Environmental Analysis of Easyjet and Its Competitive Advantage
Stelios Haji-Ioannou, the founder of easyJet, initially became interested in the idea of a European low-cost airline in May 1994 after being offered a stake in a Virgin Atlantic Airlines franchisee. On refusing the offer, Stelios soon after flew on Southwest Airlines, a successful low-cost carrier in the US. This experience became the catalyst in his decision to create easyJet.
EasyJet was established in March 1995, with low-cost flights from London’s Luton Airport to Glasgow and Edinburgh in Scotland, supported by an advertising campaign, “Making flying as affordable as a pair of jeans – ï¿½29 one way”. The flight was full, and demand for low-cost flights grew rapidly. Thereafter, Stelios over the next two years concentrated on expanding easyJet and raised additional finance to invest in additional aircrafts. By 1998 easyJet owned six Boeing 737-300s and flew 12 routes in five countries. However, today it owns 64 aircraft and offers 88 routes from 36 European airports.ï¿½
Stelios modelled easyJet around Southwest Airlines’ operational techniques, in terms of having one type of aircraft, point-to-point short haul travel, with no-frills, rapid turnaround time and with very high aircraft utilization. However, Stelios had an extra innovation up his sleeve, which was based on a paperless office. He completely avoided travel agents and issued no tickets, but encouraged internet sales. The idea of this paperless office was a key element that Stelios looked to maintain as he cherished the idea of a hassle-free environment. In 1996/7 easyJet suffered pre-tax losses of ï¿½3.3 million, however in 1998 the company announced annual pre-tax profits of ï¿½2.3 million, which was the first time the airline had posted a profit in its brief history and in 2002 pre-tax profits mounted to ï¿½71.5 million.ï¿½
To look at easyJet’s environmental analysis we have to ask ourselves, ‘Is the budget airline segment an attractive place to compete?’ To answer this question we have to look at the external opportunities and threats in the airline industry and then come to an overall assessment.
The deregulation of the airline industry in December 1992 passed by European Union legislation meant that now any European carrier could fly to any destination and demand landing slots. The new directive means that air travel companies can now expand their business and take up new ventures in Eastern Europe possibly with new routes being opened up. This can also give easyJet the prospect of developing an operation in other parts of the world, for example, starting up an operation in Sydney and setting up a ‘hub’ to possibly expand even further.
Demographic changes also give the airline industry an opportunity to target potential customer groups. For example, the number of people having short holiday breaks has significantly increased over the past few years and forecasts state that the market demand for short breaks will increase between 2001 and 2004. However, the growth will be slower than in previous years due mainly to a slowdown in the economy.ï¿½ This gives easyJet the scope to offer holiday deals, like cheap weekends for example, directed at such groups to possibly boost their customer base and keeping on top of their market research.
However, there are also a number of threats that easyJet and the airline industry may face. For example, the market that easyJet operates in is highly competitive (the ‘degree of rivalry’ is a feature of Porter’s Five Forces). The downside to the deregulation of the airline industry is that it could open up the possibility of new airlines coming in to the market. This could add to the number of low-cost carriers operating in Europe and possibly outside of Europe. With the likes of Ryanair, Virgin Express, KLM and British Airways, these existing airline companies can pose a threat to easyJet in terms of expansion, thus increasing competition. There is also the possibility of ‘flag carriers’ fighting back, for example, Swissair’s monopoly over the Barcelona-Geneva route caused an obstacle to easyJet’s expansion plan.
Set up costs are a barrier to entry (‘barriers to entry’ is also an aspect reflected in Porter’s Five Forces) in setting up or investing in the air travel business. There are a lot of costs involved, such as leasing costs, operating license, safety requirements, maintenance, buying landing slots and investing in IT or ticketing system. Although this can be a major barrier to entry for potential airline companies coming in to the market, many current airline companies have high fixed costs and low margins, so there has to be tight control on the cost centres of the business. An example of poor cost-volume-profit analysis and inefficiency was with the airline company ‘GO’, which easyJet took over to reform, expand and pursue new ventures with (this reflects ‘supplier power’, which is a feature of Porter’s Five Forces) . By 2005 new European legislation means that flights that are delayed or cancelled, airline companies have to reimburse customers with a full refund. This can also add to the increasing costs posed to airline companies.
Another threat to the airline industry is on the issue of the attractiveness of air travel relative to substitutes (the ‘threat of substitutes’ is a feature of Porter’s Five Forces) such as road, rail or boat travel for example. We have seen how ‘one-off’ events can disrupt the progress of the airline industry. For example, the devastating events of September 11th caused a major outcry and people wondered if the airline industry would ever recover, as people felt more sceptical as to whether they were going to fly ever again.
This day was considered the airline industry’s “darkest day” in history. Other world events such as wars or the outbreak of SARS and contagious diseases can also disrupt and put people off air travel.? These factors influence the way people think and how they wish to travel, which may influence demand for airline travel (‘buyer power’ is another feature of Porter’s Five Forces). The introduction of high-speed trains, like Eurostar, who run the channel tunnel rail link also offer quick journeys, with which people may feel are more reliable and safe relative to air travel.
EASYJET’S COMPETITIVE POSITION
To answer this question we will look at, ‘how well placed easyJet is to compete’. I will look at easyJet’s internal strengths and weakness’ and come to an overall assessment of how well placed it is.
