EasyJet strategy: SWOT and PESTEL analysis

This report will provide a detailed analysis of EasyJet’s current corporate appraisal or SWOT analysis. This will identify its strength, weaknesses, opportunities and threats. This will help the companies decision makers understand where the organisation is now. A PESTEL analysis of the industry will examine the local, national and global influences of political, economic, social and technological factors to understand opportunities and threats well. This will provide an evaluation of the external business environment in which the company operates. This analysis will highlight the fundamental changes that the airline industry is undergoing, especially; in defence to the turbulent environment it faces from exogenous forces (terrorism, oil prices, SARS etc) and endogenous forces.

Next we will use Porter’s Five Forces analysis of the industry and the increasing threat of other low-cost carriers (Ryanair, bmi baby etc) and also threats from the flag carriers (British Airways, Air France, KLM, Lufthansa etc). This will show how its critically important for EasyJet that strategic alliance, size and technological innovation have on its profitability. Overall the analysis will highlight the inherent threats and weaknesses suffered throughout the industry, and also the importance of innovation to maintain low cost advantage, alliances and size to success. Finally the report will examine the extent to which EasyJet’s current ‘no frills’ strategy is the appropriate strategic fit to its organisation both in terms of resource capability and business environment.

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An Internal and corporate analysis in terms of strength, weaknesses, opportunities and threats (SWOT) will assist in gaining an understanding of where EasyJet is currently in terms of strengths and where improvement is required within the business and what outside environmental threats it may face as well as what new opportunities are available to the company in the short and medium term. We will start by looking at strengths:

EasyJet serves diverse ranges of European routes with principle activities in both Leisure and business markets, offering 60 key European routes. Its current cash flow position is also strong, with cash flow from operating activities increased by 61 percent between the six months ended 31st March 2003 to six months ended 31 March 2004. The business has also enjoyed an increase turnover and trading profits resulting in continuous substantial growth in underlying profitability over the last 7 years (see table 1). This has resulted in a strong Balance Sheet – the companies’ net assets reaching the record level of £724 million (aided by retained profit mainly).

EasyJet is also Europe’s leading low-cost airline having completed a merger deal with Go to create Europe’s number one low-cost airline. Brand Awareness is another strength that is attributable to the company – In November 1999, selected as a business super brand by the Super Brand Council, recognising EasyJet as an outstanding brand name. The company’s Online booking facility in October 1999 aided Internet sales to pass the one million mark. This has lead to EasyJet customers enjoying ‘ Ticketless travel’ – this reduces the cost of issuing, distribution, processing and reconciling tickets. EasyJet also enjoys internal strengths in its operations in terms of efficient use of airports – by reducing turnarounds to 30 minutes and below, EasyJet can achieve extra rotations on the high frequency routes.

EasyJet appears to have internal strengths in terms of brand awareness, cash flows, and operational efficiencies. But what are the internal weaknesses suffered by EasyJet? The primary weakness is the perception of low quality – low cost can also be seen as low quality service than that offered by the established national airline i.e. British Airways. Also, suffers weakness in the area of hospitality in terms of on board offer of ‘Free Lunch’, the eliminating of free catering on board may result in loss of potential customers. The existing competition also have strong brand image globally, EasyJet is recognised nationally and within the European markets, however, national airlines like British Airways is recognised worldwide and has stronger brand awareness.

EasyJet also operates a flat management structure, which may lack a formal discipline that is needed as the organisation grows. The idea of remote working can also result in co-ordination and control weaknesses. It is difficult to co-ordinate the individual employee because in principle they operate independently of each other. It’s also hard to monitor the performance of each individual.

So having considered the internal strengths and opportunities above, what are the potential opportunities available to EasyJet and what are the threats faced by EasyJet both from within the Airline industry and as a result of the world economy itself. Weaknesses identified earlier could also offer potential opportunities in terms of development of brand awareness globally. The EasyJet brand is established in the European market, but brand awareness is required outside the continent. There are potential opportunities in terms of new routes and expansion of services offered, EasyJet has already launched a number of new European routes, how about expansion into the Asian Pacific? Undertaking market shift to globalisation – expanding outside the European market will be key to continuous enhancement of business performance.

Follow on from market expansion will also create opportunities for new facilities or services ‘Free Lunch’ – offer on board catering facilities to compete with mainstream airlines. The increase growth of world tourism will offer opportunities in terms of undertaking joint venture with local/foreign travel companies; hence, Going places and Thomas Cooke are already providing such services to growing number of holidaymakers each year. Finally, opportunities may also exist in the area of innovation and alliances, how about a joint venture scheme with Ryanair to maintain and enforce the low cost competitive advantage.

