Strategy analysis: easyjet plc PDF

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Airline and Airport Management: easyJet plc

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Table of contents Introduction and the Organisation

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1.1.

Products and Markets

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1.2.

Marketing Strategy

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1.3. Value Proposition Financial and Economic Performance Analysis Analysis of Airline Industry

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3.1. PESTEL Analysis

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3.2. Five Forces Analysis

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3.3. Internal Analysis Two Scenarios

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4.1. Scenario 1: The Brexit

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4.2. Scenario 2: Competition Conclusion and Recommendations References List of Figures Figure 1: Seating categories and prices 5. 6.

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Figure 2: Product categories of easyJet

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Figure 3: Routes and network of easyJet

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Figure 4: Market position

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Figure 5: The price of jet fuel between 2011 and 2017

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Figure 6: Porter’s five forces analysis

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Figure 7: SWOT analysis of easyJet

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Figure 8: Head-to-head competition in LCC market

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Figure 9: Price comparison among LCC in Europe List of Tables Table 1: Comparison of operating measures between 2015 and 2017

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Table 2: Key financial performance measures of easyJet between 2015 and

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2017

1. Introduction and the Organisation

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Page 3 of 21 The primary objective of this report is to produce a report of an airline currently in business in the aviation industry, describing its current products and markets, marketing strategy, and value proposition; analysing its financial and economic performance; analysing its macroeconomic environment; and providing recommendations for two scenarios based on the analysis. Therefore, this report has selected easyJet plc, which is a low-cost European point-to-point airline. EasyJet was founded by Sir Stelios Haji-Ioannou in March 1995. Based on strong values of safety, simplicity, one team, integrity, passion, and pioneering, easyJet is now the second-largest European low-cost carrier (LCC) based on passenger numbers after the Irish airline Ryanair. The company uses a cost advantage model, which is based on the development of strong number one and two network positions, excellence in customer and operations, adoption of data and digital strategy, development of new revenue streams, and employment of the best people within the industry. EasyJet is based at London Luton Airport.

1.1. Products and Markets EasyJet offers a single class all-economy layout, which has three types of seat arrangements, such as standard seats, up-front seats, and extra legroom seats (easyJet, 2018, Figure 1). In addition to the standard fares, easyJet offers FLEXI fares, easyJet Plus, and Flight Club programme (Figure 2). The company also sells snacks, foods, drinks, and gift items on board; however, it does not offer in-flight entertainment like music or movies.

Figure 1: Seating categories and prices (CAPA, 2013)

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Figure 2: Product categories of easyJet (own compilation based on easyJet, 2018)

EasyJet flies to 132 destinations and operates 802 routes in 31 countries, including Europe, Morocco, Egypt, and Israel (easyJet, 2018). Figure 3 shows that the company has broad coverage in the southern and western Europe, focusing more on key holiday destinations (Morris, 2018). EasyJet occupies number one position in 11 airports and number two position at 6 airports (Figure 4), covering 300m people within an hour drive of an easyJet airport. Overall, easyJet’s main markets are: the UK, France, Italy, Switzerland, the Netherlands, Portugal, and Spain.

Figure 3: Routes and network of easyJet (easyJet, 2018)

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Figure 4: Market position (based on Morris, 2018)

1.2. Marketing Strategy The initial marketing strategy of easyJet was very different from the traditional airlines and it was based on ‘making flying as affordable as a pair of jeans’, urging the travellers cutting out the travel agents (Beynon-Davies, 2013). From its inception to April 1998, easyJet’s bookings were made through telephone, removing the commissions for the travel agents. From April 1998, the company developed its website easyJet.com, which has removed the costs of call centres. According to Sagittarius (2015), at present, easyJet’s marketing strategy is based on digital marketing strategy, addressing three areas of marketing, which are: 

Attracting customers: EasyJet ensures that its customers know, like, and understand the brand and the company’s offerings.

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Improving conversations: EasyJet’s website supports 14 languages and attracts more than 364m visitors from 221 countries each year (Sitecore, 2018).

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Exploiting the existing: Existing customer relationships are totally explored through segmented communications.

