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The Key Environmental Drivers in the Airline Industry

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Assignment Submitted Monday 20th December 2004
1. The Key Environmental Drivers in the Airline Industry

(appendix , PESTEL / Porters Five forces)
The airline industry is a turbulent and competitive sector, influenced by multiple environmental variables/driving forces. How these key drivers influence individual sectors within the industry differ.

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Political issues, such as the threat of ongoing war in the Middle East, and more recently issues in Sth. America have driven oil prices up. This is intrinsically linked to the cost of aviation fuel. Whilst these political factors have direct economical ramifications such as increasing fuel costs, increased congestion, environmental restrictions, higher security, and insurance, they also have potentially indirect devastating socio-cultural effects for the airline industry, upon the attitudes towards air travel.

The result of these shifts in attitudes cause a snowball effect throughout the industry. Where by, a decrease in air travelers, impacts upon airline profits, whilst the requirements for increased airport security, result in a slower turn-around for operators, increasing costs for the airlines, and in turn raising the cost of air tickets.

Large numbers of network carriers have resulted in a substantial overcapacity in the market, which was exacerbated by the events stemming from September 11th. These all reflect the increased perceived risk of terrorism.

Surprisingly these key drivers have proven to be potentially advantageous for the ‘no frills’ airlines. An increase in low-cost airline passengers reflects, or more so suggests, a general consensus that these airlines are less likely to be targeted by terrorists. Whilst major airlines suffered immensely post 911, the European low-cost airlines entered a period of unprecedented growth. We could also ascertain to an extent, that the perceived risks associated are not subject to short-haul flights. Additional key drivers in the growth of low cost airlines include the deregulation of the European Airline industry, increases in disposable income, leisure time and internet use.

Key technological advancements have been of particular benefit to ‘low-cost’ airlines. They have facilitated the implementation, of such systems as internet booking. This combined with shifting attitudes towards purchasing tickets online has been capitalized upon by the ‘no-frills’ airline sector.

2. Critical Success factors for ‘low cost’ airlines
The ‘low-cost’ airlines share a common approach to conducting business. This stems from the business model established by Southwest (US since 1967). Southwest has paved the way, proving to be a model organization for ‘low-cost’ airlines. Critical to the success of ‘low-cost’ airlines, as the name suggests, is the delivery of competitively lower(cost efficient) travel costs to the consumer, compared with their major counterparts. Customers expect a service that places price over comfort. Factors determined by consumers/stakeholders are central to success, thus it is critical for the organization to able to consistently meet these requirements (Thomson, 2004). “…we aim 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” (Easyjet 2004). Easyjet’s mission statement outlines the company’s aspirations or promises, therefore determining, to a degree, stakeholders expectations of their service. It clearly states that Easyjet aims to provide a safe, good value and reliable transportation. We could therefore state that critical to Easyjets success is the delivery of these promises. There are also, however a number of critical success factors dictated by the industry or nature of the business environment. These airlines concentrate on providing point to point, short-haul flights throughout Europe. Distinguishing factors consistent across all ‘low-cost’ carriers, include the ability to sustain minimal operational costs and significant investment in ongoing promotional activities, which contribute towards enhancing market place awareness and perception. The establishment of a strong culture and public image, reinforced by clear, and recognizable branding is also evident. Online bookings account for 90% of Easyjets business. Internet accessibility
(online booking) and the supporting technological infrastructure of their service, has also proven a fundamental imperative for ‘low-cost operators’. The necessary financial backing to support the operations/infrastructure, human resource requirements, and physical assets (ie.planes etc), establishment of an efficient and effective supply chain and logistics are all critical to the carriers success. How does Easyjet meet these critical success factors? Easyjet meets stakeholders expectations by effectively ensuring costs ‘across the board’ are kept to a minimum. This includes strategic decisions to fly mostly to smaller less popular airports, where landing slots are more readily available, tariffs are cheaper, and planes can be turned around more efficiently. Concurrently they are vigilant in ensuring that all aspects of operations are sufficiently slimmed in the most cost efficient and effective manner, whilst maintaining the necessary safety standards to meet or surpass the CSF’s. The company maintains its position, on offering only point to point services. Easyjet recognize the need for, and invest extensively in the promotion of, the culture and image of the company. This cultural marketing has been reinforced by their bold distinctive branding coupled with the charismatic charm of Haji-Ioannou.

