Aims and objectives
Aim of this analysis is to investigate the recent past of the industry and how:
these carriers react to the external environment changes
adapt their strategies accordingly
try to take advantage from external changes
use new technologies to implement strategies, and
assess the likely future developments of the European Airline industry and the treats it might face.
Past and future of the European Airline Industry
One of the external factors which has considerably impacted the European Airline Industry is deregulation (1), prior to 1997 airfares in Europe were high and were decided by the International Air Transport Association (IATA) and European governments, which were also deciding which carriers would fly between which destinations and with what frequency.
After the deregulation was effective, any registered airline could fly between every destination in Europe, at the price they considered most suitable to charge.
The macroeconomic picture was, then, characterised by some negative events:
The 9/11 attacks to the Twin Towers and the consequent “economic de-facto recession” (2) and constant threat of terrorist attacks,
The second Gulf War,
The alarms launched by the WHO relating to the outburst of the SARS and the Swine Flu viruses,
The international financial crunch.
These events seriously impacted the transatlantic/long-haul air traffic, whilst the European low-cost industry started and continued to booming. The fear of flying, following these events, induced people to cut their travel budgets and preferring short-haul to long-haul routes.
Another relevant factor affecting the European Airline Industry is represented by the oil’s price instability, which at the beginning of the year peaked at over $180 a barrel (3), and represented 40%-50% of airline’s operating cost in 2008.
The industry has benefited from and leaded the globalisation process. Removal of trade barriers, through the “open sky” policy operated by the European Union, has, in fact, contributed to accelerate the globalisation process and the expansion of markets.
Another relevant factor is represented by the significant technology advancements. In particular, the bar-coded boarding passes (BCBP) system has allowed organisations to eliminate the magnetic stripe boarding passes which were very expensive, making it possible to check-in online.
The internet and the implementation of other technological solutions have allowed the industry to optimise processes and economically restructure their operating models, to ultimately boost revenues and cut costs.
The Pricing Systems, for instance, provide dynamic pricing strategies considering demand elasticity, whilst the Crew Scheduling Systems permit to effectively manage and control crews. Other powerful tools are the: Profitability Forecasting, Network Analysis, Aircraft Scheduling, Easy Check-in, Self-Service Kiosks, e-Ticketing and Online Distribution.
Technology also contributes to reduce the industry’s impact on the environment through: new-generation engines, aerodynamic improvements, weight reductions, engine upgrades, and second and third generation biofuels.
In December 2006 the European Commission raised a proposal to include aviation into the Emissions Trading Scheme (4), which was seen by the Associations representing the industry as a further threat.
But legislation has a much wider impact on the industry, which is, awash with regulation imposed by both local governments and the European Union (5) (Appendix 1).
The air transport regulation developed by the EU, which also aims to favour competition and is constantly evolving taking into account the development of the industry, is binding and cannot be differently applied by member states (6).
Carriers are subject to both national and international/European authorities, in order to lobbying and acquire a stronger bargaining power, they have constituted several associations (Appendix 2).
As seen, the external environment is constantly affecting carriers in different ways, so that they need to change and adapt their strategies in order to keep competitive advantage. Looking at the strategies implemented by Ryanair and Air France–KLM will allow to see the differences on how a low-cost airline and a flag carrier react to the changing environment.
Ryanair’s corporate strategy is aimed to become Europe’s leading scheduled passenger airline, constantly expanding its low-fares offer to increase passenger number, through cost-containment and efficiency boosting policies.
In order to achieve its strategy Ryanair uses a flexible approach, starting with a prescriptive/planned strategy involving a series of prescribed steps, and adapting it accordingly with emergent strategy (7). It adopts a prescriptive approach when planning a new route, for instance, but it can suddenly switch to the emergent approach when a route is not showing to be profitable as expected, promptly cancelling it.
Analysing the stakeholder mapping framework clearly emerges that suppliers take the role of “key players”. In order to pursue its cost-containment strategy, Ryanair is continuously struggling to bargain on ground-services fares, fuel edging and to have discounted prices from Boeing for its 737- 800s aircrafts.
It’s, instead, evident the irrelevance of employees through unions, to whom Ryanair has never recognised bargaining power (8), employees can have their say just through Employee Representative Committees (ERCs).
Looking at Ryanair’s strategy through the strategy lenses, emerges that the lens it uses is the strategy as design one: every process, aimed to cost-containment, is carefully evaluated to secure the attainment of the desired outcome.
The organisation also develops innovation, generating new ideas to achieve cost-containment, Ryanair is the first carrier which has charged passengers for boarding luggage and checking-in, and to operate a 100% online check-in policy.
Considering that the demand for air-tickets is elastic, in order to stimulate demand from travellers, Ryanair’s long-term direction will continue to focus on low-fares.
