Introduction: The European Airline Industry
The first European countries to start the use of air travel were: Finland, Belgium, France, Germany, U.K., and the Netherlands. The oldest carrier in the union was KLM (Brueckner e tal 2003). This carrier started operating in 1919 and it’s still operating using its original name. The European union airspace underwent deregulation in the early 1990’s, a move that since then has had a quite significant effect on the structure of the airline industry. This effect has greatly been a shift towards “ budget” airlines which operate on shorter routes (Brueckner e tal 2003). This has seen the growth of small and new airlines such as Easy Jet and Ryan air at the expense of traditional airlines such as KLM. Another trend witnessed in the industry recently is a privatization of the national airlines. Examples of national airlines recently privatized are Easy Jet and British airways (Brueckner e tal 2003).
The regulating bodies for the carriers include: Euro control:- this is the European organization for the safety of Air Navigation. It’s a civil cum a military organization with 34 member states (Button e tal 2003). The core mandate of this organization is to ensure the development of a seamless, pan- European Air Traffic Management (ATM) system which will support the present as well as future challenges of the aviation industry (Button e tal 2003). The organization is faced with one key challenge which is to cope with the forecast development in air traffic while at the same time ensuring a high degree of safety. The organization involves itself in the strategic and tactical flow management as well as controller training. The organization also ensures the development of a state of the art, safety proofed technologies and procedures as well as the collection of air navigation fees (Button e tal 2003).
The European parliament is charged with the responsibility of monitoring issues related to air traffic control. It is also responsible for the implementation of a uniform transport and safety policy. The parliament has played a very crucial role in the prevention of air accidents (Button e tal 2003). This has been largely through the blacklisting of those carriers which do not meet EU safety standards (Button e tal 2003).
The European community’s internal air transport market liberalization was began in 1987 and took full effects in 1997 (Dennis 2005). This has changed the situation in the sector since it has seen the creation of a single integrated aviation market. The implication of this liberalization is free market entry and unrestricted setting of airfare as well as service level by airlines (Dennis 2005). Despite many constraining factors, liberalization has promoted greater competition and this has greatly benefited passengers as well as shippers. The liberalization effects have been felt in the industry structure, output, route level competition, and air travel fares (Dennis 2005).
Industry structure:– liberalization has seen the removal of barriers to entry. This has encouraged innovation and entrepreneurship in this sector. the number of EC airlines offering scheduled services has also increased following this liberalization (ELFAA 2004). Between 1992 and 2002, an increase from 124 to 131 was registered. Liberalization has also seen a very high degree of exit with only slightly above half of the airlines present at the start of 1993 still operating scheduled routes under their own code today (ELFAA 2004). Only 64 out of the 144 airlines which were the pioneers of the industry are currently operating (ELFAA 2004). This tread is attributed to high competition occasioned by the liberalization. The liberalization has also seen the emergence of the so called “no frills” airlines. These airlines have taken more than 11% of the total market and are still expanding rapidly. They are largely based in the UK and Irish republic. In 2001, these airlines carried about 25% of the traffic from UK to other European member states (European Commission [EC] 2001).
Output:– output has skyrocketed since liberalization took full swing in 1997. The number of scheduled intra-EU routes served especially international routes has increased by 75% (EC 2001). Liberalization has also impacted on the domestic routes served with an increase of about 12%. Liberalization has clearly facilitated the maturity of domestic markets with seats and aggregate seat kilometers increasing by 41% and 43% respectively since liberalization started. Seats and aggregate seat kilometers on international routes has also significantly increased (EC 2001). Seats have increased by 96% while seat kilometers have increased by 129% on international routes. This is a clear indication that output has greatly increased as a result of liberalization (EC 2001).
Competition at the route level:– liberalization has occasioned a lot of competition at the route level. For instance, the number of international scheduled routes with three and above carriers has more than trebled. Domestic routes have doubled as a result of the entry of a second carrier (historically, only national carriers have operated domestically (European Commission [EC] 2006).
Liberalization has also had an impact on fares. Between 1992 and 2000, overall average inflation in EU member states was about 19% (EC 2006). Over this period, fares rose by 32% and 26% in the business and normal economy classes respectively. Promotional fares however decreased by 13% over the same period as a result of liberalization the inflation notwithstanding (EC 2006).
