A Consultancy Report on The United Kingdom Airline Industry - Free Essay Example

A Consultancy Report on The United Kingdom Airline Industry Introduction †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 2 The Discount/ No-frills Airline Industry in Europe †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 4 EasyJet †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 5 Crowded Market †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 6 PESTLE Analysis †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 8 Five Forces Model †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..†¦Ã¢â‚¬ ¦ 11 Conclusion †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ 12 Appendix †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 14 Bibliography .†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.†¦.†¦Ã¢â‚¬ ¦.†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 15 Introduction The airli ne industry in the United Kingdom has undergone dramatic change as a result of the deregulation of the industry by the European Union’s Article 10 of the Treaty of Rome that set in motion measures to promote international trade as well as the removal of varied restrictions (AirlinesGate, 2006). The airline industry in Europe traditionally was highly regulated in terms of national quotas regarding flight capacity as well as fixed prices. The liberalization measures introduced starting in 1987 paved the way for cost related pricing on fares as well as certain discount fare types which were permitted in consort with negotiated pricing. The third round of liberalization introduced in 1993 and later expanded upon in 1997 permitted airlines in the European Union access to other markets and thus they could establish their operations in any Member State under harmonized rules. This round also allowed the airlines to determine their own fare structures that were subject to predatory p ricing safeguards (AirlinesGate, 2006). The foregoing set the stage for the entrance of discount / no-frills airlines which changed the face of the industry in the region. This report will address the discount/no-frills segment of the industry in particular as well as critical key strategic issues that face EasyJet and why such are the case. It shall also address critical success factors for airlines operating within this segment of the industry and those carriers as well as alliances that could potentially be successful as well as unsuccessful. The highly competitive state of the industry means that EasyJet will have to be aware of key strategic options to see it through the competitive state of the industry over the next five years and beyond. The discount / no-frills or ‘low-cost carrier or airline’ is a concept that originated in the United States as introduced by Pacific Southwest Airlines in 1949 (Wikipedia, 2006). Due to the limited operation and success of this carrier within that period, the implications of its innovative concept, discount pricing through a elimination of extras provided by the airline in-flight, was made globally popular by Southwest Airlines which began operations in 1971 and has derived a profit in every year of its existence. The business model for the discount, no-frills, carrier follows a simple yet effective concept (Britt et al, 2002): singular type of class for all passengers, utilization of one type of airframe model to standardized maintenance costs in ground services, parts inventory and procedures utilized by maintenance and other personnel, utilization of a yield management fare system that rewards passengers for early reservations, non-reserved seating, flights typically booked into secondary airports thus lowering landing fees as well as the potential for air traffic delays, short – fast turnaround flights to increase plane utilization, destination to destination flight routes which further enhances plane utilization and turnaround times, utilization of a direct method of selling tickets to avoid commissions and intermediates via promoting use of Internet bookings, dual role utilization of employees who perform multiple functions to reduce staff redundancies and eliminate unnecessary costs, and the elimination of in-flight catering services for an optional paid food and drink method These general parameters result in cost reduction and operational modes that enable discount airlines to drastically reduce fares, which has caught on with that segment of the public looking to travel minimizing costs. The threat of the ‘discount / no-frills’ airline to the traditional full service carriers lies in price, which the full service airlines are unable to compete on. The Discount/ No-frills Airline Industry in Europe Airline deregulation in the European community as evidenced by the passage of the third round of liberalization in 1993, which was further amended in 1997. The preceding set in motion the foundation as well as framework whereby the discount/no-frills segment could enter the market. That environment has been a boon to passengers as well as new airlines that have entered the industry, however as with all new service innovations the initial purity of the concept later gives way to nuance and side developments that further refine the segment introducing variables upon the original theme. Key strategic aspects that face the discount/no-fills carriers are: The continued entrance of new competition as well as consolidation and merger. More full service carriers forced to enter the segment with their own discount lines. Fragmentation of the discount / no-frills concept as evidenced by EasyJet’s primary airport concept as well as business and leisure class focus. The introduction of more limited services creating a semi service discount / no-frills segment as already introduced by free drink offers and memberships that provide for varied food offerings. Additional service