The company has consistently demonstrated the ability to yield large profits, essential means by which to finance the current and future prospects for the company. It strategically chose to increase available capital by floating on the stock market, as opposed to raising capital through extensive borrowing (gearing). Until recently, Easyjet chose to operate only one type of aircraft. This also, was a strategic choice, which has multiple advantages such as reducing overheads incurred in training operational staff, and the reduction of the maintenance variables and associated costs of maintaining their fleet at the industry standard.

3. Easyjets Core Competencies

In the ‘low cost’ airline industry it is necessary to be competent across a range of areas in order to be a viable market contender. However, it is clear that Easyjet excel in several areas, hence highlighting their core
competencies. The ongoing success (increasing profit margins and business growth) of Easyjet, indicates an exceptional ability to consistently maintain low costs and entice new customers in what is a turbulent and competitive environment. How do they achieve this? Where is the magic?

A combination of vigilant cost cutting, throughout Easyjet’s value chain, whilst continually meeting stakeholders requirements demonstrates an extraordinary ability to position themselves, on the cost versus benefits threshold (customer threshold requirements). Distinguishing operational ‘cost-cutting’ procedures include their ticket-less boarding system and near paperless office. Although these could be perceived as insignificant or minor procedures, they do, to an extent represent the innovative thinking embodied within the organization. It is important to note that clearly both these, and similar procedures can be easily imitated by competitors, however the organizational culture that stimulates this innovative environment, is not so easily replicated.

“To a great extent the culture of the organization is dictated by the strategic leader”(Thomson, 2004 pg.421) The charismatic leadership qualities of Haji-Ioannou coupled with Ray Webster, previously of Air New Zealand, form a dynamic team of solid experience backed with entrepreneurial flair. It is Haji-Ioannou’s vision and public persona which reinforces and has influenced the embedded culture of the organization. ”An entrepreneur is a person who habitually creates and innovates, to build something of recognized value around perceived opportunities” (Thomson 2004, pg. 425) Haji-Ioannou has clearly identified the significance of culture within organization, and has effectively utilized and marketed it, hence shaping the publics perception of the company. This gives a face to the carrier, in turn differentiating Easyjet, in what is a difficult industry to make your product stand out, especially when your competitors are offering a very similar product. By no means is this a revolutionary concept, but one which has been tried and tested by predecessors in the airline industry including that of the ‘model’ business Southwest and the ever so ‘lime-light’ hungry Richard Branson. Nevertheless this marketing approach has proven successful in differentiating the carrier, thus clearly being a strong
competence, hence advantage over competitors.

“The webs favorite Airline “(ezyjet website, 2004) Without buying into the marketing propaganda, it is clear how successful Easyjet has been, at identifying not only the opportunity, but also strategically implementing and marketing their online booking system. This has set the bar for other ‘low-cost’ carriers. Access to online booking is clearly a CSF or ‘lynch pin’ in Easyjet’s operations and is an integral ‘value-adding’ part of the process in which they have indisputably demonstrated extreme competence in establishing and maintaining. (appendix 5:Value Chain Analysis) Considering the turbulent and competitive nature of the Airline industry, it is clear, that the competencies stemming from operational capabilities are somewhat durable, but they also can be easily transferred or replicated by competitors. However the more tacit sources of competitive advantage are much more difficult for competitors to replicate. These factors implicate concerns, regarding the sustainability of competitive advantage, hence highlighting the need within this industry for active identification of opportunity and innovation in meeting it.(Kotler, 2003) 4. Easyjets Strategic Capability

Thomson 2003, defines strategic capability as the ability to be able to meet, or to beat that of your competitor’s competencies. This can be achieved through benchmarking or comparing the company’s resources.

Key capabilities are reflected by not only the CSF’s and the core competencies (see 2&3) but also the company’s resources. A significant capability, fundamental for implementation of strategy is the company’s financial resources.

