European Airlines: Strategic Management

Introduction

Low Cost Carriers – LLCs have changed the market rules and have forced large and established global airlines to adopt new strategies. Also called as Budget Airlines, LLCs offer a no frills flight with skeletal service and provide steeply discounted fares to budget travellers. These airlines operate on niche routes with smaller airplanes and have even forced large airlines to reduce their fares. The obvious beneficiaries are the middle class budget travellers who can now fly, a privilege that not many people could afford earlier. Post September 11, 2001, the airlines industry has seen major upheavals and lesser passenger load. Operations of the LLC carriers such as Ryan Air have had a disruptive effect on the market with large Air Line operators who have high overheads seeing a fall in the market share since these companies cannot reduce airfares and enter into a price war with LLCs. At the same time, many LLC carriers such as Air Madrid, Buzz Air and Air Polonia have closed down since they could not manage their operations with low fares (Hubbard, 2008). This paper examines the European Airline Market and makes recommendations on how the airlines can manage in these hard times. The paper performs a PEST analysis and a Porters Five Forces Analysis to make some recommendations.

PESTE Analysis

The current business environment, with economic recession and downturn has created a heavy burden for airlines. With a hundreds of business closing down and thousands of people losing jobs, the number of business and tourist travellers has reduced. This section performs a PESTE analysis of the business environment and posits on the actions required for the future. The PESTE analysis gives an analysis of various forces such as political, economical, social, technical and environmental that act on the airlines industry.

Political Forces

The Civil Aviation Authority – CAA regulates the airlines industry in UK and this is a UK government body. CAA is known to adopt restrictive and open skies policies, on an off. In 1990, deregulation of air routes was introduced and literally any airline operator could land and take off from any airport, including Heathrow and go to any destination in the US or any other place. Many government airways such as British Airways were privatised and then the government attempted to place restrictions on the routes of BA that other operators flew. Airports are under the control of the Airports Authority, again a division of the government. The CAA attempts to control and restrict the flight of other operators by introducing a number of regulations such as safety regulations, air travel organisers licensing scheme that is used to monitor and regulate UK tour operators and extend financial protection to customers, airspace policy, employee protection and many more. It recently grounded Sudan Airways by suspending the air operators certificate as it was determined that the operator ‘did not meet international safety standards‘. It has been alleged that granting of the air operators certificate that every airline operating in UK must posses, is often used as a stick to beat airlines into paying hefty landing and airport use fees. The counter argument is that airline operators are not self-regulated and attempt to cut safety requirements to cut costs and hence such punitive measures are required. However, since the economic crises and the failure of many LLCs such as XL Airways, Ryanair and others, the authorities is finding ways and means to sustain the industry by reducing fees, taxes and airport use charges (ATW, February 2009).

Economical Forces

The airlines industry has seen a severe beating, post September 11, 2001. Air travelling suddenly lost appeal and just when people had got over their fear of flying, came the steady and steep rise in oil prices that increased the operating costs and almost ruined many carriers. Oil prices have fallen from the all time high of 147 USD per barrel in July 2007 to less than 40 USD per barrel. However, because of the recession and downturn and credit crunch, Job losses the airline industry has seen a fall in revenues. Premium passenger traffic has reduced by 11.5 percent while economy class has fallen by 4.8 percent, load factor that was 77.3% in 2007 has fallen by 2.2 percent and the overall passenger traffic has reduced by 7.8% when compared to 2007. Airlines had placed orders for new aircrafts and these were delivered in 2008, giving an excess capacity of 3.5%. Loss for 2008 was 2.2 billion GBP and by 2009, loss would be more than 7.5 billion GBP. The global load factor has fallen to 73.3 % with cargo and freight traffic reducing by 22.6%. There are regional differences in the load factor falls with Asia Pacific sector down to 72.6%; European region load factor down to 73.8%; North American at 78.1%, African carriers to 68.5% and Middle East down by 11.1% fall to 70.2%. This affects global operators who operate across different regions (IATA, 29 January 2009).

Social

LLC services have reduced the airfare costs considerably and allowed budget travellers to fly more. With easy availability of flights, more destinations have become accessible till recently, holidaying in exotic locations was affordable.

