Easyjet Company Ltd: a strategic analysis

Introduction and company background

The business environment in most markets is volatile and requires that organisations be constantly alert of the changes in order to remain competitive. This is especially the case where a business operates across different national economies with each market exhibit distinct characteristics. The knowledge of foreign markets is crucial for success in international expansion and successful management of international subsidiaries (Hill, Jones and Galvin, 2004). The same applies to the domestic markets. The airline industries in the UK, Europe and other emerging markets have faced several changes characterised by a growing preference for low cost carriers. This change has been buoyed by the global economic crisis that saw many organisations yield suppressed profits hence making more clients opt for low cost airlines. Easyjet is a British company that was founded in 1995 with an aim of providing low cost services (Thomson, 2010). The company has subsequently grown to be one of the leading low cost carriers in the world with a global market share of 0.6% (OneSource, 2012). The company considers the option of expanding to the Indian market as one of the ways through which they can achieve their growth objectives. This paper evaluates the company’s strategic positioning in the UK and Europe and outlines the factors that must be considered before a decision is made on expanding to the Indian market.

Competitive and environmental analysis in the UK

The UK is accounts for 12.9% of the European airline industry with Germany (12.5%), Spain (10.6%), Italy (9.5%) and France (6.8%) being the other main players in the region (Datamonitor, 2011). The airline industry in the UK can be divided into two segments: international and domestic. The international segment accounts for 81.7% of the industry. The UK airline industry has been shrinking from its 2006 levels with the industry recording 104.9 million passengers- down from 116.8 passengers in 2006 (Datamonitor, 2011). This contrasts from observations made in other European countries French and German airline industries growing at 2.1% and 5.8% respectively between 2006 and 2010. However, it expected that the UK industry will grow at a rate of about 4.4% to reach a value of $ 26.4 billion by 2015 (Datamonitor, 2011). This rate is lower than the projections of industry growth for French and German industries which have been projected to grow by 6.5% and 8% respectively.

In the industry, airline companies are the main players. The main suppliers are the aircraft manufacturers, fuel suppliers and skilled employees. The main customers are individuals seeking to use the airline services with other customers being business clients wishing to charter the planes (Thomson, 2010). Overall industry rivalry can be said to be strong as the market is dominated by large players with economic growth and other macro economic challenges contributing to this rivalry.

The fact that the buyers in the industry are numerous and disintegrated makes them less influential and unable to influence pricing. However, the customers are increasingly aware and are also price sensitive (Datamonitor, 2011). Considering that the cost of switching from one player to another is low, buyer power is raised significantly. However, price competition can be eased through differentiation by allowing extra comfort and entertainment on the flights. Buyer power can also be controlled by companies offering loyalty schemes in order to discourage switching to other industry players (Starkie, 2008). On the whole, buyer power is moderate. Suppliers for aircraft are few and are able to wield immense power in terms of influencing pricing. Airlines have to get into contracts with suppliers with significant switching costs in terms of fines associated with the termination of contracts. Boeing and Airbus have a de facto duopoly in the supply of jetliners with low capacity jets being supplied by companies such as ATR, Bombadier and Embraer (Onesource, 2012). There are no substitutes to most of these supplies. The main suppliers of fuel are also few and can significantly influence the price of fuel. In 2011, 29% of the operational costs in the industry are attributed to fuel costs (Datamonitor, 2011). There are no viable substitutes for the fossil fuel and this makes the industry vulnerable whenever the suppliers alter their prices unilaterally. Supplier power is therefore very high.

The threat of entry is curtailed by the high level of input needed to set up operations. One would need to purchase new planes and secure operation slots in the airports around. Vast resources are also needed to fund initial operations especially when it is considered that the business may run for a while before it can break even (Thomson, 2010). It also takes time before an effective distribution system can be set up. There is also the problem of the already established airlines monopolising the take-off and landing slots in the available airports and this acts as a barrier for entry (Starkie, 2008). New airlines are therefore left to scramble for the unattractive slots. Besides, one must appreciate that the established airlines already have a good brand name and new airlines are not likely to gain customers in the market with ease. The overall threat of entry is weak.