The strategy employed by low cost carriers is clearly cost focused strategy. This is a strategy well explained by Porter in his generic model. Other strategies in this model are the differentiation and niche strategies (Fawcett e tal 1998). The cost focused strategy is a strategy that involves reducing the features of a product to a minimum level so as to keep costs low. Low cost airlines are characterized by: high seating density and high load factors, uniform aircraft types, direct booking through internet or call centre, lack of frills like free food/drinks, lounges or “air miles” , simple pricing management systems, use of secondary airports to reduce charges as well as turnaround times, and high profitability than established carriers (Fawcett e tal 1998). This clearly shows that, low cost carriers use porter’s cost focused strategy. Ryan air as a low cost carrier relies on a very simple firm organization as well as logistic principles. It offers point to point connections from smaller airports such as Dublin and Stansted (Fawcett e tal 1998). The reason for this is to capitalize on the cheap landing tax as well as handling fee offered by these secondary airports.
Ryan air’s fleet basically consists of one type of aircraft that operates more hours a day with the aim of maximizing the utilization of the fleet on daily basis than the traditional carriers (Fawcett e tal 1998). Ryan air was actually the first airline to engage low cost airlines in Europe. Its airline tickets are half the price of traditional carriers such as British Airways. Its sales promotions are also equally cheap with prices as low as $0.01 (Franke 2007). This is a situation that has completely changed people’s perception of air travel. They no longer take it as the preserve for the rich (Franke 2007). To succeed in implementing cheap air travel, Ryan air adopted a technique which involved eliminating unnecessary services offered by traditional airlines. These include: free meals, as well as mile collecting scheme. It also offers frequent flights and uses paper free air tickets to reduce expenses. Ryan air’s strategy of relying on internet bookings trough its website has helped it keep operating costs low since this has helped eliminate the cost of agents. Internet bookings account for 96% of the total bookings (Franke 2007). Ryan air has however tried to introduce aspects of differentiation in its operations. Differentiation strategy is a strategy that entails charging higher prices for those features that add value to a product. This introduction has been witnessed by the airline’s introduction of a business class as well as frequent flyer program (Franke 2007).
Porter’s five forces theory can be used to analyze the case of Ryan air since it explains the effect of influences on competing within an industry. Analyzing Ryan air from the buyer perspective, it offers a basic commodity to a large number of buyers (Franke 2007). This is a market type which is not likely to have powerful individual buyers. This allows Ryan air to dictate its terms. Owing to the fact that customers’ decision making is largely influenced by price as opposed to the product features, this gives the company higher chances of acceptance in the market (Franke 2007). Ryan air’s acceptance by product consumers is further enhanced by the fact that its quite punctual and its rate of flight completion is ahead of that of its competitors. Its strategy of making use of small airports with less air traffic minimizes chances of delays hence enabling it stay ahead of its competitors operation wise (Franke 2007). Ryan air though faces criticism about one of its policies that requires the disabled to pay for wheel chair transfers. This policy has been ruled by many as illegal and discriminatory. This policy is as a result of its cost-focus strategy which makes it hard to introduce features for a minority group. Such an introduction would largely eat into its profits (Franke 2007).
Suppliers:– the key suppliers of Ryan air are airports. Regional airports have subsidized the airline to cushion it against the impact of rise in oil prices. The airlines subsidize Ryan air since its flights to the region have ensured economic benefits for the region. Airlines which use major airports do not get such a subsidy hence are forced to add levy on tickets to offset rise in oil prices (Gillen e tal 2004).
Entry to the market:– this requires finances to set up an operation hence calls for investor support. The alternative to this in the event of no investor showing up is to grow gradually by first leasing a plane or buying a cheap , small plane. The latter is the path that Ryan air took at its initial stages. It began by buying a fifteen -seater plane (Gillen e tal 2004).
Substitute products:– low cost airlines will ever remain attractive to consumers since alternatives such as trains are disadvantaged by the presence of seas and other water bodies between destinations (Gillen e tal 2004). Rivalry:- Ryan air’s good strategies have enabled it stay ahead of its competitors. These include avoiding any operations which go out of Europe’s main airports. This has enabled the carrier provide a superior product since they’ve successfully managed to avoid delays through this (Gillen e tal 2004).
