Introduction
The airline industry across the world is characterized by stiff competition. Every player is doing everything possible to acquire the biggest market share and have an advantage over competitors. Business executives in this industry treat strategic management as an important aspect of making a business succeed.
This is not unjustified; a critical analysis of the market reveals an array of strategic management tools used by the various players in the industry to keep companies afloat, giving them an advantageous edge over others. This report analyses UK’s airline industry, and how it affects Easy Jet’s strategic management.
The industry’s current and future Macro environment
The leadership of any profit oriented company is always concerned about the current trends in the environment in which it operates. The UK government’s decision to increase corporation tax has affected the operations of many airlines, with some such as Ryanair opting to move their operation bases to other locations (Mintel, 2011b). The recent global economic problems affected most economies in the world, including the UK.
The credit crunch slowed economic growth in many countries, with most posting a negative growth curve. The recession had far reaching effects in the credit industry, which is the life line of most economies (Association of European Airlines, 2011)
It became exceedingly difficult for companies and other business entities to acquire credit to keep their operations running. It also became difficult for consumers to access credit for their expenses, and this almost brought most credit driven economies to their knees.
The effects of the recession are still being felt, and the airline industry is no exception. It is still reeling from the effects of high operational costs worsened by the rising cost of fuel among others (Hitt, Ireland & Hoskisson, 2010). Economic growth is still very slow in the UK, and the country posted a 0.2% growth rate in 2011 (Mintel, 2011a).This is a negative growth trend, and the economy is still far from full recovery.
The slow economic recovery and growth is doing little to raise consumer confidence. Though interest rates are falling, the restrictions on borrowing only worsen inflation, which by 2011 figures stands at 0.5%. (Mintel, 2011b). The decrease in consumers’ disposable income only makes it more real that they are likely to cut down on spending.
The effect of this on the airline industry is that many customers are likely to abandon high cost carriers for cheaper airlines. With unemployment numbers in the UK projected to hit 3 million soon, (Mintel, 2011a) airlines have a need to adopt strategies that will keep them afloat when their consumers spend less, or decide to ditch them altogether.
Consumer perception is fundamental to any business. Consumers in the airline industry have the perception that flying is the fastest way by which one can get to the destination they desire. Most people do not want to be late, and delays and other inconveniences can easily change this consumer perception. Technological advancements are set to change this.
Though flying is undoubtedly the fastest way to travel, investment in fast and convenient international rail systems could make a consumer rethink his/her options. When check-in, inspection and boarding time is factored in, for some consumers the better option turns out to be the rail system.
There are reasons for each consumer’s decision to use one airline and not the other. For some consumers, cost is an important consideration and for others, convenience and comfort are more valuable. Research shows that young adults are more likely to use cost as a determinant in their choice, while older passengers may hinge their decision on convenience and comfort.
UK’s demographics show that its population is ageing fast. Statistics show that the 75-84 age group is growing at a faster rate than any other age segment. The younger age segments are increasing at a much slower pace (Mintel, 2011c).
Research findings on consumer trends show that the older generation is most likely to choose a carrier on the basis of much more than cost alone (Hitt, Ireland & Hoskisson, 2010).This group of people is also working for a longer period of time, and shunning early retirement.
This means that they have access to income even in their old age. The young adults, however, almost always consider cost as a prime determinant in their flying decisions. The low cost fliers, therefore, may be faced with a consumer base that is slowly shrinking, due to the growing ageing population.
The company’s current position in the competitive environment in the UK, and abroad
Easy Jet is a low cost carrier that targets the domestic European (short haul) market though it also operates in North Africa. The airline is one of the top performers in the industry (Mintel, 2011d). It is reported to have airlifted the largest number of passengers in 2011, despite not having the largest fleet (Mintel, 2011e).
Easy Jet has the record of being the only airline in Europe that repeatedly recorded increases in passenger numbers over the recession period, even as passengers cut back on traveling (Mintel, 2011d). International travel especially, reduced by a considerably huge margin (Mintel, 2011c).
These reports do not purport that the company faces no threats to its survival. The competition in the industry is high, and rivalry among the competitors is at its peak. The low cost carriers command almost two thirds of the airline industry in Europe.
The players are numerous, most of them having similar strategies and with little differentiation in products. Competitors such as Flybe, Monarch airlines and Ryanair offer similar services to their customers (Mintel, 2011e). They also use expansion as a strategy to acquire a bigger market share.
Since they are low cost carriers, cost leadership is a strategy present in almost every company’s strategy. The consumers in this industry, therefore, wield a lot of power over the companies as they can easily switch from one airline to another.
The low cost airlines are expected to increase their market share considerably in the near future (Mintel, 2011f). These projections are likely to trigger an influx of players into the market. Most of the existing carriers are already positioning themselves for this.
