent flights to these routes, as well as avoiding congested airports. Evidently, there already existed airlines in Europe which were offering limited services during the early 1990’s. However, most of them were either charter airlines or small national carriers (Furlong and Hannon 2005, p. 15). Their main business was to offer the companies dealing with inclusive holiday packages cheap air travel (Furlong and Hannon 2005, p. 65).
Ryanair, founded in 1985, is an Irish low-cost airline (Costa et al 2002, p. 19). The airline’s head office is based in Dublin Airport, whereas its main operational bases are in London Stansted Airport and Dublin Airport (Costa et al 2002, p. 43). Ryanair operates approximately 300 Boeing 737-800 aircraft on more than 1,100 routes around Morocco and Europe from 46 bases (Costa et al 2002, p. 12). Ryanair airline has been characterized by the effectiveness of low-cost business model, rapid expansion and an outcome of the year 1997 deregulation of the aviation industry in Europe. The airline operates across the European Union since 1992 when a deregulation of the European airline industry gave right to carriers from one European Union country to operate programmed services to other European Union states. Ryanair has 44 European bases and has a significant presence in Italy, Germany, Spain, Poland, and the United Kingdom amongst other European states (Costa et al 2002, p. 22). The airline’s biggest market is the United Kingdom and it contains Ryanair’s largest base. Its three biggest British bases encompass Liverpool, London-Stansted, and East Midlands airports (Costa et al 2002, p. 19). The airline offers transport services to its customers at affordable costs.
Apparently, Easy Jet is among the leading European low fare airlines, and with regards to the passenger of aircraft as well as the revenue, it is larger than Ryanair, but by a remarkably small margin (Costa et al 2002, p. 24). In the year 1994, Easy Jet made a profit of approximately 1627.4 m Euros from the total revenue of 1074.2 m Euros (Costa et al 2002, p. 22). This better ability in turning out a profit from their Low Fare Airline operations is probably the reason why the market capitalization of Ryanair is almost 4 times higher that of Easy Jet. Clearly, Ryanair´s valued at €4895.5 million and Easy Jet is being valued at €1291.9 million (Costa et al 2002, p. 28).
Sterling was founded in 1962 by Sterling Airways. It was first founded as a charter airline in Denmark. In 1993, it went bankrupt, but was restructured in the year 1995. After its full opening in 1999, it was owned by the Norwegian companies Ganger Rolf ASA and Bonheur ASA (Costa et al 2002 p.27 ). Evidently, Sterling changed its strategy towards the low fare airline business model in 2000 (Costa et al 2002, p. 28). Since then, it has vastly expanded from its origins in Scandinavia. In 2005, it was bought by the Icelandic company Fons Eignarhaldsfelag, which also owns its alliance partner Iceland Express (Costa et al 2002, p. 27). Despite the fact that it has changed its strategy since its restructuring in 1995, Sterling has not yet posted any profits. Its losses in the fiscal year 2004 were 16 million Euros (Costa et al 2002, p. 25). Due to this, the CEO at the time was partly blamed due to the escalating high prices, as well as his lack of hedging towards the same (Costa et al 2002, p. 23). Clearly, this is an example of an earlier discussion to show how vital hedging can be used as a tool of reducing risk exposure to oil fluctuations (Costa et al 2002, p. #).
This airline is wholly owned by the Danish A.P Moller group. It began operating in the 1970s with both scheduled and charter operations (Costa et al 2002, p. 35). Currently, these two operations are still part of the airline’s business. It is apparent that the airline operated as a full service until February 2004. Later, it changed its strategy towards the low fare airline business model. It used its concept of fly as one would like (Costa et al 2002, p. 29). This is a concept that makes it possible to buy cheap seats with no fills. The airline has not been able to make any profits since the year 2000. The table below shows its annual report
Year 2000 2001 2002 2003 2004
Annual results 16.66 -41.81 -26.46 -83.56 -67.05
Competitive Rivalry within the Industry
This measures competition levels amongst the existing firms. It is apparent that when there is high competition in a certain industry, then firms in that industry get low returns due to the high competition costs (Campbell et al 2002, p. 33). This can be highly unfavourable for the firms, especially during times of economic instability. Evidently, there is high competition in the airline industry. The key players in this industry have to compete with other and with leading players in the industry, and this means that companies have to use effective strategies in order to overcome such a competition and remain successful in the market. Apparently, rivalry among the companies in the European low fare industry has tremendously increased, as the liberalization in the industry has resulted to high competition (Franke 2004 p.34). Through their business models, the low fare airlines are in a position to lower their prices while focusing on price leadership. This has stimulated the full service airlines to lower their prices as well in order to maintain their market share (Franke 2004, p. 35). The competitive rivalry within the European low cost industry can be subdivided into two distinct parts (Franke 2004, p. 38).
