EasyJet - A No-Frills Airline - Case Study Example

EasyJet: A No-frills Airline Table of Contents Table of Contents Background 3 Objectives 3 Business Level Strategy 4 Competitive Advantage 5 Main Findings 5 Advantages 8 Disadvantages 10 Conclusion 11 Recommendations 11 References 13 Executive Summary This paper will discuss the cost leadership strategy implemented by EasyJet by exploring the major dynamics surrounding it, from the formulation to implementation. This paper will also explain the advantages and disadvantages of this model as used by EasyJet. EasyJet uses a cost leadership strategy, which involves selling to customers directly instead of using travel agents. The company also practices fare bundling, which it has used since 1997. Some of the advantages of EasyJet’s strategy include higher profitability, funds for growth, sustainability, and higher market share. The disadvantages of the cost leadership strategy, as employed by EasyJet, include negative perceptions of quality, poor customer service, and unsustainable discounting systems. It is recommended that EasyJet adopt highly flexible strategic decisions, develop a more aggressive and direct strategy, and reevaluate its wage structure. Finally, it will provide a comprehensive conclusion, and make the necessary recommendations regarding the subject. This paper provides a comprehensive perspective of EasyJet as a company, including the cost leadership approach, which is the generic strategy favoured by the company. Background EasyJet is a leading budget airline that operates mainly in Britain and Southern Europe. The company’s headquarters are in Luton, Britain. According to Anderson (2014:41), as at December 2014, EasyJet employed almost 9,000 people and flew to over 600 destinations in 30 countries. In the financial year ended September 2014, the company posted revenues of £4,527 million (Anderson, 2014:41). This represents a 6.3% growth in the 2013 financial year. Pre-tax profit, on the other hand, was £581 million, representing a 21.5% increase in 2013. EasyJet’s 2014 financial results were positive to say the least, and reflected the strategic decisions made by the company to maximise efficiency and expand its services to more countries (Chen, 2013:34). The strategic plan implemented in 2013 was necessitated by changes in the global and European airline industries that complicated operating conditions for most airlines. EasyJet, however, has been able to not only adapt but also to perform in spite of the conditions. As of December 2014, the company’s founder, Sir Stelios Haji-Ioannou, is the largest shareholder (Doganis, 2013:38). Apart from basic travel, EasyJet offers a range of auxiliary services. For example, it collaborates with Gate Gourmet for its in-flight products and services, Europcar, for car hire services, and booking.com that helps customers find accommodation during their travel (Drummond, Ensor, & Ashford, 2013:31). The company also partners with Low-Cost Holidays that offer migration across airlines and transfers, and Alvia, which provides travel insurance via the Mondial brand. Objectives This report will: a) Identify EasyJet’s competitive strategy. b) Analyse the mechanism employed by EasyJet to implement this strategy. c) Critically examine the strategy favoured and employed by EasyJet. d) Provide recommendations based on the analysis to enhance EasyJet’s performance as per the strategy. Business Level Strategy A business level strategy is a plan or approach used by firms to perform different functions in their commercial operations (Gross & Luck, 2013:69). Generally, large firms have more business level strategies as they usually have many departments with various business functions. Small firms may apply these strategies to their processes and assign them to various employees (Evans, Campbell, & Stonehouse, 2012:53). Businesses typically employ business level strategies in indoctrinating employees, shareholders and managers in their principles and methods of operation (Evans, Campbell, & Stonehouse, 2012:54). Business level strategies are crucial in the development of methods that give companies a competitive advantage over rivals. Usually, business level strategies go hand in hand with a competitive advantage: the more comprehensive the business level strategy, the greater the competitive advantage a company stands to enjoy (Gross & Luck, 2013:72). As such, the formulation of business level strategies requires professional and thorough interventions. Common business level strategies include: i) Coordination of unit functions ii) Identification of market niches iii) Development of unique advantages iv) Monitoring of product strategies (Gross & Luck, 2013:37) v) Utilisation of human resources Competitive Advantage When a firm posts profits that surpass the industry average, it is said to enjoy a competitive advantage over other players in the same industry (Cavusgil & Knight, 2014:37). The objective of business level strategies is to gain long-term competitive advantage. According to Michael Porter, there are two variants of competitive advantage: differentiation advantage and cost advantage (Katie, 2013:37). Competitive advantage only arises when a company can supply the same benefits as rivals but at a reduced price, or provide the same benefits as those of rival goods or services. Consequently, competitive advantage allows the company to offer superior value for its clients and superior returns for itself (Kinney & Raiborn, 2012:36). Both types of competitive advantages