Porter’s “Five Forces” and their Application to easyJet
To analyze the airline industry, we will apply Porter’s five competitive forces.
In today’s airline industry, there is no simple or unique strategy to follow, whereas we deal with a rather complex business sector, with a series of variables to consider. The aim is to establish the most appropriate strategy and implement into the airline market on a long-term basis.
In the air transport industry, the policies of traditional, well-established European airlines are practically similar, in terms of aircraft, seating configuration, flight frequency and pricing. Driven from Porter (1985), easyJet took advantage of a major problem of traditional airline firms, substitution that occurred when companies of another industry can fulfil airline customers’ needs in a better way. EasyJet avoided partly substitution, trying to sell cheaper to the customers that preferred a more economic way to travel. What is more, in modern aviation the “Barriers to Entry” into the business market are extremely loose and the restrictions are almost inexistent, facilitating the airline of Mr. Haji-Ioannou to emerge into the major market of Europe. By all means, this situation inevitably empowers customers, who in their turn have a variety of choice and a great bargaining power. Many of them choose a price flexible carrier that will allow spending their money elsewhere.
Apart from customers’ power, Porter (1985) argues that a firm should not depend on a single supplier, because this fact seriously damages the companies he supplies, decreasing their cost benefit. GDS (Global Distribution Systems) are the basic suppliers of airlines’ reservation systems. The arrangement between them is that GDS is paid through a booking fee, payable on each booking made, considered a great cost even for traditional carriers. UK firm easyJet; has constructed from the beginning a radical strategy of direct selling, avoiding the travel GDS booking fees and travel agencies commission system. It was the appropriate policy for a low-cost airline, which measured these expenses to the benefit of the firm. (Shaw, 2004)
Overall, Porter’s five forces model is considered a valuable source of information, in view of the airline’s strategy decision making, considering a range of contradictory factors.
Rivalry among other airline industries
~ In the UK, the main competitor of easyJet is Ryanair, especially when Ryanair bought one of the smaller firms in the market, Buzz. Nowadays, there is a debate about which firm is the largest. Other competitors are MyTravelLite, Virgin Express and Air Berlin.
~ Some tour operators sell air only scheduled seats to reduced prices. (Feldmann, 2002)
Marketing Mix
Price
- “low cost airline service”
- discounts for tickets booked online
Product
- “point-to point” air services
- links to all easyGroup websites
Place
- Telephone reservation system
- Internet booking system
Promotion
- Advocates internal marketing
- Very humorous and attention-catching campaigns
- Slogan: “the web’s favorite airline”
SWOT Analysis
Internal analysis
Strengths
↑ The brand name “EasyJet” is distinctive.
↑ Lower training and supervisory costs due to usage of two aircraft models.
↑ Low fares, thus greater seat occupancy and high efficiency in operations.
↑ Innovative and strong leadership.
↑ Strong e-business.
↑ The flights to main terminal airports throughout Europe makes the company attractive.
Weaknesses
↓ The focus on price and convenience (two drivers of growth) reach their natural limits, thus differentiation seems difficult.
↓ Inadequate long term strategy for expanding outside Europe (Asia, Russia and Middle-East).
↓ Lack of attracting business travellers.
External Analysis
Opportunities
♦ EU member nations’ entrepreneurial activities will be a source for business and economy travel.
♦ Vertical and horizontal expansion should be an important perspective for EasyJet’s growth in maturing markets.
♦ Fleet growth from acquisitions.
Threats
● Higher costs due to the increase in environmental taxes.
● Other ways to conduct business, less expensive, from other companies.
● The capacity and cost-cutting tactics by competitors which could affect passenger traffic on popular routes.
(Jobber, 2004)
PEST Analysis
In order to examine the external macro-environment in which EasyJet operates, we will use the PEST analysis which scans the Political, Economic, Social and Technological environment (Johnson et al., 2005).
Evaluating Resources and Capabilities of EasyJet
The vital resources of a company consists of its productive characteristics; whereas capabilities refer to the firm’s corporate dimension and explain what a firm is capable of doing. Resources can be classified on three types: tangible, intangible and human capital.
According to Grant (2007), tangible resources are “the physical assets of an organization such as plant, labor and finance”. In easyJet’s existing strategy, the physical assets were:
- The concentration on hubs with little direct competition, such as Luton, an airport based near the city center of London. Firm’s headquarters are also placed in Luton airport.
- In 2007, easyJet presented a fleet expansion of 31 aircraft deliveries, in terms of Airbus arrangement (introduction of A319, easyJet Switzerland).
Concerning financial criteria, easyJet:
- Beginning at September 2002 with the Go acquisition, 84% of the fleet was financed through bank leases.
- Long-term gearing from banks and re-finance the purchase of its equipment.
- Airbus Contract will finance the airline’s resources and cash flow.
Apart from tangible resources, it is essential to examine intangible capabilities, which are “non-physical assets such as information, reputation and knowledge” (Grant, 2007). Technology is a key characteristic of easyJet’s corporate culture, as the firm was implemented in the airline market through Internet and practically introduced online selling tickets (e-ticket), with no use of traditional paper ticket. Its reputation became global through its web site.
