Business strategy
Environmental and
Industrial analysis of European Low-cost Airlines
Name: Kshitij Munankami, Student ID: 21101418
It is a known fact that
Airlines industry is one of the growing sectors of the world economy. Low-cost
airline industry was originated from USA in 1970s and has been commercial ever
since (Blaha, 2003). To read more about Low-cost airlines please go to Appendix
[A]
This report will provide an
environmental and industrial analysis of the European Low cost airlines. To
better understand the LCCs industry and its business environment, PESTEL
analysis and Five Forces analysis are deployed in the report.
The key steps to analyse
the environmental external factors of European LCCs is by PESTEL analysis.
Below are some opportunities and threats addresses from PESTEL analysis.
It is well known that the
political stability is rare in any country. We have seen that recently, there
has been a huge unbalanced in political situation in all around the world and
that can lead in great instability for LCCs industry.
· There have been many terror attack observed in past decades that
has placed huge negative impact and resulted in dropping the number of air
travellers dramatically (Wu, 2012). The government raises the operating charge
in terms of security that leads a great impact for the LCCs industry increasing
their business cost. This lead to be a threat for LCCs.
· Deregulations of European airlines in 1997 have result in
significant growth of Low-cost carrier (Cooper, 2005) giving them opportunity to
compete and to extend their network. Deregulation has increased the competitors
and the price wars between them. So, having a low fare ticket strategies LCCs
industry is a step ahead among other aviation industries.
· Taxes in airlines tickets have escalated intensely and it cause a
significant impact and threat for the LCCs industry. The rise
in air passenger duty in 2012 by 8% has adversely affected on LCCs business
(BBC, 2012). Furthermore, several airports these days enforce passenger
facilities charges. So, considering all these extra charges it is difficult for
LCCs to compete with its lower fare tickets strategies.
The economical factors play
a significant role in aviation industry specially to the Low-cost carrier as
their main strategies is to lower their cost as possible.
· Over the past years, aviation industry has tackled with
substantial alterations in its operational environment, from high fuel prices
to economic recession resulting in lowering the demand of air travellers and
resulting as threat for LCCs. Although LCCs strategies has
been proving them a successful business even in the time of recession but the
increasing cost of fuel has arisen a serious effect on them too. To see the
real life example please go to appendix [B]. This increasing prices leads to
rise in operating cost for LCCs resulting emerging difficulties for the LCCs
industry to keep up with their low cost strategies.
· Many peoples are unemployed due to recession. According to BBC
(2013) survey, the unemployment rate has decreased slightly but still there are
large numbers of unemployment in the country. Unemployment means less expense
and less travelling which is also one of the factors affecting LCCs industry.
Due to that reason, it is threat for LCCs.
Social factors include
lifestyles, tradition, values, etc. LCCs industry is also affected by the
demand for mobility. The number of people flying in plane was minimal in
past due to expensive tickets. It was financially difficult for lower or medium
class income people to afford the ticket fares for their holiday destinations.
However, the numbers has climbed in the recent days (Hayhurst, 2013). The
increasing LCCs industries in majority of holiday destination have facilitated
travellers to travel more often in convenient fares and that provides an opportunity for
LCCs to increase their business revenue.
In this modern 21st
century, technology plays significant role in aviation business industry and
has become the prospects for LCCs industry. Internet has become a leading
driver to transform LCCs business. For instance:
· Advancement in technology facilitates LCCs for reducing their
turn-around time (Taneja, 2002). Deploying advanced technology, Aircraft
fueling can be operated alongside with passengers boarding and this will reduce
the time required for aircraft from arrival to following departure.
Hence, LCCs will have better opportunity for generating higher
margin
· Advancement in technology will also provide an opportunity for
LCCs to reduce it staff cost by implementing the online ticket system, web-
based check-in and urgency boarding.
There is no doubt that
natural disaster can have unexpected effects for airlines industry. More the
travellers are more the emission of CO2. It has been revealed that the short-
haul flights produce more emissions per km than, as more emissions are discharged
on the time of take off and it is threat for LCCs (Jardine,
C.N., 2009). So, LCCs have to implement new technological method to cut its
emission or come up with new strategies in order to be successful industry in
this competitive airline market.
There are number of
regulations established by European Union (EU) with a view to liberalization of
the industry, ensuing an open-air competitive market.
· EU regulations are on the basis on non-discrimination,
transparency legislation constraining airport from providing various deals to
different airline operators and also restraining on state subsidizations to
airlines (European Commission, n.d.). This gives an opportunity for
LCCs to compete with other aviation industry with their low fare strategies.
· EU has legislation with an ambition to recuperate the passengers
right for all the travellers in EU (European Commission, n.d.) and it has few
negative effects in LCCs. For instance: The passenger rights also included the
compensation for long delays and cancellations; whereas the compensation price
is fixed for all the airlines (European Union, 2012). Generally, passenger
flying with full service pay higher fare then LCCs but in case of any
cancellation or delays LCCs have to bear a similar cost as full service
airlines and it is a threat for them.
The LCCs key driver for
change will be Low fares and Network
The main key success for
any budget airlines is their lower fares flight ticket. The factors that
travellers are ready to compromise on service and facilities of LCCs are their
lower fares. To be a successful in this competitive market LCCs should
implement the strategies that save costs and utilizing those savings to attract
more customers is an essential component of effective operation in this price
war market. Moreover, offering additional customer service in the board will
not only innovate new source of revenue but also attract business class
travellers. Similarly, utilizing the aircraft and airport facilities for short
turn-around times. Moreover, efficient internal process in overall organization
helps to maintain the low costs strategy and increasing the profit at the same
time.
