Strategic Management Critical Essay

INTRODUCTION

A success history of the Europe’s second largest budget airline EasyJet began in 1995, when a young entrepreneur Stelios Haji-Ioannou leased two Boeing 737-200 aircrafts to initiate first routes from London’s Luton airport to Glasgow and Edinburgh (http://www. easy. com/PDFs/easyGroup_Brand_Manual. pdf. , 2011) The core business strategy of a new EasyJet airline was borrowed basically from US’s Southwest Airlines. The company has adapted this low-cost airline strategy to European market by cutting operational costs and decreasing the complementary services like providing onboard food or not selling connecting flights (Williamson, 2002).

Unlike its main competitor Ryanair which was mainly concentrated on flights inside the UK, EasyJet strategically pursued a market expansion and accomplished its first international route to Amsterdam in April 1996. To strengthen its market position in European continent, EasyJet has increased the number of base openings and acquisitions. In early 1998, the company has announced about an acquisition of a Swiss airline and became Geneva’s home carrier. Moreover, in 2002 EasyJet purchased its rival Go airline and inherited three new bases at London Stansted, Bristol and Midlands Airports.

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Openings of new bases in Italy, Spain, France and Germany between 2003 and 2007 also helped the company to gain a sizeable presence inside the continent (http://www. easy. com/PDFs/easyGroup_Brand_Manual. pdf. , 2011). According to an annual report for the year 2011, Easy Jet was the United Kingdom’s largest airline by the number of passengers carried (54. 5 million), having 19 bases, 204 aircrafts and 547 routes between 118 European, North African, and West Asian airports.

Furthermore, the last year performance indicates that the customer satisfaction rate has increased by 79% and company’s total profit was 226 million pounds (http://2011annualreport. easyjet. com/overview/highlights. aspx. , 2011) Besides going to Initial Public Offering in early 2000, Stelios has decided to extend the Easy brand to other businesses. So, today Easy Group is the owner of the ‘easy’ brand and licences it to all of the ’easy’ branded businesses, including EasyJet plc. , Easy Car, Easy Hotel, Easy Pizza, Easy Cruise, Easy Mobile, Easy Office, Easy Bus, Easy Cinema and many other franchisees (http://www. asy. com/PDFs/easyGroup_Brand_Manual. pdf. , 2011). This report briefly analyzes the budget airline industry and the strategies EasyJet is applying to outperform its competitors and gives recommendations to improve its market standing.

MISSION STATEMENT

The mission statement of each company depicts its business purpose or a reason for existence. The Easy Group’s mission statement: “To manage and extend Europe’s leading value brand to more products and services, whilst creating real wealth for all stakeholders”.

VISION STATEMENT

The vision statement identifies the business’s goal and the steps it is going to pass to reach its business aspirations. Easy Group’s vision statement is: “To be the best low-fare airline in the world”.

BRAND VALUES

EasyJet is building its brand based on five values:

• Safety – Our number one priority, no compromises
• Teamwork – We will get there faster together
• Pioneering – Breaking the mould to find new ways and new opportunities
• Passionate – We are ambitious to be the best we can be
• Integrity – We mean what we say and we do it!

Moreover, the Easy Group is promoting its brand by sounding slogan “More value for less” (http://www. easy. com/PDFs/easyGroup_Brand_Manual. pdf, 2011).

INDUSTRY ANALYSIS

Competitive forces in each industry vary greatly depending on the number of factors. Before formulating and implementing any strategy, management in any industry should clearly identify the strength and possible effects of five different competitive forces. Thus, a formal industry analysis model developed by Michael Porter helps to analyze competitive pressures associated with: rivalry of competitors, bargaining power of suppliers, argaining power of customers, threat of new entrants and threat of substitute products.

RIVALRY AMONG COMPETING COMPANIES

Thompson, Gamble and Strickland indicate that rivalry is mostly fierce in the industry whenever the competitors constantly decrease the costs, buyers’ switching costs to competing products are high and the market growth is slow (Thompson et al. , 2006). In line with high customer’s bargaining power, competition among low cost carriers is leveling down the profits and margins.

Only a limited number of airlines like Ryanair, Air Berlin, Fly BE, German wings, DBA are in a direct competition with EasyJet as all they offer European-wide flights. However, there are numerous regional LCCs which also compete in their local market segment. As customers are very price sensitive, the low prices and other strategies to improve operations can be easily copied by competitors and differentiation based on other soft factors as service quality, additional benefits is becoming very challenging for these airlines (Geiger et al. 2008). Additionally, the major routes among Europe’s main cities are already served by large international airlines which in turn intensify the competition for LLCs.