Technological

Airlines have been soundly castigated for emitting global warming gases, causing widespread pollution and increasing consumption of fuel and natural resources. With increase in LLCs, more people fly rather than take a train or bus there are demands to reduce the carbon footprint of airlines. Airlines add 4% to global warming gases, at very high altitudes where the gases are not dissipated. LLCs have added to the problem with opening routes to far off places that allows people to buy weekend homes and cause more pollution. Airlines are expected to join EU emission trading system by 2012, this is expected to add 15 GBP to the fares, something passengers cannot afford, and airlines cannot bear. There is a pressure to build fuel efficient engines, reduce fuel use, simplify and centralise air traffic control from 34 individual ATC that burns 12% more fuel and to invest in bio fuels and green technology (Milmo, 3 June 2008).

Environmental Forces

Airlines have been increasingly blamed for pollution, both due to aircrafts and the airport activities. Recent plans to add a third runway at Heathrow has been resisted by environmentalists and residents of West London. About 100 new routes have been added to small towns and cities across Europe by LLCs who enjoy low taxes and offer low rates to ferry customers. While tourism has increased, there are arguments that people from low income groups often travel and spread litter besides causing pollution. There plans to make airlines buy permits if they wish to embark or depart from any European city, from 2012 onwards (Charlemagne, 17 July 2008).

The analysis has been presented in Appendix A1. PESTE Analysis.

Porters Five Force Analysis

Porters 5 Force Analysis gives details of the macro environment forces in which the industry operates.

Industry Rivalry Competition

There is intense rivalry between different operators and the indulge in price wars, provide high discounts, all with the intention of gaining more passengers. Many airlines have tied up with large corporate. Tour operators and aggressively advertise their services to increase passenger load. With the emergence of LLCs, the competition has shifted to price and not the level of service. Budget customers do not mind waiting for more time or foregoing in flight service so that they can fly cheaper (Hubbard, 2008).

New Entrants

New Entrants are faced with high barriers as they would have initial high overheads but they would be forced to offer very low rates. The more they lower the prices, the lesser would be the margins they get and hence the financial burden would be difficult to bear. In addition, new entrants would have to either take aircraft on lease or buy their own aircraft and both these options are very expensive. With the market filled with many LLCs, it would be difficult for a new entrant to make an impact. Acquisition of loss making airlines with serviceable aircraft is a strategy that can be considered (Hubbard, 2008).

Suppliers

Suppliers in this case are the agencies that provide in flight catering, servicing of aircraft, tour operators and booking agents, fuel suppliers and other service providers. The fortune of these entities is linked with that of the airline operators and consequently suppliers do not have any bargaining power. They would have to accept whatever terms and conditions are extracted by the airline operators. Fuel suppliers have some amount of bargaining power since there are limited turbine fuel suppliers in an airport. However, even these companies have to accept longer credit terms since airline operators are not making money and nothing would be gained by grounding a flight (Hubbard, 2008).

Buyers

Buyers are the passengers who are desperately sought by airline operators. Buyers have a very high bargaining power as they can easily switch to other flight operators who offer lower fares and the choice for buyers is very high. With LLCs that charge for in flight services, passengers have the option of bringing their own food and beverage and not buy the overpriced fare. Buyers also make use of frequent flyer miles to gain further rate reduction (Hubbard, 2008).

Substitutes

Substitutes in this case refers to other airlines that may offer flights on the same routes at lower rates and also at times that are more convenient. LLCs have managed to disrupt the airlines industry and have forced large airline companies to rethink their strategy (Hubbard, 2008).

Please refer to Appendix A2. Porters Five Force Analysis for more details.

Recommendations

The following observations and recommendations are made (Datta, 2008):

  • Price wars do not help anyone and reducing fares to compete with LLC can only bring ruin to airline carriers.
  • Consolidation by forming alliances for seat sharing and code sharing must be followed to increase load factor.
  • There is an urgent need to invest in fuel efficient and green technologies as regulations for carbon emission and reduction of carbon foot print would come in any day.
  • Costs have to be controlled by improving internal efficiency and by raising fares, if possible
  • Technology holds the key for customer satisfaction and improvements
  • Make frequent traveller miles transferable to close family members and for certain employees of an organisation. Some differential pricing can be used.
  • Number of flights has to be reduced. Code sharing has to be analysed to find benefits in terms of revenue gain and branding.
  • Cost reduction exercises should be taken to reduce unwanted costs
  • In flight catering should be sourced from more economical vendors and menu items reduced.
  • Question of leased or owned aircraft has to be examined again to find which is more profitable.
  • Online booking presence should be increased to reduce costs and increase availability.
  • There should be a reduction in the number of routes flown and the number of flights from one point to another.
  • Reduce booking opening days to prevent customers from booking months in advance and get low rates
  • Frequent flyer miles membership criteria should be changed to make it more exclusive
  • Charging for in flight services should be examined to see revenues and overhead costs of maintaining food and in flight services.

