Airline is an important industrial in European economy, with the liberalization and deregulation of European market, it is filled by a number of small-sized and large-sized airlines, recently, the model of low cost carriers is widely spread from America to Europe, the success attracts rivals to adjust business models to enter this market. Air France-KLM also attempts to adopt this strategy. This essay will use PESTEL and stakeholder theory, as well as corporate social responsibility (CSR) concept to analyze general environment and specific environment including customers and suppliers.
Main ideas are Air France-KLM (FK) should concern CSR behavior especially including social and environmental perspective to conduct low-cost strategy rather than only consider economic perspective which is short-term financial performance, because it could not bring a sustainable development for company. Furthermore, FK should have operational resilience and strategic resilience under the uncertainty of dynamic environment, and integrate CSR as a organization culture which will become a competitive advantage. The general environment analysis could provide reference for other companies, and analysis of stakeholder theory and CSR concept will give a guidance for sustainable development of companies.
Air France-KLM is owned by French airline (Air France) and Dutch airline (KLM). It is the largest airline company in the world, while the profit is continually decreasing in Europe within recent 5 years (Market Line 2014). It is positively seeking a path to maintain competitive position in European airline market. Two largest competitors are Ryanair and EasyJet in Europe who operate low-cost strategy which learn from Southwest in US, and they rapidly capture market share. Air France-KLM is planning to use same strategy to compete with them.
Environment is a significant indicator that influences the operation of business. It is dynamic and complex, different elements are interrelated and interacted that bring different influence for present and future activities of companies. Analysis of environment usually is divided into macro-environment and micro-environment, they separately cover the general environment and specific related environmental factors such as customers, suppliers and regulators (Kew and Stredwick 2005).
As Europe is located in a low valley suffering debtor crisis, new business model is encouraged to stimulate the economy and transfer risks for government. This essay will evaluate and discuss the low cost strategy Air France-KLM will adopt, firstly, it will analyze the general environment using PESTEL tool, and using Five Forces model and stakeholder theory further seek the issue and factors that can help company to succeed in a long term. Especially, it will explain the importance of corporate social responsibility in business operation. Finally, it is to find the opportunities and threats that company should notice for future success to combines different factors.
Air France-KLM is holding by Air France and KLM which is a Dutch airline, the alliance was formed in 2004. The headquarter is located in Paris, and it obeys the French law. Subsequently, it became the largest airplane company in terms of revenues in Europe, even over the world. However, the operating profit to Air France-KLM (FK) continually decreased from 2012 (MarketLine 2014). Air France-KLM is exploring another strategy to survive in the competitive airline industrial. As BBC reported Alexandre who is CEO of FK claimed company will adopt the Low cost carriers (LCCs) strategy to recover and sustain competitive position in airline industry (Clark 2014).
Environmental analysis is an inevitable step to help company identify issues, flexibly and innovatively solve problems, also assist the strategist to improve the decision making process (Kew and Stredwick 2005). The internal and external environment analysis will be required in order to explore fitness of strategy within the whole business environment and internal capabilities; in addition, the analysis on competitive structure of industrial environment and stakeholder will deeply explore the important factors for the sustainable development rather than short-term success, especially CSR concept includes social and environmental perspective instead of simply economic perspective which presents financial profits (Button 2014). FK will better understand the opportunities and threats under the business environment analysis.
The characteristics of Low cost carriers are presented on maximum utilization for facilities and economically provide service that customers themselves need. Usually, it has a high seating density, single class configuration, point-to-point services; it frequently uses second-tier airports on cost saving (CAPA 2014). It also keeps a low maintenance and training costs, as well as eases scheduling and takes advantage of bulk purchases to obtain discounts from manufactures (Budd et al 2014). It generates profits from ancillary revenue such as meal, snack and luggage (Budd et al 2014). This model started from America Southwest Airline in 1978. Nowadays, LCCs as a strategy is widely adopted in Latin America and Europe. The combining analysis between the environment and characteristics above will evaluate the low cost strategy of Air France-KLM.
PESTEL as a macro-environment analysis tool helps to understand the complex trend of environment. PESTEL includes political, economic, sociological, technological, legal and environmental. The analysis concerns the longitudinal and cross-sectional changes in time line.
Firstly, liberalization events in US market significantly impacted other countries (Fu and Oum, 2014). France has high liberalized operating environment that enable companies to flexibly run any legal business model, it provides environment that FK can practice low cost strategy instead of the whole service provided with high cost (Budd et al 2014). Liberated market will be an advantage for innovation of business and increase the market power of company. It is big opportunity that companies can expand their network, as FK is an alliance to share strengthen and risks between French and Dutch airplane company (Fu and Oum, 2014).
However, high-degree liberalization inevitably bring fierce competition. Additionally, the business model of public-private partnership is dominating the European airlines (Cruz and Marques 2011), especially the privatization process of European airlines is salient, government decreased the stake for business, as French government hold a 16% stake on FK (Stothard and Bryant 2014). As a result, company will obtain less financial support from government, government is able to bear less risk of deficit.
