The Competitiveness Of The Airline Industry Management Essay
Airlines operate in a very competitive environment, according to (Robbins et al. 2000 cited in James, 2004) this dynamism is due to constant changes in external environment, hence an organisations’ survival is reliant on its ability to create value (Michael Porter, 1985 cited in MacMillan and Tampoe, 2000).
Placing value creation at the core creates better-quality for the customers and superior advantages for the organisations. For this reason this project will examine Virgin Express and Virgin Blue using the questions below;
To find out what factors would determine whether Virgin Express could have succeeded in Europe if Ryanair or Easy jet had gone out of business.
To discuss how important is local market knowledge and operation experience in achieving success.
To explain the benefits that could accrue from merging Virgin Express with SN Brussels
To discuss what factors might determine whether Branson is successful in the USA.
Background to Models
Every organisation must have strategies. As an ancient Greek writer, Xenophon eloquently puts it “strategy is knowing what business you propose to carry out,” (Cummings 1993: 134 cited by Macmillan and Tampoe, 2009).
Although, Classical school writers such as Drucker (1995), chandler (1962), Ansoff (1987) and Andrew (1971) have all provided the framework for strategy, yet they are still criticised for being too closely tied to military and economic models. Hence, psychology, sociology and biology scholars – offered fresh ideologies about strategy ((Macmillan and Tampoe, 2009).
Businesses do not operate in a vacuum and essentially strategies are used to deal with the changing environments (Chaffee, 1985:89-90 cited in Mintzberg, Ahlstrand and Lampel, 1998: 16)
There are many external factors which affects an organisation’s future, thus, they need to scan the environment, to review strategic directions, using a combination of strategic tools such as the PEST analysis which useful in understanding market growth or decline, business position, potential and direction for operations, see (Appendix 3) for PEST framework , the SWOT analysis which identifies the strength, weaknesses, opportunities and threats and last but not lease Porter’s Five Forces models (Kotler, 1998 cited in Coursework4you, 2002-2009) which details the industry competitors that can potentially affect the firms profitability and create uncertainties.
Importantly, in a market that has uncertainties, researchers such as; (Drucker 1993; 1995; Hamel 2002; Leonard-Barton 1998; Nonaka 1991; Pemberton & Stonehouse 2000) believed that knowledge is the keystone for competitive advantage (Gehani 2002 cited by James, 2004).
Analysis of Questions
Virgin Express Airlines was established by the acquisition of the Belgian airline EBA, making it the base of Virgin Express. However, its operation later became unsuccessful see (Appendix 1) for an overview of the company.
On the other hand Ryanair and Easy jet, two other low cost airlines have succeeded so far in Europe, see (Appendix 2) in the appendix which gives details of their strategies.
Historically air travel in Europe was controlled tightly by the Government due strong nationalist sentiments towards domestic 'flag carriers'. However, due to many supportive policies from the EU government, low cost airlines are anticipated to have greater potential (International Business, ABE, 2008). Virgin Express could have succeeded in Europe if based on the PEST analysis
Political and regulatory factors
Legislative changes in the factors listed in (Appendix 3), which can result from government decision, can have far-reaching effects on the business operation, by way of example;
The decision (1997) to deregulate and liberalise the flight market, lifted most restrictions and enabled European carriers to offer routes between any points in the European Union. Hence the market became very competitive under less strict regulation (Forsyth, 1998), leading gains in allocated efficiency resulting from fare reduction through higher load factor, better prices structure, more optimum network or routes, as well as gains in productive efficiency.
According to a publication by (Eddy Van de Voorde, 2007) low cost airlines benefited from a very liberal legal framework and geo-political factors such as the Single European Aviation Act which provided many market opportunities listed in (Appendix 4), the enlargement of the European Union, which created an opportunity to promote stability and prosperity in Europe (Archick and Kim, 2008) and the Underdeveloped air capacities in big continental European cities see (Appendix 5) in the appendix, created opportunities for expansion by increasing its fleet size (Datta, 2005).