introductions thus creating a semi luxury discount segment somewhere in between full service and no-frills. The preceding are strategic considerations that are an outgrowth of any successful industry segment as it seeks to continued growth as well as differentiation among competitors. Present discount/no-fills airlines must add additional aspects as pricing variables are already close, and the introduction of discount segment operations from full service carriers is creating further pressures in this regard as these full service spin offs already have the parent organization’s in-flight catering systems to draw from in the future. EasyJet The development of ticketing and reservation systems on the Internet has been the underpinning that has helped to launch the discount / no-fills airlines into their relative competitive position as consumers can check across many flight and airline schedule to select the lowest fare. A survey conducted by AvantGo (2003) indicated that sixty-two percent of those questioned indicated that price is the most important determining factor in sele cting an airline and that for personal travel seventy-four percent booked online. This foundational underpinning has been the basis for the phenomenal growth in the industry. The discount / no-frills airline industry in Europe is dominated by Ireland based RyanAir and EasyJet. The differences in EasyJet’s business model from its main competitor, RyanAir, is that EasyJet (EasyJet PLC, 2000): Flies primarily to leading airports, which also differs from the standard ‘discount / no-frills’ business model. RyanAir flies primarily to the standard discount / no-fills secondary airport destinations to keep costs low (Edgaronline, 2006). EasyJet place more emphasis on the attraction of business as well as leisure travelers, utilizing however it utilizes the same single class cabin concept as the discount / no-fills business model (EasyJet PLC, 2000). As a result of the EasyJet’s utilization of primary airport destinations, its fares are higher than RyanAir, and its on-time punctuality rating is lower. The debate over which airline is number one is a result of EasyJet having a higher turnover, and RyanAir flying more passengers. Crowded Market The discount / no-frills airline industry in Europe also consists of 54 low cost competitors in this segment with new carriers entering all the time (imakoopedia.com, 2006). The estimates of the industry in terms of passenger growth have predications indicating that it will rise from the 20 million passengers carried in 2002 to 125 million in 2015 (Britt et al, 2002). With so many carriers, consolidation and mergers are inevitable. Key alliances will have to be made in the future as a result of the competitive state of the industry even with the projected high growth rate projected into 2010. EasyJet has already proceeded to (EasyJet PLC, 2004): expand its fleet of aircraft adding airframes, Boeing 737, that offer increased operating efficiencies and economies of scale to enable the company to operate along a broader route structure, it operates out of Luton utilizing a minimized staff to conserve on operating costs, the maintenance aspects has been contracted to third parties in a cost saving measure, The expansion into Switzerland and its alliance with TEA as well as deals with Geneva airport are strategic variables the company has pursued that is helping to secure its future position in the industry segment EasyJet will have to forge additional airport alliances in the future as well as eventually enter into a hub concept due to the broad destination base and its upper scale discount leisure and business class travelers in response to future competition. Critical success factors for any operator in the discount sector will be; The continued attraction of new customers as well as broadening the appeal to increased segments of the traveling public. EasyJet will undoubtedly increase its emphasis on the general travel segment while continuing to be the leader in discount business and leisure travel customers. Its secondary and primary airport structure puts it in the position to carry out this dual role over the next five years. Economical internal operations are a continued must in this segment as well as a larger fleet of airframes that are fuel-efficient to expand route and destination variables. EasyJet has made steps in this direction and must continue to do so into the future as well as innovate technological advantages in ticketing, Internet promotion and other areas. Increasingly, service is going to become another important aspect of this market segment as the appeal of simply low fares wares off the traveling public. EasyJet will have to keep pace with as well as innovate ahead of competitors where it can to provide increased service levels as public demand increases in this regard. Fleet financing is critical to maintaining newer aircraft that operate on lower fuel and maintenance costs thus keeping operational costs low. This is a critical component for all carriers in this segment and a situation that EasyJet will need to address. The industry is moving toward more destinations and thus fragmentation will not serve the newer entrants unless they create either alliances, or merge with competitors. EasyJet and RyanAir already have the size and muscle to continue on their own, however, increased inroads by full service carriers with discount operations will make their future tasks more difficult. EasyJet will need to seek alliances as well as mergers with small niche operators to enlarge its route structure in a cost saving manner, as well as expand to transatlantic routes to permit it to keep attracting larger population segments and stay in advance of developments in this direction already in progress. RyanAir, KLM, and British Airways, are future threats as a result of their