THREAT OF NEW ENTRANTS

Capital requirements in the airline industry are immense. New entrants should have sufficient amount of aircrafts which also require high maintenance costs. Additionally, if a new entrant wants to gain a market share and remain competitive, it should achieve a maximum level of efficiency by price cuts which in turn may hurt its profits.

Apart from these financial factors, the European sky is already very congested with severe competition on airport slots and legal flight permissions from local authorities is quite difficult (Geiger et al. , 2008). Moreover, many established European airlines such as Lufthansa, KLM-Air France are entering to low cost carriers’ segment with their own low cost brands like Germanwings and Transavia-France, respectively (Cintuglu et al. , 2006). This last factor is indeed very high threat for Easy Jet’s operations in European market.

THREAT OF SUBSTITUTE PRODUCTS

Thompson, Gamble and Strickland point out that the level of pressures from substitute products can be appraised by three factors:

1.  whether substitutes are readily available and attractively priced,
2. whether buyers view substitutes as being comparable or better in terms of quality, performance and other attributes; and
3. how much it costs the end users to switch the substitutes (Thompson et al. , 2006).

Since the unique selling proposition of low cost airlines is speedy travel for a low price, any transportation that can compete on time and price requirements can be a potential threat.

The whole Europe is covered with fast, convenient and well-connected train system at comparatively low cost. For short distance travels, the train can be a better substitute due to time savings for security checks, check-ins and reservations. Moreover, cars are also well suitable for these kinds of trips as well. But for longer distance travel, a flight is much preferred due to a speed and time requirements (Geiger et al. , 2008).

BARGAINING POWER OF SUPPLIERS

In the airlines industry, the bargaining power of suppliers is rather high, as the market for airplanes is very limited worldwide.

Today, mainly two aircraft suppliers Airbus and Boeing are supplying the commercial airliners with airplanes. So, they are controlling the market for planes with a capacity of more than 130 seats and are in a strong competition with each other. This enables budget airlines to receive lower prices at favorable terms and conditions and additional maintenance services when purchasing new aircraft (Cintuglu et al. , 2006). However, as EasyJet has made an agreement with Airbus to purchase only A319 and A320 models, the switching costs to Boeing’s aircrafts would be extremely high.

Company would have to retrain the pilots, reorganize its supply chain for parts and maintenance. Another high cost EasyJet is facing is from airports (http://2011annualreport. easyjet. com/overview/highlights. aspx. , 2011). Due to its strategy, EasyJet is flying to only major small sized airports in the cities, which definitely charge airlines higher prices. In order reduce these costs, EasyJet is choosing off-peak times to flights, which is beneficial for both sides. For EasyJet, the cost of fuel accounts for almost 13% of its ticket price.

So with this rising fuel costs, the company is trying to hedge the price with suppliers beforehand and purchases the fuel in future or option terms (Williamson, 2002).

BARGAINING POWER OF CUSTOMERS

For the LCCs, the highest bargaining power of customers remains in the ticket price. Customers are seeking for transportation that can carry them to their destination within an acceptable amount of time and in the cheapest possible way. Therefore, passengers’ switching costs to other budget airlines or substitute mode of transportation like trains or cars are quite high.

Thus, EasyJet is selling its services directly from the Internet and avoids costly travel agents (Geiger et al. , 2008). Moreover, management is trying to offer the cheapest flight on any route across the Europe to remain competitive.

SWOT ANALYSIS

SWOT analysis is a formal tool for assessing the company’s current resource strengths and weaknesses, and upcoming external opportunities and threats. It provides a clear overview of the business’s market position and lays a foundation for crafting new strategies that will leverage the capabilities, take the opportunities and defend against the external threats (Thompson et al. 2006).

 STRENGTHS

A company’s strengths mainly include something it is competent at doing or any other attribute that enhances its competitiveness. Strengths can take a form of skill or important expertise, valuable physical, human, organizational assets, competitive capabilities or strong intangible assets and strategic alliances (Thompson et al., 2006). EasyJet’s primary strength comes from its strong brand recognition and brand equity. Due to the enormous efforts of the cofounder, the ‘Easy Group’ brand is widely known across the Europe.

Moreover, many customers can easily recognize and associate the orange colour with the EasyJet owing to the high service quality and customer satisfaction. Secondly, EasyJet is holding a very strong financial position. As the annual report for the year 2011 depicts, company’s profit before tax went up by 60 million reaching ? 248 million, despite high fuel costs (http://www. centreforaviation. com/analysis/easyjet-becoming-successful-hybrid-lcc-business-airline-annual-results-show-62977, 2011).

Besides this, company’s physical assets including 204 aircrafts of Airbus A319 and A 320 models are quite new comparing to its competitor Ryan air’s fleet which mainly uses second hand used aircrafts. Therefore, company’s expenses for aircraft maintenance are much cheaper. Another strong position of EasyJet was gained by its intensive short-haul network in Europe with 19 bases and 547 routes and high market shares in valuable markets like London Gatwick, Milan Malpensa, Paris, Geneva and Amsterdam (http://2011annualreport. easyjet. com/overview/highlights. spx, 2011).

