Exploring Strategic Trends Essay

 

 

 

 

Executive summary

 

This report will discuss how the whole airline industry is facing various external as well as internal situations and in these situations how the low cost airlines are operating and making profits. After the incidence of September 11th the whole airline industry has changed its picture. Due to this event the airline industry would suffer heavily, stocks plummeted and ticket prices are at all time lows. Apart from such events increase in fuel prices, political situation in gulf, widespread diseases like bird flu and SARS etc. also had hampered the viability of flag carriers and overall airline industry. The flag carriers (national airlines) have certainly been forced to economize, cutting the number of short route European journey where costs are too high. In these circumstances entry of Low-cost carriers however, changed the whole competitive situation that could be coupled with consumer confidence, and have remained cost-effective. Europe’s Budget airlines such as Ryanair and EasyJet and Go, are also however flying high. The success of the low-fare strategy is critically dependent on the maintenance of a low cost base. Lower costs are the only competitive advantage in the short-haul economy sector since air travel is effectively a commodity product.

Since a couple of years, following the European deregulation of commercial aviation, an armada of discount carriers is reshaping the local airline landscape, or rather horizon. At first sight considered impossible, the no-frills trick hit the nerves of the European passengers. Even more so, it has basically thrown overboard anything slightly related to catering, which could be considered a good thing; given the “”denial of food”” almost airliners serves. Low cost carries has adopted the strategies apart from keeping the cost at the lowest possible like single type aircrafts, making hub of all activities to no busy airports nearer to metropolitans, no frills, minimum turn around time, minimum distribution channel cost, long term contracts with employees and outsourcing most of the services. These strategies have changed the whole scenario of the airline industry.

Exploring Strategic Trends

Short situation analysis:

The European Airline industry is a dynamic industry that changes its trends in accordance to general European economy. The over all air transport market in Europe is expected to grow substantially in the comings years. The international air transport association along with few leading bodies like AEA and ATI estimate that number of international scheduled passengers traveling between countries in Europe will grow from 233 million in 1999 to 302 million in 2005, reflecting an annual growth rate of 4.9%. By contrast, the low fare segment of the market is expected to grow at a significantly higher rate. It is estimated that low-cost airlines which carried 6.3% of all domestic and international passengers with in Europe in 1999 will increase that to a share of 16-18% by 2005 making them a formidable unit in the Europe air travel market. (European Airline industry-strategies for the new Millennium-sky Tech Solutions accessed from the website www.skytechsolutions.com and Global Market Forecast, The future of flying, 2006-2025, (2006), November, Accessed from the website www.airbus.com). Now it has been evident that aviation market in Europe has been increasing especially for low-cost carriers. The Low Cost Carriers (LCC) industry has come up with successful performance and result over the years. Low cost airlines objective was to maintain low fares airline, operating frequent point-to-point flights on short haul flight, mainly out of regional and secondary airports. The heart of its strategy was based on providing no frills service with low fares designed to stimulate demand particularly from budget-conscious leisure and business travelers, who might otherwise have used alternative forms of transportation, or who might not have traveled at all. Easy jet is operating in Europe having original hub in London/Luton. The environment for LCC’s in Europe is hyper competitive. Even after deregulation, the European commission was concerned that liberalization had been ineffective, for several seasons. For example, advertised discounted fares are often so hedged with conditions and limited in quantity that passengers actually receive little benefits. Further, strictly allocated slots at many major airports, such as London/Heathrow and Amsterdam/ Schippol, were retained by incumbent national carriers, which restricted the scope of new market entrants. The European market continues to be characterized by higher fare and operating costs than the US resulting from relative by high tax and excise charges on fuel and higher hading, and higher handing, ground handling and air traffic control charges. These stem form less competition in services, fragmentation in air traffic control and grater worker protection and benefits in Europe than in the USA. Relatively short distances on intra European routes also contribute to higher expenses on a par “available seat mile” (ASM) basis passed on to the traveler in higher fares. The European market is also rendered difficult for airline operators because the airports and skies of Europe are more congested than in USA. This forces new entrants into smaller airports, which tend to be from large metropolitan city centers, in contrast to the USA where smaller airports are usually within 10 miles of major city centers. Another airline sub sector in Europe is the vertically integrated groups of tour operators and travel agents, which use in house charter airlines. Since deregulation some of these charter airlines have entered the scheduled service sector but are still sticking to leisure-dominated routes. In Europe, high-speed rail travel and construction of major tunnels and bridges provide viable and quicker transport alternatives to the air travel of up to 500km.

