Strategic Analysis of Easyjet Essay
Strategic Analysis of Easyjet
EasyJet the airline industry was founded in 1995 by Stelios Haji- Ioannou and from thence struggled to maintain their competitive position in the airline industry. By introducing the ‘no-nonsense’ theory to the European market, after its deregulation in 1992, easyJet did prove power by increasing the size of the low-cost market and winning passengers from prominent traditional airlines as Lufthansa and British Airways. Stelios Haji-Ioannou established the company which is based on the low-cost, economy model of the US carrier southwest. EasyJet based it’s believe on the concept that cutting needless costs and ‘extras’ that typify traditional airlines would contribute to a change in fares. EasyJet’s first flights flew from Luton to Glasgow and Edinburgh in 1995 with two hired Boeing 737-300 with an aptitude of 148 seats costing £29 per trip. Seats were sold and advertised via the telephone reservation system only. It was a tremendous development to see that just a year later, in 1996, they began their international flights with services to Luton and Amsterdam with their owned aircraft.
Subsequently in the following year, their website was launched, easyjet.com which formed an A year later, easyJet launched their website, easyjet.com which from 1998 onwards formed an vital part of the business concept and offers for 98% of their bookings today. Their fleet and routes were being stretched in August 2002, and by procuring British Airways’ low-cost subsidiary Go and accepted to take over GB another British Airways franchise in October 2007 to initiate flights later in April 2008. EasyJet so far, has acquired 107 Airbus aircraft and has also condensed its Boeing fleet from 73 in 2003 to just 30 in 2007. Today, easyJet offers 289 routes from 77 airports in 21 countries and they are known to operate 137 aircraft.
1. DEFINITION OF TERMS.
VISION AND MISION STATEMENT.
A mission statement states the company’s aims. This is usually published in the company’s literature on websites and in the company’s reception areas of offices. It’s of great value to customers since it tells them what to expect from the company in terms of product service and also gives focus to employees about the company’s achievements. In BTEC National Travel and Tourism Bk 1, Gillian Dale and Helen Oliver say Easy jet’s mission statement is to… ‘Provide our customers with safe, good value, point to point air services. To effect ant 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’… (159). Meanwhile in Strategy implementation and Practice, Dave Chauffey points out… ‘a vision statement is a summarized statement of the goals a company hopes to achieve in the long-term. These goals may not be achieved in a short-term, but will indicate the direction to which the company’s working….’ Originally introduced in 1994 as a low-cost airline, Easy jet aimed at undercutting the traditional carriers such as the British Airways, by creating a lean operation’…. (352).
According to Jan Havenga & Llse Hobbs in A practical guide to Strategy….’ The term strategy is considered by many to be a weighty subject. It is neither like a science nor a profession and has been in its military form for ages. But it’s new in other aspects(less than 50yrs) as a discipline or field of study. Hitt at al define strategy as; an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage…’(p.9).
2. PART 1: ENVIRONMENTAL INDUSTRY STRUCTURE, OPPORTUNITIES AND THREATS. 2.1. THE ENVIRONMENT – STEEP
The features or elements listed below are likely to have an impact on the airline industry and should be considered when formulating an effective company strategy for easyJet.
Socio -cultural factors.
• The expectation of people to fly at cheaper rates is growing alongside the number of low-cost carriers. Hence easyJet is faced by competitors that are ready and able to match its prices on similar routes. easyJet has concentrated on maintaining its low costs in order to remain competitive. • London particularly in the UK is known as a popular travel destination for people around the world. easyJet, considering people with lower income, has offered opportunities for travel to and from the UK at affordable prices. Extending regularly their airport bases all over Europe and North Africa portray their struggle to reach markets in under-developed areas. • In dying need for more convenient ways of booking and flying on an ad hoc basis, there could be a remedy that is by offering them better last minute deals.
Higher fares are currently charged for flights not booked in advance. It’s noticed at times, last minute fares are higher than their ‘rivals’ specifically on major routes.
•keeping track of technological growth in the field of e-commerce and the manufacture of aircraft is a strategy to gain competitive advantage. A confirmation is their project launch with with Airbus to build more lighter and fuel efficient aircrafts. They are known to be powerfully innovative, for instance easyjetholidays.com offers flight and accommodation packages to be booked directly by customers on their website easyjet.com. An arising issue will be the extent to which technological developments can counterweight upward pressures on prices and costs.
