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Airline is a large and growing industry, and it is also the most fiercely competitive sector. It facilitates international trade, world economy growth, tourism and international investment. Therefore it becomes one of the major industries in the world.
However, airline as a fast growing industry, which has significant relevance with external environment and could directly affect the profitability and operation. PESTEL analysis gives a certain overview of the different Macro-Environmental factors that the company has to take into consideration (Wikipedia 2005). This assignment will through PESTEL analysis to point out the major external environment drivers influencing airline industry and explain the future change of these driving forces. World airline industry is divided into major and low cost airline, either in US or in Europe.
However the business models for both are radically different. This assignment also will focus on low cost airline and analyse the business model, competitive strategies, and future prospect in European airline industry. PESTEL ANALYSIS The analysis of the external international business environment is designed to identify the strategic opportunities and threats it faces; these are the key forces of change in the business environment that are likely to result in a change of strategy either positively by presenting new strategic growth opportunities to the firm, or negatively by posing threats to the continuation of present strategies.
PEST analysis is a simple method of carrying out an environmental audit these influences in order to identify which factors pose these strategic challenges (Robin John 1997). PESTEL analysis (Political, Economical, Social, Technological, Ecological and Legal) is simple business audit tool, which gives a certain overview of the macro-environment factor for an industry or a firm. These factors which airline industry embroiled in will threaten to impact its profitability and operation. Political and economical are the key drivers behind the airline industry. Political
Drawing on the political factors in PESTEL performed on airline industry. There are three major components that have bought change to this industry. Those are Deregulation, War and Terrorists. Deregulation The US airline Deregulation Act 1978 and Air transportation Deregulation in Europe 1978- 1997 which have bought an evolutionary change to the airlines. In the aftermath of deregulation, the development of airline industry rises dramatically. Especially for the low cost airline, there are hundred of them were found in the US. One of the winners was Southwest Airline- today American’ s most profitable airline.
In Europe, low cost airline carriers such as Ryanair and EasyJet are expanding very rapidly. However the monopolies like British Airway and Lufthansa got more landing right and privileges from government before liberalisation. War After few years of deregulation in the US the world airline industry recovered. However, Gulf war was strongly hit the airline industry. From 1990 to 1993 the air carriers suffered four years of losses totalling over US$ 22 billions (The World Airline Industry Case Study). People were afraid of flying, which led to a decline in passenger traffic. Terrorists
The world airline industry was severely shaken by the terrorist events of 11th September 2001, and this is directly result in a catastrophic fall in personal air travel. After that, the security level was increased at all the airport, that result in high cost put into airline industry, due to more personnel and further expensive security applications. More security leads to increase waiting times, makes air transportation less attractive. Economical Economical can be another major factor for the airline industry. Airlines’ profitability is closely tied to world economic growth and international trade.
Due to the rate of war and terrorist event, the growth rate of economy dramatic slowdown, capacity in Europe outstrips demand, which gains the low yield to the airline industry. The airline industry is now faced with significant capacity overhang and high cost platform, especially in the US. The report shows that, two major airlines American Airline and United airline losses of more than US$ 3billion for 2002, which makes world airlines get struggle. Moreover, oil prices increasing also affecting their profits. The price of fuel increasing which lead to the more money will put into ticket.
Therefore the passenger demand will decrease. In recent, especially for the period from this year Januarys to July, the oil price rose sharply. According to the US Air Transport Association (ATA) six airlines have been forced to close down at the beginning of Airpal this year. ‘There has certainly been an acceleration of shutdowns in the past month or so,’ a spokesman for ATA said, adding that 10 carriers had been forced to close since 25 December. ‘This is all to do with the cost of jet fuel. Carriers simply cannot afford it. ‘ (Report from James Doran, May 2008)
Increasing oil cost not only apply for the airline industry, but also affect other industry such as public and private transport, all the heavy and light industry etc. Social The social sector, which are strongly from employment perspective and safety. After September 11th 2001, not only American airlines struggled but also most European airlines laid off thousands of people during the past year. A report states that British Airway cut 7,000 jobs, which is 12. 5% of its total workforce ,and followed by KLM. Lufthansa increased the working hours in ground personnel in Germany.