Also, the Open Skies Agreement which enabled free access to the market for all airlines created the basis for accomplishment of a single market free of discriminations and enhances a coherent European policy for international aviation (Datta, 2005). Also the creation of a Single European Sky (SES) is a milestone in reducing environmental emissions. Reductions should come from shortening holdings (aircrafts flying in a fixed pattern awaiting permission to land); improving flight corridors and more efficient routings will concentrate on in-flight reduction potentials. Sky emerged in the 1960s, when Euro control, the European organization for the safety of air navigation, was founded. Its strategic objective is the creation of a single upper sky, which enables the efficient use of airspace.
The Air Miles scheme is not considered as a taxable perk by the government in the way that company cars are taxed which may change to allow airlines to compete on more equal grounds with the likes of BA (Best essay, 2003).
Besides the proceeding liberalization of the aviation market, the Europeans become environmentally conscious, thus the European Commission counteracts by integrating the airlines flying in or to Europe into the existing EU-ETS. However, this measurement would decelerate its economic growth and lead to higher ticket prices
Since cabin crews have an important role to play in safety, the Joint Aviation Authorities (JAA), an ICAO body, has adopted standards (JAR-OPS) which include provisions on flight crew training. These standards improve air transport safety in Europe by developing a Human Factors-centred approach, in operational training, Crew Resource Management courses as well as in pilot performance management see (Appendix 9 ) for more political and regulatory factors
Economic and financial factors
Economical factors such as those listed in (Appendix 1) can have effects on the profitability of a business for example:
The slowdown in the economy due to the recession has led to a shift in demand, a large proportion of passengers have chosen price over service. They are prepared to give up frills, choice or flexibility in return for lower prices. This is certainly very evident on short haul routes. For example, the number of short haul European business class trips from the UK has fallen dramatically from nearly 65% in 1991; to 25% in 2003 also see in the (Appendix 7). According to the IATA Annual Report of 2004, other external shocks, including the 11 September terrorist attacks; SARS epidemics; and the Iraq war has increased the demand for low cost airlines (Airport-int, 2009).
According to the ATA, labour is the an airline's is the number one cost; airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others (Investopedia, 2010) as a result of the Single Market Policy airlines can recruit staff from any country in the EU, addition some countries labour laws are stricter than other for example labour laws in Belgium( Strategic Marketing Management, 2008) is stricter that in Sweden, so airlines can employ workers from Sweden because there is. There are no laws relating to wages and other remuneration, which are regulated only by collective agreement no government instead (Stockholm, 2007) creating opportunities for wages negotiation and cost efficiency through the reduction of wages.
This recession is delivering real cost benefits through the combination of a weaker dollar, lower interest rates, lower airport costs, and lower unit costs, these saving can then be passed on to the customer in the form of lower prices, which would increase demand and overall increase the profitability of the business.
Social factors such as those listed in (Appendix 1) can also have an impact on airline success for example
The changes in demand for leisure travel include more short term breaks and more independent holidays where passengers book flights, car and accommodation by themselves which offer greater flexibility which increase demand for domestic travel in Europe (Datta, 2005).
Also the European travel and tourism has set up an action group, to promote the history, culture and recreational facilities of their national territories, see (Appendix 8)
Additionally, the number of persons in older age categories will rapidly increase due retirement schemes. In view of this development, the number of more experienced senior travellers will increase faster than the development of tourism demand in general, increasing demand for quality, convenience, low cost travel security and easy transportation (Etag-euro, 1999-200).
The average number of persons per household will decrease still further, which will result in higher disposable incomes and spending power, thus this will increase demand in general especially for long haul long-haul travel and short breaks in particular, also there would be higher level of interest in winter sun holidays (Etag-euro, 1999-200).
The average level of education is also increasing. This will result in holidaymaking in which the arts, culture and history play a more important role, including more educational and spiritual holidaymaking, increasing demand for special products, the more prominent inclusion of elements relating to the arts, culture and history in package tours and self-organised holidays, also demand for new destinations in Central and Eastern Europe will increase (Datta, 2005).
As a result of the he reduction in the number of days of paid leave for holidaymaking An increasing need to supply additional low-cost products, and most importantly the shortening of the longer main holiday in favour of more short ones (Etag-euro, 1999-200).
