Airline Industry: Challenges and Opportunities - Essay Sample

Introduction

The airline industry is one of the most highly competitive and capital-intense sectors. It exhibits the interplay of different factors, such as low barriers to entry, and the large number of airlines. The steady liberalization of worldwide air transport has turned to be the most noteworthy trend since 1990. The industry has several factors which have stimulated the emergence of the cost-leadership carriers such in Europe airlines. Diaconu (2014) states that the primary factors which favor the rise of the European cost-leadership carriers include cyclical sector of air transport, air transport price, and air transport sector deregulations.

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The "Low-cost firm" concept was first set up by Pacific Southwest and then implemented by the Southwest Airlines. It was facilitated via the Deregulation Act of Airlines of 1978; Southwest attained high profitability and growth and expanded to a national airline dealing with thirty states. The success of Southwest led to the low-cost carrier model to be adopted by several North American airlines like AirTran, Westjet, and JetBlue at the beginning of the 1980s. Driven by the focus of the European Commission on achieving additional competitive and unified Europe, promoting global trade was viewed as the key to growth (Diaconu, 2014). Thus, many consecutive measures of deregulation were initiated by the European Union. It was when the European market was efficiently fully liberalized, and currently, European Union possesses the other liberalized market of aviation after the United States of America.

The existence of the cost-leadership has been identified to be related to three major factors. Firstly, the air transport is a cyclical sector, thus the demand is linked to the economic cycles (Hatty & Hollmeir 2003). Secondly, the air transport price is a significant constraint to the population large portion (Flouris 2016), and lastly air transport sector deregulations permit new services development and therefore encouraging the new airlines' creation (Gillen &Gados 2017). From the factors, it can be said that the third one was crucial to the emergence of the cost-leadership carriers since low-cost carriers cause airline deregulation directly. Europe airlines' market deregulation began with the 1987 first package.

Before 1987, the flight between any two European major cities entirely via designated flag carriers. Therefore, the first package implementation allowed the introduction of cost-related fares and specific discount tariffs, as well as bargaining, and some cooperation in air service agreements (Price & Hermans 2015). easyJet and Ryanair were among the first airlines adopting cost-leadership strategy in Europe. The following deregulation package was promulgated in 1990, and it permitted superior freedom of traffic rights as well as the inter-European general acceptance 'Fifth Freedom' rights when reducing price. The cost-leadership carriers' market share has visibly grown because of the implication of regulations, particularly after 2000. The cost-leadership airlines' sector rose from 1% in 1991 to over 24% of the market of all Europe flights by 2014 (OAG 2014).

Significance of the Problem

The European environment offers evidence of low-cost subsidiaries of charter carriers' emergence such as MyTravel Lite by MyTravel or Thomson, erected by Britannia that has produced a new model: diversified chartering companies. The main strategies for cost reduction are the same as those for subsidiaries using a single aircraft type, Internet booking, food charges and maximizing the use of aircraft (Jarach 2004). However, these airlines have a special feature that distinguishes them from other airlines, i.e., the costs associated with their subsidiary status are usually lower, because their parent companies have considered a considerable period of time in the aviation industry to reduce prices (Doganis 2001). The last low-cost airline model is the so-called "national subsidy price competition", which enables them to be financially supported by government ownership to establish tourism or promote a specific airport as the hub of the region (Kim, Park and Park 2014). At that time, most of these types of airlines had low fares and could only survive with the support of the government.

Theoretical Basis of the Study

According to Dobruszkes (2015), the origin of low-cost airlines proposed that several of them are branches of the full-service airline network like Snowflake which belongs to SAS. The other classification is the traditional carriers like Ryanair or the regional operators such as Flybe that have implicated low-cost strategy on purpose of enhancing competitiveness. However, Dobruszkes argued that several carriers have operated in a low-cost airline like EasyJet from the outset. Particularizing on the case of Europe's low-cost carriers, Dobruszkes differentiates four models which are according to the network type and the alleged exclusivities and the routes operated with no rival. A: small networks with much exclusivity like Intersky; B: broad supplies having much exclusivity such as Ryanair; C: small networks imitating charters, for instance, Windjet; D: broad supplies mimicking charters include easyJet case. Furthermore, Francis, Humphreys, Ison, and Aicken (2015) approved him and made a classification that there exist five types: Subsidiaries, Cost Cutters, Southwest copy-cats, state-subsidized and diversified charter carriers.