Both Ryanair and Easyjet have demonstrated excellent financial growth. Both company’s have large capital available to finance expansion. (Cash in the bank Ezyjet 427,894,000, Ryan Air 899,275,000 – 2002). The figures for ROCE(return on capital employed) suggest that Ryanair(10.3%, 2002) is slightly out-performing Easyjet (8.48%, 2002). These ratio’s, demonstrates Ryanairs ability to gain marginally higher returns on their available
resources before making any distribution of those returns. The sales ratio’s reflect the total asset utilization. These figures (Ryanair 39.46%, Easyjet 68.58%) indicate what sales are being generated by each pound worth of assets invested in the business. It is clear that Easyjet is gaining more from their investment than their counterpart. This undoubtedly is a positive benchmark, although it may reflect some limitations in improving these figures.(appendix 2:Financial comparison). Both Ryanair and Easyjet have substantial financial backing (cash in the bank) to support ongoing business and expansion.

(Appendix 3: SWOT Analysis) This brings to question, whether the climate/environment is suitable for expansion. Experts believe there are too many carriers in Europe, and suggest that low cost airlines need to be consolidated. Easyjet recently acquired ‘Go’ airlines. I recommend that in light of their current positioning (Environment, Industry, Competitiveness, Financial strength) they continue to strategically seek new acquisitions, in the pursuit of further market dominance/growth (appendix 4: strategic positioning). As the UK Market is nearing saturation, there is clearly a substantial shortfall of ‘no frill’ carriers covering Europe. This along with the incorporation of new countries into the EU, presents a vital opportunity for the expansion of Easyjet’s routes. Their current situation strongly indicates, favorable circumstances, by which to capitalize on such opportunities. This will require substantial investment in new planes, staff and necessary airport infrastructure. They currently have the resources to embrace such a strategic approach, although sufficient contingency plans must be established to counter potential risks, such as expanding too quickly. The potential benefits however, by far outweigh these risks. Concurrent to these strategic approaches, the airline must maintain its current focus on cost and innovation, vigilant in ensuring sustainment of their current competitive advantage.

References

D, Rae (2001) ‘Easyjet: a case of entrepreneurial management’ Strategic Change, 10,6,325-336 available from Emerald database [accessed 16th December
2004]

Thompson, J (2004) ‘ Strategic Management’ 4th edition, Italy : Thomson Learning

Bibliography

Easyjet (2004) ‘ Annual report 2003 ‘ available from www.easyjet.com [accessed 12th December 2004]

Ferdows,K (2004) ‘Easyjet and Southwest lead the way’ Srategic Direction, vol 18, pp17-22. available from Emerald Database [accessed 12th December 2004]

Flottau,J et al (2004) ‘ The No Frills march on’ Aviation Week & Space Technology, Vol.160 issure 19, p62. available from EBSCO [accessed 12th December 2004]

Ford,N (2004) ‘Low cost airlines enter the Gulf marker’ Middle East, March 2004, issue 343 ,p40. available from EBSCO [accessed 12th December 2004]

Harvard Business Review (2004) available from http://harvardbusinessonline.hbsp.harvard.edu/b02/en/hbr/hbr_home.jhtml [accessed August 04 – Dec]

Johnson, G & Scholes,K (2002) ‘Exploring Corporate Strategy’ 6th edition, England : Pearson Education.

Kotler, P (2003) “Marketing Management”(11th edition). England, Prentice Hall

Mullins, L (2004) ‘ Management and Organizational Behavior’ England, Prentice Hall

Slack N, Chambers.S, Johnson,R (2004) ‘Operations Management’ 4th edition, England : Pearson Education.

The Economist (2004) available from
http://www.economist.com/about/about_economist.cfm
[accessed August 04 – Dec]

Appendix 1

PEST Analysis

Political-Legal factors
 Threat of ongoing war in the middles east.  Fear of terrorism has reduced passenger numbers and increased the need for security, and resulted in a slower turn around of planes.  Eu expansion may provide access to new potential markets.  De-regulation of the European Airline Industry  European countries are underdeveloped in terms on no frills and these offer huge potential for further growth.  environmental laws regarding pollution ( both noise and CO2)  Eu legislation is increasing the statutory levels of compensation for compensating canceled flights.  Experts believe there is not the room for the multitude of Airlines in Europe, indicating the need for restructuring and consolidation of the industry.

Economical factors
 increasing fuel costs
 the need for higher security and insurance post 911 (reflect terrorism)  The positive effects of globalization
 Increases in disposable income
 The recent introduction of a single European currency has reduced translation costs for carriers and lessened the risk of exposure to adverse
movements in foreign currency.  Airport charges have risen to reflect both increased security.  Increasing threat of global recession

 European countries are underdeveloped in terms of no-frills airlines
Socio Cultural Factors
 promotional factors
 Some apprehension (germany and …….) using credit cards online  It appears that many passengers believe that low cost airlines are less likely to become the target of terrorists.  Passengers can be disappointed when the actual price they have to pay for a ticket is much higher than the advertised price.