According to Sagittarius (2015), in relation to marketing strategy, easyJet also uses a number of marketing channels, which are: 

TV advertising: Raising brand awareness.

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Website: EasyJet’s website generates approximately 200,000 bookings per day.

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CRM: easyJet’s customer relationship management (CRM) is done through content marketing, which inspires customers for flying again.

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Mobile marketing: easyJet has embraced mobile marketing through apps and mobile technologies.

1.3. Value Proposition A value proposition is a statement that states the benefits a product or service will provide to the customers, particularly by being different to or better than the products or services provided by the competitors (Financial Times, 2018; Rigby, 2011). Being a LCC, easyJet has a simple value proposition – point-to-point travel at cheaper prices as opposed to the conventional carriers that fly on similar routes. To keep the prices low, easyJet has removed some conventional frills, which facilitate easyJet increasing turnaround time. In recent times, the company has focused more on the business travellers by offering frequent flyer card and has targeted an age group that has more disposable income for taking cheaper air travel. EasyJet wants to see itself at the centre of youthful summer getaways and easy city breaks (Morris, 2018). To differentiate itself from other LCCs, easyJet offers good customer experience at attractive prices through digital innovations (McDonald, 2015).

2. Financial and Economic Performance Analysis Table 1 shows the operating measures of easyJet for the financial year 2015, 2016, and 2017. Seats flown and number of passengers grew by 16% and 17% respectively in the financial year 2017 over 2015. The ASK and RPK also increased by 14% and 16% in 2017 over 2015. The total number of aircrafts, the total number of routes, and the total number of airports also increased by 16%, 17%, and 1% in 2017 over 2015. However, the utilisation of operated aircrafts (hours per day) declined by 2% in 2017 over 2015. Additionally, on-time performance and overall customer satisfaction declined by 5% in the financial year 2017 over 2015 due to increased disruptions, adverse weather conditions, and continuing congestions at London Gatwick airport (easyJet, 2017). Although the total number of employees increased by 16% in 2017 over 2015, the employee engagement declined by 8% in 2016 over 2015, reflecting a challenging year for easyJet.

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Table 1: Comparison of operating measures between 2015 and 2017 (easyJet, 2016 and 2017) (*base year 2015; **comparison between the financial year 2015 and 2016)

Table 2: Key financial performance measures of easyJet between 2015 and 2017 (easyJet, 2016 and 2017) (*base year 2015; **comparison between the financial year 2016 and 2017)

Table 2 shows the key financial performance measures of easyJet during 2015-2017. Total revenues increased by 8% in the financial year 2017 over 2015. Passenger revenues and ancillary revenues also increased by 6% and 18% respectively in the financial year 2017

Page 8 of 21 over 2016. However, operating costs increased by 28%; operating profit, profit after tax, and ROCE declined by 41%, 44%, and 49% respectively in the financial year 2017 over 2015. The main contributing factors that increased the operating costs are increased airports and ground handling costs, crew costs, selling and marketing costs, and other costs (easyJet, 2017). Similarly, the main contributing factors for the decline in these three key measures are the unfavourable movement from foreign exchange due to the Brexit referendum, the acquisition of 23 new aircrafts, dividend payout of £162m, and an increased borrowing of £215m in the financial year 2017 (easyJet, 2017). Although net cash at the end of the year declined by 18% in the financial year 2017 over 2015, net cash increased by £144m in 2017 over 2016. Overall, the 2017 financial year was quite challenging for easyJet in terms of key financial indicators.

3. Analysis of Airline Industry 3.1. PESTEL Analysis An industry’s environment can be analysed through the PESTEL (Political, Economic, Social, Technological, Environmental, and Legal) framework (Rahman et al., 2015).

Political Factors: Rahman et al. (2015) noted that a number of geopolitical events have affected the aviation industry in recent times. For instance, easyJet (2017) noted that the UK’s decision to leave the European Union (EU), which is generally known as the Brexit, would have considerable effect on the airline as the company enjoys considerable benefits from the Open Sky Regulation of the EU. In addition to the UK’s political decision to leave the EU, other factors, such as political instability in Russia and Turkey and continuous threats of terrorism in principal European cities have considerable impact on air travel.

