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With a passage of time there has been privatisation and deregulation of the airline industry, traditionally the state-owned flag carriers and exposing them to the forces of competition the monopolies and protectionism ended up. This assignment will primarily focus on Easyjet, and will consider the generic strategy adopted by the company for the air travel sector. A value chain analysis of the business will also be undertaken to establish core competencies and distinctive capabilities of the business.
In Europe, due to the expansion of market, the breaking down of trade barriers, the airline industry was deregulated in 1992. Therefore, European airline can fly and land anywhere in Europe. This is the chance for European airlines to expand their market and their routes across the Europe and implement their low cost strategies with a greater accuracy. Another feature of this change has been the emergence of the "no frills" airlines, which have achieved rapid growth in market share in the short haul flight in European market. In Europe Easy jet is one of the prominent low-cost airline company and the successful example of "no frills'' airline. In 1995, the company was founded by brainchild of Stelios Haji-Ioannou, the son of a Greek shipping magnate, based on the low cost, "no frills'' model of the US carrier Southwest. Stelios Haji-Ioannou has still more than 50% stake in the company shares. Recently Easy jet is growing day by day with the increase of size of the market and more recently by taking away the passengers from major airlines.
The primary objective of the company is to reduce the price of flight with short haul air transport, where price is elastic and more people will fly. Today, the company offers 500 routes from 114 European Airports in 27 countries. (Annual report 2009) In Nov 1995, the company started its first flight from Luton to Glasgow and Edinburgh leased with two Boeing 737-300swith 148 seats capacity at a price of £29 one way flight. At that time the company sold all its seats over the phone, to avoid the agent commission. In 1998, for the first time the company launches its website 'easyjet.com' which onwards form an important part of business idea.
Figure 1 represents the European market share for the low fare airline industry at this stage the 71% of the market share is controlled by two major organizations. Easy jet (31%), Ryanair (40%), other (29%) have a major slice of the European market and compete vigorously in order to attain profit and market share. Easy jet's 31% market share has been achieved through a wide variety of measures and its stakeholders expectations are high their perspectives.
According to Porter (1998), state that generic strategy is a method that an organization applies in order to achieve its long term goals and he notes that a company may achieve its goals by following any one or a combination of the following three generic strategies, cost leadership, differentiation, and focus. Easyjet enjoys the profit by having low cost leadership in the airline industry. To attain the low cost leadership it has implemented several processes which reduce the cost of transporting passengers. These processes are as below which helps Easy jet to attain the low cost leadership in the airline industry.
Quick turnaround time which uses the ground efficiently
Business model of Easyjet is designed to achieve the high utilisation of aircraft. The turnaround time (Time between aircraft arrival and pushing back to the departure) is minimised by crew to secure and prepare for the next flight which is the key to make quick turnarounds. Thus Easyjet requires fewer gates and other airport infrastructure than full-service airlines. This underpins the low-cost strategy as stated by Andy Chu, an airline analyst at Merrill Lynch
Online ticketing and minimal use of office infrastructure
Easy jet operates nearly ticketless office where all the documents and posts are scanned in document management systems. The "no frills" airline also eliminates the meals that people do not want which reduces the cost of paper bags and other paper product to store the food in the flights. Easy jet operates online ticket booking process which reduces the cost for the ticket paper and printing the tickets. The online ticketing process also eliminates the agent commissions which reduce the ticket cost for the customers.
Minimal use of airport infrastructure leads to reduction of operation cost of business
For the sake of quick turnaround time the company uses simple airport infrastructure. For example Easy jet prefers not to use air bridges where it is not required. As the company is "no frills" airlines it does not require separate staff people for food on board which reduces the overall operational cost. Being short haul airline with a single class of service and absence of cargo service it does not require complex baggage systems and facilities to transfer the passengers to flights. This is the key factor which underpins the low cost operations for the organization.
Low advertising and staff budgets
Since employee compensation costs are typically the most important component of total airline cost therefore Easyjet controls its cost through performance appraisal. The company believe their labour cost is lower than its rivals. (Annual report, 2008)
Due to the opening of internet website and online ticketing brought significant financial figures in the company services. Low cost promotion, free publicity, internet sales and yield management aid the marketing and sale operation. The company primarily advertise low fare on its website, in newspaper, and on radio and television. The company also try to minimize their cost in term of on job training and low pay rate. The company also setup a small advertisement budget because the company don't want to spend money on their advertisement as they provide low fare to its all destination.
Easy jet focusing on three main strategies, Focus on our customers, own our market, and reduce our costs.
Focus on our customer: the company aim to know our customer value and design our core product and ancillary services accordingly. The company believe to create better value for the customer whilst reducing the costs to improve its competitiveness. (Annual report, 2005)
Own our Market: To develop the existing market, the company will depend aggressively against their competitors. This means that their strong base and establishing quickly, the company offering numerous routes with multiple frequencies to existing and new points on the network, and establishing a strong brand in the market. (Annual report, 2005)
Reduce Our Costs; the company management focused on reducing the cost and increasing the return on equity. While doing that, Easy jet continue to challenge industry norms and reduced cost further through high productivity and innovative in term of knowledge and procuring goods and services. (Annual report, 2005)
Value Chain Analysis
As the company's generic strategies has been explored above are concerned with the strategy that should adopt at the macro level and the external environment of the firm. "Differences among competitor value chain are a key source of competitive advantage." (Porter 1985: 36) The value chain is based on the firm overall strategy and linked in term of positioning, as explained by the generic strategies model.