Figure1: EasyJet SWOT Analysis

Having considered the possible future opportunities what are the potential threats that EasyJet needs to bear in mind? Firstly, threats in terms of new & existing competition. Ryanair continues to lower costs, which enables it to persist lowering fares aggressively. Also, mainstream airlines are now lowering fares to engage in price competition. Another major industry wide threat is the volatility in price of fuel – ‘Oil price record high of $53 a barrel.’ this was the headline in the business pages of all the newspapers last November.

EasyJet also faces potential threats in terms of unprecedented tragic events like September 11^th. Potential threats in terms of changing social trends like holidays outside Europe (many now want to experience the eastern cultures and travel to holiday destinations like China and Japan) and also travelling via the EuroStar to Paris etc. Potential threats of economic recession, since air travel is effectively a commodity product, it is recession prawn. And, finally threats of any takeover bids from national airlines.

Figure 2: Five Forces Model – ACCA Paper 3.5 (2001)

Porter explains that there are five forces inherent in a market, which will jointly determine the intensity of competition and profitability of EasyJet and the airline industry. The first is the threat posed by new entrants, as with the European deregulation of commercial aviation and the emergent of low cost carriers. The second is the threats from substitutes, rail travel v air travel, the growing demand in Eurostar and cruses. The third force is the threats from the bargaining power of buyers, is this strong for both EasyJet and the entire airline industry with a large number of alternative suppliers, hence, the aggressive pricing strategy. This results in a very strong competitive rivalry in the industry. This is intensified as a result of little or no differentiation in the service offered. Finally the threats from the suppliers bargaining power, this is very strong in the airline industry for two reasons, one is highly skilled labour can command a very favourable terms and second is the price of oil.

All of those (political, economic, social, technical, legal and environmental) factors will to some extent apply to the airline industry.

POLITICAL – Following the European deregulation of commercial aviation, a fleet of low cost carriers are reshaping the local airline landscape. Ryanair uncompromisingly fought its way into the market with an aggressive pricing strategy.

ECONOMIC – the travel industry is vary recession prawn and also very sensitive to changes in oil prices. Since the events of September 11th the airline industry suffered heavily, stocks plummeted and ticket prices are at all time lows. The world economy is however, now on the up post September 11^th. Consumers are optimistic and the travel and tourism industry are now booming again.

SOCIAL – changes in consumer taste and lifestyle represent both opportunities and threats for the industry. Opportunities in terms of worldwide destinations are now popular with holidaymakers and also the growing trend in international business ventures, e.g. major banks and insurance companies’ relocation call centres in Asia. The threats are in terms of alternative holidays Disneyland Paris via Eurostar (Euro tunnel) and P&O cruise.

TECHNICAL – Changes in retailing methods as such ticket sales via the Internet is now a common place in air travel, passengers receive an email containing their travel details and booking reference when they book online. Paperless operation, the management and administration of the company are undertaken on IT systems, which are accessed through secure servers; provide flexibility in the running of the airline. The development of the next generation aircraft will also lead to technological opportunities in term of fuel efficiencies.

LEGAL – The European deregulation of the commercial aviation provided both major strategic threats and opportunities, the national mainstream airlines faced severe price competition from discount carriers. Threats are also in terms of legislative environmental laws regarding pollution and use of more environmentally friendly fuel, which are at premium prices.

ENVIRONMENTAL – The energy sources used, namely oil has vast ecological/environmental implications. The threats are in terms of fines and rise in cost of raw materials.

A ‘no frills’ strategy is often associated with low cost airline companies like EasyJet. This form of strategy combines a low price, low perceived service benefits (no free lunch) and a focus on a price-sensitive highly competitive market segment. This strategy is focused on keeping costs down and EasyJet’s policy of ‘no free lunch’ and efficient use of airports by limiting turnaround to 30 minutes. Back in 1995 when EasyJet was lunched it was tipped by most to fail with its ‘no frills’ strategy. However, by year 2000 it has not only managed to survive but also increased its market shares and assets of aircrafts to 74 and servicing 105 routes and carrying over 20 million passengers a year. So the strategy has been very successful for EasyJet and appears to have been the correct strategic decision.