WEAKNESSES

Company’s weaknesses are something it lacks or the areas which company does poorly relative to its competitors. Thompson, Gamble and Strickland relate weakness to deficiencies in competitively important physical, organizational or intangible assets, inferior or unproven skills, expertise or intellectual capital (Thompson et al., 2006). In a domestic market, the share of EasyJet is shrinking due to high competition from Jet2, Baby, BMI, Ryan Air plus a host of smaller independent competitors (Curtin, 2012).

Therefore, company should better to drop unprofitable routes inside the UK which just increase the operating costs. The other company’s weakness is that it is not offering in-flight meals to routes longer than two hours (Cintuglu et al. , 2006). Offering this kind of perk for longer distance routes may differentiate it from competitors and attract customers. Even though the share of the business customers are increasing rapidly in EasyJet’s customer base, company has not launched any tailored services for this segment, which may bring high potential revenue.

OPPORTUNITIES

Market opportunities in each industry offer the company a potential for growth. However, the attractiveness of opportunities varies greatly based on the company’s strengths and capabilities, its current strategies and corporate culture and vision (Thompson et al. , 2006). EasyJet’s strong financial position and revenue allows the company to acquire smaller competitors in the UK and European market, even in the Arabian Peninsula and CIS countries. So, there is high potential for the company’s market expansion.

Additionally, as the customers’ strong demand for mobility has increased, company can offer customized routes to different customer segments such as business trips, travelers and students. For the longer distance trips, EasyJet can enter to a strategic alliance with American, Asian or Australian airlines in order to create additional comfort for travelers.

THREATS

Threats are external factors outside the firm’s control and which may pose substantial negative effects on the company’s operations and profitability (Thompson et al. 2006). In the low cost carrier segment, there is a high threat from established national airlines, which are entering to low cost segment with their own budget airlines like did Lufthansa and Air France (Curtin, 2012). The other potential threats for airlines are increasing airport and airspace charges. As major European airports are raising the prices, a drastic affect is seen in decreasing marginal profitability of budget airlines (Geiger et al. , 2008). Another undesirable external factor for EasyJet is still a tremendous oil cost.

Even the company is hedging the fuel price; it is still rising unexpectedly and accounting for the greatest portion of ticket price. Moreover, the UK government is proposing to lower the tax on long distance flights and increase it on short-haul flights due to high carbon emissions (http://2011annualreport. easyjet. com/overview/highlights. aspx, 2011). If this law starts acting, it may dramatically affect the profitability of low cost carriers which mainly fly for shorter distances.

CORE COMPETENCIES

A core competence is a proficiently performed internal activity that is focal to a company’s strategy and competitiveness.

Thompson, Gamble and Strickland point out that most often, core competence is a knowledge-based, resides in people and in a company’s intellectual capital (Thompson et al., 2006). Since the EasyJet follows the low-cost business model, it has built its core competencies by improving its value chain activities and cutting costs to minimum. Company has decreased the cost of its supply chain activities by purchasing fleet of airplanes on a very favorable financing contract basis with Airbus, even achieved discounts up to 50% on list price (Spieler, 2004).

Moreover, as the fuel is one of the highest costs, EasyJet hedges forward, on a rolling basis, between 65% and 85% of the next 12 months anticipated fuel and currency requirements and between 45% and 65% of the following 12 months anticipated requirements. This policy has widely aided the company to reduce short-term earnings volatility (http://2011annualreport. easyjet. com/overview/highlights. aspx, 2011). Other main core competencies of the company lie in efficient operations. EasyJet’s plane utilization rate is relatively higher than other European airlines, about 12-13 hours per day (Spieler, 2004).

Company has achieved this efficiency by low turn-around time in airports. EasyJet’s aircrafts spend less than half an hour in the airport they arrive. Here, aircraft fueling and board cleaning are done simultaneously with passengers boarding and thus, valuable time is saved (Geiger et al, 2008). Moreover, company does not divide the board cabin into classes; rather it has only one class. Therefore, an extra space inside the plane is occupied by seats and EasyJet aircraft carries more people than other national aircrafts.

Due to its large load factor and efficient yield management system, company’s revenue for the year 2011 has increased at a higher rate than its costs. Source: CAPA and company reports EasyJet’s advanced selling, distribution and marketing activities also add to core competencies. From the time it was established, company has avoided extra commissions payable to agents, and designed strong web based platform for selling its tickets only through its web site. By implementing this strategy, EasyJet has cut down administrative costs.