Ryan air and Easy Jet use different types of cost reduction models. As explained , Ryan air focuses majorly on secondary airports which charge less. Ryan air also focuses on new leisure market with no direct competition. Ryan air therefore uses a model that focuses on costs as opposed to markets (Gillen 2005). The airline aggressively persuades suppliers and airports to reduce charges. Ryan air service to secondary airports is done at a low frequency. Easy Jet on the other hand focuses on primary -high cost airports at high frequencies. It focuses on existing, business as well as leisure and new markets while embracing competition from existing carriers. Low cost carriers use either of these two models (Gillen 2005). Other carriers though tend to be offshoots of existing major carriers, a fact that makes them lack the cost advantages enjoyed by Easy Jet and Ryan air (Gillen 2005).
The emergence of low cost carriers in Europe has had a significant impact mostly on the airports where they operate from. Gatwick, Luton, and Stansted have acted as the cradle for these low cost carriers. The number of routes served by these low cost carriers from these airports has increased significantly from 1997 to date. This increase can therefore be attributed to the low cost carriers (Gillen 2006). The social impact occasioned by the emergence of low cost airlines is also worth noting. Air travel before this emergence was made for the rich and was largely viewed a s such. Low cost airlines have though changed this trend since they are quite affordable. In 1997, about seven million UK citizens travelled abroad while in 2006, this figure rose to about 38 million (Gillen 2006). This affordability has therefore served to promote social inclusion for the people of the region. Their personal mobility has also been enhanced. This has in turn boosted the quality of life of Britons as well as their workforce mobility and flexibility. We can therefore argue that efficiency in the industrial sector has been boosted by low cost carriers since they are now enabling the majority of citizens reach their work place in time and therefore work for longer hours in a day. It has already been noted that one major crisis in the transport sector that the low cost airlines have solved is travel delays (Gillen 2006).
The social arena has received a major boost from the low cost airlines. This is because, they have provided a vital link to family and friends overseas (Gillen 2006). At stansted for instance, about eight million passengers are flying overseas to visit their friends and relatives every year. Low cost carriers can be said to have enhanced globalization as more and more people are now able to visit other countries and experience different cultures (Gillen 2006). The economy has not been left out as far as sectors which have benefited from low cost airlines are concerned. The impact is positive. This is largely because, airports have expanded to accommodate the increased numbers of people opting for air travel as a result of the reduced fares (Gonenc 2000). This airport expansion has translated to job creation. Its estimated that about 15000 new jobs have been created in Stansted over the last few years following the introduction of low cost carriers and more jobs are expected to be created as the airport continues to expand (Gonenc 2000).
The airline industry ahs seen the introduction of newer engines . This coupled with the fact that air travel has become more efficient as a result of competition has led to lower environmental damage per passenger kilometers flown (Gonenc 2000). If the airlines replace more of the old planes with new more efficient ones, then the negative impact on the environment is bound to decrease. One should also note that, as more people opt for air travel, the rails are becoming less busy. The number of people using cars has also reduced. This means that the pollution which would have been produced from these means of transport has become less. The environmental impact of low cost airlines is therefore positive (Gonenc 2000).
Low cost carriers normally start from low and new airports. Small airports have little traffic and therefore waiting time for such planes is lower (Gillen 2005). An airplane requires air conditioning and power throughout the waiting time. This therefore means that, the lower the waiting time, the lower the energy required to carry out this. Additional energy is also required by the road traffic that transports people to the airports(Gillen 2005) . The more the passengers a certain airport can accommodate, the more the number of vehicles required to transport them to the airport and therefore the more the emission from the vehicles. This means that, since low cost airlines operate from small airports holding a small number of passengers, the environmental pollution associated with them is therefore very little. Its worth noting that airlines incur expenses in clean up as well as in fines in the event of pollution. The lower the pollution therefore, the lower the fines and cleanup expenses and therefore the lower the negative economic impact(Gillen 2005) .
The emergence of low cost carriers has affected negatively other means of transport in Europe. An interview carried out recently on the beneficiaries of the new concept indicated that about 6% of those who travel through the low cost airlines would have otherwise used train, 15% would have used car while 71% would not have travelled at all. This shows that other travel means are bearing the brand of this new trend (Gillen 2005).