are normally referred to as positional advantages as they explain the company’s position in the market as a pioneer in either differentiation or cost. Main Findings Cost Leadership Strategy According to Haynes & Grugulis (2013:21), the cost leadership strategy is one of Porter’s strategies of creating competitive advantage. It focuses on offering the lowest possible prices in order to appeal to consumers and elbow out competitors (Haynes & Grugulis, 2013:24). It has always been held that this strategy is ideal for large companies that enjoy huge economies of scale, especially ones that intend to gain competitive advantage by ensuring high levels of efficiency and offering the least possible prices. Cost leadership can be extremely effective as EasyJet has demonstrated. The Dynamics of EasyJet’s Cost Leadership Model Fare unbundling is one of the primary features of EasyJet’s low-cost model, which it has implemented and refined over the years to meet an increasing need to remain as affordable as possible (Reid, 2014:45). Fare unbundling is a cost leadership strategy designed to draw price-conscious customers and compete on base airfares. EasyJet has been using this strategy since 1997, when it started discounting ticket prices for bookings done via their recommended channel (Lickorish, 2012:32). For example, the company discounted direct online tickets at POS (point-of-sale) by around £2.50. In 2008, the company introduced distinct charges for different items, which include change fees, partner charges, in-flight beverage and food, credit card charges, and excess baggage charges (Lickorish, 2012:34). In 2008, EasyJet wanted to grow auxiliary revenues and decided to introduce levies for checked hold luggage. The strategy worked, enabling the company to significantly grow its ancillary revenues and has maintained an upward trend in this segment to date (Pitt & Koufopoulos, 2012:34). These programs were introduced to passengers as a strategy of standardising the variable costs incurred by EasyJet in order to offer utilities to the expense of providing them. For example, if a passenger does not want to be charged for a suitcase to be kept in the hold, the company will bear lower expenses, which will be manifested in a lower base ticket price for that passenger (Liao, 2012:16). All customers paid standard base fares, but those seeking superior services (e.g., greater leg room) or extra services (e.g., in-flight food and beverage) could pay for them as an auxiliary service (e.g., a la carte charges). In spite of this, the unbundling method is evolving rapidly (Pitt & Koufopoulos, 2012:21). Currently, many airlines, especially budget carriers, offer fare class systems to implement different fare bundles of different utilities that were previously sold as autonomous supplementary products. Table 1 below presents a breakdown of the features of EasyJet’s cost leadership strategy, with emphasis on the product and operating aspects. Product Features 1. Fares/ network Low, basic, unconstrained fares supported by high frequencies that lack interlining and are point-to-point. 2. Distribution Call centres, travel agencies, fast internet services, and ticketless sales 3. In-flight No meals, no complimentary alcoholic drinks, no seat allocation, no light beverages and snacks, single class, compressed (high density) seating. Operating Features 1. Fleet Single type aircraft that support high utilisation (up to 12 hours per day). 2. Airport Auxiliary, enabling turnarounds of between 20 and 30 minutes. 3. Sector length Fleeting, roughly 400 nautical miles 4. Staff Competitive salaries, high output, profit sharing. Source: Yu (2012:59) How EasyJet has implemented the Strategy To successfully implement its low-cost model, EasyJet has completely avoided using travel agents by offering direct sales only. It even forces customers to pay for all food and beverage they want to consume during their flights (Rhoades, 2014:49). The company considers such aspects of its low-cost strategy to be condonable, attractive even, to customers who pay for fares using their own funds. EasyJet specifically targets three classes of price-conscious and price-aware customers. These are: a) Passengers visiting relatives. b) Leisure travellers flying briefly. c) Managers and entrepreneurs from small companies (U.S. GAO, 2013:21). At this juncture, it is important to discuss staff conditions (e.g., profit sharing, high output). First, it is generally astounding how little employee and staffing issues feature in topics about EasyJet’s low-cost model. In fact, they basically stand out in their absence. Secondly, if we look to more specific issues, there are justifications for questioning the reality of the staffing strategy employed by EasyJet (Ross & Westerfield, 2013:83). For example, on the issue of competitive wages, it has been argued that pilots working for EasyJet are paid around 25% less than their counterparts employed by traditional airlines (U.S. GAO, 2013:35). This disparity was a major source of challenges and hostilities when EasyJet acquired rival carrier GO in 2002, with clamour for strike action dominating talks at the time. Regarding airport efficiency, EasyJet prefers, and tends to operate from airports whose operations augment their strategic goal of cost-cutting. For instance, it tends to avoid airports with delayed processes such as document verification, in order to reduce delays that, in the long run, translate to poor efficiency and higher expenditures (Katie, 2013:31). Technology is a huge