The European Airlines Industry - Essay Example

 The European Airlines Industry The European airlines industry is undergoing turbulence as the macro-environment analysis suggests. Three airlines went bankrupt in 2001 but all there were the low-cost budget airlines. This calls for an analysis of the macro-environment. Macro-environment analysis Political/legal The government brought about changes in the regulations and freed the European airline market from competition, pricing and services. This led to exploitation by the budget carriers who priced their products much below those of the national airlines. Changes in legislation and opening up of the skies, led to the creation of a new segment of flyers - it created a new market for the budget airlines. Thus deregulation led to increased number of passengers. Airlines with long-haul routes continued to earn profits but smaller airlines were unable to reap the benefits. Major airlines were allowed to charge higher prices between the individual EU countries and they also signed up different agreements with the USA for long-haul flights. The European Commission, on behalf of the EU challenged these agreements as it was against the competition rules of the EU’s Treaty of Rome. A new agreement opened up all major European airports to all carriers. This further enhanced competition as the low-cost airlines started competing in the long-haul flights. In addition, terrorism, heath scares and war reshaped the European airline industry (SD, 2004). Landing fees are high at the major airports. Economic More passengers are opting for low-cost airlines, thereby affecting the legacy airlines. Other factors that have affected the number of people traveling is advanced technology in teleconferencing, downturn of the global economy, increased fuel cost and the events of 9/11. Price became controlled on long-haul routes but the legacy airlines found other means to generate profits. The legacy carriers adopted the hub and spoke strategy where they derive economies of scale through full load over long distances. This is less attractive to the smaller carriers. The smaller carriers offer no-frills, point-to-point simple fare structure but without compromising on safety although passengers are not very happy with the service of the low-cost airlines. Consolidation is also taking place in the industry. No airline has significant competitive advantage over rivals. The airlines face a competitive thereat and keep trying different strategies like entering the budget segment or focusing on the business segment. Technological Global warming is an important factor that airlines consider in their strategy development. Some airlines believe that air traffic is not the greatest contributor to air pollution and the car and industry pollution is much higher. Political logging is going on that alternative to air transport should be found to reduce air emissions. This has added to the pressures on the airline industry. Airlines are using technology to offer service to their consumers – online bookings and check-ins. At the same time technological advancement in teleconferencing has reduced the amount or air travel. Social The European airline market consists of the business traveler and the leisure segment (80%). Many entrepreneur and small owner-managers have become travelers and are able to reap benefits of low-cost airlines. This is a new segment that has been created by the low-cost carriers. These entrepreneurs can now travel to cross-border countries and enhance their business and 90% of the people want cheap price. People are not concerned about the brand and they look for safety, price and schedule. The business traveler travel at company cost and look for full fares but of late they are also under pressure from their companies to use the low-cost airlines. The problem arises because some budget airports are located far from business areas. Since there is no distinct line between the two segments the airlines are unable to develop marketing strategies. Environmental factors The industry has made a negative impact on the environment. The industry has come under criticism due to emission of carbon into the environment, erosion of the zone layers and it has brought about the effects of global warming. However, even with these negative effects the industry has become more innovative as they try to come up with new mechanisms to manage and control the negative effects. Summary of Micro-Environment Analysis Deregulation in the European airline industry freed the European airline market from competition, pricing and services. The open skies policy created a new segment of travelers who preferred the cheaper airlines. A new agreement opened up all airports to all carriers. The long-haul carriers and the budget carriers followed different policies in offering their services. The budget carriers were preferred due to their pricing strategy and doing away with frills on the journey. Technology has impacted the industry because it has facilitated online booking which has made it cheaper for the travelers while reducing the margins of the agents or even eliminating the agents. Technology such as teleconferencing has reduced the need to travel thereby impacting the airline industry. Global warming has been said to be enhanced due to the