- The 'macro-environment'
- The 'micro-environment'
- The 'internal environment'
Figure 1 Source: http://
3.0 Situation Review: The European Airline Industry:
The European air transport industry comprises more than 130 airlines, a network of over 450 airports and some 60 air navigation services providers.
The European Short-haul Airline sector is one of the world’s most competitive air travel markets. With the amount of passengers flying within and out of the U.K. expected to increase from 180 million in 2000 to 500 million in 2030, there appears to be huge demand in this industry.
4.0 Segmentation of the European Airline Industry:
The airline market in Europe has traditionally been divided among five types of carriers: large international carriers (e.g. Lufthansa, Air France), small nationals (e.g. Iberia, A Italia) and their local market competitors (e.g. Span air, British Midland), regional companies, and charter carriers. Research suggests that by 2010, this industry structure will undergo fundamental change, leaving only three primary segments as highlighted in the diagram below:
Figure 2 Source: AEA, IATA, Mercer analysis
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Network carriers/alliances—each of the major international carriers is likely to solidify its position as an alliance leader. Most regional and second tier airlines will likely enter into alliances with the network carriers as feeder/shuttle services to the air traffic hubs and to provide complementary services. According to Mercer one-third of flag and second tier carriers will exit the market.
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Low-cost airlines will gain significant share of the intra-European air market for leisure travelers and cost-conscious business travelers.
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Charter carriers will see only marginal growth, and are likely to face market share losses to low-cost carriers on intra-European routes. They will need to strengthen their integration with leisure groups to protect their niche package tour market.
5.0 European Airline Industry vs. US Airline Industry:
The diagram below views the European airline industry in relation to the US airline industry; it shows how the US carriers receive state funding unlike those in the European Union. This may distort competition within the industry.
Non-reimbursed costs: Hand-outs from US Government:
800 million Euros USD 3 billion
Figure 3 Source: IATA Legal Symposium 2004
Figure 3 highlights how security costs cause distortion of competition between European and US carriers. A future transatlantic competitive landscape that is heavily weighted against European airlines will add further pressure to the problems already faced through intra-Europe competition.
6.0 The Macro-environment:
The macro-environment may be defined as the collection of uncontrollable forces and conditions facing a company or industry. The external marketing environment can be audited in more detail using approaches such as:
- SWOT Analysis
- PESTLE Analysis
Each of these frameworks will be used as tools to analyze the macro-environment of the European airline industry. The SWOT analysis will focus on the No-frills sector to evaluate the robustness of the low-cost business model.
6.1 SWOT Analysis: Low-Cost Airline Industry:
The SWOT analysis is used to analyze the internal and external view of the low-cost airline industry with a view to analyze the growing threat of the no-frills model upon the traditional industry.
6.2 PESTLE Analysis: The European Airline Industry
Figure 4 Source: www.nvq5.com/businessreview/ images/pestlediag.gif
Political Analysis
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Open-Skies Agreement: In 1997, the European aviation became a highly competitive single market. Discretionary powers of the national authorities have been curbed allowing airlines to enjoy greater freedom to set fares, open new routes and determine what capacities to offer.
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Expansion of the EU in 2004: Moves toward a federal government for the EU will likely result in attempts to create competition on a Europe-wide basis as trade barriers and anti-competition barriers are broken. Eastern Europe is heralded as an emerging market in the process of being exploited by the airline industry.
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Industry Monitoring: The European Commission continues to monitor the industry and investigate to make sure competition is fair; an example includes the monitoring of Ryan air subsidies at Charleroi Airport.
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Expansion restrictions: European Legislation on air and noise pollution will restrict the possibilities of airport expansion projects e.g. Heathrow expansion scheme.
Economic Analysis
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World business: Air transport is essential for creating jobs and opening up new market opportunities. Over 40% of world trade of goods (by value) is carried by air.
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Rising real income: There is a strong relationship between rising real incomes and demand for air travel. Providing accession countries enjoy economic growth and development once inside the single market, there is every chance for existing airlines to exploit market opportunities. Economic growth is the main driving force of the airline industry.