• internal rivalry, which is usually between low fare airlines
• rivalry between low fare airlines and full service airlines, creating subsidiaries or other methods to compete with the prices offered by the former
• Aimed at stimulating demand especially from fare-conscious business and leisure travellers.
• Operating on one way pricing policy. Customer service
• Delivering excellent customer service performance.
• Operating from uncongested airports and focusing on execution of services.
Focused criteria for growth
• Establishing its effectiveness in the United Kingdom market
• Instigating more routes from the United Kingdom to other locations served by higher fare carriers
• Starting novel domestic routes in the European Union states
• Creating more novel bases in Europe. Commitment to quality maintenance and safety
• Employing and training cabin crews, pilots and maintenance staffs.
• Following the European airline industry standards for maintenance.
Large route network
• The extensive route network in the continental Europe enables the players to acquire unique resources for their competition within the global market Financial resources
• Helps the players in the industry to defend its routes.
• Forces the competitors to retreat in price wars
(Ruddock 2007, p. 78)
Competitive strategy of Easy Jet will be analyzed based on the porter’s generic strategy framework and resource based framework (Ruddock 2007, p. 67). There are various generic strategies that can be employed by businesses including differentiation, cost leadership, integrated cost differentiation/leadership, and focused cost leadership (Ruddock 2007, p. 71). These generic strategies assist firms in establishing and exploiting a competitive advantage. Easy Jet uses differentiation strategy, cost leadership and focused differentiation. Cost leadership is founded upon a company managing and organizing its activities that add value to make sure that its costs are the lowest in the market.
Differentiation strategy, on the other hand, is founded upon persuading clients that the company’s products or services are superior compared to those of the competitors. The exclusivity of the service or product may permit the firm to set a higher price for it (Capon 2008, p. 56). Alternatively, focus differentiation strategy is designed for a market segment of a service, instead for many markets or the entire market. EasyJet makes use of each of those. For instance, the airline provides its services and products at low costs compared to the competitor (Ruddock 2007, p. 72). Alternatively, the company has focused on a narrow client segment including the United Kingdom and Irish travellers and business persons whose budget was too tight to use key airlines (Ruddock, 2007 ).
In terms of resource base, Easy Jet has employed expansion strategy which has enabled it to position itself in the market (Butler and Keller 2000, p. 79). Since it began operating, Easy Jet has been launching new routes. Furthermore, its acquisition of Buzz in 2003 enabled the company to get instant access to eleven novel French regional airports and, furthermore, made Easy Jet to be the leading airline operating in London Stansted Airport (Butler and Keller 2000, p. 79). Moreover, Easy Jet uses the low fare airline business model for its customers. It also uses the low distribution cost via the ticketless internet booking (Butler and Keller 2000, p. 42). It employs the primary airports mostly, like the Schipol, Copenhagen, as well as Amsterdam and Kastrup. Besides, Easy Jet is itself an entity also a part of the Easy Group Holding Company where their main aim is to seek a forward and backward integration. This is due to the fact that they want their customers to use the Jet not only for the part but for the entire journey (Butler and Keller 2000, p. 8).
Another competitive strategy used by Easy Jet is customer relationship management (CRM) software which is aimed at improving its online services and, at the same time, cutting on gratuitous spending and operating costs by a projected amount of £750,000 (Costa et al. 2002, p. 18). Currently, the CRM software is being used by Easy Jet’s various European websites and certainly, the service features a basis of knowledge which refines and expands depending on its usage. This has allowed timelier and easy access to various kinds of company’s information, such as booking information.