increase in air traffic and the governments are enforcing rules to combat the environmental degradation. Industry analysis Industry rivalry The threat from new entrants has reduced because consolidation has been taking place in the industry even among the international carriers. Two legacy airlines have gone bankrupt and a third could survive because of the support from the government. Some budget airlines have also disappeared. Rivalry exists not only between the legacy carriers but also between the legacy and the budget carriers as the latter are trying to fly on long-haul routes as well. The open skies policy has increased the rivalry in the industry. However, threat from new entrants at this juncture is not there. Bargaining power of consumers Consumers are price conscious and they have a choice. They today do not look for frills but for the price. Even the corporate sector is encouraging the executive to fly budget airlines. As has been stated in the case study, 99% of the people want the cheapest price. The budget airlines are able to offer the price the customer wants as they have been able to understand the needs and wants of the customers. The consumers also want service along with the price so the airline cannot afford to merely offer low price. Since the budget airlines are striving to attract the business travelers, they have to be conscious not to use the airports that are away from the main city. Besides, inter-country travel within Europe so far had been taking place through surface or rail. It is the introduction of the budget airlines that created a new segment for small-haul flights. Hence the consumers can always switch back to the surface transport should the flights become costly. The consumers are not concerned about brand but about safety, on time and prices. Overall the bargaining power of the consumers is high. Product differentiation The line between the traditional airlines and the budget airlines has become blurred as the budget airlines are trying to offer long-haul routes and use the regular airports. At the same time, the legacy carriers are reducing prices and lowering services. Both have started offering online booking facilities. The traditional long-haul carriers are trying to maintain some differentiation and have formed alliances such as Star Alliance. They offer assigned seats and meals which the budget carriers do not. The budget airlines only offer point-to-point flights with one way ticketing whereas the legacy carriers work on the hub and spoke model. The traditional airlines are able to charge higher fares on major routes. Bargaining power of suppliers The major supplies in the airline industry include the aircraft, labour and fuel. There are only two major manufacturers – Boeing and Airbus and all carriers are equally dependent on them. The budget airlines usually repurchase aircrafts rather than invest in new ones. The manufacturers do have the power in their hands but deliveries of high-placed orders take several years to fulfill. Labour you unionized and they do have bargaining power. This is the reason the budget airlines keep minimum staff and have automated several processes. The airlines have the power to renegotiate the labour contracts. The prices of fuel are determined by market forces and geopolitical forces. Strategic alliances Mergers and consolidations have been taking place in the European airline industry. Several major airlines started forming their own budget airlines but subsequently gave it up. Some major airlines like KLM and Air France merged together while other major airlines are forming alliances like Star Alliance and use the hub and spoke model. Scandinavian Airlines set up deals with low-cost airlines like Maersk in Denmark and Skyways in Sweden. Such arrangements broke the EU competition rules and had to be renegotiated. Leading European airlines then got together and launched their own website to sell airline tickets at cheaper prices and fill the last minutes seats. This helped to reduce the booking costs for all airlines and also enabled offering special deals to fill last minute seats. Then all started offering extensive online booking facility. Hence the airlines have no competitive advantage because all offer all facilities. Industry analysis The European airline industry has been witnessing alliances, consolidation and mergers at all levels. Industrial rivalry has increased because of the open skies policy. The consumers continue to have the bargaining power as they have numerous choices. They insist on pricing without any compromise on services. The business travelers also have started using the low-cost carriers but they do not like to use the faraway airports. The major carriers, in a bid to combat the threat from low-cost carriers tried to enter the segment by starting their own low-cost airlines but did not succeed. They then formed a consortium and started offering seats online which reduced their booking costs but left them with no competitive advantage. The bargaining power of suppliers has also reduced in the industry as labour is being reduced at various points by the airlines especially with the low-cost carriers as they try to automate services. Fuel prices are governed by market forces. The future of the airline industry is not bleak because the number of