Secondly, to considering economic factors, German and France as primary strength motivate the economic recovery of Europe, French government is gradually putting effort to diagnose economic ills (Barber 2014). European countries still have maintained the high unemployment rate since financial crisis occurred in 2008, although it slightly fell in 2014 compared to last year (Statista 2014). Inflation rate had a slight fall in November than that of October, it will be a danger for debtors due to less revenue from sales, incomes or taxes, and debt problems is serious; energy price is falling as well (BBC Nov 2014).
The important social indicators is consumer behavior is gradually changing. The increasing number of customers choose the high-speed train for a short journey instead of the airplane as a result of the punctuality and similar price on same time consuming (Dobruszkes 2011). In addition, the strength of unions in this two countries is very high, labour union has strong power such as pilots or crews.
The impact of technology is significant, as the big data time is coming (Mark 2014), companies own the large number of data information about consumer, which will rapidly push the innovation of business, if company can dig and utilize the meaning of data.
For the most important environmental and legal analysis, climate change is as one of themes in previous G20 conference and future UN conference will hold in 2015, and it will concentrate on a new set of Sustainable Development goals and emphasize the multilateral co-operation on a range of vital issues (FT 2014), which implies France should contribute to same goal, and perhaps the more strict regulation will be adopted, for example, CO2 emission. Additionally, the terrorism is serious problem airplane companies is facing. In macro-environment, five forces model can identify and analyze the competitive structure of industrial environment. Forces in relation to stakeholders can be discussed upon priority. The opportunities and threats will be identified further.
Firstly, the intensity of rivalry is high, the large number of competitors in Europe is divided into two strategic streams, one is the large-size airplane such as Lufthansa and British Airway which are seeking path to compete in Europe; other representative group is LCCs including Ryanair and EasyJet. Various business models are emerging under the motivation of liberalized market conditions and globalization, airline companies could seek partner including other airlines companies and airports to form network for enhancing market power; additionally, each European country can operate and switch route freely (Fu and Oum, 2014). In contrast, LCCs provide service for customers who have high elasticity for price, it rapidly captured the market share as a result of low switching costs for buyers.
To considering new entrants, 77% small-size companies failed which learn from LCCs to enter market, because the established companies with strong reputation and first mover advantages, and their size do not enable them to create the economies of scale (Budd et al 2014).
Stakeholder theory claims companies should notice the interests of other groups, not only do companies focus on the interests of shareholder which is financial performance (Jensen 2001). Customer have highest power and interests for company, company usually prioritize them into first post; employees second, managers third, and shareholders last, according to the hierarchy of interests (Kew and Stredwick 2005).
Customers have the most power and the highest interests to organization. From production side and demand side of economic perspective, as the analysis of business environment above shows the supply is over than demand, the number of fragmented airlines is more than customers (Budd et al 2014), so that the bargaining power of buyers is powerful, also switching cost is low between airlines. Low-cost strategy of FK is not lucrative in a market with high intensity of rivalry.
However, business environment is along uncertainty and dynamics, the growth of Euro area will enable companies to earn the financial obtains as economic perspective. In fact, demand-supply economic perspective is narrow, the increasing demand of LCCs will lead to tragedy of the common for suppliers, because suppliers only consider the economic returns compared to inputs, and plunge themselves into price battle ignoring value creation, the more followers will emerge, obtained profits from one unit of input will be gradually decreased with the increasing rivals, and tragedy probably occur. So only economic perspective can not achieve success.
CSR thoughts will benefits the long-term development of companies. It takes account of social and environmental perspective for a sustainable success, maximizing social welfare is an important measure under social perspective, and industrial success is based on sustainable development (Button 2014). Resources is limited in the world, when managers make decisions, they should consider to increase the long-run value for firm rather than a short-run financial performance including equity, debt and stock. Ryanair cancel safety cards stuck on the back of the seats, the legal proceeding is debatable. It requires trade off through time, also among different constitutions. When companies give up present cost of a unit for receiving that at some time in the future. As costs of input come from different resources including labour, capital or material purchased.
The company with CSR can attract and retain talents and establish the brand image and reputation for companies. The power of suppliers as one force represents inputs, simultaneously, they consist of important stakeholders including suppliers, employees, aircraft manufactures and fuel as well as airports. Firstly, employee as the most important internal stakeholder has high bargaining power within industrial. It is reported from BBC, the pilots of FK struck due to the reduction of their salary when low cost strategy adopted (Stothard and Bryant 2014). As above mentioned, company should not save cost from input to create short term profit, it impaired the interests of employees, employees will bring less output; on the contrary, if company can give them more care and welfare, they will create more value, such as company can provide training and individual deportment planning to maintain enough talent pool for future development, employee also will return to company through high quality of services and improve the satisfaction of customers.