component of EasyJet’s corporate strategy, since effective application of technology leads to high efficiency and better attainment of deliverables. Just like technology, fuel efficiency is closely related to overall efficiency. The acquisition of fuel efficient yet cost-effective aircraft enables the company to implement its cost-cutting strategy (Ross & Westerfield, 2013:59). Advantages Higher Profitability Selling products or services using a lower cost structure and competitive pricing attracts greater profit margins than firms that spend more to sell products or services of identical quality (Katie, 2013:29). Higher Market Share Firms that offer prices that are lower than industry averages tend to attract more business from consumers who are price-sensitive, and such consumers form majority of the customers in any market (Kasabov & Warlow, 2012:103). Lower prices drive majority of consumers to the providers, and this can increase market share. This may explain why EasyJet has consistently maintained a high market share in its market segment since implementing its low-cost model. Sustainability The low-cost model is extremely sustainable because, during economic downturns when price wars become the survival strategy, firms using cost leadership tend to stay afloat (Heppell, 2013:45). This is supported by low-cost strategies like vertical integration, low-cost supplier linkages, and high outsourcing and efficiency. From 2006, EasyJet has been outsourcing its IT facilities to Savvis, a services company. When it comes to vertical integration, EasyJet launched easyJet Holidays in 2012, which is part of the company’s portfolio (Kasabov & Warlow, 2012:84). To enable this, the company has vertically integrated accommodation by using a low-cost bed-bank strategy, and merging it with the company’s air route network in Europe. Funds for Growth Low operating costs, which are fundamental to cost leadership models, free up plenty of capital for financing growth or more investments (Grundy, 2014:26). For example, more funds can be injected into technology upgrades, company expansion, promotion of new or unexplored markets, research and development (R&D), and higher dividends. Disadvantages Discounts Constant low pricing can hurt EasyJet when it comes to pricing offers and discounts. Since EasyJet strives to offer the lowest prices constantly, it may not record adequate profit margins to provide frequent promotional discounts (Abudho, 2013:24). When passengers are conditioned to anticipating low prices at all times providing discounts may appear suspicious or conniving. Customers may doubt whether or not the company actually offers the cheapest prices (Hagen, 2013:34). Customer Service Constantly low prices limit the profit margin and compel companies to operate on low budgets (Hagen, 2013:57). This can negatively affect the ability to hire professional customer service and sales personnel to maintain high customer service levels, and create challenges when it comes to maintaining repeat customers. Perception of Quality Low-cost strategies sometimes do not consider production costs, product demand and profit margins. Obsession with being the cheapest supplier can also create the perception that the product or service is of lower quality than that of rivals (Cram101 Textbook Reviews, 2013:48). Consumers may also think that the product or service is cheap because it is obtained by dishonest means or is even counterfeit. Price Wars and Vulnerability to other Low-Cost Rivals EasyJet is not the only budget airline, and its low-cost strategy has shown other companies that they can also profit by cutting operating costs and offering low prices (Hagen, 2013:42). Like any other profitable industry, the airline sector has very observant rivals that look at what other companies are doing and then replicating them in their own business models to achieve success. Although EasyJet’s cost leadership strategy has proved effective thus far, it is becoming increasingly obvious that it is not exclusive to the company (Grundy, 2014:39). Conclusion EasyJet’s low-cost model appears to be working as intended. The company has managed to grow into one of the most profitable and admired airlines in the world. This discussion shows that the cost leadership strategy is not only effective but also highly adaptable. EasyJet has demonstrated the relevance of the model and set an example for other companies that want to maximise profit without alienating its core customer base. Recommendations First, with the increasing volatility of the global airline industry, EasyJet needs to adapt highly flexible strategic decisions that will cushion it against shocks and drastic events. Secondly, alongside Ryanair, EasyJet is no longer the only budget carrier in Europe. Several formidable rivals have emerged that will, sooner or later, pose a huge threat to the companies’ market share (Sarker & Pillai, 2012:43). EasyJet needs to be more aggressive, direct, innovative, and purposeful with its strategy. Finally, EasyJet needs to re-evaluate its wage structure. Despite priding itself on offering competitive wages, its key employees are still being paid lower than other rivals’. This can lead to high turnover if competitors manage to lure them from the company with higher wages. Although low wages are a cost-cutting measure, airlines are realizing that wages are a competitive factor that can give them an advantage in service provision and delivery (Grundy, 2014:71). 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