However, to win over the French and German publics might cause problems as there appears still to be a general reluctance to use credit cards over the phone and Internet (Best essays, 2003).
Technological factors such as those listed in (Appendix 1) can influence organisational performance for example;
The penetration of the internet - and its use for information and the purchasing of tourism products and services has increased, More and more people are booking holidays on the internet(dosstoc, 2010) giving rise to E-tickets and a decrease in the use of travel agencies resulting in direct booking. E-tickets facilitate the trend toward direct customer sales. But beyond reducing travel agent fees, airlines on an average also save about $6-7 dollars for every ticket they don't have to print and mail to customers (Datta, 2005)
Europe offer diversity in its technological systems which are used to optimise the airlines processes and restructure their existing operating models economically. IT systems help in boosting revenues as well as cutting costs and thus enable the airlines to stay ahead in the competition (Datta, 2005).
Some of the systems available are aircraft scheduling system, to increase productivity, Aircraft scheduling systems to optimise fleet, CRM solution to streamline products, Easy check-in, Self service kiosks, e-ticketing, online distribution to optimise processes and gate assignment and planning systems to optimise assets and optimization for systems for manpower, machine, vehicles etc (Datta, 2005).
How important is local market knowledge and operational experience in achieving success?
Knowledge is a key business asset and according to Drucker (1993) it is the only meaningful resource (Mathi, 2004), thus in order for it to be effective there must be proper management.
Knowledge management is generating information from sources such as libraries, research, consulting firms and the chamber of commerce etc., on products, people, and processes, thereby creating greater value Mathi, (2004). However, knowledge management is concerned with spotting, translating, sharing and exploiting information and Knowledge therefore can be acquired by experience, experimentation or acquisition (Tidd and Bessant, 2009).
Nonetheless, acquiring knowledge of one’s local market is of paramount importance because through the scanning and analysis of the environment organisations can identify gaps such as market and service opportunities. These opportunities then encourage innovation in product, processes, position and or paradigm (Tidd and Bessant, 2009). As a result the company benefits from first mover advantage which can be instrumental in building market share and can translate into business success for example Amazon, online book selling and the I-Tunes platform – a complete system of personalised entertainment.
Similarly, gaining local market knowledge through research enables an organisation to better understand the changing needs of customers so that the right marketing mix strategies can be adopted. Also it help organisation to effectively target, segment and position its products in the market, thereby reducing cost, increased efficiency and creating value for the customers (Strategic Marketing, ABE, 2008) subsequently creating and maintaining loyalty. A loyal customer pays dividends not only in terms of lifetime profitability, but in referrals and reputation. Grouping together customers of similar profitability enables service budgets to be maximised whilst at the same time ensuring a relevant marketing campaign, which can be highly personalised and effective (Cincom, 2005), for example low cost airlines such as Ryanair in Europe and South West Airlines in the USA was able to gain success by adopting effective marketing mix strategies to fulfil the rising demand for cheap flights and flexibility in air travel.
Unquestionably acquiring local market knowledge enables organisation to critically analyse the external environment using PEST analyses listed in (Appendix 1), five forces analysis, explained in (Appendix 9) so that organisation can obtain a clear picture of the threats and opportunities in the market. Having done this, the organisation can devise suitable strategies to exploit the opportunities and eliminate the threats (Job functions, 2010). Local market knowledge also enables organisation to assess its internal capabilities, resources and competence using tools such as benchmarking and resources audit to identify best practices, which could improve performance and increase productivity thereby gaining success, as in the case of Xerox in the 1980s.
Overall it helps with the strategic planning process, which encourages organisation to be proactive rather than reactive, encourages employee involvement in the decision making process and also planning present opportunities for the development of consistent business information systems resulting in easier control and implement and evaluation of processes.
However individuals and organisations acquire knowledge by experience. Experience comes through repetition, organisations and individuals develop relatively permanent changes in behaviour, as additional transactions occur in a service, or more products are produced by a manufacturer, the unit cost often.
