International Competitiveness

EasyJet Report : Competitive Advantage Sustainability

Pedro Ganiguer 52865

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Warsaw School of Economics International Competitiveness

Summary This essay focuses on EasyJets, a low-cost airline company. I will try to analyze the potential sectors where EasyJet is able to gain competitive advantage and, more important than that, sustain it. To achieve this goal I will present airlines environment, EasyJets mains strengths and weaknesses and, further, opportunities to explore and threats to be prepared off and try to avoid. I thought it would also be crucial to understand its main competitors way of working and how EasyJet should deal with this menace. I chose to develop this essay in a more theoretical overview instead of analyzing profits, costs, revenues, etc. I think its more adequate and interesting regarding this courses goal.

Introduction EasyJet is a clear example of an European low-cost airline company. It raised for the initiative of Mr. Stelios Haji-Ioannou, the son of a Greek shipping magnate who founded the company. Today, he and his family still hold the majority of the shares. The concept of EasyJet is based on the belief that demand for short distances air transport is price elastic. This means that, if prices for flights are being reduced, more people will fly. Traditional airline concepts are based on the assumption that airline traffic grows in line with the economy and that cutting prices will only lead to a decrease in revenues. With the introduction of low-cost concept to the European market, after its deregulation, EasyJet has proven this theory wrong and goes from strength to strength by actually increasing the size of the market and more recently by taking away passengers from the majors tradicional airline companies. This Brithish airline currently carries more passengers than any other UK airline company, operating domestic and international scheduled services on over 500 routes between 118 European, North African and West Asian airports. It employes more than 8000 people.

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Warsaw School of Economics International Competitiveness COMPETITIVE ADVANTAGE Competitive advantage is whatever allows a firm to earn and sustain a return that outperforms direct competitors. For an airline, this might show up as an ability to earn a larger surplus between unit revenues and unit cost than direct competitors are able to earn. Therefore, the aim of each organization is to achieve competitive advantage, but this is not enough. The question is what resources and competences might provide a competitive advantage in ways that can be sustained over time? A crucial point is to find out a competitive advantage that is difficult, or better yet impossible, for competitors to imitate or substitute. Indeed, barriers to entry must be created or, if they already exist, sustained in order to protect the chosen strategic position. Moreover, competitive advantage is context-dependent, meaning that competitors with different and perhaps new perceptions of the marketplace can undermine it by changing an industrys context. Low-cost carriers have been doing this in some air transport markets for a number of years, and their impact on how the industry competes is continuing to rise. In the same way, it is important to say that competitive advantage varies from market to market. For instance, in the context of internationalization, the competitive advantage for one market may not be effective in another. To sum up, the question is what kind of resources can provide an efficient competitive advantage to the company? I chose three sources of advantage that may be difficult to imitate and therefore can be sustained along time: Organizational culture: This cannot be precisely imitated by competitors, and thus, if it is service-oriented and relevant to the airlines vision of what it wants to achieve for its customers, can be a vital source of advantage. The style of service delivery is much less easy to imitate than the functional attributes of a service. Competitors might be able to see what an airline is doing, but not how it is being done. If the what matters to customers and the how is not imitable, competitive advantage can be sustainable. Brand image: This includes everything an airline does and stands for, and is the foundation of its customer franchise. If relevant to the targeted customers, favorable and actively developed, it can be a powerful and sustainable source of competitive advantage.