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Increases in GDP: Rises in GDP have a positive affect on the industry, and this is exuberated by the high income elasticity of demand.
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Recession: Of all the airlines the low-cost ones are the best positioned to with-stand recession.
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Growth in travel demand: Demand for air travel in Europe increased three-fold between 1980 and 2000 and is set to increase even more. Figure 10 shows how the European travel market is set to grow, in RPK (Revenue Passenger-Kilometres) in relation to other world-wide travel markets; the graph shows a growth above the world average of 5 per cent between 2002 and 2022 for the European market.
Figure 5 Source: http://www.airbus.com/pdf/media/gmf2003.pdf
Social Analysis
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Loss in passenger confidence: As a result of the tragic events of September 11th and the floods in Central Europe in 2002 there has been a need to rebuild confidence in air travel.
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Lifestyle changes: The aging population and the rising number of people buying holiday homes abroad will have a positive affect on air travel growth.
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Air Traffic Control: Problems due to congestion of the skies will affect future consumer safety concerns.
Technological Analysis
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Internet for travel bookings: Airline websites are a crucial part of the whole industry, they accounted for 58% of all air travel bookings in 2000, compared with 53% in the previous year.
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Improved aircraft and jet technologies: New aircraft technology is forcing hub-airlines to change, both posing extra challenges and offering potential solutions. The fact that the latest versions of single-aisle jets, such as Boeing 737-800, have much longer ranges than those 10 years ago means that low-cost airlines, which usually opt for a fleet using one type of aircraft, can now contemplate some long-haul routes.
Legal Analysis
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Air Passenger Duty: The Department of Transport and the Treasury are proposing to raise air passenger duty from £5 to £10 on economy tickets within Britain and from the UK to Europe.
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Compensation Laws: Air travelers whose flights are delayed, overbooked or cancelled will be legally entitled to generous levels of compensation following a landmark European Union deal: a blow to low-cost airlines.
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Safety: Despite the rapid and constant growth in air traffic, accident rates have been reduced by over 50% during the past 20 years.
Environmental Analysis
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Air traffic: With the number of passengers using UK airports forecast to increase the European Commission is putting huge emphasis on the airline industry to lower the noise and emission pollution and adopt a more environmentally friendly technology. Pollution cost UK £1.4 billion in 2000, producing 30 million tones of CO2 (5% of total), expected to rise to 55million tones (10/12%) by 2020.
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Tax exemption on Kerosene: If the industry continues to grow at is predicted rate, its contribution to greenhouse gases will be 75% according to the Royal Commission on Environmental pollution (RCEP). Tax exemption on kerosene provides no incentive for airlines to use efficient aircraft.
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Airport expansion: Expansion poses environmental issues requiring, for example, increased support infrastructure e.g. roads.
7.0 Conclusions and Recommendations
Since the unprecedented events of September 11th the European air travel industry has been slowly recovering; analysts are forecasting that BA will finish the year until the end of March with profits of around £600m, close to the record level of 1996. But the rising travel and revenue figures merely reflect a belated recovery from a trough. Even if the travel numbers are rising, the airlines have to offer huge discounts to fill seats.
However, BA appears to be the exception; Lufthansa has plunged into a 980 million Euro loss. Network airlines everywhere are facing the same challenge due to the fact that they were designed for the time of state regulation and ownership.
As the flag carriers try to adapt to a single market with free competitive forces, competition has sharply moved in from the low-cost airlines with their economical business processes such as selling seats over the internet and flying their aircraft more hours each day.
Two things matter to airlines - the amount of empty seats on their planes and the cost of getting those planes into the air. Reducing those two factors leads to profits, and in recent years, the European industry has been struggling.
The fear of terrorism and disruption in the world's aviation system has simply made things much worse. And looking to the future of European aviation, it seems that the issues associated with the environment will be addressed severely, possibly leading to taxation on the one thing supporting airline growth; Kerosene. Furthermore, the matter of over-capacity, which has lead to a lack of taking-off and landing slots, could hinder further growth and drive up prices for the low-cost airlines.