However, at the same time low cost airline were attracting more traveller, such Ryanair and easyJet. Moreover, the safety was most people considered after September 11th 2001, because people were afraid of flying. Therefore there is decline on air travellers. Technological Technology in airline industry is fast moving, however it very costly. Alliance gives the opportunity to the major airline to offer customers a global route coverage. Shard check- in system and online ticket book also give the airline industry significant support. Ecological
Ecological factor consist of recycling, the level of pollution and attitudes to the environment. For the airline industry, pollution tends to be very important. In the early of this year, London Heathrow Airport announced, third runway and the sixth terminal will be built up and they will be operated by 2020. The Department for Transport claims building a third runway will increase the number of flights to and from Heathrow from 473,000 a year to 700,000-plus by 2030, and generate an extra 181 million tonnes of carbon dioxide emissions, also noise pullution will increase. The Independent, By Ben Russell, Political Correspondent, 2007) Therefore, not only Heathrow airport sholud beware of emission, but also for the whelo airline industry should be considered. Legal Legislation for the airline consist of employment laws, company law, tax law and their regulation. Redundency, Landing right, health and saftey, that are all the airlines should be concidered as legal factor. Future Development on Airline Industry Gulf war, world trade centre disaster, Iraq war, which several time hit the airline industry.
Economical and political factor has always been and continues to be the two major external environmental drivers influencing the airline industry. From 2004 until present, airline industry recovered and it become more attractive for investor. The most recent, Indian famous company Kingfisher successfully entered airline industry. However the only factor could have significant change is technology which includes development of internet and new aircraft will be used in airline industry. The future development for the major airline will pay more attention on alliances with other companies.
Secondly, price differentiation, which to access different target group of customer. Moreover, the major airline should have direct link with business area, which low cost airlines do not have. This is can be an advantage for the major airline. Low cost airline is growing too fast leads to the loss of their competitive advantage. Security and cost cuts might cost their customers. Therefore they should improve their image concerning security, services, quality and alliances with other companies, in order to attractive more customers. Business Model of Low Cost Airline
Low cost airline has distinct business model, which is different from major airlines. It will offer the minimum standards of service and very low price for the shot distance flight. This model perfectly fit into Poter’s theory, which states that company offering a low price product to a small and specialized group of buyers or the company seeks a cost advantage. The unique business model of low cost carrier contents: • A single passenger class • Single aircraft (airbus A320or boeing737) • Unreserved seating • Secondry Airport • No-frills service Point to point and short-haul flight and more frequency • Online ticket booking • Fast turnaround time That is the business model for cost airline to achieve cost advantage. The low cost airline structure can be defined by three key components, which are simple product, position and low operating cost. (MERCER Management Consulting, 2002, See Figure 1) [pic] Figure1. LCAs Business Design Source: MERCER Management Consulting, 2002) Simple product: ‘no frills’ extra payment for food and drink on board, all the service are kept as simple as possible.
Position: for low cost airline they positioned on non-business class, short-haul and point to point traffic with high frequencies, using secondary airport. Low cost operating: low wages, low landing fee, low costs for maintenance to ensure the cost advantage. Competitive Strategy Porter (1980) has described three general types of strategy that are often used by businesses. These three strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension and looks at the size and which part of the market you will target.