Economic Factors: Mhlanga and Steyn (2017) noted that the world’s economy affects the aviation industry considerably. The World Bank (2018) has predicted that the global economy will grow at 3.1% in 2018 and the PwC (2015) predicted that the global economy will grow at an average of 3% till 2050. The price of jet fuel was reduced by 68% in 2017 compared to the price of 2011 (CAPA, 2017, Figure 5). The reduction has considerable effect

Page 9 of 21 on LCC’s profitability as fuel cost constitutes 40% or even more of the total cost (CAPA, 2017), and the CAPA (2017) has predicted a rise of fuel price by 10% in 2018. However, due to the Brexit, easyJet is vulnerable to currency fluctuations (easyJet, 2017). Consequently, a strong or weak British pound sterling against the Euro and the US dollar can affect the profitability of easyJet significantly.

Figure 5: The price of jet fuel between 2011 and 2017 (CAPA, 2017)

Social Factors: Mhlanga and Steyn (2017) noted that the growing income of the global middle class has increased the demand of aviation industry. Additionally, based on the research carried out by the Boston Consulting Group, Chandrappa (2014) noted that the Generation Y or the Millennials (people born between 1980 and 1999) will shape the aviation industry as the Millennials’ spending on business travel would increase by 50% by 2020. However, the baby boomers’ (people born between 1946 and 1964) declining spending on business travel has negatively affected the revenues of the legacy carriers (Mhlanga and Steyn, 2017).

Technological Factors: Porter and Kramer (2011) noted that the significant use of technologies in aviation industry has affected the performances of the airlines considerably. For instance, airlines have introduced various digital technologies, such as mobile platforms and apps that can help customers in booking their tickets and seats, lounges, hotels, and transportations, and in other activities like boarding pass (easyJet, 2017).

Environmental Factors: Environmental factors like climate change, air quality, surface access, and noise can be critical for the aviation industry (PwC, 2017). For example, the

Page 10 of 21 European Commission (2017) noted that air quality and the expansion of Heathrow airport in the UK is a burning issue. However, increasing technological improvements will eliminate the environmental impacts considerably for the aviation industry (European Commission, 2017).

Legal Factors: Mhlanga and Steyn (2017) noted that the rules and regulations in the air travel industry have become more stringent than ever before. They also noted that the industry requires regulatory and antitrust authorisations when it comes for mergers and acquisitions. Furthermore, the industry has been prone to adopt increasing security measures for regulatory compliances in recent times (Mhlanga and Steyn, 2017).

3.2. Five Forces Analysis Porter’s five forces framework analyses the degree of competition within an industry, facilitating the development of business strategy (Johnson, 2014).

Figure 6: Porter’s five forces analysis (adapted from IATA, 2011, p.22)

Page 11 of 21 Based on Figure 6, the bargaining power of suppliers in the European aviation industry is high due to strong labour unions, insulated competition from the global distribution systems, concentrated oligopolies in engine and aircraft manufacturing industry, monopolies at airports, and increased concentration for the service suppliers (Babic et al., 2017). The bargaining power of buyers is also high due to low switching costs and commoditisation of air travelling (Babic et al., 2017). The threat of substitutes is medium due to high competition from high speed train and web-conferencing technologies (Babic et al., 2017). Additionally, the threat of new entrants is high due to easy access to markets and distribution channels as well as constrained incumbency advantage (Babic et al., 2017). Finally, competition within the existing competitors is also high due to economies of scale, restrictions on consolidations, competition on prices and schedules, and commoditisation of indirect distribution channels.

3.3. Internal Analysis EasyJet’s internal analysis can be done through SWOT (strengths, weaknesses, opportunities, and threats) framework to develop the company’s strategic capabilities (Johnson et al., 2012). Figure 7 shows the internal analysis of easyJet.

Figure 7: SWOT analysis of easyJet (Alim, 2011; CAPA, 2013a; easyJet, 2016, 2017; Fedosova, 2016; Geiger, 2016)

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4. Two Scenarios From the PESTEL, Porter’s Five Forces analysis, and SWOT analysis, it appears a number of factors that need to be considered as risk factors and should be addressed accordingly by easyJet and the Brexit issue and competition within the aviation industry issue appear as the most crucial.