While the full-service carriers are struggling to get back to the traffic levels they enjoyed in 2000, the budget airlines are growing by more than 10 per cent a year. The expansion of the EU in 2004 will provide vast opportunities for the low-cost sector but for the budget airline industry to thrive; low-cost really does have to mean low-cost.
Summary of abbreviations
ACI EUROPE – Airports Council International – European Region
(www.aci-europe.org)
AEA – Association of European Airlines (www.aea.be)
ATAG – Air Transport Action Group (www.atag.org)
ERA – European Regions Airline Association (www.eraa.org)
EUROCONTROL – European Organization for the Safety of Air Navigation
(www.eurocontrol.be)
IATA – International Air Transport Association (www.iata.org)
Observers
Research Portfolio
Company Reports
Easy Jet Interim report March 2003.
Internet Sites:
This is the website for the Association of European Airlines and provides information and statistics regarding the European airline industry.
The airbus website provided useful forecasts for the airline industry as a whole and as well as for the European sector. I was able to look at predictions in travel demand.
This website provides up-to-date business news; I obtained an Interview with Stelios Haji-Iaonnou, John Rossand 28th January 2003, which gave me an insight into easy Jet’s strategy from the perspective of its founder.
This is Easy Jet’s official website. The web site shows flight and destination information. The web site also provides a general overview including information about the company, its history and its strategy which can be used to gain insight into the low-cost airline operating model
- http://www.economist.co.uk
The economist website contains business articles relating to the European airline industry. One of the main articles from the Economist was entitled,
‘Silver linings, darkening clouds’ 25th March 2004
This article focused on the future of the airline industry, including issues relating to market consolidation.
This is the website of the guardian newspaper. I found articles on the airline industry through the website’s search engine entitled,
‘Landing us in it’, 6th December 2003
This article reviewed the environmental issues surrounding the airline industry.
‘Easy Jet plans £2.7bn expansion’, 8th Jan 2002
This article discussed the future of Easy Jet compared to other low-cost airlines including expansion plans.
This website provided lots of information and forecasts about the European Airline Industry, including safety report.
This site contains up-to-date travel news and contains various articles about the airline industry which can be accessed through a search engine. I used the article entitled,
‘Battle of the low cost airlines’. August 2003
This article analyses Easy Jet and Ryan Air in terms of passenger numbers and revenues
I used the article entitled,
‘Early birds get full service before prices take off’, 30th September 2003
This article reviewed the position of low-cost airlines relative to competitors including British Airways.
This is the official website of the World Tourism Organization. It enabled me to research Europe as a tourist destination. It provided information on the current political and economic situation. I used the article entitled,
‘Global Tourism Trends and Prospects for Central and Eastern
European Countries’, Shlevkov, 13 December 2002
Research Papers:
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Mintel Report ‘Travel Agents – UK’, June 2002
This report looks at the use of travel agents in the holiday market sector. It discusses amongst other issues, the increase in demand for Independent travel and how this may affect the holiday market through the eyes of a travel agent.
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Mintel Report ‘Holidays – Coping with a Crisis – UK’, Jan 2002
This report discusses repercussions of events such as the 11th September Terrorist attacks on the US on the travel and holiday industry including the effects on low-cost airlines.
Textbooks
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Electronic Commerce B2C Strategies and Models; Elliot, 2002, John Wiley &Sons Ltd
This textbook contains analysis of strategies undertaken by the low-cost airline Easy Jet, allowing me to understand its key business drivers.
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International Marketing Strategy; Isobel Doole and Robin Lowe, 1st edition, 1999, International Thompson Business Press
This textbook contains the context, techniques and strategies involved in successful international marketing. It provided me with a good background to better direct my research and understanding
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Principles of Marketing, Brassington, F and Pettitt, S, 3rd edition 2003, Prentice Hall
This book provided me with an overview on the principles of marketing. It contains case studies which aided my understanding into certain marketing principles. The book is a good point of reference as it puts theory into a practical context.
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Marketing Theory, a student text; Michael J Baker, 1st edition, 2000, International Thompson, Business Press
A collection of original contributions on the subject of marketing theory, from specialists.