Environmental and Industrial analysis of European Low-cost Airlines

Business strategy

 Environmental and Industrial analysis of European Low-cost Airlines

Name: Kshitij Munankami, Student ID: 21101418

1. INTRODUCTION                                                     

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.

 2. ENVIRONMENTAL ANALYSIS

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.

2.1.1 POLITICAL              

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.

2.1.2 ECONOMIC    

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.

2.1.3 SOCIOCULTURAL    

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.

2.1.4 TECHNOLOGICAL

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.

2.1.5 ENVIRONMENTAL

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.

2.1.6 LEGAL

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.

3. KEY DRIVER FOR CHANGE

The LCCs key driver for change will be Low fares and Network

3.1 LOW FARES

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. 

3.2 TECHNOLOGY

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. 

4. INDUSTRIAL ANALYSIS

Porter’s Five Forces Model is implement below to analyse the forces that impacts European LCCs industry.

4.1 THE THREAT OF ENTRY

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.

4.2 THE THREAT OF SUBSTITUTION

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.

4.3 THE POWER OF BUYERS

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.

4.5 THE POWER OF SUPPLIERS

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.

4.6 COMPETITIVE RIVALRY

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.

5. CONCLUSION

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.

  

6. REFERENCES             

 6.1 BOOKS AND E-BOOKS

·      Blaha, V. (2003) Low Cost Carriers – Evolution, Strategies and Performance [e-book] GRIN Verlag. Available at: Google Books <http://books.google.co.uk/books?id=1XfKJKxDzwkC&printsec=frontcover&dq=Low+cost+carriers+-+evolution,+state&hl=en&sa=X&ei=sf1vUqalEKm30QW4noDQCw&ved=0CEEQ6AEwAA#v=onepage&q=Low%20cost%20carriers%20-%20evolution%2C%20state&f=false> [Accessed on 24^th October, 2013]

·      Cooper, C. (2005) Tourism: Principles and Practice [e-book] Pearson Education. Available at: Google Books <http://books.google.co.uk/books?id=OWonlWCgp34C&pg=PT514&dq=Deregulations+of+European+airlines+in+1997+have+resulted+in+significant+growth+of+Low-cost+carrier&hl=en&sa=X&ei=-_xzUoWFFqqb0QXw4YDoDA&ved=0CD4Q6AEwAw#v=onepage&q=Deregulations%20of%20European%20airlines%20in%201997%20have%20resulted%20in%20significant%20growth%20of%20Low-cost%20carrier&f=false> [Accessed on 19^th October, 2013]

·      Dorig, D. (2009) The no frills strategy of Low-cost Carriers [e-book] GRIN Verlag. Available at: Google Books <http://books.google.co.uk/books?id=x0fPPCZhZjwC&pg=PA20&dq=ryanair+started+low-cost+model+in+uk&hl=en&sa=X&ei=gOZzUo6kJJKT0QX_qICADQ&ved=0CD8Q6AEwAA#v=onepage&q=ryanair%20started%20low-cost%20model%20in%20uk&f=false> [Accessed on 28^th October, 2013]

·      Hatch, M.J. (2011) Organizations: Avery short Introduction [e-book] Oxford University Press. Available at: Google Books <http://books.google.co.uk/books?id=7B-2Oex2x08C&pg=PA17&dq=US+low+cost+carrier+doing+good+even+in+recession&hl=en&sa=X&ei=SmtxUuD_DMXOhAfxy4HYCg&ved=0CFoQ6AEwBQ#v=onepage&q=US%20low%20cost%20carrier%20doing%20good%20even%20in%20recession&f=false> [Accessed on 1^st November, 2013]

·      Taneja, N.K. (2002) Driving Airline Business Strategies through Emerging Technology. Ashgate Publishing Limited: England.

·      Wu (2012) Airline operations and delay management: Insights from airline economics networks and strategic schedule plan [e-book] Ashgate Publishing. Available at: Google Books <http://books.google.co.uk/books?id=uy9I0YiMBvUC&pg=PA218&dq=due+to+9/11+terror+attack+affecting+airlines&hl=en&sa=X&ei=LUtxUoOrHKSP7AbHlYDgCA&ved=0CDIQ6wEwAA#v=onepage&q=due%20to%209%2F11%20terror%20attack%20affecting%20airlines&f=false> [Assessed on 3^rd November, 2013]

·      Vaisgh (2010) Foundations of Airlines Finance: Methodology and Practice [e-book] Ashgate Publishing. Available at: Google Books <http://books.google.co.uk/books?id=x73IGvsmox0C&pg=PA7&dq=southwest+airlines+invented+low+cost&hl=en&sa=X&ei=ngNwUqbzH8-Z0QX22YDgCA&ved=0CDEQ6AEwAA#v=onepage&q=southwest%20airlines%20invented%20low%20cost&f=false> [Accessed on 24^th October, 2013]