Nowadays, a customer just pays for the ticket using his credit card in the company’s website and when arrives to an airport receives a special number in check-in and enters the board. As the marketing activities are crucial for the sales of tickets, EasyJet is trying to use distinct ‘guerrilla promotional approach’, national newspapers and even TV series which have already created large media buzz (http://www. mba2007. co. uk/dba/studies/Easyjet-casestsudyvaluechain. doc. , 2007). Additionally, company’s efficient human resource management system creates core competencies.

Unlike to other major airlines, EasyJet has a very lean and flat management structure and employs about 2288 people across its whole European network (http://2011annualreport. easyjet. com/overview/highlights. aspx. , 2011). This management structure helped the company to avoid high overhead costs. Moreover, relatively smaller number of employees both in crew, management and administration allows the company to pay competitive wages, profit sharing and results in improved productivity (Williamson, 2002).

BUSINESS STRATEGIES

Among generic competitive strategic options companies can pursue either low-cost provider strategy or differentiation strategy. These competitive strategies enable the company realize their plans to outpace their competitors, better serve their customers and become the industry’s leader (Thompson et al. , 2006). EasyJet has been implementing an overall low-cost provider strategy that helped it to gain a competitive advantage and become the industry’s lowest cost providers.

Company has achieved a cost advantage by efficiently performing value chain activities and controlling the factors that drive the costs of value chain activities. Moreover, it has eliminated some cost-creating activities in the value-chain (Thompson et al. , 2006). * Controlling the cost drivers. Main cost drivers in EasyJet’s operations are inputs. Taking this into account, company has been using a single-fleet strategy. By using a single type of plane, EasyJet is eliminating the costs associated with training of pilots, engineers, ordering new maintenance equipment and changing its supply chain structure.

Secondly, EasyJet contracts with major but small sized airports in cities where they fly. Planes do not land in big airports like London’s Heathrow or Frankfurt airport due to extremely high costs. But company still tries to choose smaller airports inside the cities (Cintuglu et al, 2006). This is beneficial for both customers that they do not have to spend time and money to reach the airport outside the city; and for EasyJet that is paying less amount of money to these in-city airports by mainly using off-peak periods of the day to its flights.

Besides these factors, by high utilization of its planes and efficient operations, company was able to reach economies of scale and experience- and learning- effects, which in turn decreased operational costs significantly (Spieler, 2004). Revamping the value chain. EasyJet came out with some innovative ways to eliminate cost-producing activities in its value-chain. Firstly, company has avoided the services of travel agents and sells its tickets only through its web page www. easyjet. com (http://www. mba2007. co. uk/dba/studies/Easyjet-casestsudyvaluechain. doc, 2007).

This innovative web platform is easy for customers to use, gives 15 language options, enables customers to compare the flights to various routes and destinations, and choose the optimal alternative. Besides the flights, customers can look through other service options such as accommodation, transport, holidays and other essentials (www. easyjet. com, 2012). Moreover, company’s strategy of encouraging customer to book earlier for lower prices assisted it to ensure a high yield management. But as the time of the flight approaches, the prices of the tickets also rise.

In a way to cut its costs, company has decided to strip away the extras and concentrate on only providing basic value – transportation, at low fares and without extra frills. Thus, company do not offer in-flight meals and additional inboard services (http://www. centreforaviation. com/analysis/easyjet-becoming-successful-hybrid-lcc-business-airline-annual-results-show-62977, 2011). Apart from the low-cost strategy, EasyJet has followed some complementary strategies like acquisition and outsourcing (Thompson et al. , 2006).  Acquisitions.

As the UK local market for low cost carriers was extremely competitive, EasyJet has strategically planned to increase its local market share and expand geographically. Company’s healthy financial condition allowed it to acquire its rival Go airline in 2002 and GB airline in 2007. Company’s chief executive Andy Harrison told about acquisition of GB airlines: "This is an acquisition which both strengthens our customer offering at London Gatwick, our biggest base with an attractive catchment area, and allows us to fully capitalize on the potential of the airport through a larger number of slots... e expect to achieve both cost and revenue synergies as we expand our business at Gatwick. " (Dewson, 2007).

These local acquisitions aided EasyJet to increase its slots and access in London Gatwick and Stansted airports. Besides this, the acquisition of Swiss airline in 1998 gave the company a vast opportunity to expand its geographic coverage ( http://www. easy. com/PDFs/easyGroup_Brand_Manual. pdf. 2011) Thanks to this acquisition, these years EasyJet is making almost 60% of its flights outside the UK, mainly inside the European continent (http://2011annualreport. easyjet. com/overview/highlights. aspx. , 2011)  Outsourcing. Outsourcing strategy has become very popular due to two reasons (1) outsiders can often perform certain activities better or cheaper and (2) outsourcing allows a firm to focus its entire energies on those activities that are at the center of its expertise and that are the most critical to

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