“Human resources are the productive services that human beings offer to the firm in terms of their skills, knowledge, reasoning and decision-making abilities” (Grant, 2005). Last but not least, human resources functioned within the general innovative philosophy of the airline company:
- All the employees were outsourced, technically supported by other airlines, in terms of check-in personnel and pilots.
- By all means, personnel recruitment is organized through Internet. Departments’ autonomy in recruiting employees.
- Lack of superior class (business class) in its flights, and increase of economy seats from 109 to 149.
- Cash management. With the attitude of an aggressive start-up, easyJet has not paid a dividend so far, preferring to save profits to fund future expansion.
- Resource Utilization. EasyJet has the highest load factor and keeps its aircrafts flying longer (known as “sweating the assets”) rather than its main ‘no-frills’ competitors.
3.1 Distinctive Capabilities of EasyJet
The sense of capability reflects the image of a firm, as considered by both staff and customers. It is also the ability to become better than rivals using distinctive corporate attributes. Capabilities grow through use, and the speed they grow is critical to success (Kay, 2003).
EasyJet’s capabilities focus on the implementation of a yield management and sell a great amount of tickets through Web. The power as an Internet retailer, was an additional advantage to its business profile. A series of EasyJet capabilities are:
- No selling through travel agents (no ticket commission).
- No paper tickets. Replacement with e-tickets and reduction of costs by issuance.
- No main airports.
- No catering service on-board, cut off meals in customer service.
3.2 EasyJet’s Value Chain Application
A firm’s success depends on how efficiently it combines the activities in the value chain of Porter, making correct suggestions as to what the customer is willing to pay for the firm’s products and if that amount goes beyond the costs of the value chain activities (Macmillan et al, 2000).
- Primary activities of EasyJet( Porter, 1985):
- Inbound Logistics: Airbus Contract, low inventory costs due to JIT supply system.
- Operations: Fame through the cultivation of a strong brand name. Low-cost Philosophy.
- Outbound Logistics: Stable Customer support, no frills policy, high brand awareness.
- Marketing and selling management: Well-known brand that can grow even bigger. EasyJet uses Internet for promotion and advertising.
- Service: Customers are aware of what they are buying and acknowledge the firm’s philosophy and policy to cut in-between costs.
- Support activities of EasyJet depict an overall organisational structure and consist of purchased inputs:
- Technology Development: Customers’ demand for constant development and research.
- HR Management: CEO (board of directors) in EasyJet are sensitive towards environmental and social issues, trying to educate the personnel.
- Procurement: Long-term relationship with suppliers
- Infrastructure: The company foundations have all the characteristics for further development. Competitive strategy.
- The key characteristics of EasyJet add value to the firm’s strategy and enable the company to attain sustainable competitive advantage.
4. EasyJet’s strategies & evaluation
4.1 EasyJet’s Stakeholder Analysis
Stakeholders are individuals or groups who affect, or can be affected, by the company’s actions. EasyJet’s stakeholders are divided into two categories, the external and internal stakeholders. The external stakeholders are consisted of the customers, suppliers, subcontractors, press, government and lenders. In addition, the internal stakeholders are the employees, marketing department, and financial director.
4.2 EasyJet’s Stakeholder Mapping
Stelios Haji-Ioannou and his family remains the major shareholder owning 22% of EasyJet. EasyJet’s stakeholders are plotted upon the power/interest matrix according to their level of interest (expectations) and extent of power that can be applied in each stakeholder group (company’s strategy determination), as shown in the above figure :
Source : Johnson et al., 2005.
4.3 The Generic Strategies Matrix
Figure 1 Generic strategies matrix
In the case of EasyJet, after implementing cost focus strategy, the company managed to develop competitive advantage which was one of the basic factors for easyJet’s success. In order to achieve and sustain cost leadership strategy the company should locate and exploit all resources of cost advantages. As one of the pioneers in the low cost airline market, EasyJet based its business on a number of principles :
- Limited on-board service. Stelios’s idea was to implement his customers’ the feeling that flying with a plane is like taking a bus. It is necessary that there should be no catering on-board, if the whole process is speeded up.
- Use of regional airports, for point-to-point flights, with low landing fees which reduced turnarounds and allowed more intensive use of aircraft.
- Absence of ticketing with use of simple ticket fares and a policy of no refunds.
- No business class seats, therefore maximizing the aircraft’s capacity. Many business people who are frequent fliers on short hauls do not care much about the comfort rather than flexibility.
-
Outsourcing which provides flexibility and reduces the investment in assets. EasyJet is used to subcontract its crew, including pilots and cabin crew.
- Young employees thus lower wage costs.
- Direct marketing and Internet sales. Stelios recognized the prospective for sales on the Internet before it had become widely available. Stelios formed his customers’ purchasing habit resulting approximately 80% of all seats being sold over the Internet in 1998. For that reason, easyJet managed to lower distribution costs and is ranked amongst Europe’s biggest Internet retailers.
- Paperless operations.