Beneath the surface of EasyJet’s cosmetic cost savings of not offering free in-flight refreshments or different first, business and economy classes, was a philosophy of cost saving that permeated through the entire organisation. The 2002/03 annual report reconfirmed this business model of the airline:

• Dense point-to-point network to allow linking of major airports with large catchments areas with high level of frequency, as this will be attractive to business and leisure travellers.
• A strong and visible brand to create a high level of awareness with consumers. Supported by innovative and effective advertising.
• Dynamic fares with a simple structure and also ensuring that it are the cheapest fare on the route. Therefore, demand led with proprietary yield management system.
• 100 per cent direct selling of fares; over 90 per cent of sales are online. This eliminates the need to any commissions to external sales agency.
• Highly utilised fleet of aircrafts that are large, modern, efficient and relatively environmentally friendly. This results in high levels of asset utilisation and reduced unit costs.
• Finally, the key to sustaining high levels of growth is the scalability of the operations. This also reduces the marginal cost of incremental growth; increasing scale brings valuable economies (Johnson, G., Scholes, K., Whittington, R., (2005).

Another price-based strategy is the hybrid strategy this seeks to achieve an element of differentiation and a price lower than that of competitors. Implementing this strategy successfully depends on EasyJet’s ability to deliver enhanced benefits to customers over its competitors together with low prices. However, if EasyJet could significantly differentiate its service over its competitors then it could obtain higher prices. Therefore, the low cost strategy is the ideal strategic fit to its environment. Combining perceived low price with perceived added value can be a highly successful strategy but one that requires innovative thinking.

EasyJet’s competitive advantages via low prices are sustained in a number of ways. EasyJet in its pursuing of low-price strategies may be prepared to accept the reduced margin either because it can sell more fares than competitors. EasyJet may be prepared and has to a large extend engaged in price war with competitors via its lower cost structure (economies of scales due to its larger operations) and also has the financial resource capability to fund short to medium-term losses with the aim of driving out competitors in the longer terms. A prime example of this was the subsequent takeover of Go by EasyJet. Price wars are becoming more prevalent as traveller use the Internet to compare prices and ‘shop around’. EasyJet has cost advantages through company specific capabilities, which drive down costs throughout the value chain.

Porter comments on cost leadership as ‘the low-cost producer in its industry… must find and exploit all sources of cost advantage’ (Porter M.E (1980)). We will consider the value chain for EasyJet in more detail later in our discussion. Cost advantages might be achieved because of EasyJet’s efficient use of airports. This will require a mindset where innovation (in cost reduction) is regarded as essential to survival. EasyJet is an international example, The introduction of Airbus A319 aircraft, combined with the retirement of ‘old generation’ Boeing 737 aircraft, will result in a two-type ‘new technology’ fleet, which will commonality and lessen complexity and deliver high level of asset utilisation and reduce unit costs. Finally, EasyJet has sustained its price-based advantage by focusing on market segments where low fares are critical and valued by customers.

EasyJet’s first generic strategy is to achieve an overall cost leadership in the low cost airline industry. Therefore, it is vital for EasyJet to have a thorough comprehension of their costs and cost drivers. EasyJet is forever trying to attain a cost level that is low relative to its competitors.

EasyJet cost efficiency is achieved in a variety of way as shown in the following diagram:

The success of low-fare (cost) strategy is primarily dependent on the maintenance of a low cost base. This is critical for EasyJet having analysed the competitive rivalry position in the industry. With Ryanair maintaining high margins despite reducing yields through strict cost management. Lower costs are the only competitive advantage in the short-haul economy sector as air travel is effectively a commodity product. It is also anticipated that Ryanair will continue to lower costs, which will allow it to continue to engage in a price war, by lowering fares aggressively.

Managing for value involves managing both value activities and cost drivers. This involves EasyJet retaining funds from operations; hence, a healthy Balance sheet in terms of retained profits. Significant investment in assets and managing financing costs. Funding strategies developments is clearly important in that the nature of funding must be appropriate and compliments the low cost strategy of EasyJet, by ensuring that interest costs are low. Strategies are largely determined by the extent to which they deliver best value to both customers in terms of being competitiveness in the marketplace (leading low cost airline) and also to provide value to shareholders. EasyJet’s no frills strategy does not only mean a cut in Cabin crew and “denial of food”, but also allows for a faster pre-flight preparation, thereby reducing the time grounded as well maintaining fare.

As funding from operations are clearly a major contributor to value creation. In the long term, this is concerned with the extent to which the organisation is operating profitably. Table below provides an analysis of EasyJet’s sales revenue and profitability ratio since 1998. Investments in assets are also key consideration in value creation in that consideration of the extent to which assets and working capital are being utilised. EasyJet appears to have developed competences in supporting much higher levels of business from the same asset base than other rival airlines. This affects value creation as follows:

• The cost of capital investment
• The management of the element of working capital

Table 1: Sales and Trading Profit of EasyJet

Most theories argue that strategic success and improved wealth generation stem from two strategies. The first is to reduce the ‘bottom line’ costs of operation (low cost strategy) and the second is to increase the value of the organisation and its reputation to customers, so that they will demand more or pay more for what they receive (differentiation strategy) (ACCA Paper 3.5 (2001)). Porter through the use of the value chain illustrates how resources should be utilised to enhance least-cost production or differentiation strategies (the generic strategies suggested by Porter). The value chain analysis will show the total value added by the airline industry and EasyJet. All airline companies within the industry will have similar value chain, which will include activities such as obtaining fuel, designing fare structures, airport facilities, developing co-operative agreements, and providing customer service. Value chain analysis can provide important insights into what management need to focus on strategically.