Setting an adverse example, Foxconn as a large manufacturer adopted military management to employees and ignored their normal needs for reducing cost, as a result, employee suicide and reputation of company was impaired, likewise talents are not willing to work here under abnormal management. CSR could be employee and employer relationship, while Legal utilization for employee is only the lowest level of CSR, Low cost strategy with CSR should not only obey legal behavior, but also pursue ethical, economic and philanthropic behavior (Carroll 1991). Aircraft manufacture is another stakeholder group, low cost strategy may squeeze their price and change manufacture process, as FK wants to reduce the weight of seats and increase the intensity of seat.
They should “co-production” with them rather than simply ask them to achieve requirement, otherwise, suppliers will be reluctant to change manufacturing process for FK only. For instance, IKEA uses flat-package for products from manufacturing to selling as core competitive advantage, it desires suppliers of China to satisfy the flat-package manufacturing process, it not only help to upgrade production technology, but also provide training programme for employee (Inge and Claes 2011).
IKEA maintains the good relationship with suppliers. These ethical and economic CSR behavior will increase the wealth of stakeholders, simultaneously, it improves itself production efficiency in value chain. For philanthropic behavior as the highest level, company donates to communities for local better development. Company can collaborate employees to contribute this, such as employee regularly participate volunteering activities for 20 hours each year.
Also, as environmental and legal analysis above, CSR perspective can stimulate the innovation and initiative of company. For low-cost strategy, FK can try to innovate new technology or operational methods, such as the use of biofuels and the improvement of CO2 emission disposing.
The last force is the threat of substitute, the prevalence of high speed rail as substitute has advantages for a short route. Especially, for business group, they can use telecommunications on high speed train, and company also spend less on business trip. So the business passengers is decreasing. The noisy and pollution are comparative less than airplane. As German Airplane adopts corporate with high speed rail to compete with LCCs.
Based on analysis above, Air France-KLM (FK) adopt low cost strategy, the opportunities and threats can be identified. Liberalized market environment and rapid privatization process provide a favourable condition for development of new model, while they also achieve a high competitive market. It represents other large-sized company also can adopt this model to enter the market. Also, existed competitors with first mover advantages and rich experience, and high speed train as substitutes whose advantages are salient gradually capture the market share for a short-route trip. The pressure of legal environment on CO2 emission and labour union is heavy for operation of FK on low cost strategy. Compared to Ryanair, it ignored the CSR behaviour no matter what level about legal, ethical and philanthropic behaviour. It will be a path for long-term sustainable development for FK.
CSR more concern social and environmental value that FK could create, it as a large airline company will explore and represent a new and correct path bearing CSR rather than the short development for financial performance, because it will cause tragedy of the common for the whole society, it will more take account of the interests of stakeholders. In detail, it can use biofuel and decrease the CO2 emission, also maintain good relationship with customers and employee, as well as suppliers. Catching the development of technology, FK should utilize the big data to dig needs of customers to innovate the business model. Under the turbulence of terrorism, European countries can corporate together to resist it for the whole society.
French domestic CSR policy as a national competitive advantage will support this business model of FK (France Diplomatie 2014), as investment in CSR while it is difficult to receive profit in short-term, so perhaps FK could reduce the short-term financial pressure from support of government. So the policy of government is consistent with corporate strategy will be helpful. A differentiated low-cost strategy could be adopted by FK.
CSR can be a culture of company as a competitive advantage to position itself in market, so that it will always stimulate the innovation and learning of organization, and maintain effective human resources management such as attracting and retaining talents. Organization should consider the knowledge management through technology to advocate CSR concept to every internal and external stakeholders in order to better achieve CSR activities.
In addition, FK as one of large-size companies, it has enough experience and strengths to compete with other LCCs, even though they have first mover advantages in terms of reputation and economics of scale. On the other hand, as a large-size company has solid organizational institution and vested interested group so that the strategy change of organization is not easy. As the growth of Euro area with uncertainty lead to bigger risk FK will face (Cadman and Giles 2014), it indicates FK should concern the operational resilience and strategic resilience, once it suffers the unexpected adversity.
In conclusion, under the analysis of complex and dynamic environment, Air France-KLM should adopt a differentiated low cost strategy. The economic and political market environment with high-degree liberalization and privatization will provide conditions for the development of business model, also increase the market competition due to a large number of rivals emerging under deregulation.
Ryanair and EasyJet with first mover advantages have captured the large market share, also they have accumulated more experience, but the weakness of rivals and trend of environment such as regulation on CO2 emission and sustainable development indicate FK should bear responsibility to seek another path, which more concern the interests of stakeholders, CSR behaviour and activities to create long-term value such as the use of biofuel. At the same time, FK can integrate CSR as a culture, also a competitive advantage in order to continually motivate itself to innovation and learning, also improve the effectiveness of human resources management.
The development of technology will require FK to utilize data to dig needs of customers to innovate the business model in big data time. European countries also need to corporate together to resist it for common society under the turbulence of terrorism. Uncertainty of environment also require company have operational resilience and strategic resilience, once it suffers the unexpected adversity.
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