Within the airline industry substitute products can come in the form of alternative travel possibilities such as trains, coaches etc. However, these substitutes do not fulfil the need to travel worldwide in the shortest time available. Technology in the form of emails and videoconferencing can also decrease the need of travel.
There has also been a rise in organisations purchasing corporate jets rather than flying their employee’s first class. It has been estimated that there will be a 10% drop in first class travellers by 2005.
Buyers can influence competition, as they are able to push prices down and are able to bargain for better quality and service. However, as consumers that purchase plane tickets do not purchase large amounts they therefore do not have strong bargaining power. Buyers do however have low switching costs and can decide to switch airlines or alternatively decide to travel by other means instead. In general, the threat of buyers is comparatively low.
Suppliers within the airline industry consist of aircraft manufacturers, suppliers of fuel and technical support etc. As the airline industry only has a small number of companies which produce aircraft. This means that they have concentrated suppliers, which leads to stronger bargaining power.
Airplanes cannot be substituted for another product therefore it is an important input for the airline, which strengthens the manufacturer even more. In addition, the fuel providers have a bargaining position, which allows them to increase prices without consideration towards the airlines whom are their important customer group.
The threat of forward integration is low as it is presumed that aircraft manufacturers or fuel provides etc. will not purchase an airline. However, the strong position of the fuel providers and the strong position of manufacturers need to be taken into account.
Within the airline industry there are two groups of competitors, the mature airlines and the low cost airlines. The mature airlines have been established for more than 100 years and with the recent crisis that the airline industry has encountered has led to a process of consolidation and the formation of a basis of agreement within the airline industry, therefore they are no longer competing against each other.
Low cost budget airlines are also not competing now. This is mainly because this part of the industry is mainly controlled by Easyjet and Ryanair and both are targeting customers at different ends of the market.
Although there is a distinctive place within the market for both the mature and low cost airlines it cannot be excluded that they do not overlap. British Airways are already modifying their strategies to be able to compete on the low fare market. In 1998, they launched a local ad campaign to target no-frills travellers. Whilst Easyjet are opening more routes to obtain the market share of the mature airlines. Therefore, competition between competitors within the airline, industry is very high.
An organisation can influence the five forces of competitors by applying certain strategies, which will restyle the attractiveness of an industry. If an organisation reshapes its structure, it can then lead to a change in an industries attractiveness, which could be for the better, or worse. Porter’s ‘Five Force’ analysis provides an uncomplicated overview of the competitive environment of an industry and can be used to introduce an industry structure.
The SWOT analysis, as previously mentioned, is another tool used by organisations to allow them to look at both the internal and external elements, enabling them to formulate a strategy. Therefore, we can look at the strengths, weaknesses, opportunities, and threats that both Easyjet and British Airways may face.
British Airways are able to formulate long-term strategies especially in investment and partnership policies. They are also able to focus on domestic, regional, and European routes as they have a strong British market as a base. They also have a strategy orientation to strengthen the future of the organisation by repositioning themselves within the low cost part of the industry.
With Easyjet, their low cost strategy is their main strength. They can utilise this by using simple company logistics, effective use of airtime and an appreciation of its UK market. With its main concentration on primary airports, it does not come under direct competition with Ryanair. Easyjet, have developed a powerful brand while invigorating demand with low prices.
Repositioning can also be a threat for British Airways as their main customers are business travellers. In 1998, British Airways adopted a new marketing approach to try to win back disaffected and first class customers. One customer was quoted in saying, “Flying with BA today is a hassle – you’re not made to feel special and it’s out of it’s depth if anything goes wrong” (Dwek, 1998). Customers were clearly not satisfied with their in-flight service and felt their issues were not being addressed, as British Airways were to busy concentrating on attracting new customers. This led to confusion on BA’s strategy orientation.
As Easyjet operates on low costs, this means it limits its attraction for certain groups of customers. In addition, as it does not operate in secondary airports so as not to compete with Ryanair, it means that they will not be able to capture new customers. Its heavy reliance on computers for booking and for the storing of information could be risky due to failures and viruses. Easyjet may also face problems on the domestic markets, where there is already high competition and other full service airlines provide only slightly higher prices compared to what Easyjet already offer.
British Airways due to its maturity has reached a certain size and has a well-established culture, however this does make it difficult for them to adapt and make use of opportunities made available by the environment. Its orientation towards partnerships, hence the recent one with Spain’s Iberia airline this month, may reinforce its position worldwide.
British Airways produced a new aircraft ‘Boeing 737-400’ in 2002, which can be seen as a sign of confidence in future recovery.
“…an airline only invests heavily if it sees sustained growth and high utilization” (Costa et al, 2002)
The new aircraft fleet will be used to serve routes between Johannesburg to Cape Town. The 140-seater aeroplane it the first kind in Africa, allowing for expansion into other areas such as Nairobi and Luanda which were previously out of range.