Apparently, the customer relationship management service allows approximately 1.5 million people, who visit the Easy Jet website every week, to accomplish end-to-end transactions whilst they are online (Costa et al. 2002, p. 10). This is done without any involvement from the customer service agents. The service reacts to keyword searches and language texts by the use of artificial intelligence in order to make sure that the details which are returned by the customer are correct and pertinent to the initial criterion. In fact, research has revealed that presently, 90 percent of clients are independently resolving queries using the service. However, various queries which may not be tackled via the service may be forwarded to the company’s customer agents via e-mail as they have access to resources comprises in the knowledge base. In case a novel query is raised by the customer, the customer service agent usually uploads the response, and this saves time for transactions made in the future. Currently, customer e-mail questions have lessened by 40 percent, and this has given agents sufficient time to focus on more multifaceted issues.
Future Strategy of Easy Jet
Following the rapid growth of the European airline industry since its liberalization, Easy Jet has to take into consideration if it would respond to new entrants into the market through ceding niche segments, or through being aggressive in the competition for price, service and routes all in an attempt to push the new entrant out of the market (Costa et al 2002, p. 20). In order to achieve this, strategic decisions market research on the various combinations of service and pricing is required (Costa et al 2002, p. 20). Moreover, Easy Jet should take an account of the costs of the competitor, as well as the competitor’s capacity in each route in question. In addition, the competitive objectives of the new entrant are of paramount for it to anticipate how it is going to respond to any move it would take (Campbell et al 2002, p. 19). With this kind of information, there would be less residual uncertainty. In addition, the incumbent airline would be in a position to develop a confident business care around its strategy (Campbell et al 2002, p. 22).
It is recommended that Easy Jet targets mostly leisure travellers, as commercial often demand regular flights to a number of destinations, look for quality service and regular flyer programmes, and are willing to pay a premium for these benefits (Campbell et al 2002, p. 14). Besides, Easy Jet should ensure that the growth in its fleets does not lead to higher operating costs. Moreover, it should also focus more on the direct marketing, for instance introducing a customer retention scheme. To ensure its brands are different from those of its competitors, Easy Jet could also introduce the cause related marketing scheme, develop a reputation for being a caring airline (Campbell et al 2002, p. 23). In conclusion, Easy Jet should develop an accurate, as well as realistic market niche to be served (Campbell et al 2002, p. 17).
The Likely Number of Players within the Industry Sector in 5 Years Time
The European airline deregulation procedure has brought about many start-up entries into the airline industry. In addition, entry into the airline industry currently does not necessitate high capital investment. Presently, there are various players in the European low cost airline industry, including the British Company Easy Jet that was established in 1995, the Irish airline Ryanair that was established in 1990, Air Berlin, and German Wings amongst others, and these airlines have been capable of shaping the European market (Schneiderbauer and Feinsilber 2002, p. 3). There has been a noted growth in the European low cost airline industry since the airline deregulation process. The growth trend of new entrants into the market implies that there is projected continual growth in the future. In fact, studies have revealed that the European skies are extremely congested, which means that there are many players in the market. This analysis implies that in the next five years, there will be an increase in the number of players in the European low cost carriers and to mention, it is of immense benefit to the customers. This increment is fuelled by low prices of entrants and the changes of customer’s lifestyles making them travel for leisure and business deals.
Conclusions and Recommendations
This report has focused on the analysis of the European low cost airline industry. The strategic issues analyzed in this report that are related to the airline industry encompass the fierce competition, high fuel prices, high treat of new entrants in the market, and substantial losses experienced by the airline industry. The European low cost airline industry has various players, including the British Company Easy Jet that was established in 1995, the Irish airline Ryanair that was established in 1990, Air Berlin, and German Wings amongst others. Most of these players are employing their strengths in order to remain in the market and continue to be competitive. Such strengths encompass operating at low costs, offering excellent customer service, employing such services as customer relationship management systems; some, like Ryanair, operate on one way pricing policy; and commitment to quality maintenance and safety. Easy Jet is one of the players in the European low cost airline industry. The company has employed various strategies in order to remain competitive in the market, including customer relationship management.
Reviewing the trends of growth in the European low cost airline industry in the past, it is apparent that there will be an increase in the number of players in the European low cost carriers in the next five years. In future, the Europe low cost airline industry may consider operating as a high cost airline, as this will give it an opportunity to compete with other larger airlines such as the British Airways. The companies can emerge successful as long as they apply effective marketing and business strategies, as well as are able to compete efficiently in the market. Furthermore, the companies may consider establishing themselves in other countries outside the European continent, as this will also widen the geographical market. It is evident that most successful firms are those which adopt an international dimension and choose to diversify in other regions across the world. This will also save and protect the companies in case of any instability or disaster in one region.