•An increase in fuel costs, environmental restrictions and congestion. Higher security and insurance costs, reflecting the risk of terrorism can affect the operating costs. A solution to curb higher fuel costs is to stock up large quantities of fuel in advance which will enable the company to avoid short term effects of price increases. • Traffic should be boosted in the long-term via globalisation, meaning easyjet is on the right footing to the further expansion of its routes. Globalisation should continue to boost traffic in the long-term. That means easyJet is on the right track to expand its routes further. Placing an order for 120 Airbus fleet to be delivered until 2015 is an indication of the company’s assurance in the long-run market domination.
• To counteract the effects of avian pollution, these aviation companies are advised by the government to reduce their carbon rates. Easyjet has responded to this call by assisting the production of new environmentally friendly planes e.g the ecojet. They actually aim for fuller planes and offer a chance for their customers to join the course to reduce carbon emission. They can achieve this by paying in a token amount into a private account that will be used by the company to support environmentally friendly projects.
• Regulation and deregulation by governments of different countries and states. • The EU east-enlargement has created a new viable market for easyjet.
2.2. THE INDUSTRY’S STRUCTURE – PORTER’S FIVE FORCES MODEL. Michael Porter’s 5 forces model is very vital and useful in analysing every industry seeking to achieve a competitive advantage over its rivals to which easyjet is not an exception.
The threat of substitutes
• Marginal threat from other forms of transport like train and car on domestic routes. It’s confirmed that the cost advantage of most low cost carriers, overshadows the increased comfort and Usually the time and cost advantage of the low-cost carriers far overshadow the increased comfort and elasticity of cars or trains. Distances are far too great for trains and cars on international routes to be considered an alternative to air travel. Just a handful of cars can travel certain routes e.g Euro lines from London to Paris.
The threat of new entrants
• High capital requirements negate threat to some extent. EasyJet commenced with a loan of £5 million and 2 chattered aircrafts, but needed a £50 million investment raised by debt and parity in year two to speed expansion and acquire 4 new aircrafts. •Due to the maturity of the UK low cost market, in comparison to Europe in its entirety, Easyjet as the largest operator has a good and comfortable position. However expansion into completely new European markets might be very difficult. This is because already established cash strong holiday firms like TUI are building up their own low- cost operations. • Inadequate take-off and landing slots for aircrafts makes it difficult for new carriers to find suitable airports.
The power of suppliers
• The price of aviation fuel is directly interrelated to the cost of oil in the market. There easyjet as a individual airline company does not have the power to change it. • Producers of airplane are concentrated in the industry, for example Boeing and Airbus do provide most of the commercial planes. Easyjet basically was operating a particular type of aircraft until lately. The company’s deal with the Airplane manufacturer, Airbus shows that favourable agreements can still be accomplished. The reliance on spare parts from one manufacturer could pose a threat. • The further expansion of easyjet definitely gives it an urge over its suppliers.
The power of buyers
The buyer’s power within the airline industry and more importantly around the low-cost market is quite robust. This is because customers will often shop around for healthier prices, particularly with the dependence of the low cost airline on the internet. Price divergences can easily be found and misused by the consumer. Therefore the operator must keep a consistent check on prices. • In such situations, there’s always a need for customer loyalty because of the low switching costs. A customer might decide to switch to another airline anytime especially if the prices and quality are the same.
Rivalry among existing firms
• Easyjet has major competitors in the UK such as Ryan air, BMI and MytravelLite and external rivals or competitors as Virgin Express, German wings and Air Berlin are competitors. For all the fore mentioned airline industries, Ryanair is the only one to have succeeded and demonstrated a continuous annual profit. • British Airways and other traditional carriers out of the UK are also in stiff contests but on a lower scale. This is because they are known to target different market segments.
2.3. SWOT ANALYSIS
The establishment of internal strengths and weaknesses and also of uttermost importance to consider the external threats and opportunities in order to is a necessity It is necessary for easyJet to establish their internal strengths and weaknesses, at the same time considering the external threats and opportunities in order to react with the suitable alterations to their global strategy.