Easyjet’s opportunity came from the crisis the airline industry has been through in recent years. Due to being a young organisation, it does not face problems with adapting to new environments. They are also seeking opportunities on mature airlines by targeting business travellers. In 2002, they targeted the corporate travel market with the launch of a dedicated online facility. Chief executive, Ray Webster said the link would enable corporate account managers to oversee accounts in the same way as with full-service carriers, he stated that "It will allow an implant to come in and review what travel has been booked".
The main threat that faces BA is new competitors that are coming into BA’s home market. They are threatening BA’s strong position within its market. It is also threaten buy the general economic crisis and the necessary reduction in production costs. Whilst the main threats that are facing Easyjet are the general losses within the low budget business and the rise in fuel prices.
“It is important when undertaking the analysis not just to relate it to the historical situation.” (Johnson and Scholes, 1993)
Both BA and Easyjet may find that their strengths may not be relevant, depending on how their environment is developing. It is also important to note that an analysis of their weaknesses should recognise that their importance will vary depending on what strategy BA or Easyjet are likely to pursue.
Next, we can analyse both BA and Easyjet’s strategies using Michael Porters (1985) ‘Generic Strategies’. Porter’s three generic strategies are cost leadership, differentiation, and market focus.
“Firm’s relative position within an industry is another important question when it comes to competitive strategy. Positioning determines whether a firm’s profitability is above or below the industry average.” (Porter, 1985)
A cost leadership strategy is when the company sets out to become the low-cost producer or service provider within its industry. A differentiation strategy is when an organisation seeks to be unique within their industry and is rewarded for their uniqueness with a premium price. A focus strategy is based on the choice of a narrow competitive scope within an industry. Porter argued, that for a company to ensure long-term profitability, it needs to be clear as to its primary generic strategy otherwise there is a chance they will become ‘stuck in the middle’.
British Airway and Easyjet’s position in the ‘Generic Strategy Matrix’ is illustrated below based on Porters framework.
British airways serves a broad customer base and with their new price concept, they are targeting a wider range, as it no longer focuses on business travellers, but now on price sensitive customer with their introduction of the airline card in 1998.
“…creating something that is perceived industry wide as being unique. …differentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic target” (Porter, 1980)
In addition, the price concept can be seen as a differentiation strategy. British airways offer different types of tickets, i.e. e-tickets, family tickets etc., which differ in price and service levels. BA has become an above average performer within the airline industry due to being able to achieve and sustain differentiation. They have achieved this as their price premium exceeds the extra costs that have incurred in being unique.
A misunderstanding about this strategic position adopted by BA is that a successful differentiator operates in high-price markets. In some circumstances, a strong price can be a positive differentiator, as consumer’s associate price with value.
However, differentiation strategies also have risks. For instance, strong differentiation can be costly, buyers may be dissuaded by rising selling prices and decide to opt to lower cost competitors, and are willing to sacrifice some of the features and attributes. The buyers need for a highly differentiated service like the one BA’a offers can decrease over time, a trend that is becoming more common by other imitations narrowing the differentiation gap. A differentiator like BA cannot afford to be complacent.
Easyjet’s competitive capacity is more limited than that of British Airways as it only focuses on price sensitive customers, therefore Easyjet concentrates on a very narrow target market. Easyjet must find and exploit all sources of cost advantage. As they are able to achieve and sustain overall cost leadership, they have become an above-average performer in the airline industry, as long as it can continue to command prices.
Concerning competitive advantage, Easyjet concentrates on costs therefore achieves overall cost leadership. It inhabits a low cost Niche position.
“The low cost airlines developed sufficient lead times and competitive advantage to limit any new entrants to niche positions – and we still do not believe that the full service airlines have the culture to successfully develop sustainable in house low fares subsidiaries” (Bingelli and Pompeo, 2002)
However, there are problems associated with the idea of sustainable cost leadership as this entails that Easyjet has the lowest cost compared with competitors over time. This is unlikely to be achieved simply by cutting back costs however their competitors i.e. Ryanair can and will do this too.
The search of a cost-leadership strategy will require Easyjet to have a strong focus on cost management, scale economies, and have experience curve cost advantages through the maintaince of volumes. In reality, it can be questioned whether cost leadership is a separate strategy. Sharp (1991) stated, ‘having a cost advantage is merely a facilitator to differentiate, usually on price’, adding that low-cost form seeks to remove bases for differentiation, so as to offer a generic service to the entire market, therefore reducing differences between segments.