size, reputations and standings within the industry. Increasingly, other carriers could enter this sphere as a result of profitable operations thus representing additional threats to EasyJet’s position. Management will need to seek new routes, expanded operations to other travel theaters, such as the United States as well as Asia and the Far East to keep in front of developments that are sure to take place. In addition a merger or alliance with another carriers is a definitive potential that will aid in faster expansion and addition routes to add customer appeal. PESTLE Analysis EasyJet competitive operating environment represents one of the most competitive as well as cost intensive industry segments. The following PESTLE (Renewal Associates, 2004) analysis will identify the climate the company operates in and is further explained in the Appendix: Political The European Unions deregulation has already set in force the political ramifications in the industry which barring unforeseen developments should remain as is. Economic The discount/no-frills airline segment is perfectly positioned for economic vicissitudes in that downturns play into its low cost price conscious strategy. This downside variable is a major reason for the business side appeal the segment enjoys as evidenced by the many new entrants. KLM introduced Buzz and British Airways has introduced Go Fly in response to the foregoing, and they are joined by United Airlines Ted, Qantas Airlines Jetstar and numerous other examples in the United States, Canada and Asia. Social There is no social stigma attached to utilizing a discount / no-frill airline. The segment of the market that utilizes these services can justify it in terms of savings, convenience, short haul preference or any number of rationales. The upscale image of full service airlines represents a price that other consumer elect to pay for the service they either like or expect, as well as the associated conveniences. Full service also appeals to upper income demographics as well as certain corporate customers who have a so-called image to protect or maintain. Technological Further advances in air frame fuel economies, seating capacities, Internet software and interactive web sites will add to the inbred appeal and foundations driving this industry helping to service the projected increases of passenger traffic to the forecasted 125 million in 2015. Legal The EU’s regulatory framework establishes a clear operating parameter whereby legal issues are clearly understood and as such can be avoided. Environmental Fuel efficiency will continue to be an issue for the industry as will crowded skies and airport congestion in the future. EasyJet will need to acquire the right airframes for the differing airport and route structures it will continually evolve into as a result of competitive pressure to expand. The preceding factors help to set and identify the climate, as well as external factors of the environment in which EasyJet operates (Renewal Associates, 2004). This helps the company to formulate its overall strategy as well as the varied strategic decisions in crafting marketing and operational plans that (Renewal Associates, 2004): Matches the activities of the company to its operating environment, The varied goals, values and expectations which thus will and does influence those strategies, Helps to identify the range of the activities of the company to aid in determining what it should as well as should not do, Aids in the matching of the company’s activities to fit its resources, and allocate those resources to achieve the most effectiveness, Helps to determine the direction that the company will move in over the long term, and Indicates the potentials as well as possibilities for change that might need to be applied throughout the company as a result of the foregoing In the instance of EasyJet, as a result of the foregoing, the following are the findings in this regard based upon the factors as identified in the PESTLE Analysis: EasyJet was formed on 18 October of 1995 by Stelios Haji-Ioannou specifically to enter the discount/no-fills airline segment. As a result its fleet, internal operations, administration, initial as well ongoing strategies have been directed at this market from the onset. The foregoing represents a distinct operational and organizational advantage in that the company is specifically matched to its industry segment. And while this is also true of some other entrants, such as RyanAir, full service airline entrants might suffer from parent company over views that might cloud the clarity of operations and thus their competitive effectiveness. The present company strategies, goals and expectations are a product of the strength as well as size of the competitive environment in which is presently operates within, as well as new entrants, mergers and development, maturation of the discount / no-frills market within itself as time progresses. EasyJet has pioneered one such inter industry diversion in its offerings to business and leisure passengers as well as its flights that include primary airport destinations. The preceding point to innovations that either EasyJet or others in the industry will make in the future would could include the addition of free soft drinks, Club memberships that offer varied in flight or destination services. Another example of EasyJet’s pioneering ideas is the removal of weight restriction limits on luggage that is within reason and the beginning of the EasyJethotels booking accommodation service. Five Forces Model Michael Porter’s Five Forces model (Wikipedia.com, 2006) used in the analysis of industries utilizes the following aspects to identify competitive aspects within an industry to aid the company to uncover as well as determine areas in which it can develop a competitive edge in some aspect or area(s) of the