The substitutes to air transport are road, rail and water transport. The road and rail options tend to pose the highest threat of substitution. However, customers are forced to consider the tradeoffs between cost and the amount to time to be wasted by such substitutions. The growing sensitivity to environmental degradation has also seen customers begin to avoid air transport due to the serious impact it has on the environment. The extent to which an airline service can be substituted depends on the distance covered and the cost with statistics indicating that about 18.3% of air passenger volumes can easily be substituted by car, bus or rail (Datamonitor, 2011). The threat of substitutes can therefore be assessed as moderate.

The players in the industry range from large airlines like British airways and Virgin Atlantic to low cost carriers such as Ryanair and Easyjet (Thomson, 2010). The level of rivalry is heightened by the fact that industry players have similar services in the different categories. The increasingly price sensitive customers are on a constant look out for fairer deals and this pits industry players against each other in price competition. There are also low levels of diversification which further leads to heightened rivalry. The switching cost is low with customers not facing significant losses when switching from one brand to another. Exit costs are also very high in view of the fact that most of the investment outlays are specific to the airline industry (Datamonitor, 2011). Having considered all the elements in the industry, rivalry in the UK industry can be categorised as very high.

Despite the low level of attractiveness of the UK airline industry, Easyjet can still maintain a strong performance. By focusing on their low cost low price strategy, the airline can continue to serve the increasingly informed and price sensitive clientele. However, with the high level of rivalry, it is expected that the company would at best experience modest rates of growth. This makes it necessary to evaluate other markets with an aim of setting up international operations. An ideal market would be one with lower levels of rivalry and with higher rates of industry and economic growth rates.

Environmental analysis and entry into a foreign market

The first process in the internationalisation process should be characterised by an environmental audit of the target market (Hill, Jones and Galvin, 2004). Such an audit is done to compare such a market with the domestic market with an aim to establish whether or not it would serve the interests of the organisation. It’s presumed that this stage comes after an internal analysis has been conducted using the known frameworks with an aim to understand the capabilities that could be used to yield a competitive advantage in the market. International expansion could either be for survival or for the achievement of organisational objectives (Hill, Jones and Galvin, 2004). For instance, a company that cannot cope with rivalry in the market may choose to survive by entering markets where the levels of rivalry are lower.

Analysis of the foreign market should be done on two levels: the industry level and at the macroeconomic level. Industry analysis is useful in helping the organisation understand what strategies would be useful in guaranteeing their survival. It evaluates the strategies employed by the competitors, the characteristics of the customers, specification of suppliers and other factors relevant to the daily operations of the organisations (Porter, 1996). The most appropriate framework for this analysis is the Porter’s five forces model which considers the following: Market rivalry among current players, buyer power, supplier power, threat of entry and threat of substitutes. Some important facts about the Indian airline industry as outlined below:

The period between 2006 and 2010 has been characterised by strong growth in the Indian airline industry in terms of passenger numbers. The industry grew by 30.4% in 2010 and this translated into a passenger volume of 80.8 million with statistics indicating that the annual growth rate stood at 14.1% between 2006 and 2010 (Datamonitor, 2010). This makes its performance much better than that experienced in the UK. As opposed to the UK market where international segment accounts for over 80% of the industry, India’s domestic segment accounts for 74.6% of the industry’s revenue (Datamonitor, 2010). India continues to have a high economic growth rate which is expected to be accompanied by a reduction in poverty levels and average improvements in the per capita income. The Indian airline industry is characterised by strong industry rivalry with large market players dominating the market. The main market players have a low level of differentiation meaning that the services offered are quite similar (Datamonitor, 2010). This heightens competition based on price. Rivalry among industry players is heightened by the fact that the switching costs are very high. A player in the industry cannot change their line of business without incurring heavy sunk costs. As can be seen in the sections below, supplier power and market rivalry among current players is high. Other elements such as buyer power, threat of substitutes are moderate with the threat of entry being low (Datamonitor, 2010). This implies that the overall assessment depicts the Indian airline industry as characterised by moderate rivalry. 