A key strength that EasyJet have been able to develop over the years is that it has a very efficient process of management. For example, EasyJet’s cost base is a definitive strength that has partly led to their success in the airline industry. What is it that makes easyJet’s prices cheap?
Looking at the formal aspects of easyJet, we can see that they have sought to minimise costs where possible and a number of operations were set up to help them achieve this. For example, they managed to save ï¿½24 per passenger by not offering a meal service and flying into London’s Luton Airport relative to Gatwick. Costs were also cut by not offering business class seats, allowing for more seat capacity. EasyJet’s merger with low cost airline ‘GO’ also gives them the scope to expand on its operation and they can benefit from this by gaining economies of scale, thus reducing costs.
The technological operation of online booking, that easyJet employs has also saved costs. Stelios avoided computer reservation systems and travel agents as he believed that they added 25% to total operating costs. In 1999 internet sales accounted for 60% of revenues and now nearly 90 % of all passenger bookings are made online. A paperless office was much cherished by Stelios and added to the cost-effective operation.?
The behavioural aspects that easyJet have adopted are also a strength that has helped them achieve their competitive position. The easyJet Culture Committee, were responsible for establishing social events such as staff parties and every Friday at Luton, easyJet held a company-sponsored barbecue in which the staff get to know one another better. Stelios also believed that being the underdog in such a highly competitive market strengthened his team and bought them closer together. Punctuality was also important to the operation easyJet employed. This was because customer satisfaction was closely linked to punctuality in terms of responding to customer needs and maintaining a strong customer base.
Another strengthening aspect for easyJet, which is closely linked to the behavioural aspects easyJet adopts, was the reputation and brand awareness that it had developed over time and in comparison to other airline companies. This partly came through the airline’s high-profile battles but moreover came from Stelios’ wit, by considering himself the ‘people’s man’. An example of a high-profile battle was on the issue of Swissair’s monopoly over the Barcelona-Geneva route, in which Stelios had the words, “Say no to Swissair monopoly” printed clearly on the aircraft. He also issued a full refund to the passengers of the controversial flight to Barcelona to win the support of customers, which again spreads brand awareness.
An example of how easyJet developed its reputation was that if a flight arrived more than four hours late, Stelios instructed his staff to write a letter of apology and issue a full refund, as customer satisfaction was given top priority. The fact that fares were so low gave customers the image of an ‘old and tacky’ aeroplane, but when they saw a brand new aeroplane they were impressed. Other airline companies such as Ryanair were not as concerned about its marketing and brand awareness in comparison to easyJet, which again puts easyJet in a favourable position.
EasyJet’s critical capabilities have also been a highlight in the development of their speed and flexibility in its operations. For example, many of the airlines operations were outsourced, which not only cut costs but also improved efficiency. Subcontractors handled a lot of the responsibilities, like check-ins to the customer information desk and they also made it possible for the airline to remain ticketless, meet its goal of a 20-minute turnaround at the gate and maintain its safety.
There are also a number of weaknesses that easyJet may be faced with. The downside to EasyJet’s merger with ‘GO’, could be that more pressure is put on the management team, which can possibly de-motivate and stretch them, as the joint operation is now larger and more time demanding, therefore adjustments to the organisational structure will be required. This also relates to the issue of high costs. When we talk about the airline industry we are looking at high fixed costs and lower contribution to cover the fixed costs and provide a profit, therefore easyJet have to be careful with their the Cost-Volume- Profit analysis in order to achieve their objectives.
Another potential challenge that easyJet faced was on the issues of subcontractors. The outsourcing of vital functions posed certain problems, for example, at some airports that were not frequently serviced, easyJet hired external ground handlers, who were not employees. Stelios did not like this idea as he felt they did not attend to customer needs in a punctual and satisfactory manner. This could pose the threat of losing customers.
So, overall we can see that easyJet’s merger with ‘GO’ gives them the potential to expand and gain form economies of scale, which can put them in the driving seat in this industry. However, easyJet’s main strength is their brand name or goodwill, which can take years to build up, but can be lost very easily.
In conclusion, we can see that externally easyJet are faced with the large threat of increasing competition, due to the deregulation of the airline industry, which could open up the market, but on the other hand it gives easyJet the opportunity to expand on its current operation. However, we can not rule out what the future for short-haul air traffic will hold. Will people switch to the high speed train or other more ‘reliable’ modes of travel? Will there be another event like September 11th? Such factors can most certainly affect demand for air travel. There may also be place for the traditional government-backed flag carriers, which may challenge the low budget air travel industry.
With Stelios leaving easyJet, it is debatable whether or not this could turn out to be a strength or a weakness for easyJet. The notion of Stelios being the ‘people’s man’ could be seen as strengthening aspect in boosting easyJet’s customer base, as customer satisfaction and marketing were given top priority. On the other hand his entrepreneurial management style may have posed a threat, for example, refunding every one of his passengers in the Swissair battle over the Geneva-Barcelona flight could have exposed easyJet to high fixed cost and low margins, hence having a knock-on effect on the business’s Cost-Volume-Profit analysis, which may put easyJet in the ‘red’. So, we can see that there are both positive and negative aspects concerning easyJet’s environmental analysis and competitive position.
The style of writing the group decided to adopt was in a ‘deductive’ tone. All the data used was secondary data and using a deductive style of writing meant that there was a lack of primary data used. We started by analysing the theory researched and then looked at the data to back up our reasoning. The strategy we adopted was in the form of a case study and grounded theory.