4.1. Scenario 1: The Brexit After the triggering of the Article 50 in March 2017, the UK is set to leave the EU in March 2019, but the impacts of the Brexit remain mostly uncertain as negotiations unfold (Barclays, 2017). The Brexit will have severe impact on air connectivity, the aviation value chain, and regulations of aviation industry (Independent Transport Commission, 2017), leading to changes in airlines business models and corporate structures, exit of the EU’s single market, disruptions in the EU’s aviation industry for regulating air traffic, having EU ownership and headquarters inside the new EU, and disruptions for the air traffic control organisations (Vargas et al., 2017). Theoretically, there are three possible scenarios for the UK’s aviation industry due to the Brexit (Warner, 2018), which are: 

Option 1: No agreement between the EU and the UK (hard Brexit);

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Option 2: Bilateral trade agreement between the EU and the UK (flavours of Brexit); and

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Option 3: The UK’s membership of the European Common Aviation Area (soft Brexit).

In Option 1, the UK needs to revert to the policies implemented by the World Trade Organisation (WTO) after Brexit, introducing standard rules of the ICAO (International Civil Aviation Organisation). Therefore, this option would be the most devastating for both the EU and the UK as the British aviation industry is totally aligned with the EU. Option 2 can be adopted by implementing bilateral trade deals. However, this process can be very timeconsuming. Finally, by retaining the membership of the ECAA (European Common Aviation Area), the last option is the most favoured as it minimises the disruption although the UK will have to adopt all the regulations imposed by the EU.

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4.2. Scenario 2: Competition From Porter’s Five Forces analysis, it has been noted that the global aviation market is highly competitive and easyJet competes with both the flag carriers, such as IAG Group (owner of the British Airways), KLM, Lufthansa, and Air France as well as with other LCCs, such as Ryanair, Norwegian, Vueling, and Wizz Air. For example, ANNA Aero (2016) noted that easyJet competes with Ryanair, Vueling, Norwegian, and Wizz Air in 42, 34, 22, and 2 airports respectively (Figure 8). Consequently, the main competitor of easyJet is Ryanair, which is also cheaper compared to easyJet (Fehrm, 2017, Figure 9).

Figure 8: Head-to-head competition in LCC market (ANNA Aero, 2016)

Figure 9: Price comparison among LCC in Europe (Fehrm, 2017)

Page 14 of 21 Although similar to other LCCs, easyJet has adopted a business model, which is characterised by now frills low cost, point-to-point service, low overheads, operate from primary airports, standardised fleet, rapid turnaround, low complexity, online services, and hedge fuel cost (Aljahira Capital, 2013), the recent demise of Monarch Airlines and other struggling airlines like Air Berlin and Alitalia have raised the question regarding their business model (He, 2017). The fierce competition forces the LCCs to benchmark their prices against each other, which can reduce their profit margin considerably, and this was observed in case of Monarch Airlines. From the financial performance analysis, it is also noted that that easyJet’s profit after tax has declined considerably in recent times.

5. Conclusion and Recommendations Based on the analysis, this report has found out that the Brexit will have considerable impact on easyJet and the current competitive market has created very challenging environment for easyJet in Europe’s low-cost aviation market. Consequently, this report has provided a number of recommendations for easyJet, which are discussed in the following sections.

In relation to Brexit, easyJet has already established a new airline – easyJet Europe in 2017, which would be headquartered in Vienna, Austria (easyJet, 2017). This newly established company will enable easyJet to operate its business both Europe and domestically within the European countries when the UK will leave the EU in March 2019 regardless of the outcomes of the EU-UK aviation agreement. Although the initial problem of the Brexit has been solved by establishing a new company and acquiring the AOC (Air Operator’s Certificate), easyJet needs to restructure its share capital as the current EU laws state that an EU member state can permit an airline to operate its services if the company’s share capital is owned and effectively controlled by the EU nationals (Topham, 2017). Easyjet’s main shareholder is its founder Sir Stelios Haji-Ioannou, who has both the British and Cypriot citizenships (Topham, 2017), and consequently easyJet needs to class his share as either British or EU-owned.

In relation to competition, eas...