industry. Through the utilization of Porter’s Five Forces model (Wikipedia.com, 2006) management can thus formulate a better understanding of the context of said industry environment it operates within: Bargaining power of customers The growth rate projected for the discount airline segment to 125 million by 2010 reduces the bargaining power of customers in terms of the supply demand factor but the nature of the segment is based upon pricing and as such this represents customer bargaining power through a basic lack of loyalty based upon price shopping through Internet comparative web sites. Bargaining power of suppliers Suppliers in this instance are contracted in EasyJet’s operational mode for maintenance and large-scale services. The acquisition of planes is a competitive business on the part of airframe manufacturers thus providing the edge to the buyer side of the market. This aspect of Porter’s Five Forces does not have much leverage in terms of being able to affect operations to any appreciable degree. Threat of new entrants With 54 present operators in this segment and the projected increase of passengers in the European arena to 125 million from the current levels of 20 million by 2010, makes this aspect an extremely important consideration. EasyJet’s present dominance could be quickly put at risk through large mergers or acquisitions as a strategy, as well as direct competition in its business and leisure class segment. The lack of definitive customer loyalty makes all of the preceding possible, thus EasyJet’s entrà ©e into hotel bookings and destination services on its web site is a move to secure some aspect of loyalty on the part of its customers. It will need to look at and take additional steps in these directions as well due to the intense competition. Threat of substitute products or services The competitive aspect of the industry will bring forth expanded service offerings in the drive to secure broader customer profiles. This means that the addition of free soft drinks, snacks and other areas will be introduced, as well as free limited snack type meals on longer flights. Innovations will come in unexpected ways as competitors seek to make an impression on the market and thus the defensive as well as offensive position on the part of EasyJet will need to be one based upon quick response and implementation. Intensity of competitive rivalry As indicated, the 54 entrants in the discount/no-frill segment is a major competitive factor that exists presently and will increase in the future. And while the number of entrants might actually reduce, the level of competition will increase as result of the growth of some competitors as well as through mergers, alliances and acquisitions. The presence of full service carriers within this field is a major consideration as they already have structures in place whereby they can utilize economies of scale to aid in their discount segments and as a cross selling tool. Conclusion Dominance in any industry segment is both a blessing as well as a potential headache as it provides other firms with a clear target to aim for. Being number one or two in any market segment undoubtedly means that there will be firms attempting to erode your market share as a definitive part of their strategy. Not being able to determine who will attack, from what angle or when means that EasyJet has only one option, to attack all segments of the market it holds, as well as expand into other segments as well. It has been indicated that the best defense is a good offense, and in the case of the highly crowded and competitive discount / no-frills airline segment, this might represent the only measure to ensure long-term survival. History in other industries as well as airlines has shown that the faster route to expansion is through merger, acquisition and or alliances. The benefit is that an ongoing operation is picked up with in place operations, equipment, facilities, personnel and a market identification factor among consumers. The economies of scale as a result of size make this aspect an undoubted part of the discount segments future and is a primary methodology that will leap frog some competitors to the forefront. EasyJet must be mindful of these points as well as the new innovations in services, ticketing, destination offers, accommodation alliances, rental car associations . The additional benefits that alliances, mergers and acquisitions bring are joint marketing programs, revenue growth, increased market exposure, strengthened network, more feeder traffic and a comprehensive product that can attract customers. The bigger is better theme is not true for all industries, and then again it is a must in others. The discount segment will start to live on this concept due to competition in ensuing years and represents the direction carriers in this segment of the market will need to compete on price utilizing economies of scale as the leverage. Appendix PESTLE This analysis helps a company to formulate is strategies through a clearer understanding of the external environment they operate in presently as well as in the future and is investigated systematically. It is not concerned with the organization’s internal environment or strengths, that is a process reserved for such methodologies as Porter’s Five Forces Model. The implicati ons arising from the utilization of the PESTLE analysis in conjunction with Porter’s Five Forces provides a clear framework to evaluate the identification of goals and objectives that are in consort with the realities of the industry as well as competition. Porter’s Five Forces This model represents a concept that identifies the relationship between competitors in a particular industry as well as potential competitors, buyers, suppliers to provide alternative solutions facing a company. 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