This has had a dramatic effect in some cases. Never the less, on the positive side, growth in air travel in the European market is one and half times that of the more mature American market. Vicious price wars were launched by major airlines serving the same route by LCC’S. As soon as the new carrier was forced out of business, the big airlines raised its prices and withdrew its extra seats. A trend among national carriers has been to form alliances amongst themselves and/or with smaller airlines. It is predicted that, by 2010 the airline industry will form into a maximum of four groupings of national airlines. Generally, large established airlines have tended to consolidate their position in their hub airports and not to avail of EU cabotage rights, instead opting for code sharing links with smaller airlines.

Methodologies: The 1990’s saw the birth of several LCC’S in Europe starting with Ryanair. Generally these airlines use the tactics of offering low fares no frills and point-to-point routes to smaller airports. The LCC were able to achieve costs as low as half those of a major network carriers. Generally, they have not confronted the large established airlines in head to head battles, by choosing airports that were not served by large carriers, instead growing volumes on new routes. By 2001 the other main LCC operating in Europe were Buzz (owned by KLM hub in Amsterdam / Schippol), Ryanair (Stansted), Go, Virgin Express (main hub at Brussels), Air one (out of Milan) and easy jet (original hub in London/ Luton). Between the LCC’S in Europe Ryanair is by far the dominant player in the budgeted airline industry in Europe. The cheap flight deals offered to customers are frequently confusing. Often when passengers attempt to avail themselves of advertised bargains they discover that the deals are hedged with conditions and that just a small proportion of seats are offered at the bargain fares. In view of this fact, the Sunday times (18th Oct. 1998) carried out a study of four airlines – Debonair, easy jet, go & Ryanair. Results of the survey showed that early booking was more likely to get a bargain, but it was not always a guarantee of the lowest fares, as prices could go down if sales stagnated. Airlines monitored each flight by means of a yield management computer program. Early Internet booking apparently resulted in the cheapest fares, and the best fares were usually available for fights that left at unsociable hours. In this hyper-competitive environment easy jet is operating from the outset as a LCC or budget carrier, airlines set themselves vigorous but steady growth ambitions which it hoped to achieve in various ways.

Findings: Easy jet has a mission statement which reflects its main objectives and thrust areas: “To provide our customers with safe, good value, point-to-point air services, To effect and to offer a consistent and reliable product and fares appealing to leisure and business markets on a range of European routes, To achieve this we will develop our people and establish lasting relationships with our suppliers” (Accessed from www.easyjet.com on 17th february 2008). Easy jet was profitable from their inception, by pitching their fares to be low enough to attract new customers but high enough to provide a satisfactory operating margin. This could be quite a challenge, given the steep marketing operating and advertising costs associated with the launch of a new route especially in continental European markets where Easy-Jet mostly operating. Easy-Jet revenues and profits are shown in Appendix-1(Accessed from http://www.easyjet.com/EN/About/index.html on 17th February 2008).
Easy Jet claimed that it generally made its lowest fares widely available by allocating a majority of seat inventory to its own lowest fare categories. According to airline, this means that its no-frills services allowed it to priorities features important to its clientele, such as frequent departures advance reservations, baggage handling and consistent on-time service. Simultaneously, this eliminated non-essential extras that interfered with the reliable, low cost delivery of its basic flight. The eliminated extras included advance seat assignments, in flight meals, multicasts seating, access to frequent flyer program complementary drinks and other amenities. Most of the LCC including Easy Jet outsource their catering services to cut costs. Even some airlines dropped its cargo services, which ultimately reduced their turn around time due to absence of loading and unloading services. It claimed that business travelers, attracted to LCC’s not only due to low cost but due to its frequency of operations and punctuality despite often less conveniently located airports and absence of pampering. Most of the LCC’S realized that the achievement of its objective of being a leading no-frills airline in Europe like easy Jet depended on being the lowest-cost airlines. Use of the Internet to reduce distribution costs, Maximise the utilisation of the substantial assets, Ticketless travel, No free lunch, Paperless operations and Efficient use of airports are the some features which has been adopted by easy jet to cut the costs and remain cost-effective.