The second stage of enquiry needs to be the macroeconomic analysis. This involves the analysis of factors that affect the entire economy or a number of industries. Understanding the macro environment allows organisations to understand the level of risk involved upon entering the given markets (Hill, Jones and Galvin, 2004). The PESTEL model is a very useful tool for guiding a balanced analysis of the macro environment. The model outlines the political, economic, social, technological, environmental, and legal factors as the factors that must be considered. The knowledge of the environment enables business executives to make a decision on the extent to which localisation and globalisation strategies are to be applied (Barney, 2010). The application of localisation strategies refers to the modifying the practices of a subsidiary to suit the unique characteristics of the host country. Where the market characteristics are different, localisation becomes more advisable. For instance, the practices embraced in administration and operation in the parent market could either be imported directly into the subsidiary or modified to suit the unique characteristics of the host country (Haberberg and Rieple, 2007). Similarly, advertisements and financial management practices would have to be in line with market preferences and existing legislative frameworks.

Political factors refer to factors such as political stability and the political systems in the country and their philosophy in relation to facilitating private enterprise (Haberberg and Rieple, 2007). This is where risks of nationalisation of organisations arise. India is said to be relatively stable with private enterprises known to run with minimal interference from the authorities. Closely related to political factors are the legal factors which refer to the taxation regimes and other regulations aimed at controlling the conduct of business. India has been known to be at the forefront in the creation of environments conducive for investment (Datamonitor, 2010). This factor has greatly contributed to India’s attractiveness to FDI with organisations expected to thrive upon entry. However, this also poses a threat of entry with additional inflows of investments expected to heighten competition. Economic factors refer to the GDP growth rates, per capita incomes and others. The rate at which the economy grows determines how fast organisations can grow with emerging economies known to present the highest growth prospects due to their impressive rates of growth. The economic growth rate in India has remained at about 8% for the last decade and this is much higher than the growth rate seen in the developed economies (Thomson, 2010). This means that Easyjet could grow at a faster rate in the Indian market buoyed by the expected high rates of economic growth.

Social factors refer to customer preferences and demographics. With a population of over 1 billion people, India has the potential to have a vibrant airline industry as is evident from the strong growth in the number of passengers in the period between 2006 and 2010. Over 40% of this population can be classified as middle class with the Indian standards depicting them as persons with reasonable levels of disposable incomes (Thomson, 2010). This implies a likelihood that the growth in the number of passengers is to rise significantly in the future.

Once the industry and macro environment analyses have been concluded, the organisation must evaluate its competencies in line with the assumptions of the resource based view of the firm. The aim of such an evaluation would be to match the opportunities arising in the environment to the core capabilities with an aim to establish how the organisation can yield a competitive advantage under the circumstances. Decisions on the entry approaches as well as initial marketing and branding efforts should also be made. Uppsala’s internationalisation theory recommends an incremental approach to entry (Johanson and Vahlne, 2009). The company could consider getting into joint ventures to last for the first few years before capitalising on their knowledge and exposure to launch full operations in India.

Conclusion

The industry rivalry in UK airline industry is very strong and is characterised by players scrambling for market shares. The low cost segment is equally crowded with industry players such as Ryaniar and Easyjet competing aggressively to attract and retain additional market shares. This makes it necessary for the company to look to other markets to help achieve its growth objectives. Among the popular targets for international expansion are the emerging markets such as India. Such markets are characterised by high levels of economic growth which in turn helps in lessening the level of industry rivalry. Moreover, India possesses a very high population whose members are increasingly entering the middle income level hence making them potential customers of the low cost airlines such as Easyjet. Caution must however be taken to ensure that decisions are not made based on assumptions. Intensive enquiries to diagnose the risks involved should be carried out and informed decisions made on whether to internationalise or not. The analysis should also be comprehensive enough to inform the company on the appropriate modes of entry and on the best strategy when it comes to the choice on whether to pursue a globalisation or a localisation strategy.

References

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