passengers has been steadily increasing and is expected to further go up. Airlines are seeking new aircraft to carry people more efficiently. They are also trying to develop new routes to enhance profits. However, because of cost pressures the airlines are unable to develop a specific product for a specific market. They have to keep trying different methods to capture as much as possible. Consumer demographics are changing and so are the consumer preferences. In fact consumer behavior is difficult to predict and they switch brands for even a small price difference. Firms need to understand what their target customers really want. The differences between the legacy carriers and the low-cost carriers continues although passengers face disadvantages with low cost carriers – such as poor service and airports not within easy reach. Hence the low cost carriers would continue to get the leisure segment. Recommendations As can be seen that the future for the European airlines is not bleak, airlines need to change strategies as the situation demands. Harvey (2000) contends that with the entry of low-cost airlines and flights across continents, globalization of labour markets has occurred through “out-basing” where airlines employees are based in different parts of the world and generally on lower terms and conditions that those at the home base. BA relocated its ticket functioning unit to India. Other airlines should start locating some functions and services to low wage countries. Cost pressures are immense like rising fuel costs and taxes but these are not in the hands of the management. These are controlled by the government but the labour cost is under management control, and hence this is the areas where most benefits can be reaped. Headcount reduction and downward renegotiation of employee contracts became common leading to introduction of flexible labour, says Harvey. Increased outsourcing has allowed the airlines to drive down the costs of the subcontractors. Airlines also set up low-cost subsidiaries or franchised smaller airlines. To cut costs, airline started offering bookings directly to passengers through the internet (SD, 2004). The legacy airlines should focus on such cost efficiency measures to maintain profit levels. As a protectionism of the ‘clean sky’ initiative, the European government is working closely with the airlines and the manufacturers to cut emissions by as much as 40 percent from the present levels by 2015 (ClimateBiz, 2007). This would result in 40 percent less carbon dioxide, 60 percent less nitrous oxide and the sound will half of what it is today. This will reduce the effects of the aviation industry on global warming and develop greener airplane technology. The Association of European Airlines feels that as much as 12 percent of their carbon-dioxide output is caused by inefficient and inadequate infrastructure. Airline leaders feel that creating a "Single European Sky" would have an overall greater impact on aviation's environmental footprint. The low-cost carriers are not in unison with the government policy and feel that industries and cars contribute more to the pollution. The legacy carriers should come forward and support the government in such measures. This would enhance their brand image because today people have become conscious of socially responsible organizations. If they find that an airline supports such causes, they would be keen to fly such airlines. Hence the airlines must have a clear marketing objective and corporate goals in mind. This would help them to devise their own best strategy to sustain competition and emerge winners. The fittest will survive and the airline that adopts the most innovative strategy will become the market leader and the most preferred airline. References ClimateBiz, 2007, 'creating a "Single European Sky" would have an overall greater impact on aviation's environmental footprint.’ retrieved online 14 May 2009, from http://www.climatebiz.com/news/2007/06/25/european-airline-industry-develops-clean-sky-initiative Harvey, G 2009, 'Employment relations in liberal market economy airlines', Employee Relations, vol. 31, no. 2, pp. 168-181. SD, 2004, 'Industrious times at British Airways and Ryanair', Strategic Direction, vol. 20, no. 4, pp. 4-6. Appendix A Macro-environment analysis Factor Issue Political/legal Deregulation Open sky policy High landing fees War/terrorism Economic Controlled prices More passengers becoming price conscious Legacy carriers adopt hub and spoke model. Technological Airlines investing in new safer aircrafts Airlines using the ICT to offer online bookings and servicing the clients The same advancement in ICT reduces passenger travel due to teleconferencing Social Customer segmentation difficult More small business owners using air travel thereby benefiting the low-cost carriers Leisure segment (80%) and business travelers (20%). Not concerned about frills, only price concern Appendix B Industry analysis Factor Issue Innovation Airlines trying to introduce newer and safer ways to carry people Innovative ways to attract and market their services Consumer Behaviour difficult to predict More businesses asking executives to opt for low-cost carriers Policies Open sky policy should benefit the airlines Clearer sky policies should be taken advantage of Read More