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Warsaw School of Economics International Competitiveness BASES OF COMPETITIVE ADVANTAGE IN LOW- COST SECTOR Organisations that try to achieve competitive advantage obviously hope to preserve it over time. In EasyJets case sustainability is achieved mostly through low-price advantage. Sustaining Price-based Advantage An organisation pursuing competitive advantage trough low prices might be able to sustain it in several ways: Operating with lower margins may be possible for a firm that has greater sales volumes than competitors, due to economies of scale by diluting fixed costs on unit prices. Some firms may have unique access to low-cost distribution channels, be able to obtain raw-materials at lower prices than competitors or be located in an area where labour cost is low Organisationally specific capabilities may exist for a firm such that it is able to drive down cost throughout its value chain. Of course, if either of these two last approaches is to be followed it matters that the operational areas of low cost do truly deliver cost advantages to support real price advantages over competition. It is also crucial competitors find these advantages difficult to follow. This requires a mindset where innovation in cost reduction is regarded as essential to survival. An example of this is precisely Ryan Air, EasyJets main competitor in the low price airline sector, who, in 2006, declared it was their ambition to be able to eventually offer passengers flights for free. There are however dangers with trying to pursue low-prices strategies: Customers may start associating low price with low product/service benefits Cost reductions may result in an inability to obtain a differentiation strategy.

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Warsaw School of Economics International Competitiveness THE ENVIRONMENT The environment is what gives organizations their means of survival. In the private sector, satisfied customers are what keep an organization in business. Nevertheless, environment is also the source of threats: hostile shifts in market demand, new regulatory requirements, revolutionary technologies or the entry of new competitors. Environmental changes can be fatal to firms. It is vital that managers analyze their environment carefully in order to anticipate and if possible influence environmental change. Airlines Industry Evolution The air travel is one of the worlds largest industries having generated over $300 billion in revenues in 2001 alone. 2001 is a reference year for the industry because of the atentate to the Twin Towers in New York on September 11. The civil aviation industry suffered a lot, because of security fears. Originally, the air travel market was based on the demand generated by business travel as multinational companies grew during the 60s and early 70s. As international companies developed their activities, the number of flights increased. The leisure market (tourism and travelling not related to business) subsequently took off as rising living standards and extra leisure time encouraged holiday makers to travel to destinations, short and long distances. The industry grew rapidly in the 80s. The first low-cost companies were Freddie Lakers (Paris-New York) in the late 60s and Virgin Airlines (from Sir Richard Branson). The industry is a capital-intensive one and is very vulnerable to the oil prices, as the price of fuel makes up to more than one third of its operating costs. A further stimulus to air travel has been privatisation and deregulation of the airline industry, ending the monopolies and protection traditionally enjoyed by state-owned flag carriers and exposing them to the forces of competition. In Europe, with the expansion of the EU and the breaking down of trade barriers, the airline industry was deregulated in 1992. This meant that any European airline could fly and land anywhere in Europe. This offered airlines the chance to expand routes across the continent and compete against each other according to free competition instead of the oligopoly of flag carriers. Oligopoly (a market dominated by a small number of companies) always leads to higher prices to the customers and , therefore, to a lower activity level. One consequence of airline industry liberalisation was the surge of the no frills airlines, which have achieved rapid growth in market share in the short haul European market. No frills airlines, the company concept developed by Sir Freddie Laker in the late 60s, means as little service as possible, so that tickets become cheap: no free meals, smaller seats, less area per passenger and cheaper landing airports, sometimes many kms away from the city destination centers.

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Warsaw School of Economics International Competitiveness EASYJET SWOT ANALYSIS The SWOT analysis enables us to understand what the opportunities and threats that represent the environment of the company are. This environment is essential to work on a competitive advantage that can be sustained over time. Also, this analysis permits us to know the strengths and weaknesses of EasyJet. INTERNAL FACTORS Strengths: EasyJet is seen as a pioneer in terms of low-cost carriers in Europe. The law of the first arrival: rather the first than the best. Cost efficiency model Business demand. Introduced in June 2005, the lounges offer free drinks, snacks and magazines, as well as the standard flight information and access to phone, Internet and email. Moreover, EasyJet operates competitive routes between major cities The EasyJet Culture Committee is responsible for establishing social events. Advertisement like affordable as a pair of jeans reinforce the image Reputation and brand awareness. These are primarily due to the Easygroup products that have built the reputation of EasyJet. Also, EasyJet is concerned with customer satisfaction which is not true for most low-cost carriers. Weaknesses: Management troubles. In August 2002, EasyJet and Go completed a merger deal to create Europes number one low-cost airline notably with the acquisition of Deutch BA. But EasyJet is in trouble because of the cultural and managerial differences. Image of low-cost airline. Moreover, customers still are worried about the security of low-cost Airlines High cost structure. This is explainable by the preference for principal airports or airports closer to city centers, which practice higher landing agreements Non profitability of Easygroup products