Problem Statement

According to the EasyJet Annual Report and Accounts of 2017, some of the essential resources that have led to the success of the airline such as they have a strong capital base that has a market capitalization of about 5 billion Euros as well as 357 million Euros cash position as at 30th September 2017. Its credit ratings are said to be the strongest in the airline world. The other resource is that it operates a contemporary Airbus fleet, applying the A320 aircraft family, and is investing in the fuel-efficient aircraft's A320neo and A321neos as well as the new 186-seat from summer 2018. The plane has a dedicated workforce that exceeds 12,000 people comprising of 7,547 cabin members of the crew and 3,291 pilots by 30th September 2017. Also, it leverages its customers" rapport management capabilities, thus driving revenue through increasing customer loyalty and putting into practice its broader digital strategy. Therefore, their increasingly complicated data use will enable them to continue making the travel affordable and accessible in the longer term (easyJet 2017). Finally, easyJet interrelates with several stakeholders in its operations like the suppliers, customers, national governments, and regulators.

Research Questions

This study will seek to answer the following questions:

• What are the significant factors that stimulate the emergence of cost-leadership carriers in Europe?
• What types of low-cost airlines models exist in Europe?
• What critical factors have prompted the success of EasyJet?

This project aims:

• To determine the factors stimulating the emergence of the cost-leadership carriers in Europe
• To determine the major types of European low-cost airlines models
• To establish the critical factors which have prompted to the success of the easyJet Company

Literature Review

Cost leadership refers to the business strategy that establishes a competitive advantage through the least cost operation in an industry. It is a function of the size, efficiency, scope, cumulative experience, and scale of a business. A business that employs a cost leadership strategy aims to exploit the scale of production, to define its scope appropriately, and to streamline its economies of scale, which include such things as sustainable purchasing approaches. Also, this strategy enables a business to produce highly standardized products and services as well as incorporate advanced technology in the production and delivery of its products and services.

Increasingly, companies are adopting a strategic mix which allows them to realize market leadership. Some of the elements of the strategic mix include cost leadership, improved customer service and enhanced product leadership. It is noteworthy that cost leadership and price leadership are not synonymous. Low cost production does not guarantee low prices for products and services. Thus, when a company realizes low cost of production while offering products and services at market rates, it realizes a higher than average profitability. One characteristic of cost leader companies, though, is that their competition is based on price. This approach makes such businesses effective in that they exhibit low cost management and structures.

The concept of low-cost has gained traction since its first major application to the management of business in the 1970s in the United States, with the launch of Southwest Airlines. This concept follows a simple principle. The company commits to offer its customers reduced prices in comparison to those offered by other players in the market. However, this price-reduction comes at an expense, as most of the secondary services that would accompany the product or service are removed. For instance, in the case of low-cost airline companies, services such as meals that would be present in traditional airlines are removed. The instant success of this business strategy led to new players in the airline industry adopting the same business model. In 1991, Ryanair followed in the footsteps of Southwest Airlines, adopting a low-cost strategy in the European airline market. EasyJet joined the fray in 1995, and is perhaps one of the existing testaments to the success of the cost leadership business approach.

EasyJet is the airline segment of group Easy, which also runs EasyMoney, EasyCar, and EasyInternet, all of which operate on the basis of the same model. It is presently the leading low-cost airline in the UK, serving over 400 routes with more than 170 aircrafts in over 25 countries. The company offers no frills services at the lowest rates. This approach is sustained by its generic strategy that is based on the belief that an airline can be profitable in any route provided an aircraft can fly on the route multiple times to a low-cost airport, on the basis of a minimum market size. EasyJet's cost leadership approach has remained sustainable over the years as it guarantees the company a 30-40 percent cost advantage compared to the large-scale airlines. To endear itself to the consumers, EasyJet offers a low-price strategy that seeks to realize the best prices for the customer while endeavoring to provide services that are similar to those offered by its competitors.

There are two approaches to cost leadership which are applicable to EasyJet. Foremost, a cost leadership strategy becomes successful when the company is capable of identifying a market segment that competitors are less interested in. In the case of the airline industry, most of the industry players focused on the high-end market, leaving the low-end market unserved. The second approach that is equally applicable to EasyJet is the identification of a segment hat attracts prices that enable the business to remain sustainable. Technology helps in the realization of cost leadership. EasyJet uses a ticketless approach to booing, which makes its services easy to consume. All that the consumer needs are an identification. Passengers enjoy their seats based on their arrival time at the airport.

EasyJet's cost leadership strategy is the sum of multiple approaches. The airline's ticketless flights imply that the company eliminates the cost that would normally be incurred in the d...