2.3.1. Internal Analysis
•The company’s image must be of standard. There should be a difference on its price and products. This way, customers are going to be loyal to the brand. • Finance is the back bone to the success of every company. To be able to build a successful company that will compete with arch rivals, your financial position must be very strong. •In our contemporary society, no company survives without the strategy of innovation. You must continuously innovate new ideas that are flexible in the face of competition. • E- business is known to be a strong business strategy adopted by most successful businesses today. Launching, adverts, sales and promotion are mostly done over the internet because this facilitates things and it enables people with busy schedules to meet up. Weaknesses
•The main weakness with these airline industries is that they have no customer retention policy. Once they have acquired a handful of clients and the business seems ok, they don’t cater about a strategy to retain customers especially in the low cost aviation sector. •They do lack competent services, flexibility and focus in business, e.g. offering flyer programmes frequently to passengers. In brief they render the low cost model unattractive for most business travellers. •There are two important drivers of growth which needs focus. Price and convenience are to be looked into. Frequent flights needs to be arranged, few connections, and more airports to be built nearby. The fore mentioned factors are definitely reaching their limits.
2.3.2. External Analysis
There is a Potential for future growth in subsequent years is priorities and business strategies are well implemented. • Man full-service airlines may drift away from the regional market and base their focus on more profitable long-haul routes, therefore leaving the market to the low-cost operators. • The short-holiday market seems to be of importance to easyjet as it grows swiftly than the UK travel market in general. • Their price reduction scheme has definitely taken them a step ahead of their rivals.
• Some complications leading to expansion has been met since viable new routes from the English capital are scarce. • Competition will intensify taking into consideration the saturated state of the market and the unavailability of other options. •Intensification of competition will lead to greater complications in demanding motivations from communities, like the token fee easyjet received at Luton. • In times of economic downturn, companies limit business travels. More so due to new- time consuming security measures, travel alternatives like video conferencing have been introduced.
3. PART 2: RESOURCES AND KEY COMPETENCES
Key success factors
Before analysing the resources and capabilities that put companies on an advantage competitively, Grant proposes it is essential to identify their key success factors. In accomplishing this, the company needs to carry out a research on what their customers need (demand analysis) and eventually a means to survive the competition (analysis of competition) (Grant, 2005, p.94). For Easyjet, the following analysis for demand and competition seems relevant. Sources for Demand.
•Their low prices call for an increase in demand.
• Safety measures are also a point of attraction.
• Punctuality of flights
• Excellent baggage delivery
The above factors can be observed as the beginning of expectations for customers from every local airline. However there are some elements that can distinguish easyjet from other airlines. These elements can be viewed as their accomplishment factors. From the start, the probability of booking one-way tickets which traditional airlines did not offer was eminent. This option existed but for a much higher price than return tickets. Bookings over the internet was a convenient factor that was satisfactory to customers, hence it is considered a success factor.
After the establishment of what the customer’s value, the company has to focus on the competitive nature of the market. The following criteria should be considered; Sources for Competition:
• Barriers to entry should be very high
• Financial resources needed to set up the industry should be standard.
• Cost efficiency should be maintained.
Consequently easyJet’s key achievement factors develop from their low-cost business model. Rhoades and Waguespack outline the most characteristic aspects of the model as; • The direct sale of tickets through the internet, and eliminating the commission of travel agents. • Their seats had a dynamic price tag (charging premium prices at peak periods and just a token during less popular periods. • The absence of frills (reserved seats, free meals or drinks on the plane) the management explained they will be used for further revenue generating opportunities. • The implementation of a point-to-point service
• Single aircraft strategy (meant to simplify crew, staff maintenance, training and the achievement of operational flexibility that will create economies of scale for both aircraft and parts purchasing. • The aircrafts will do short turn around, i.e it will make trips to shorter distances only. •Only a single-class cabin shall exist (Rhoades and Waguespack Jr, 2006). These are the elements which form the basis of easyJet’s key success factors. They can be considered as financial strength, operational efficiency and scale efficiency.
EasyJet’s Resources (Tangible).