Finally, it could be argued that cost leadership can be a precarious strategy, which may speed up the move towards a commodity market in which; ultimately, no one benefits (Partridge & Perren, 1994)
Both British Airways and Easyjet have a possible threat in losing their current position, however, this is more so in the case of British Airways, due to their period of restructuring. Its trying to offer different levels of services and price, from their ‘First’ for business traveller to their low frills carriers from Manchester to Belfast and Cork. They are trying to please different customer targets at the same time. To avoid being ‘Stuck in the Middle’, they need to redefine their position as soon as possible. According to Porter, a company should be specific in their choice of competitive strategy otherwise, they run the risk of being ‘Stuck in the Middle’.
Easyjet’s ‘Stuck in the Middle’ danger is not as harsh as British Airways as they are relatively aware of the fact that they need to stay focused. However, if they start to concentrate more on growth instead of cost they may loose their main strength, which is low production costs.
Miller (1992) argued that a sharply specialised strategy could be disastrous. He stated
‘…most products must satisfy a significant market in numerous ways: with quality, reliability, style, novelty, convenience, service and price. Unless all of the important hurdles are met, customers will be driven away” (Miller, 1992)
Therefore being ‘Stuck in the Middle’ may not be so disastrous. All products and services must own core attributes which will be offered by all competitors within the given market and without which they would not be sellable in that given market.
The strategies of BA and Easyjet vary vastly due to their varied core competencies. This is mainly due to the two different historic backgrounds of both companies and the differences in the nature of their business.
Easyjet’s core competences can be defined as a strict leadership and disciplined management towards a strong low cost focus, therefore its strategy is to maintain low production costs, thereby being able to offer low fare tickets for less service.
BA’s core competence can be defined as its strong geographic position in the global market. Its former concentration on business travellers has not been top priority as demand decreases. Even though BA tries to gain in the business class segment its recent focus has been towards a very wide range of customers by offering low, medium and high price levels for different service levels.
Resulting from different core competences both Easyjet and BA’s strategies differ also. Easyjet’s cost focus leads to the lowest possible fares and a limited service level in terms of airport choice, in-flight service, ticket printing, and seat reservation. BA’s complex situation in the weak industry leads to strategic modification. It now offers a more diverse choice of tickets with a different price and service range due to instability. Its attempt to reposition itself includes the consequence of losing their loyal business customers and is therefore risky.
Finally, it can be stated that Easyjet’s strategic performance is very straightforward and the company acts proactive. In contrast, BA seems to have difficulties in defining such a ‘clear-cut’ strategy and finding its new market position. Due to recent changes in the airline industry BA acts reactively.
Bibliography
Benjamin, T and Zimmerman, J (1980) Top Management Strategy, Simon and Schuster Ltd, UK
Binggeli, U, and Pompeo, L (2002) Hyped hopes for Europe’s low-cost airlines, (online) McKinsey & Company, Inc.
Brown, S and Eisenhardt (1998) Competing on the edge, Strategy as structured chaos, Harvard Business School Press, Boston, Massachusetts
Chicken, JC and Hayns MR (1999) Strategy and Priority, Business Press, London
Costa, P, Harnard, D and Lindquist, J (2002) Rethinking the aviation industry,(online) McKinsey & Company, Inc.
De Wit, B and Meyer, R (1998) Strategy, Process, Content, An international Perspective,
Dillabough, C (2003) BA launches local ad to target no-frills travellers, (online) New
Media Age,
Drummond, G and Ensor, J (2001) Strategic Marketing, Planning and Control, 2nd Edition, Butterworth-Heinemann, Oxford
Dwek, R, (1998) Marketer delivering BA’s promise to repair relationships with key fliers, (online) InfoTrac Onefile,
Hamel, G and Prahalad, CK (1994) Competing for the future, Harvard Business School, USA
Hitt, M, Ireland, RD and Hoskisson R (1999) Strategic Management, Competitiveness and Globalization, Third Edition, International Thompson Publishing, Cincinnati, Ohio
Johnson, G and Scholes, K (1993) Exploring Corporate Strategy, Third Edition, Prentice Hall International (UK) Ltd, Herefordshire
Looy, B, Dierdonck, R, and Gemmel, P. (1998) Service Management – An integrated approach, Financial Times Pitman Publishing, London
Miller, D (1992) The generic strategies trap, The journal of Business strategies 70 (6), pp30
Morgan, G (1997) Images of Organization, Sage Publications, London.
Partridge, M and Perren, L (1994) Developing strategic direction: can generic strategies help?, Management Accounting (British) 72 (5), pp28
Porter, M (1998) The competitive advantage of nations, Macmillan Press Ltd, Hampshire
Porter, M E (1980), Competitive Strategy, The free Press, New York, USA
Porter, M E (1996) What is Strategy? Harvard Business Review, Nov-Dec 1996
Sharp, B (1991) Competitive marketing strategy: Porter revisited, Marketing Intelligence and Planning, 10 (4), pp. 296-301