The secondary success
factor for European budget airlines is technology. The use of an emerging
technology can generate significant business efficiencies within many sectors
of LCCs operation. It can improve the operations in broad spectrum such as
logistic of operating connecting flights, improving customer service, advancing
the systems to ensure the major factors for any airline industry; i.e. safety
and security (Taneja, 2002). Technology is an equalizer of competency
facilitating LCCs to compete with full service airlines by reducing their costs
such as accessibility of network formation system over the web. Advance
technology has significant affect on both supply chain (means that connect
business) and the value chain (business activities to build, provide and
maintain a product) of the industry (Taneja, 2002). Implementing advance
technology will facilitate the LCCs to adapt for the changing dynamics of the
customer and environment expectations. For instance, according to Dillow
(2010), MIT team aims to build an aircraft with advanced technology that could
trim down the fuel required by 70 percent. So, technology is one of the key
factors for LCCs to succeed in this recent competitive market.
Porter’s Five Forces Model
is implement below to analyse the forces that impacts European LCCs industry.
New entry in industry
results in higher level of competiveness and falling-off concentration,
regularity, hubs and capacity controls in envisaging market prices.
Furthermore, Europe aviation industry is already facing congestion problem due
to high competition on airports slots and flight authorizations (BBC, 2011).
So, in case of new entrants in the present route can lead an instantaneous
price war sets in resulting heavy burden on cost-effectiveness (Telegraph,
2008). However, the established LCCs have already positioned themselves in this
competitive aviation market with their respective low-cost model. So, new
entrants require high capitals investments in order to survive in this European
aviation market. Considering all these points, the threat is moderate.
Low-cost carrier industry
implies the most attractive model in terms of travellers needs. Its speedy
service with lower cost model have facilitates travellers so much that other
mode of transportation is less likely to be its substitution on its network.
The only means of substitution would be high-speed train. Train networks are
well organized and have good connection in majority of the cities in Europe
(European Commission, 2008). So, for short distance travel, it can be one of
the substitutions and can be threat in competition. However, the
advantage of travel speed with lower cost of LCCs outweighs the weakness of
travelling via plane. So, the threat is low.
Travellers always look for
the transportation medium that has speedy service with cheaper fares. In
ancient days, the buyers had less bargaining power on airline ticket purchasing.
However, it is entirely different scenario in today’s modern days. Advance
Internet technology system has offers the buyer more bargaining power by
facilitating buyers to buy the cheapest and convenient ticket comparing between
the numbers of various transport mediums. So, price-negotiating power of
purchasers is the dominant force on LCCs. Hence, LCCs have to offer the
cheapest flights in order to compete in this competitive aviation market. So,
the threat in this factor is high.
Supplier power involves
three key inputs to operations when it comes to airlines industry: Aircraft,
fuel and airports. There are two manufacturers that satisfy all the
requirements of the recent airliners, i.e. Airbus and Boeing (Ibsen, 2009).
These manufacturers have high competition between each other and that can
stipulate an opportunity to LCCs for negotiating on the time of aircraft
purchase (Irwin and Pavcnik, 2003). However, once they agreed on certain model
of aircraft then to switching to another model or to another supplier will be
too expensive. Furthermore, airlines cannot alternate jet with any other
invention and for this reason the suppliers can still have high bargaining
power when it come to manufacturing aircraft. Similarly, LCCs can avoid the
central airport with high charges using a secondary or regional airport with
less bargaining power (Papatheodorou and Lei, 2006). Lastly, jet fuel is a
commodity which price keeps on fluctuating according to market and
geo-political factors. Hence, LCCs can lower its general fuel cost by
implementing fuel hedging program. Considering all these factors, the
threat is moderate high.
The air transport market
liberalization has boosted the competitive rivalry in the European air industry
(Mason and Gray, 1995). The low-cost airlines have been able to compete with
their rivalry through their low cost business model. The first
competitive rivalry for European low cost carrier will be full service airlines
forming subsidiaries or other by implementing other methods to compete the
price that LCCs offers (Pels, 2008). However, this option of creating the
subsidiaries to compete with lower cost model of LCCs has not been evidently
beneficial. For instance, British Airway sold its subsidiaries Go to restore
its profits at all its unprofitable operations (BBC, 2001). Due to current
economic unbalance, travellers are likely to prefer lower fare airlines for
short-haul flights and that offers an extra momentum to LCCs. Moreover, the
point-to-point routes of LCCs offers suitable platform for their customers to
decide their journey by easy transferring of tickets where as in Full service
it is more complex and expensive to make a transfer due to its inflexible
ticket policies. So, the threat in competition with full service airlines is
low.
Secondly, there can be
internal competition amongst LCCs Company. In past decades, more LCCs have
emerged with low-price model in the European aviation market resulting in more
competition. Hence, company implementing the better strategies and offering
more deals for customer can lead the LCCs industry and therefore the threat is
high in competition between LCCs.
LCCs industry in Europe has
considerable of opportunities for their business growth as air traveller in
Europe is increasing significantly. In order to be a successful Low cost
carrier in European market, it have to considered all the above environmental
and industrial factors that can produce a great effect in its business
progress. Due to deregulation in European aviation market, there are price wars
and increasing competition in air market. Hence, it can be concluded that to be
a leading LCCs one has to develop new unique low-cost strategies keeping in
mind of key driver change, thus securing economies of scale.
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