Business analysis of uk no-frills airline industry

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1.0 EXECUTIVE SUMMARY

The UK airline industry has experienced dramatic developments during the last decade due to the emergence and growing influence, or in other words popularity of ‘low-cost carriers’ (no- frills). No-frills carriers have had a major impact on the aviation industry and are assumed as having revolutionised the short-haul market and redefined the way people travel by offering reduced fares, more choices on airlines, airports and destinations to passengers.

     

2.0 AIM  

This research work aims to analyze the “no-frills revolution” in background, to understand better the impacts it has had on the aviation industry, on transportation and on the public, and to replicate on those issues that seem most significant to the current state of the UK aviation sector and likely future trends. The report is going to take into consideration factors such as;

  • How has the growing influence of ‘no-frills’ carriers affected the traffic growth, passengers, operational framework of the airline industry?
  • What are the environmental influences and the changing trends within the industry
  • What are the factors (political, economical, social, technological, legal and environmental) affecting the industry.
  • What is the competitive nature of the UK no-frills industry using Porter’s Five Forces framework.
  • What are the possible areas of potential growth within the UK no-frills industry

The report is aimed at analysing the low- cost airline industry with reference to three major companies which are; Ryan air, Flybe, Easy jet.

3.0 BACKGROUND OF THE UK AIRLINE INDUSTRY (before the introduction of no-frills airlines)

     According to Hopkins & Jowett (1999), the aviation industry has played a significant role in UK’s transport sector and the economy as a whole. Based on facts and figures from their report in 1998, the aviation sector handled more than 160 million passengers of which a quarter of them were business passengers. Furthermore, 2.1 million tonnes of freight including spare parts for cars and fresh fruits were transported to and from the country. Around £35billion of UK exports in 1998 came from freights (20% of all UK exports) with an estimated £41billion accounting for imports. In addition 1.4% of the overall GDP came from contributions made by the aviation sector to the economy.

      In terms of employment, the aviation directly and indirectly acted as a mean of reducing unemployment by creating jobs for people within the economy. The sector generated an estimated 180,000 jobs in the UK which represents 0.8% of the total UK employment sector. About 60% of employees in the aviation sector worked for airlines as flight crew and check-in staffs and maintenance while 10% worked directly worked as airport operators, and security. The remaining 30% worked in airport concessions such as retail outlets, HM customs excise and immigration. The table below illustrates the jobs supported by aviation.

Figure 1: jobs supported by aviation

Figure 2: The growth of aviation in the UK (jobs)

Figure 3: The growth of aviation in the UK (value added)

Prior to the emergence of ‘No-frills carriers’ which occurred as a result of the liberalisation of the market in the early 1990’s, the UK airline industry was dominated by two major types of airlines which are;

  1. Traditional scheduled carriers
  2. Charter carriers

Traditional scheduled carriers

The characteristics of traditional scheduled carriers included; fixed ‘scheduled’ departure times, little competition on routes in which they operated and there was no tradition of cost-cutting i.e. reducing costs was not really significant in determining prices offered to customers. Traditional scheduled carriers offered various range of services such as food, drinks in relation to different ‘class’ of services i.e. First class, Business class, and economy. They operated mainly in primary airports of destination countries also flight bookings are done through intermediaries such as travel agents.

Charter carriers

These carriers were aimed towards serving the ‘tour’ industry. Holiday companies would arrange holidays with charter airlines which included flights to and from their destinations. Tickets are not sold to individuals by the charter airlines instead; bookings are done on a large-scale from holiday companies. Charter carriers achieved economies of scale by focusing on cheaper operation costs and higher density seating. They also claimed to have laid the foundation for ‘low-cost’ carriers.

3.1 The UK no-frills industry

Figure 4: domestic and international routes of UK no-frills airlines

No-frills carriers are airlines primarily characterised by its low fares with a focus on reducing operating costs. This type of airline mainly operates on a point-to-point network and offers no-frills services. A study conducted in 1998 by the UK CAA (civil aviation authority) described the advent of the no-frills model as a ‘third way’ way in European aviation.      

     The emergence of Ryan air and Easy jet led to the development of no-frills carriers in Europe. Ryan air, an Irish carrier was the first no-frills carrier to evolve. The company re-organized its operations in 1991 and adopted the no-frills model using the same technique provided by the US no-frills carrier ‘Southwest airlines’ which have been in existence since 1971. Ryan air started its no-frills operations by selling seats on flights between Ireland and UK focusing on some regional UK airports such as Luton while Easyjet started its operation in 1995 offering flights between Luton and Scotland.

     The market became deeply competitive with new entrants such as British airway’s Stanstead-based subsidiary ‘GO’ which was purchased by easy jet in 2002 and also KLM UK’s new brand ‘buzz’ which was launched in 2000 and was purchased by Ryan air in 2003. That wasn’t the end of the intense competition; British European also re-launched itself by adopting the no-frills model in 2002 as ‘Flybe’.

     Ryan air and Easyjet grew dramatically in the late 1990’s focusing on cost reduction and cheaper flight tickets and also extending their current operations beyond existing markets to cover routes across Europe.

     In Europe, No-frill carriers’ benefit from a 28% in market share which is a significant increase from the 13.6% occupied in 2002. IATA (International Air Transport Association) projects that the market share of No-frill carriers in the UK will increase to 35.7% by 2010.

     According to Mintel reports, in the past two years, one in three British adults have flown with a no-frills airline. About 19% have flown with easyJet and 14% with Ryanair. The table below illustrates the use of no-frills airlines as at March 2007.

Table 1: Low-cost airline flying experience, March 2007

3.2 COMPETITIVE ARENA

The major players of the UK no-frills airline market include;

  • Ryanair
  • Easyjet
  • Flybe

Table 2: Scheduled passengers carried, 2002-06

Table 3: UK scheduled load capacity (seat km used as part of seat km available), 2002 and 2006

Ryanair

Ryanair boasts to be Europe’s first low-fare airline which was originally set up by the Ryan family in 1985 with a share capital of £1 and an estimated staff of 25. The company’s first route was launched in July with daily flights on a 15- seater Bandeirat aircraft, operating daily from Waterford in the southeast of Ireland to London Gatwick.

     Ryanair began to grow steadily at the beginning of the early 90’s with a passenger volume of 745,000 in 1990 to 3.7million in 1997 flying the Dublin- London route on an average of 76.1% compared to other airlines.

     In January 2000, Ryanair launched Europe’s largest booking website  accounting for an average of 50,000 bookings a week. Furthermore, the website  granted passengers the lowest cost car hire, hotel accommodation, and travel insurance. It also became the first airline to sponsor the sky news weather reports.

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     Due to the launch of the website, the passenger volume had increased to a whooping estimated 7million passengers covering different routes across Europe. The picture below illustrates the route map across Europe.

Figure 5: Ryanair’s routes across Europe

Source:

     In 2002, Frankfurt Hahn became Ryanair’s second European base with the launch of 10 new routes to Ireland, UK, Norway, France and Italy. Due to this new improvement, the airline out-competed other low-cost airlines by attracting a higher percentage of German passengers (millions) because the airline offered the lowest air fare to ...

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