References

ATW, February 2009. Avitas Market Commentary: Facts and Figures. Ascend Online Fleets database.

Charlemagne, 2008. The trouble that starts when low-carbon goals clash with low airfares. London, Economist Print Edition, p. 3.

Datta Debarshi, 2008. European Airline Industry – Strategies for the New Millennium. SkyTECH Solutions Ltd.

Hubbard, G, Rice, J & Beamish, P 2008, Strategic Management: Thinking, Analysis and Action, 3rd edn, Pearson Education, Australia

IATA, 2009. Cargo Plummets 22.6% in December.International Air Transport Association.

Milmo. Dan., 2008. Airlines stage fight back on environmental criticism. Guardian News and Media Limited.

Appendix

A1. PESTE Analysis

Issue Issue Analysis Effect on the Industry
Political
  • Government and the political administration has imposed some punitive laws and regulations such as the open skies policy to encourage air travel and the air industry.
  • There was deregulation of air routes and any airline operator was allowed to operate, provided certain basic infrastructure rules were met.
  • However, the government attempts to tacitly support government owned airlines that have been privatised
  • There are stringent safety regulations, licensing scheme that are used to monitor and regulate the operations
The industry is forced to increase its operating costs to comply with the rules and regulations. Since many airlines are not doing well, credit problems and working capital issues serve to drag down the operations
Economic
  • Post 9/11 attacks, there was a sharp reduction in air travel
  • The ongoing economic recession has steeply reduced the number of holiday travellers. Business travellers try to find the cheapest route and carrier to reduce costs
  • With lower passenger load and higher overheads, the margins are under pressure and many large carrier as well as LLCs have closed down
The economic recession has struck a huge blow to the airline industry.
Low passenger loads and higher operating costs have shut down many airlines
Social
  • Flying was something the rich could afford earlier. However, LLCs have changed this belief and even budget travellers can fly to a number of destinations at very low rates
  • With lower airfares, many business travellers prefer to fly since they save on time also
Flying is still regarded as a worth while pursuit and more people prefer to fly. However, with LLCs, the budget customer does not generate sufficient revenue
Technology
  • There is a need to control costs by making more fuel efficient planes
  • Airplanes need to curb on the amount of emissions they produce and the concept of green technology is catching up
Airlines have to upgrade and modernise their fleet or face actions from regulatory authorities
Environmental
  • Airlines are facing intense criticism as they cause pollution and increase carbon emission in the higher altitudes
  • Europe is considering making airline operators buy compulsory carbon credits to offset their emission
  • Airports consume large natural resource beside causing noise and air pollution
Airlines have to demonstrate that they have reduced carbon emission by increasing their spending on green technology

A2. Porters 5 Force Analysis

Issue Issue Analysis Impact Rating
Industry Rivalry
  • There is intense rivalry between different operators and the indulge in price wars, provide high discounts, all with the intention of gaining more passengers.
  • Many airlines have tied up with large corporate. Tour operators and aggressively advertise their services to increase passenger load.
  • With the emergence of LLCs, the competition has shifted to price and not the level of service. Budget customers do not mind waiting for more time or foregoing in flight service so that they can fly cheaper
High – Results in Price Wars and market share attrition.
Results in high overheads and reduced revenues
New Entrants
  • New Entrants are faced with high barriers as they would have initial high overheads but they would be forced to offer very low rates.
  • The more they lower the prices, the lesser would be the margins they get and hence the financial burden would be difficult to bear.
  • New entrants would have to either take aircraft on lease or buy their own aircraft and both these options are very expensive.
  • With the market filled with many LLCs, it would be difficult for a new entrant to make an impact.
  • Acquisition of loss making airlines with serviceable aircraft is a strategy that can be considered
High entry barriers
Suppliers
  • Fortune of suppliers tied to performance of carriers
  • Low bargaining power of suppliers as airlines can procure services of other service providers
Low Impact
Buyers
  • Passengers have large choices and can switch to different operators who offer lower rates
  • Rise in budget travellers who do not mind poor service, paid in flight service, as long as they get to their destination
  • Passengers demand lower rates and better service
High impact – Passengers can dictate terms
Substitutes
  • High entry barriers for substitute air line operators.
  • Substitutes have to further cut rates and suffer more losses is they want higher share.
Low Impact

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