(Accessed from http://www.easyjet.com/EN/About/Information/index.html on 16th February 2008)

This demanded a continuous concentration on driving down costs to sustain low fares and remain profitable, even on low fields. LCC’S cost reduction strategy focused on five major areas: fleet commonality, contracting out services, airport charges staff costs and productivity and marketing costs. LCC’s fleet commonality, principally using a single type of aircrafts i. e. easy jet has opted for Airbuses as the most common aircrafts The easyJet business model was built on the principle of one type of aircraft that can be utilised throughout the network, at anytime, by any crew. EasyJet signed a deal with Airbus to deliver 120 aircraft to the airline from September 2003 over five years, with ‘price protection’ on a further 120 Airbus A319 aircraft until 2012 (Accessed from http://www.easyjet.com/EN/About/Information/infopack_fleetinfo.html On 17th February 2007). Easy jet has the type of fleet shown in appendix-2.

Adopting fleet commonality, airlines was able to obtain spares and maintenance services on favorable terms, limit cost if staff training and offer flexibility in scheduling aircraft and crew assignments. Most of the successful LCC’S attempting to Ledge out the prices it paid for the fuel by contracting for a large proportion of its needs in advance. The fuel cost difficulty was compounded by foreign exchange rates fluctuations that could not be predicted or controlled.

Most of the LCC’S has contracted out aircraft handling, ticketing, baggage handling and other functions to third party. The LCC’S have attempted to obtain competitive rates and multi-year contracts at fixed prices limiting exposure to cost increases. EU directives forbidding ground-handling monopolies in European airports has enabled LCC’S like easy jet to continue to negotiate economical contracts in these likely competitive conditions. Contracted out services have been monitored by selected airlines staff so that LCC’S could maintain and retain control of quality and safety without incurring the cost of a specialized labor force for a modestly sized fleet. These contracting out services avoid the labor unrest.

Airport charges include landing fees, passenger loading fees, aircraft parking fees and noise surcharge. Most of the LCC’S reduced these fees by avoiding the congested main airports, choosing secondary and regional airport, secondary and regional airport destinations, which are anxious to increase passengers through put. These airlines have been able to produce high volume for airports so it has negotiated favorable access fees. Less expensive gate locations and outdoor boarding stairs rather than jet ways (which also consume more turnaround time) help to keep cost down. Generally less busy airports can be expected to provide higher rates of on-time departure; faster turnaround timer and fewer terminal delays, all of which maximize aircraft utilization and mean fewer restrictions on slot requirements and on the number of allowed take-offs and landing. Easy jet always emphasized on the punctuality of flights and it is a top priority, second only to ensuring the safety of passengers and staff (Accessed from the website http://www.easyjet.com/EN/About/Information/punctuality.html).

LCC’S are consistent with their policies of point-to-point flights on short-haul routes. This allows the airlines to offer direct non-stop journeys, avoiding the costs of providing through services for connecting passengers as well as delays often caused by late arrival of connecting flights. EU legislation to prevent airports from offering deferential deals to different airline operations created level playing field to all the operating airlines.