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Warsaw School of Economics International Competitiveness EXTERNAL FACTORS Opportunities: Growth of petrol cost. In the face of rising costs, the traditional companies set an overcharge on their price that enabled low-cost airlines to stabilize or increase their price without losing their competitive advantage. What is bad for low-cost airlines, is calamitous for the others, and, in an ideal world, the low-cost would prefer to have high petrol cost for a long time Market growth. The volume of passenger traffic using air transport should be twice comparing the railways by 2030, reaching 923 billion passenger kilometers.

This map shows EasyJet Airlines potential covering almost all European Continent. Threats: Government intervention. Some major airlines like Air France, Alitalia, etc. are helped by the government, authorizing them to turn in non-profitability. This obviously is an unreal scenario on the private sector Crashes and European terrorism: customers are worried about safety especially in the low-cost airlines. Thus, a crash of any one low-cost carrier could give birth to prejudice and even eradicate them. The 11 September terrorist attacks failed to affect low-cost airlines, as they occurred in America, and they have no transatlantic routes. European terrorism would have had totally different effects on the low-cost carriers.

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Warsaw School of Economics International Competitiveness FIVE PORTER FORCES

POTENTIAL ENTRANTS -EU regulation removes barriers to entry for airlines based in Europe.

-Expending of market towards Eastern countries.

BUYERS SUBSTITUTES
-Road, rail or boat travel. -High speed rail expanding in Europe (like Eurostar). The Intensity of the Rivalry is important. This is notably due to the threats of buyers and substitutes.

-Increased use of the Internet, approaching a situation of perfect knowledge and thus pushing the industry to perfect competition. -Very volatile Customers. -Wide range of substitutes. -Worries about security.

SUPPLIERS Surge in oil prices decreases the margins of budget carriers. Main airports are overcrowded which involves more power for them.

This model has shown how the rivalry within the airline industry is important. Indeed, the deregulation of the industry permitted the entry barriers to fall down. This led to airline proliferation, mainly within the low-cost segment. In 2005, there were 54 low-cost companies in Europe. Subsequently, more airline companies led to more power for suppliers like the airports. At the same time, the substitutes are becoming more and more competitive, which give the buyers more power. Moreover, the 11th September incident and the crashes that occurred since then have led to fear among the customer with respect to airline transport, increasing the power of the substitutes. The growth of the Internet particularly gave the customers the option to make the right choice (involving the notion of marketing). The threat of buyers, added to the threat of substitutes, is especially affecting the industry that is in a situation of exacerbated competition. I can conclude that most of the low-cost airlines are going to die or to merge with others, leaving EasyJet and Ryanair in a dispute within the segment.

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Warsaw School of Economics International Competitiveness RYANAIRS ANALYSIS As it has been said, most of the low-cost companies are going to collapse. Since I am analyzing Easy Jet I thought it would be relevant to understand how its main competitor Ryanair works and its main strengths and weaknesses. As I did a research on this company I clearly understood Ryanair is the cheapest airline. Furthermore it can be considered the one with best costefficiency. Firstly due to a perfect process of management - one type of aircraft built by their own engineers. Secondly because of the strategy of using secondary airports which allows Ryanair to have a huge influence on this specific supplier. Finally, it was the first European low-cost created in 1985 and has been collecting customers since then, as they become familiarized with this firm. On the other hand, Ryanair has also its weaknesses. The fact that this company obviously provides the minimum customer services is a negative point. Also judicial troubles that have occurred along the years of firms existence prejudice Ryanairs brand. Last, working in secondary airports may be considered an advantage but is also a weakness in terms of traffic, as the firm has no presence in big metropolis where movement is bigger. Comparing EasyJet and Ryanair EasyJet segment Ryanair Discount segment