According to Stabell and Fjeldstad 1998, that value chain categorise the value adding activities of a firm and "value chain analysis is a method for decomposing the firm into strategically important activities and understanding their impact on cost and value". (Stabell and Fjeldstad 1998, p413)
Figure 2 identifies the critical components in the value chain of a firm and this include four support activities; firm infrastructure, Human Resource, Technology, and Procurement, other four primary
Activities; inbound logistics, operation, outbound logistic, marketing and sales and services (Porter, 1998). These activities are as follows,
Source of Differentiation
Financial policy, accounting, regulatory compliance, legal and affairs.
Training of flight, route, yield analyst, pilot, safety, and inflight
Computer Reservation system, online ticketing, Flight scheduling system,
Yield management system, and baggage training system.
e-procurement, warehousing, inventory management and maintenance
Route solution, passenger service, pricing, fuel, flight and crew scheduling
Ticket counter operation, gate aircraft operator, onboard service, ticket officer
Baggage system, flight connection, rental car and hotel reservation system
Marketing and Sales
Promotion, advertising, frequent flyer, and electronic tickets
Lost baggage service and complaint follow up
Source: Adapted from annual report 2008-09
As Easyjet airlines enjoys profit with the help of low-cost strategy, the value chain analysis of Easyjet forms below features of its low cost business model.
The major contribution by the technology in the Easyjet airlines plays effective role to reduce the cost. This can be illustrated by number of ways where Easyjet efficiently uses the technology in its day-to-day business. The study reveals that Easyjet uses mainly single type of aircraft which reduces the cost of staff for their technical training as well as maintenance. These aircrafts meet the basic customer expectations like on time arrival, baggage delivery etc. Thus customers get the same level of services in the aircrafts having single class. Easyjet uses online booking system for the ticket reservation which makes 90% of its sales (Easyjet, 2009). The online ticketing system avoids the commission given to the agents and sells tickets direct to customers. The other facility provided by Easyjet is online boarding which saves customer's time. This also demonstrates the efficient use of technology which exemplifies the great customer service experience. The other area which reduces the cost of Easyjet business is the cost of marketing and advertising (Annual report 2009). The company has the low adverting budget by which it advertises its business through online websites, Radio, newspaper etc. The promotional activity in television is also done without using any models which reduces the cost of advertisement. The company has quick turnaround time which reduces operation cost and more efficient use of airport infrastructure.
Easyjet efficiently uses technology for its major operations and outbound logistics for online ticket reservation, Baggage system and onboard services etc. The linkage of inbound and outbound logistics can be explained with technology and human resources which helps to reduce the cost in business. Thus it can be stated that human resources aligns corporate structure, company strategies, and continual changes in a fast moving business environment (Randall, 2007) The company uses aircrafts to carry the customers and meet the basic requirements only. The welcoming staffs also attract Easyjet customers to fly more with them again and again. As the company uses less airport infrastructure by having less check in desk, this reduces the operational cost. The outbound logistics can be explained by the services offered by Easyjet like car rental, online hotel reservation systems. This increases the company revenue along with the normal company sales. The company has no connecting flights which reduces the operational cost in business.
Thus, it clearly shows the efficient usage of primary activities like inbound and outbound logistics for business operation is closely supported by Technology and human resources of the company.
Easyjet also maintain healthy relations with its vendors such as Boieng, thus gets the spare parts for its aircrafts with the favourable terms. This factor adds value to the business as a cost effective agent to offer low cost fares to its customer. This capability is coupled by the good relationship with airport authorities around Europe which is also substantial factor to be able to offer low-fares to the customers. This is achieved by providing airports with storage hubs (easyjet, 2006)
Easyjet also has the advantage due to excellent customer care service to its customers. It does not only take the customer with low fares but also has the employees who provide excellent customer care with friendly on board welcome. This leads to brand loyalty for its customer (easyjet, 2008). In addition to this, Easyjet has the culture which has the excellent performance management system which motivates its employees to go extra mile for the business (annual report, 2008).
Thus it can be depict that there are many similarities between Easyjet and its competitor Ryanair but Easyjet offers low cost air fare model coupled with customer care and employee satisfaction which gives it distinctive capability in the industry.(see appendix 1) This makes Easyjet a better brand for customer and great employer for its staff members. Despite of these capabilities Ryanair still tops the chart with 40% market share of European airline industry.
In essence, Easyjet follows a cost leadership and Broad focus strategy and some of the core competencies include Technology, operation, and inbound and outbound logistics. Thus from the above analysis it can be concluded that Easyjet believes to put the employees before the customer and provides excellent customer care. These capabilities of Easyjet cannot be replicated by its major competitor Ryanair and becomes distinctive capabilities. The above capability becomes core competence of Easyjet.
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Statement from AGM - 24 February 2005