In terms of analysis, EasyJet’s distribution activities are important in terms of e-commerce, as EasyJet like to consider itself as the ‘webs favourite airline’. Standardisation in its activities as an airline leads to both economies of scale and a simpler product, which is cheaper and easier to distribute. The price of EasyJet’s tickets various as a function of the number of seats remaining, the time until the flight, and historical trends. This is done in order to maximise the yield from a flight, as many of the costs associated with running a flight are fixed relative to the number of passenger on board. Yield management is a form of risk management and therefore, adds value. The sales process is efficient, as EasyJet sells directly to customers, instead of using external sales teams. It has been streamlines by using e-commerce, firstly by telesales and now through the Internet.

Marketing and sales will involve making customers aware of EasyJet’s services are price information and also selling. This will involve retention of best salespeople supported by HR management, engineering support in terms of maintenance of the web page supported by technology development to ensure that web site has the latest prices and route and flight information. This needs to be updated constantly as this will be a live system. EasyJet manages its sales process extremely efficiently, its sells its tickets directly. Previously it used telesales and now sales are through e-commerce web site. As Internet transactions have a lower cost associated with it EasyJet encourages its customers to book on-line by offering them a discount for on-line ticket reservations. Savings made from e-commerce is another source of value creation.

In terms of competitive advantage, the internet offers overall cost leaders new abilities to reduce costs in primary activities such as marketing (i.e. e-commerce) and support activities such as fir infrastructure (e.g. quick order processing). EasyJet through its use of an overall cost leadership strategy can use internet-based technologies to reduce value chain costs in a variety of ways: On-line bidding and order processing to eliminate the need for sales calls and decrease sales force expense. Another benefit of Internet technology is lower transaction costs at multiple levels in value chain activities. Such lower costs benefit EasyJet initially as innovation is rewarded. However the sustainability of competitive advantages may be problematic: as rivals copy successful strategies, EasyJet will loose its initial advantages. And finally, service, activities that ensure that customers enjoy their flight by providing friendly on board service and assisting traveller with any special needs requirements.

In terms of support activities, EasyJet takes advantage of technological developments in order to reduce costs. EasyJet also have a reputation for paying low wages in line with its low cost strategy. Procurement and firm infrastructure as a support activity does not add much extra value. In terms of strategy, many factors are outside the control of the company, such as use of high quality components and low defect rates for its aircrafts.

This analysis outlines for EasyJet’s management how individual activities may be altered to reduce costs of operation or improve the value offered to customers. Those changes will ensure that EasyJet sustains its current market share and position and also increase margin. EasyJet may be especially good at outbound logistics lined to its marketing and sales operations and supported by its technology development. It is possibly not as good in terms of operations and its inbound logistics. This will assist management to decide as to what EasyJet should be concentrating on and what requires de-emphasising or even outsourcing. EasyJet’s overall cost leadership strategy uses low costs at each point in the value chain to lower costs. The customers of EasyJet have been using the Internet for making bookings. In addition to that, EasyJet has been offering no in-flight meals, no in flight movies. Also, only one type of aircraft is used, in order to minimise maintenance costs.

The concept of the value chain is particularly useful in understanding an organisation’s strategic capability since its concentrates on value activities and the linkages between activities rather ran just resources. Therefore, capability is strongly related to the way that resources are used and controlled. The linkages with the value chains of channels and customers which are the essence of EasyJet’s capability and which can protect its market leadership and maintain cost leadership competitive advantage from competitors. This section we will investigate EasyJet’s resources as a means of assessing the organisation’s strategic capability.

Analysis of financial resources in order to understand the strategic capability of EasyJet will need examination of financial capability and performance. Table 1 shows that EasyJet’s sales has increase year on year since 1998, with profit and gross margins also experiencing a positive trends. The company has also grown in terms of its acquisitions of GO and also increase in purchases of its own aircrafts. EasyJet also has a strong cash flow position primarily from its policy to retain profits and reinvest it back to the business. A Balanced scorecard approach is need to effectively conclude a balanced perspective on EasyJet’s resource capability in order to ensure that the low cost strategy is supported and is