•Upon consultation of the company’s annual financial report, easyjet had a profound financial reserve that enables it to respond speedily to opportunities such as the recent bid for the Great British airlines. Physical:
• EasyJet owns 137 aircrafts with Europe’s most modern and fuel efficient fleet aged 2.7yrs averagely. An option of 88 aircraft to be taken when needed builds a stiff barrier for new entrants and eventually gives them a competitive advantage. • The committed airport slots at main airports are a significant quality and another form of competitive advantage for easyJet. • Stocking fuel a year in advance is a great market strategy for an airline industry. This certainly proves their financial power and keeps them away from short term oil price EasyJet stocks fuel for a full year in advance that keeps them away from short term oil price variations. Intangible
• Easyjet makes a sale of 98% of its flights via the internet. Their website is technologically developed and updated regularly offering customers easy access for booking. Reputational
The company enjoys robust brand recognition. Since 1998 the ”easy” brand is used for ventures other than easyJet such as easyinternetcafé, easyvalue, easy music, easycar, easymoney, easybus, easycinema, easyhotel, easypizza, easycruise, esay4men, easytelecom, etc. Cultural
Stelios (chief Executive of easyjet) Like Virgin’s Richard Branson, has a charismatic and colourful personality that earns his company the admiration and ‘urge’ over others of its kind. The organisational culture is flexible and more importantly emphasises on team work and co-operation for the achievement of excellent results. To portray this co-operation and the humble nature of the staff, you can find an easyjet pilot help the crew to clean up the plane, as a measure to ensure the plane takes-off on-time.
Professional Skills & Knowledge
Easyjet possessed a Strong management team from its birth; Ray Webster, the New Zealand Airline Strategic Manager who was easyJet’s General Manager with complete responsibility, can be considered as one of the company’s main resource. Presently, their board of management include Sir Colin Chandler, Andrew Harrison and Jeff Carr who contribute immensely in achieving the company’s objective.
EasyJet makes use of subcontractors for most of its operations. Efficient communication is of uttermost importance since it serves as a strategy to accomplish operational targets. Innovative programs, workshops and performance rating systems were being initiated by the company which contributed to effective working relationships with subcontractors and suppliers.
Grant differentiates two methodologies to categorize capabilities; the functional analysis which “recognizes organisational competences relative to each of the principal practical areas of the firm” and the value chain analysis that “splits the events of the firm into a chronological chain” (Grant, 2005, P.145). For details about easyjet’s capabilities of, a value chain analysis will be endeavoured in spite of the fact that it is a service rather than a production company whereby importance will be laid on the events that would create a valued end service.
Value Chain Analysis
Within the principal activities, the incoming logistics apprehensions for example, delivery of aircraft from its suppliers (Airbus and Boeing) takes the lead. To be on the alert, easyjet has for this; easyJet has safeguarded long-term contracts that guarantee an exact amount in delivery, location and time of the aircraft. The operations concern events that are inputs into the final service: the focal operational activity is carried out by an enormous number of people managing reservations. The introduction of an online reservation system enabled the company to cut out the travel agents and so save on the commissions. By outsourcing their ground flight management services to subcontractors easyJet is also able to safeguard these activities in a more cost efficient manner. Outbound logistics is apprehensive of distributing the final product or service to the customer.
To the company it would be the actual flight which is to be safe, prompt and comparatively comfortable. EasyJet has an 84% load element on their planes which designates their efficiency in this domain. Marketing and sales is accountable for generating the consciousness among the target audience of the company about its products and services which is an area easyjet excels. Their robust marketing and sales force is the brain behind the company’s success in general. The company offer Services in form of after-sales services before or after the sale of the product or service. EasyJet has a flaw in this area because customers are not offered any incentives. For example, most of their tickets are sold on a non-refundable basis which can be distasteful for some customers adding to the fact that they do not offer any regular flier programs. Support events include the firm’s infrastructure, human resource management, technology development and procurement.
3.3.1 Key capabilities
The listed factors can be considered as key capabilities obtained from the value chain analysis:
• The company’s Operational efficiency
• Its Marketing and sales force
• Efficiency in financial management
• Its technological advancement, i.e selling most of its tickets via the internet (online).