4.4 Evaluation of Strategies
Johnson et al. (2005) model is used to analyze the strategic options of easyJet and if it satisfies the following success criteria : Suitability, Feasibility and Acceptability. Finally, it also evaluates the sustainability of the competitive advantage.
√ = favourable ; X = unfavourable ; ? = uncertain or irrelevant
4.4.1 Suitability
EasyJet’s existing strategy focuses on low-priced airports and targets on routes with little direct competition, building up elements of access and variety based positioning. EasyJet exploited the environmental change as a result of the EU airline market liberalization. In order to protect and maintain their current position easyJet decided to buy new aircraft which offers cost efficiency advantages across a bigger number of new routes. In conclusion, the big strategic issue is whether easyJet’s current positioning is strong enough and if the company’s existing capabilities can bring the same strategic approach on a future expansion five times the scale.
4.4.2 Acceptability
As a privately owned airline key stakeholders are reduced by avoiding shareholders. However, the banks are interested in terms of gearing thus providing the revenue flows increase. The employees are likely to have a strong input according to the company’s leanness. Finally, governments are expected to be supportive of easyJet’s approach as is encourages competition. On the contrary, some may have closer ties to “national flag carriers” who are possible competitors.
4.4.3 Feasibility
EasyJet has built up its brand following the successful recipe of a low cost airline. The cultural web of the company is not likely to see exceptional changes and create problems of managing performance. Future expansion and alliances should offer synergies while reducing the risks of additional stretching EasyJet’s present system. Financing is a key issue for this strategy as cash flows for the aircraft payment and bank loans may indicate ample financial resources. In conclusion, it depends upon the final impact on the company’s capital structure and cash flow projections.
4.4.4 Sustainable Competitive Advantage
The sustainable competitive advantage can be achieved through constant development of all range of resources and capabilities that a company owns. Moreover, it shows duration in time, facilitating as well the firm’s position in the marketplace. The features that make a competitive advantage sustainable are the distinctive capabilities that a firm might have and equally, a strong innovative corporate culture. EasyJet’s model differentiates from other cost leader firms, operating modern aircrafts, constantly renewing its fleet and increasing the intensity of its operations.
The company focus on cost per seat model, predicting the price of rivals and offering the lowest possible price in the market. Above all, EasyJet’s renowned characteristic was the innovation through Internet that practically introduced online booking services in the airline industry.
Due to the fact that safety is a top priority in passengers’ mind, EasyJet ensures success as it is considered one of the most reliable airlines. This philosophy lucks in many Cost Leader airlines, giving EasyJet the benefit of a high commercial position.
5. The future of easyJet
As Andy Harrison said while announcing preliminary results, by 2011 easyJet will terminate the use of Boeing when the contract lease ends and this will minimize the fleet cost complexity. EasyJet has four main categories of customers, business people, VFR and commuters, short breakers and long breakers therefore the designing of a network to suit everybody is essential to future success. EasyJet’s base driven strategic network is now competing with the traditional hub network. Benefits are low cost point to point flights which have clearly over passed the traditional legacy network. Soon enough easyJet will have 19 bases with aircraft flying to 80 destinations.
Figure 2 Network strategy
This action will take the network on a new level join up existing bases, access new routes with different flight patterns and eliminate some of the less profitable routes. Over the years it is expected this network optimization to deliver high revenues by designing the network around customer demands and to increase aircraft utilisation. These is also going to be faster boarding using “Speedy Boarding plus” at 34 major airports enabling passengers to access to a speedy checking-in service.
6. Conclusion
EasyJet is an airline company that operates with new aircrafts which have lower demands on fuel. This is crucial in a time when the oil prices are continuously raising so as the operating costs. Provided that easyJet will exploit its advantages to other airline companies could boost easyJet to one of key companies in the European airline industry disregarding the fact that it is a ‘no frill’ airline.
7. References
Bannon, D., 2005, “Strategic Marketing Course Notes”, Lecture notes, University of Paisley
Feldmann, J., 2002, “No more hiding places”, Air Transport World, vol. 39, Issue 8
Grant, R. M., 2007, “Contemporary Strategy Analysis: Concepts, Techniques, Applications”, Addison Wesley
Contemporary Strategy Analysis: Concepts, Techniques, Applications
Harrison, A., 2007, “Preliminary results”, 2007, easyJet.com
Hattee, J., 2000, “Cheap feats”, Management accounting, July 2000, Vol. 78, Issue 7
Jobber, D., 2004, “Principles & Practice of Marketing”, fourth edition, McGraw
Johnson G., Scholes K., Whittington R., 2005, “Exploring Corporate Strategy”, Prentice Hall
Kay J., 2003, “Strategy and the Delusion of Grand Designs”
Macmillan, G., 2000, April 2000, Brand republic
Porter, 2005, “Contemporary Strategy Analysis”, Fifth edition
Porter, M. E., 1985, Competitive Advantage, “The value chain”, Free Press
Shaw S., 2004, “Airline marketing and management”, Ashgate
EasyJet official web site, www.easyjet.com, viewed on November 2007
8. Appendix
EasyJet’s route map, flights across a network including Europe and northern Africa.