Main target market Product

Price Place

Middle and business -Good service quality, - Minimum services and no relaxed attitude of the payback staff - Easygroup - Business lounges A bit more expensive The cheapest of the market Major and secondary Minor airport airport Tone of advertisement: Humorous and irreverent. Tone of advertisement: Aggressive advertising sometimes towards the competitors.

Promotion

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Warsaw School of Economics International Competitiveness Business Positioning as a Competitive Advantage As I said before, one of EasyJets specific qualities is its positioning on the business segment. This could represent a competitive advantage that outperforms the direct competitor, on three points: EasyJet has some routes to major towns within the major airports; EasyJet has special business lounges; Good service quality. This is primordial with this kind of customers; Although, it is extremely important to indicate Ryanair does not want to operate on the major airports. But even if Ryanair wanted to, the surcharge of major airports makes it almost impossible. Here EasyJet is able to sustain competitive advantage over time.

Service Quality and Brand Image as Competitive Advantage It has been shown that one of the strengths of EasyJet and one of the weaknesses of Ryanair is the service quality and the brand image. Developing customer loyalty by providing unique benefits to customers via customer satisfaction and service quality image is a precious competitive advantage. Nowadays I would say it is vital mainly for two reasons: Increased use of the Internet. This point gives buyers a considerable power. Indeed, it enables them to choose the best company answering to its demand. Very volatile customers demand. Their needs and requests are in constant change as industry development is faster and faster We can see now this is absolutely relevant. I think Ryanair is not going to change its positioning anytime soon. Service quality and brand image are impossible to achieve or change in a short term.

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Warsaw School of Economics International Competitiveness Main Competitors Threat As weve seen before, RyanAir is able to present lower prices than EasyJet. This was not crucial before financial crisis grew as consumer still had the power to choose a more expensive ticket in exchange for other advantages. But times are now so difficult in Europe that scenario can easily change. In fact, as we can see on the graph, Ryanair registered, between August 2008 and September 2009, a bigger growth on passengers number and this tendency has continued until nowadays.

Passengers number evolution between Aug 08 and Sep 09 My point is that RyanAir is, in fact, a real menace as a really strong competitor and EasyJet must continue showing arguments to compete and gain advantage threw its mains market opponent.

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Warsaw School of Economics International Competitiveness MAINTAINING BUSINESS POSITION In order to get competitive advantage over Ryanair, EasyJet must continue its policies and keep developing its services and staff. Here stay some goals/attitudes to adopt in the long-term: 1. Until a real change takes place within the airline industry, it is important to keep this specific quality of EasyJet. Indeed, this positioning still makes the company attractive to the business consumer. 2. Maintaining the promotion focused on strengthening firms brand 3. Any investment in this competitive advantage seems to be risky. Wait to invest in certain occasion and dont commit the mistake of not evaluating market scenario correctly 4. Investing in service quality and brand image 5. Reduce or eradicate management trouble in order to get a perfect guiding line within the staff enabling them to follow the target of service quality 6. Create more physical evidence of service quality. The goal of these actions is to associate the service quality and the value for money to the brand image.

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Warsaw School of Economics International Competitiveness Bibliography Wikipedia Principles of Marketing by Philip Kotler, Gary Armstrong, Veronica Wong and John Saunders, 5th European Edition www.ryanair.com www.easyjet.com The Economist http://www.economist.com/blogs/gulliver/2010/07/budget_airline http://www.economist.com/blogs/gulliver/2010/11/easyjet Technology, Organization, and Competitiveness: Perspectives on Industrial and Corporate Change by Giovanni Dosi and Josef Chytry

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