Technological Factors
 How can they effectively utilize new technology to offset the increasing costs.  The need for easyjet to keep up to pace with competitors in order to maintain competitive advantage.  The growth of the internet and the willingness of individuals to use the facility to book tickets.  Easyjet must keep up-to-date with technological developments oin the field of e-commerce and aircraft manufacture in order to gain a competitive advantage.

Porters five forces : Competitive Analysis

The Threat of Substitutes
There is little threat from other modes of transport like cars and trains on domestic routes. Airlines have a time and cost advantage.
The Threat of New Entrants
Easy jet ( startup costs ) …. The cost of entry imposes some restrictions upon entering the airline market. There are limited take-off and landing sights…

The Power of Suppliers
Established airlines have more power over suppliers.
The price of fuel is directly related to the cost of oil, airlines have no power of this as it is subject to global political and economical factors. Easyjet is dependent on only two suppliers, being airbus and Boeing. This could cause problems with the availability of parts.

The Power of buyers
The low cost market is fiercely competitive on price, providing the customer with a range of low cost alternatives. The ability for the customers to shop around makes the buyer power relatively strong.

Rivalry among existing firms
Major competitors : Ryanair, BMIbaby, Mytravellite and buzz in the UK. Virgin express, Hapag Lloyd express, Germanwings and Air Berlin could possibly become competitors in the future. RyanAir is the only airline which has continued show profits continuously. BA and other large traditional carriers are to an extent competitors as well, but to a much lesser degree… Due to the huge cost base for these airlines it is unlikely they will ever be able to directly compete with the low-cost airlines. Low cost expansion is somewhat contradictory to the environmental factors…….

Appendix 2.

Financial Comparison Easyjet vs Ryanair 2002

Roce
Ryanair 10.30%
Easyjet 8.48%
Sales/capital employed
Ryanair 39.46%
Easyjet 68.58%

Cash balances

financial sound – Cash in the bank 427,894,000 Ryan Air 899,275,000 Bank and other loans

Easyjet liabilities – 804,692,000
Ryanair – 1,581,380,000

Shareholders capital

E – 97,919,000
R – 9,587,000

Working Capital ( stocks, debtors,,,,) %
E % = 62%
R % = 93%

Appendix 3.

SWOT Analysis
Strengths &
Weaknesses
Potential for growth. (EU expansion)
The Need for higher security & insurance post 911
Crowded Marketplace
Need for consolidation
More full-service airlines may withdraw
Reduced
Aircraft
prices
Growth focus on price and convenience are reaching there limits Difficulties in finding new viable routes from london

Main Strengths

Image differentiation on price & brand
+++

+

+++

7

Financially Resources
+++

+++

+

+++

10

Is perceived as being innovative and successful
+++

+++

+

7

Stong e-business
+

1
Main weaknesses

Operates only within Europe

– –
2
Image differentiation on price and brand
– –

– – –

– –

– – –

10

+

7
2

0
3

7
2

2
0

6
0

0
3

0
2

Appendix 4

Appendix 5

‘Key aspects’ Value Chain Analysis : EasyJet

Inbound Logistics +
– Central location (airport)
– Close to maintence
– close to suppliers??
Operations +++++
– efficient and accessabile booking/reservation system – organizational learning
Outbound logistics
– Selection of the same planes to reduce associated costs Marketing ++
– Stong brand differentiation
– Charismatic leadership
– Competitive pricing
Service
– service deliver to required/expected level? – most of the time Procurement
– Strong relationships with suppliers
– Bulk puchases….planes etc
Technological Development ++
– Large investment in technology to support online booking etc. HRM ++
– Open, relaxed and cooperative environment – Ongoing development
Firm infrastructure
– Cost effective information systems
– Few management levels, reduce overheads

Cite this The Key Environmental Drivers in the Airline Industry

The Key Environmental Drivers in the Airline Industry. (2016, Oct 02). Retrieved from https://graduateway.com/the-key-environmental-drivers-in-the-airline-industry/

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