This phenomenon follows an exponential curve. The organisation thus gains competitive advantage by translating this cost reduction into productivity gains. This learning competitive advantage is known as the experience curve, see (Appendix 10) for diagram, (Reference for business, 2010).
Operational experiences has enabled organisations such as Toyota to gain success because of their unique capabilities, competences and resources developed over time as a result they are able to develop innovative process such as lean production method that enabled them to benefit from reduce cost due to Just-in-time method of stock control, improve quality through Total Quality Management and kaizen.
Additionally, the company benefits from economies of scale due to mass-production, which keeps overall cost down, thus creating value to the customers by means of lower prices (Strategic Human Resources, ABE, 2008)
Finally operational experiences, acts as an effective risk management tool, which help to identify risks and issues. Also, there is reduction in the time and resources taken to complete tasks resulting in greater efficiency, and with increase probability of getting it right first time helps to reduce wastage (Aof, 2007-2010).
Too it improves relationships with Industry partners (suppliers) and customers, which gives the organisation a competitive edge, take suppliers for example because of the strong relationship developed over the years, there would be in supplies through deals and special prices thus this reduction would inevitably spread through the whole production process giving the company a distinctive cost advanatge for example as we have seen in the case study that part and parcel of Virgin Blues’ success was due to the ‘very good deals’ on aircraft that they receive after September, 11, giving the company an excellent cost base making difficult for other airlines to compete effectively (Aof, 2007-2010).
What benefits could accrue from merging Virgin Express with SN Brussels?
For most companies, the strategic decision of how to create and sustain organisational growth and reduce risk of failure is of utmost important in international business. One way of acquiring a larger market is by merging.
A merger is the ‘Voluntary amalgamation of two firms on roughly equal terms into one new legal entity’, (Business dictionary, 2010).
Virgin Express and SN Brussels see (Appendices 1 and 11) respectively for an overview of the companies. Nonetheless, there are many benefits that can be accrued by the merging of Virgin Express and SN Brussels:
Firstly, through network consolidation they would be able to redeploy and schedule aircraft more efficiently (Hansson at el., 2002); there by ending duplication of routes, in which would in reduce cost and to limit the current excess capacity on certain routes, creating efficiency (E-tid, 2004).
Additionally, in countries such as Copenhagen, Madrid, Barcelona, Milan and Rome (Brussels airlines, 2010 and Euro flights, 2010), there could be network consolidation as a result the company would be able to gain from airport operation in the consolidation of gates and terminal facilities will enable the organisation to achieve cost synergies, resulting in a competitive aviation platform that is in the best interest of customers (News bbc, 2004)
Importantly, the merger of these companies could enable efficient use of infrastructure, eliminate redundant facilities and also reduce overheads(Hansson et al., 2002) by downsizing and focusing on the efficient use of human resources which is seen as a source of competitive advantage (Mabey, Salaman and Storey, 2007).
According to Hassan et al., (2002) merger bring with it many benefits to airlines, and one such advantage is fleet rationalization, this he wrote can be achieved through lower maintenance , training and conversion cost by leveraging scale and reducing fleet type.
Both airlines being in operation for a long time could benefit through its experience curve (Henderson, 1966), also see (Appendix 10) in the appendix, As a result of operational efficiency and a reduction in wastage, the costs will decrease over time. This will allow the company to decrease its prices to levels below what is sustainable for the competition, resulting in increased competitive advantage. As the cycle repeats itself the company should continue to strengthen its overall position (Dinar standard, 2004-2009)
Finally, the merger of these companies would create flexibility, through quick check-in and priority access and boarding, On board choice of seat, complimentary food and drinks. Also passengers can take an earlier flight the same day without incurring extra charges, these benefit will add value to the customer, hence increase in customer satisfaction. In addition to this with the combined assets and investment integration the company can effectively compete on a global basis
However with immense opportunities comes great risk, report estimates that 50-70% of mergers do not succeed due to reasons such as cultural differences and difficulty in integrating IT systems (Hasson et al, 2008)
Industries have strategic elements that affect their ability to prosper in the marketplace (i.e., attributes, resources, competencies, or capabilities). The ones that most affect a firm's competitive abilities are called critical success factors (CSFs).