                    

6.2 WEBSITES

·      BBC (2001) BA sells Go for £100m [online] Available at: < http://news.bbc.co.uk/1/hi/business/1388980.stm> [Accessed on 6^th November, 2013]

·      BBC (2011) EU Commission: Airport slots need improvement [online] Available at: < http://www.bbc.co.uk/news/world-europe-13601459 > [Accessed on 4th November, 2013]

·      BBC (2012) Airlines urge review as air passenger duty rises by 8% [online] Available at: <http://www.bbc.co.uk/news/business-17566683> [Accessed on 21^st October, 2013]

·      BBC (2013) UK jobless total falls by 18,000 to 2.49m [online] Available at: <http://www.ukessays.com/essays/marketing/pest-analysis-of-ryanair-marketing-essay.php> [Accessed on 22^nd October, 2013]

·      Dillow, C. (2010) ‘Double-Bubble’ Airliners Designed by MIT for NASA could trip fuel consumption by 70 percent. Popularscience.com [online] Available at: <http://www.popsci.com/technology/article/2010-05/mit-designed-double-bubble-airliners-could-trim-fuel-consumption-70-percent> [Accessed on 25^th October, 2013]

·      European Commission (2008) Modern Rail Modern Europe [pdf] Available at: < http://ec.europa.eu/transport/media/publications/doc/modern_rail_en.pdf > [Accessed on 5th November, 2013]

·      European Commission (n.d.) Air [online] Available at: <http://ec.europa.eu/transport/modes/air/airports/slots_en.htm> [Accessed on 29^th October, 2013]

·      European Commission (n.d.) Your passenger rights when travelling by air [online] Available at: <http://ec.europa.eu/transport/passenger-rights/en/03-air.html> [Accessed on 1^st November, 2013]

·      European Union (2012) Passenger rights [online] Available at:<http://europa.eu/youreurope/citizens/travel/passenger-rights/air/> [Accessed on 2^nd October, 2013]

·      Hayhurst, L. (2013) London named the world’s low-cost carrier capital bus Asia growing rapidly. Travelweekly.co.uk [online] Available at: <http://www.travelweekly.co.uk/Articles/2013/10/29/45806/london+named+the+worlds+low-cost+carrier+capital+but+asia+growing+rapidly.html> [Accessed on 2^nd November, 2013]

·      Ibsen, A.Z. (2009) The politics of airplane production: The emergence of two technological frames in the competition between Boeing and Airbus. Technology in Society [e-journal] 31 (4). Available through University of West London Library Website: < http://www.sciencedirect.com/science/article/pii/S0160791X09000827 > [Accessed on 5th November, 2013]

·      Irwin, D.A. and Pavcnik, N. (2003) Airbus versus Boeing Revisited: International competition in the Aircraft market [pdf] Available at: <http://www.dartmouth.edu/~npavcnik/Research_files/airbus.pdf> [Accessed on 5^th November, 2013]

·      Jardine, C.N. (2009) Calculating the carbon dioxide emissions of flights [pdf] Available at: <http://www.eci.ox.ac.uk/research/energy/downloads/jardine09-carboninflights.pdf> [Accessed on 3^rd November, 2013]

·      Martin, B. (2013) Airlines boosted by falling oil price. Telegraph.co.uk [online] Available at: <http://www.telegraph.co.uk/finance/markets/10300533/Airlines-boosted-by-falling-oil-price.html> [Accessed on 31^st October, 2013]

·      Mason, K. (2001) Marketing low-cost airline services to business travellers. Journal of Air Transport Management 7, 103–109.

·      Mason, K.J. and Gray, R. (1995) Short haul business travel in the European Union: a segmentation profile [e-journal] 2 (3-4) Available through University of West London Library Website: < http://www.sciencedirect.com/science/article/pii/0969699796000063 > [Accessed on 6th November, 2013]

·      Notesdesk (2009) Porter’s Five Forces Model [online] Avaiable at: < http://www.notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/ > [Accessed on 11^th November, 2013]

·      Papatheodorou, A. and Lei, Z. (2006) Leisure travel in Europe and airline business models: A study of regional airports in Great Britain. Journal of Air Transport Management [e-journal] 12 (1). Available through University of West London Library Website: < http://www.sciencedirect.com/science/article/pii/S0969699705000955 > [Accessed on 5th November, 2013]

·      Pels. E.  (2008) Airline network competition: Full-service airlines, low-cost airlines and low-haul markets [e-journal] 24 (1). Available through University of West London Library Website: < http://www.sciencedirect.com/science/article/pii/S0739885909000171# > [Accessed on 6^th November, 2013]

·      Telegraph (2008) Low cost airlines in price war [online] Available at: < http://www.telegraph.co.uk/travel/4015854/Low-cost-airliners-in-price-war.html> [Accessed on 4^th November, 2013]