Ryanair for example, is strategically trying to consolidate its market share. This is by focusing on the routes it already operates, and not necessarily expanding to newer routes. It is also trying to keep its costs low by indicating that it may move its operating base to places in Europe outside the UK. This move is intended to reduce expenses on airport charges and “tourism taxation” to which it is exposed in the UK (Mintel, 2011g).
Easy Jet’s operations are profitable, and going by figures provided by the Association of European Airlines (2011), it is doing better than most of its competitors. In the financial year 2009/10, it saw its profits rise by about 70%, an increase fuelled by growth in passenger numbers (Mintel, 2011b).
In 2011, it recorded a pretax profit of about £230 million (Mintel, 2011c). Virgin Atlantic’s profits during the same period increased by 13%, while Ryanair recorded a 29% increase (Association of European Airlines, 2011). Easy Jet is poised to maintain its profitability, though its current expansion strategy puts it at risk, due to the high costs involved.
In order to remain ahead of the pack, Easy Jet employs several strategies. First of all, the airline employs low-cost and cost leadership strategies. It offers a low cost, no frills service aimed at the cost-conscious client. It is well known among strategists that the consumer’s perception of a product is crucial, and this perception can change in an instant (Delfmann, Baum, Auerbach & Albers 2005).
Armed with this knowledge, the company tries to convince its customers that flying with the airline gives one a unique experience, but at a considerably low cost. It may not be the lowest in the industry, but the consumer needs to be convinced of its uniqueness. It conducts media campaigns to enlighten the consumers on how much money they end up saving by flying with it.
The airline also employs the focus strategy, targeting business travelers whose schedules change all the time. It has introduced a flexible package that allows the customer to adjust his/her flight even two hours before the scheduled departure time. This time is a reduction from the previous 1 week, and it is set to have a great appeal to the business community due to its flexibility.
This was rolled out in 2010, and the company also has plans to introduce new destinations such as Berlin and Madrid. This move is aimed at attracting tourists, and the company entered into a partnership with VisitBritain in 2011 so as to sell its services to tourists and increase its market share and profitability (Mintel, 2011d).See index- figure 3.0 for Easy Jet and its competitors’ market share, figure 4.0 for profits.
The Company’s current resources and capabilities
The airline industry, like almost every other sector of the economy is increasingly becoming unstable and to a certain extent, unpredictable (Hitt, Ireland & Hoskisson, 2010). Company managers and other business executives can no longer afford to rely on the macro environment to formulate their strategies.
Competitive advantage is now seen as achievable through the utilization of an organization’s internal resources and capabilities (Proctor, 2000).This leads the strategist towards the company’s internal environment for inspiration for a successful strategy formulation (Haberberg & Rieple, 2008).
Many times, a company’s resources are mistakenly looked at as the tangible assets. Little regard is given to the intangible resources at its disposal such as market intelligence, consumer information, technology, corporate culture, brand name and reputation (Haberberg & Rieple, 2001).
This remains the case even though research has proved that they are invaluable to the company’s competitive power (Yilmaz, 2008).These have been termed by many writers such as Haberberg & Rieple (2001 & 2008) as the only real competitive edge sources that a company can maintain over time.
As a provider of low cost flights, Easy Jet’s strong brand name is associated with efficiency and reliability. It enjoys a good reputation as a market leader, and also benefits from customer loyalty. It is the only airline that reported increasing numbers of passengers since 2005 (Mintel, 2011g).
Easy Jet offers friendly services, ticketless traveling to cut costs, and most of its operations are paperless (Easy Jet Plc, 2007). Most of its bookings are done online, and the airline does not offer free lunch to passengers. The company has a relatively small fleet, and as of September 2010 the figures stood at 196 planes, with plans to increase this to about 220 by the year 2013 (Mintel, 2011b).
The company continues to bank on its capabilities such as the efficient utilization of airports, for a profitable existence and successful expansion of its operations in the industry (Easy Jet Plc, 2007). It is among the leaders in the airline industry, with a market share of about 30.31% (Easy Jet Plc, 2011).
Its competitive edge is enhanced by high utilization of its assets, and efficient management of its fleet. Its operations have a cost advantage, and it enjoys economies of scale.
The company has a strong financial performance. Its pretax profits in 2011 rose by about £60 Million (Easy Jet Plc 2011). This was made possible by an 11.8% increase in passenger numbers, and a 4.1% increase in total revenue per seat.
Much of a company’s success is often attributed to its leadership (Haberberg & Rieple 2008). A strong balance sheet reflects well on leadership and when things are not going so well, then fingers point at leaders (Smith & Golden, 2001).
In order to transform an organization from its current position to a desired status, strong leadership is required, leadership that will give guidance to employees and inspire them to perform. Charisma, motivation and intelligence are desirable attributes of a good leader in an organization (Proctor, 2000).