These CSFs can be related to technology, operations, distribution, marketing, or to certain skills or organisational capability.
Although the industry in Europe consistently grows at between 5 and 6%, which allowed carriers especially Ryanair and Easyjet to record large profits of 451 million Euros and 201 million pounds respectively in 2007 (Breen, 2010), presently, the recent has economic crisis, has forced many airlines to rethink their strategies.
In order to be sustain competitive advantages;
Airlines should adopted more diverse strategies such as organic growth by reducing the cost in the in all value chain activities or through merger and acquisitions, which could result in success as we by enabling greater access to new markets as seen in the case study of Virgin Blue.
Airlines should undertake more market diversification in both related and unrelated areas, as this would add new markets, and increase sales and profitability.
Additional they should adopt the blue ocean strategy (Kim and Mauborgne, 2004), to find innovative and niche markets that could be exploited to create superior advantages.
According to (Kim and Mauborgne, 2004 cited in Hollensen, 2007) tomorrows leading companies will succeed not by battling competitors, but by becoming innovators.
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Overview of Virgin Express
Virgin Express started on 23 April 1996, when the Virgin Group (with Chairman Richard Branson) bought the Belgian leisure airline EBA (EuroBelgian Airlines) and rebranded it into Virgin Express. It also took over EBA's fleet of Boeing 737's and has operated this type of aircraft ever since. The airline soon concentrated on low-budget scheduled flights out of its Brussels hub and became a major competitor for Sabena and later SN Brussels Airlines.
In October 2004, the Virgin Group sold its assets to SN Brussels Airlines and both airlines were integrated into the parent holding company SN Air-holding, chaired by 'Viscount' Etienne Davignon. On 31 March 2006, SN Brussels Airlines and Virgin Express announced their fusion into a single company, named Brussels Airlines. The combined airline added long haul destinations and strengthened its position in Africa.
However its low cost operations in Europe was unsuccessful because picking a Belgian carrier as the foundation of Virgin Express caused problems for the company because Belgium has some of the highest social charges and toughest labor laws in Europe and also there were high overhead cost which resulted in losses
An overview of Ryanair and Easy Jet
Ryanair was set up in 1985, by the Ryan family with a share capital of just £1. Now Rayanair is the World's favourite airline with 41 bases and 1100+ low fare routes across 26 countries, connecting 153 destinations. Ryanair operates a fleet of 232 new Boeing 737-800 aircraft and currently has a team of more than 7,000 people.
Easy Jet was established by Stelios Haji-Ioannou (Greek) in 1995. The airline is based at Hangar 89, a bright orange building adjacent to the main taxiway at Luton Airport. EasyJet currently has operating bases throughout the UK and mainland Europe. It is a truly European operation and was one of the few airlines to take advantage of the reforms offered by the single European aviation market.
Strategies of both EasyJet and Ryanair
Low cost airlines offered much simpler fares:
Seats sold first-come first-served, so passengers get cheaper fares by booking earlier; price thus automatically responds to variations in demand
The airline can also adjust the price bands if demand is greater or less than expected
All fares are one way and there is no difference in fare conditions
The Key component however, was the effective use of yield management through ticket restrictions.
Smith, Simon (2005), Strategies and effects of low cost airline. Power Point Presentation Accessed online on the [21st June, 2010]
PEST analysis looks at the external business environment and is an appropriate strategic tool for understanding the "big picture" of the environment in which business operates, enabling the company to take advantage of the opportunities and minimize the threats faced by their business activities. When strategic planning is done correctly, it provides a solid plan for a company to grow into the future. PEST is the acronym for Political, Economical Social and Technological.
Political: (includes legal and regulatory): elections, employment law, consumer protection, environmental regulations, industry-specific regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and government structures.
Economic: economic growth trends (various countries), taxation, government spending levels, disposable income, job growth/unemployment, exchange rates, tariffs, inflation, consumer confidence index, import/export ratios, and production levels.
Social: demographics (age, gender, race, family size, etc.), lifestyle changes, population shifts, education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, and earning capacity.
Technological: inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agri-tech, waste removal/recycling, and so on.