Since employee compensation costs are typically the most important component of total airline costs. LCC’S have to control these costs through a performance related pay structure. But the Social/employment legislations are always subject to change and could eventually invoke further limitations on crew working hours. Most of the airlines opted for long-term pay contracts based on productivity and share option packages. Even cabin attendants can earn commission onboard sales and in-flight services. Autonomy to employees and manages training to employees to build both functional expertise and team building, emphasis on effective coordination through frequent timely problem solving communication, shared goals and knowledge, mutual respect, safety, on-time performance and satisfaction to customer are some of the points, which LCC’S have to emphasize to stay competitive in the market. LCC’S are basically the cost-effective airlines so they must have a lean organizational structure. They have to climate inflexible work rules and rigid job descriptions. Employees could be motivated enough so that they can take ownership and get the job done. Employees must be encouraged to challenge the conventional wisdom and keep on improving. Transparent information system within organization (company), about competitors and the industry, keeps them aware of the emerging situations so that performance of the carriers evaluated time to time. To promote ownership among employees some successful LCC’S introduced to any employee profit sharing planning. Profit sharing aligns the employees interests; with the interests of the company.

LCC’S advertises its low fares primarily on its websites in national and regional newspapers on radio & TV’s. But lead by Ryanair, almost all the LCC’S including easy-jet cut its rate of commission to travel agents from 9 to 7.5% launching a website for any company in present era of information revolution must have effect on its cost cutting spree. Most of the LCC’S have their websites, which provided all relevant and necessary in formation about the airline. This has had the effect of saving money on staff costs, agents’ commissions and computer reservation charges while significantly contributing to growth. Maximum numbers of bookings were taken directly. Internet accounted for most of the sales of tickets particularly; strong performance of websites of LCC’s contributed significantly decreasing in marketing and distribution costs.

Conclusions: Due to deregulated open sky policies in Europe, many more LCC’S may come up but not all of them would fly. Due to faulty management not competition many low fare airlines may collapse as the US experience suggests. C.P. Wallace (1998) declared that the majors would have never been able to put a lot to low fare guys out of business if the low fare guys hadn’t tripped themselves up by over expansion. So worldwide in general and in Europe in particular LCC’S and Easy jet also paces the challenge now to maintain focus on its niche and to keep cost under control.

 

References:

1.      The Sunday Times (18th Oct. 1998).

2.      C.P. Wallace “Leader of the low fare pack”’ Fortune, 138 (11), December 7, 1998, pp. 92-94.

3.      Mission statement of easy jet has been accessed from the website www.easyjet.com on 17th February 2008.

4.      Accessed from the website http://www.easyjet.com/EN/About/Information/punctuality.html) on 17th february 2008.

5.      Accessed from the website http://www.easyjet.com/EN/About/Information/infopack_fleetinfo.html on 17th February 2007.

6.      Accessed from the website http://www.easyjet.com/EN/About/Information/index.html on 16th February 2008.

7.      Accessed from the website http://www.easyjet.com/EN/About/index.html on 17th February 2008.

8.      Global Market Forecast, The future of flying, 2006-2025, (2006), November, Accessed from the website www.airbus.com on 16th February 2008.

9.      European airline industries strategies for new millennium, Accessed from the website www.skytechsolutions.com on 16th February 2008.

 

Appendices:

 

 

 

Appendix-1.

Revenue and profit

Year to end September
Revenue (£m)
Profit before tax (£m)
1998
77.0
5.9
1999
139.8
1.3
2000
263.7
22.1
2001
356.9
40.1
2002
552.0
71.6
2003
932.0
52.0
2004
1,091.0
62.2
2005
1,341.4
82.6
2006
1,619.7
129.2
2007
1,797.0
202.0
(Accessed from http://www.easyjet.com/EN/About/index.html on 17th February 2008)
Appendix-2

 

Year
Airbus A319
Boeing 737
Total
2003
1
73
74
2004
21
71
92
2005
55
54
109
2006
87
35
122
2007
107
30
137
(Accessed from http://www.easyjet.com/EN/About/Information/infopack_fleetinfo.html