Strategic strength is supply-side dimension and focus on strength or core competency of firm. In particular he identified two competencies that he felt were most important: product cost and product differentiation (Figure2). For low cost airline more relate to the cost leadership. [pic] Figure2 Porter’s Generic Strategies (Porter, 1980) Cost Leadership: low cost airline has a distinct business model, which maintain their low cost advantage over the major airline. The cost even less than 50% compare with full-service carriers (figure3) Figure3 Cost advantages of low cost carriers on short-haul routes Cost item cost per seat reduction ( a discount from the operating cost per seat of a | |conventional scheduled carrier) | |Input | |Lower flight and cabin crew salaries/expenses -3% | |Outsourcing maintenance/ single aircraft type -2% | |Product design | |Use cheaper secondary airports -6% | |Minimal station costs and out-sourced andling -10% | |No free in-flight catering -6% | |Higher seating density -16% | |Process design | |Higher aircraft utilization -3% | |No agents’ commissions -8% | |Reduced sales/reservation costs -3% | |Smaller administration costs -2% | |Total cost reduction -59% | Source: Rigas Doganis, The Airline Business in the Twenty-first century, London. 2001, p. 150 To achieve the low operating costs per passenger, low cost airlines need to have as many seats on board as possible, to fill capacity as much as possible, and to fly the aircraft as often as possible. Further more, some of the low cost airline such as Ryanair run the unique ticket less phone and internet booking system to reduce the agencies cost. It saves cost for both company and passengers.
However, low passenger comfort, questionable security standards and uncertain consequence of future expansion may loss their competitive advantage. Future Prospects for European Airline Industry Low cost airline as part of airline industry has significant leading position in price and cost which the major airline can not compete with. In Europe, most successful low cost airlines have operated primarily in domestic, it currently hold one third of the airline industry market share. The major independent low cost airline in Europe are Ryanair and easyJet. Subsidiary of a legacy airline are Go, Buzz, Jetstar, Valuair, and Tiger. However it also facing the challenge from major airline and such business strategies was copy by them like British Airway’s low cost airline merged in 2002 August.
Secondly, there are around 50 low cost airlines in Europe and still new players enter in low cost competition, it will result in the supply over the demand, therefore some of the player will be out of the competition. Moreover, according to Poter’s theory, which state that company offering a low price product to a small and specialized group of buyers or the company seeks a cost advantage. This determinant that low cost airline have limited dimension. It is very hard for them to expend by adding long-haul flight and increase the quality of the service. Ryanair announced to expend their business by adding international long-haul flight, it seems quite risky, and further expansion will increase the landing fees and other cost even in secondary airport.
To sum up, low cost airlines should maintain the existing business model and take the cost advantage to compete with major airlines. However, by increasing the size of low cost airline will losing their cost advantage, therefore low cost airline will hard to keep in the future. Conclusion The outlook for the airline industry is one of aggressive growing sector. External environment could directly affect its profitability and operation. PEST analyse through Macro-Environment identify the major external environment drivers are Economical and political factor, which influence the air line industry. Technology in airline industry is fast moving, it will bring the changes in the future. The expert forecast that the air traveller will doubled by 2010.
The future for airline industry is bright and it also holds many challenges. The emergence and growth of no frills, low cost airline have radically altered the nature of competition within the industry. For low cost airline should continue maintain the existing business model by reduce the cost to improve their product. Bibliography John, R. Cox, H. Grimwade, N& Letto-Gillies, G. 1997 Global Business Strategy. London. International Thomsion Business Press. P179 James Doran, 2008 New York, Gardians Fuel costs kill off a US airline every week MERCER Management Consulting, 2002. Impact of Low Cost Airlines – Summary of Mercer Study Porter, M. E. 1980.
Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, Free Press. Porter, M. E. 1996. What is strategy? Harvard Business Review, November-December, 61-78 Rigas Doganis, The Airline Business in the Twenty-first century, London. 2001, P150 Thomas, G. 2005. To Frill or Not to Frill. Air Transport World, October, 34 Ben Russell, The Independent Political Correspondent, 2007 http://adg. stanford. edu/aa241/intro/airlineindustry. html (access date 20 /10/08) Pest Analysis, www. netmba. com/strategy/pest (access date 22/10/08) Wikipedia, 2005 Pest Analysis. http://en. wikipedia. org/wiki/PEST_analysis (access date 22/10/08)