3.3.2. EASYJET’S GENERIC COMPANY STRATEGY
Michael Porter in his book states; “there are three potentially successful generic strategic approaches to outperforming other firms in an industry: 1. Overall cost leadership
3. Focus (Porter, 2004, p.35)
EasyJet keep an eye on a cost leadership strategy. Having placed their focal importance on cost reduction in every activity on the value chain, average profits above the capital invested into the business can be achieved. Founded on the innovative Southwest model, their revision of the US model onto the European markets with a slight disparity (using major airports instead of only the secondary airports) gave them an advantage. The aptness of their choice of this strategy will be deliberated in the next passage.
4. Company’s strategy match to environment and developments
Success criteria for EasyJet’s cost-leadership strategy
There are three apt criteria to test the effectiveness of a company’s strategic excellence. These are suitability, acceptability and feasibility (Johnson et al, 2006 p.357). Suitability is deals with the strategic location considering the position of the environment, strategic capabilities of the firm and the prospects of the stakeholders. The environmental point of view, i.e the STEEP analysis reveals that easyJet’s choice of cost-leadership strategy was appropriate to the macro-environmental factors. The deregulations during the time of setting-up, the increasing need for short-haul travel and the availability of a new business ideal determined easyJet’s setting within the low-cost market. Furnished with a strong financial background and coupled with Stelios’ knowledge of the transport business (stemming from his father’s reputable shipping business in Greece) made it possible for easyJet to penetrate the airline business. The prospects of the core stakeholders, i.e. the customers for cheap air-travel were also important factors in easyJet’s choice of the cost-leadership strategy.
The acceptability test is concerned with the anticipated performance outcomes of a strategy. The return, risk and stakeholder responses can be considered in determining the acceptability of easyJet’s strategy. The financial and non-financial returns that are expected by the stakeholders can be considered through profitability analysis in terms of forecasting the return on capital employed (ROCE), payback period and the discounted cash flow (DCF) which is investment appraisal techniques. As an example, easyJet’s ROCE figure indicates a continuous growth (11.9% up from 8% of last year) which is a strong indication of their accurate choice of strategy.
Feasibility is another useful tool of assessing a firm’s strategy choice considering their resources and competences to convey a strategy. This can be established in two ways; the financial feasibility which is realised from the funds flow, forecasting, break-even analysis and the resource deployment which supports the identification of resources and competences needed for a particular strategy.
4.1.1. EasyJet’s Future (suggestions for developments)
The company seems to match their environment with their strategy of choice. A violent growth strategy to govern the airline market seems apt until the market reaches maturation. It has the option to consider whether it should answer to new entrants by leaving the niche-segments or by further competing violently on price, routes and service in an effort to chase the entrants out of the market. To reach a strategic verdict, the company has to initiate a market research on the size of diverse amalgamations of pricing and services. The company must be aware of the competitor’s costs to serve and his capacity for every route. Conclusively, the new entrant’s competitive aims are of significance to anticipate how it would respond to any strategic changes easyJet might make. They are aware that gaining this information will help curb residual uncertainty and easyJet would be able to build a buoyant business case around its strategy. It is of value if easyJet targets principally leisure travellers as business often demand frequent flights to a wide range of destinations.
This group of individuals also seek quality service and frequent flyer programmes, and are willing to pay a premium for these benefits. Also, trying to plea to widely different customer requests runs counter to the overall trend in service industries, in which unique methodologies, designed for different customers have generally been dominated. No actual occasion offers the long-haul business as it is very diverse, both technically and in customer needs, to short-haul travel. The company should maintain its focus on price and try to unite the dots in its network, which costs less than introducing new cities.
Therefore, it needs to ensure a growth in its network and fleet does not contribute to higher operating costs. Emphasis should also be placed on direct marketing i.e. by introducing a customer retention programme. To distinguish its brand further on promotional lines, easyJet could adopt systems for developing a reputation for being a ‘caring airline’, e.g. by selling shares in forest help programmes over its website and accumulating foreign currency on flights for charity etc. This to an extent will give its passengers ‘a sense of psychological comfort and well-being’ when they choose to fly with easyJet. Generally, easyJet has to devise a realistic and perfect valuation of the market-niche to be served. A persistent commitment to quality service and cost control is as important as the discipline to establish a growth plan.
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