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EU and Southeast Europe Move Closer to Single Aviation Market
(May 8, 2006)
European Common Aviation Area agreement
In October 1996, the Council of Ministers granted the EC a mandate to negotiate a multilateral agreement with the then candidate countries as well as Iceland and Norway to open up markets between Europe and its neighbours, so that an ECAA between the community and third countries would follow the same pattern as the internal market itself:
This agreement provided an opportunity for industry and consumers, especially as tourism is a major growth area in the coastal regions. There are potentially 414 airports in the region at which to operate; therefore, there is an opportunity for further growth.
It also removed remaining market access restrictions on flights between the EU and the Balkans, creating a level playing field between community carriers.
Removing existing blockages in air traffic management system, left over from the war period, which resulted in closure of airspace.
Encouraged the region to work together and to improve inter-regional relationships, to the benefit of further European integration.
Created investment opportunities and enabling capital flow from both sides as a result of easing ownership and control rules present in bilateral agreement.
Smith, Simon (2002-2005), Strategies and effects of low cost airline. Power Point Presentation Accessed online on the [21st June, 2010]
The Open Skies Agreement – A brief overview
With the new agreement, airlines in the Union can:
operate flights to the United States from any European airport, regardless of their nationality (the United States recognize them as European);
operate without restrictions on the number of flights, aircraft or routes;
set prices in line with the market;
Conclude cooperation agreements.
Companies in certain Non-EU Member Countries (countries in Europe that don't belong to the EU, plus 18 African countries) may also receive Community investment without this affecting their traffic rights to the United States. Similarly, the United States will not call into question the flights of Community airlines if non-EU European countries have invested in their capital.
The agreement also strengthens cooperation between the two parties on safety, security, competition policy, State Aid, consumer protection and the environment.
Shifting pattern of business travel
% of business travellers in premium cabins, 4 quarter average
Tourism: - European Travel and tourism Action Group – A brief overview
Under the umbrella of the European Travel Commission, Europe is promoted as a destination in the overseas markets. The National Tourist Office members of ETC support over 160 offices in overseas locations to do this work.
A major force in preserving and promoting the unique cultural heritage of each member state.
An enterprise that encourages friendly rivalry between member states, but which generates the co-operation of all member nations when Europe is promoted as a destination.
The need to promote individual centers encourages competition between cities, regions and Member States and ensures that each strives to maintain high levels of quality and to continuously upgrade its products and attractions.
An industry that distributes economic benefit more rapidly and widely than other economic enterprises.
Encourage increasing domestic travel within the community for its citizens, which enhances their sense of cohesion and community.
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All rights reserved.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
Supplier Power: Here you assess how easy it is for suppliers to drive up prices. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, if you deal with few, powerful buyers, they are often able to dictate terms to you.
Competitive Rivalry: On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
Threat of Substitution: If substitution is easy and substitution is viable, then this weakens your power.
Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, then new competitors can quickly enter your market and weaken your position.
The Experience Curve
Costs decreasing linearly at 20% as experience doubles.
The Experience Curve is defined as: “Costs of value added activities, net of inflation, will characteristically decline 25 to 30 percent each time the total accumulated experience has been doubled.”
In other words, as a company has increased experience in producing a specific product, costs associated with that product correlate with a decrease 25-30% per year (when quantified, “experience” is usually expressed in number of cumulative units produced). A graph of this relationship would plot as a straight line in logarithmic coordinates as shown in Figure 1.
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Brief Overview of SN Brussels
SN Brussels Airlines traces its beginnings to Delta Air Transport (DAT) and was later a subsidiary of Sabena. After the 2001 bankruptcy of Sabena, SN Air-holding acquired Sabena subsidiary DAT, which had survived the bankruptcy, and changed its trading name to SN Brussels Airlines in February 2002.
The airline operated full-service flights throughout Europe and Africa, continuing Sabena's extensive network there. On April 12, 2005, SN Air-holding acquired Virgin Express and the two carriers merged on March 31, 2006.
Operations continued under their respective brands until November 7, 2006, when the combined airline was rebranded Brussels Airlines.
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