Easy Jet has a transformational leadership that spearheads changes in the company to meet changing circumstances in the market. The company is pursuing several strategies that are reflective of this kind of leadership.
In a move targeting UK bound tourists and the likely increase in travelers due to the upcoming Olympics, the company has plans to increase its fleet. It has also opened up new routes and rolled out a flexible package for business travelers. These transformative undertakings reflect a transformative leadership.
Strategic options available to Easy Jet. Diversification
Every strategy pursued by a company is aimed at achieving the company’s goals and objectives, which include giving it a competitive edge over its competitors Delfmann, Baum, Auerbach & Albers 2005).The airline should diversify its products in order to attract tourists and other un exploited markets.
In terms of acceptability, strategy is acceptable to its shareholders and other stakeholders, because it is likely to increase the company’s revenue and expand its profit margins. It is also feasible since even though it will require a lot of money to finance, the company is very profitable and it can comfortably meet the costs.
Since the company’s strategic plan is to lead the low-cost airline industry, then a diversification strategy is suitable for the purpose of achieving this goal.
International expansion
The company recently invested heavily in new airplanes (Easy Jet Plc 2011), and an international expansion strategy is suitable, since it will be a justification for such a huge investment. Expanding to the international market is feasible since huge capital investments have already been made in the acquisition of new air planes, and these can be used in the new routes.
Shareholders and other stakeholders will be inclined to accept it since it may be instrumental in realizing the returns on these investments. It is also bound to raise its revenue and profit margins. The company is in a good position to exploit low-cost international markets, since it is already a low-cost carrier.
Diversification, which involves selling new products to the new markets may be a risky move for Easy Jet, but if it is successfully done, the company is set to reap big from it.
When expanding to the new routes, the company should concentrate on developing markets for its already existing products such as, popularizing the flexible package among tourists. The company’s Ansoff analysis shows us the possible strategies the company can pursue in order to maintain its profitability. See Index-Figure 5.0 for Ansoff’s grid.
Conclusion
A company’s strategic management may mean its success or failure. It needs to have leaders who understand the market and know the right decisions to make when the need arises.
The airline industry has so many players that many airlines are forced to work with others either through alliances or mergers, if only to ensure their survival. The analysis of Easy Jet reveals an industry that forces even the market leaders to look towards other smaller and arguably insignificant players for survival.
References
Association of European Airlines 2011, Research and Statistics: Trends, via AEA database.
Delfmann, W, Baum, H, Auerbach, S, & Albers, S. 2005. Strategic Management in the Aviation Industry, Ashgate Publishing Ltd.
Easy Jet Plc 2007, Preliminary Results 2007. Web.
Easy Jet Plc 2011, Europe by Easy Jet Plc: Annual Reports and Accounts. Web.
Haberberg, A & Rieple, A 2001, The Strategic Management of Organizations, Prentice Hall.
Haberberg, A & Rieple, A 2008, Strategic Management: Theory and Approach, Oxford University Press.
Hitt, M.A, Ireland, D.R & Hoskisson, R.E 2010, Strategic Management: Concepts: Competitiveness and Globalization (Concepts (Cengage Learning), South-Western College Publishers.
Mintel 2011a, ‘Airlines-UK-September 2011: Broader Market Environment,’ via Mintel database.
Mintel, 2011b, ‘Airlines-UK-September 2011: Companies and Products,’ via Mintel database.
Mintel, 2011c, ‘Airlines-UK-September 2011: Competitive context,’ via Mintel database.
Mintel, 2011d, ‘Airlines-UK-September 2011: Market Share,’ via Mintel database.
Mintel, 2011e, ‘Airlines-UK-September 2011: Market Size and Forecast,’ via Mintel database.
Mintel, 2011f, ‘Airlines-UK-September 2011: What people think of Airlines,’ via Mintel database.
Mintel, 2011g, ‘Airlines-UK-September 2011: Segment Performance,’ via Mintel database.
Proctor, T 2000, Strategic Marketing: An Introduction, Routledge: London.
Smith, J. R & Golden, P. A 2001, A Strategic Management Simulation, Prentice Hall: New Jersey.
Yilmaz, K. A 2008, ‘The Corporate Sustainability Model for Airline Business,’ European Journal of Scientific Research, Vol. 22, No. 3, pp. 304-317, via Eurojournals.
Index
The Net margin and Margin profitability ratios were used to determine Easy Jet’s profitability.
Fig. 1.0 Easy Jet’s Profitability (2010 & 2011).
Fig. 2. Easy Jet’s Profitability (2010 & 2011).
Figure 3. Revenue generated by Easy Jet and its Competitors. (Financial Year 2010/2011).
Figure 4. Market Share (Easy Jet and its Competitors).
Figure 5. Ansoff’s grid for Easy Jet.