The carrier is also focusing on new growth possibilities: expand to continental Europe, increase routes and frequency on current schedule, launch domestic flights (cabotage), connect airports within its current network (triangulation) and start new routes currently served by no carriers, while expanding ancillary services. Ryanair is, clearly, simultaneously acting in all sectors of the Ansoff’s product/market matrix. In terms of market penetration, maintaining and increasing its market share on current markets, pursuing a pricing strategy to drive out competitors.
In terms of market and product development, aiming to expand its current activity to new geographical markets and offering new services.
In terms of diversification, planning to deliver services on areas where no carriers are operating, taking the risk of not reaching the expected revenues.
Ryanair is also seriously pursuing acquisition and merger opportunities (9).
The technique Ryanair uses the most, consistently with its strategy, is the value chain analysis, allowing to gain a thorough understanding of the way resources are used and how, consequently, achieve effective competitive advantage identifying key drivers and costs in order to reduce them (10).
This strategy is inexorably pursued in four directions:
Aircraft equipment, using a single model Ryanair controls costs of training, maintenance, purchase and storage of spare parts and bargain good purchasing terms.
Personnel cost, through productivity enhancement and productivity-based pay and incentives.
Customer service cost, obtaining favourable rates at fixed-price, for multi-year contracts, from external contractors.
Airport Access and Handling Costs, operating to and from secondary and regional airport at lower airport charges. Preferring less expensive gate allocations and outdoor boarding stairs to the most expensive jetways.
Ryanair exploits the technology support activity side of the value chain analysis. The implementation of its own internet booking system and check-in 100% online has allowed eliminating third-party commissions. In some airports (11) have also been introduced self check-in kiosks.
Before analysing the validity of Ryanair’s strategy and its ability to compete in the market in the light of Porter’s five forces, is important to consider that the airline is a mature market in most of the European countries and is likely to reach saturation in the next years. Although deregulation and EU regulation aim to make the market dominated by perfect competition, there are still some barriers to entry, as the Porter’s five forces analysis will help to find out.
Threat of new entrants - medium – there are still barriers represented by high capital investment, special licenses and flight authorisation. The lack of slots availability makes almost impossible to access many airports. If operating new flights in routes already operated by other low-cost airlines a price war would be inevitable.
Threat of substitutes – medium – takes the form of land travel, Eurostar, Eurolines, Ferries, etc. Another indirect threat is represented by the video conferencing system, which might reduce the need for business travel.
Bargaining power of buyer – high – customers are price sensitive, switching to another low-cost carrier is very easy and doesn’t imply further costs, all carriers are online and offer easy access to fares and offers. No loyalty feeling on which rely.
Bargaining power of suppliers, Ryanair, thanks to its large scale, holds a considerable power to change suppliers for better terms. Although, changing Boeing for Airbus would produce worst effects to Ryanair, which should retrain its entire staff. Fuel price is controlled by hedging. Regional airports have little bargaining power, whilst bigger ones, which Ryanair avoids, have a strong power.
Existing rivalry – high – the low-cost market is highly competitive and its business model can be copied rather quickly. There is not differentiation on services and price remains the main differentiation factor. So far, direct competition with Easyjet has been avoided, by mainly operating from/to different destinations, the moment the competition should become direct, this will produce strong pressure on prices, revenues and profitability.
Other two effective tools to take in consideration when working on strategy are the SWOT and PEST(LE) analysis. The first focuses on the internal factors relating to the organisation’s strengths and weaknesses, opposed to the external opportunities and treats. The PESTLE represents, instead, a macroeconomic analysis which considers the influences coming from the external environment: political, economical, social, technological, legal and environmental (Appendix 5).
Air France is an established European flag carrier which has been severely affected by the September 2008 global crunch, to the extent that it had to adapt its corporate “successful profitable growth strategy” accordingly.
The carrier, which has always been punctilious on providing high quality service, is now redefining its offer containing investments and implementing cost-containment plans, while continuing to pursue its three main activities: passenger, cargo and maintenance.
On redefining its strategy, Air France-KLM has to consider the interest of the stakeholders included in its mapping, where trade unions represent a constraint, having their say even with regard to alliance and partnership decisions. Has been, instead, reduced the influence of lenders, KLM, in fact, was rather exposed to debts till 2006.
Air France -KLM
Air France-KLM has recently focused its strategy to cost reduction, while still pursuing growth. The Ansoff’s market matrix has been used to plan its expansion in different markets through partnerships. Air France which in 2004 merged with the Dutch flag-carrier KLM, has recently expanded its market penetration, agreeing an operational partnership with the Italian flag-carrier Alitalia, which had previously merged with Air One, gaining then access to the Italian market, the fourth-largest in Europe.
The reason of these moves is to drive out competitors in the airline mature market and increase usage by the existing clients through a common loyalty scheme.
The Ansoff’s matrix has been used by the carrier also to implement product development strategies according to the lens strategy idea. The “fare combinability” system, for instance, allows passengers to fly to a destination with an Air France flight and come back with a KLM one.
Strategy as idea, used to develop innovative in-flight and ground-based products and services, is supported by focus group and a specific project Innovaction (12), involving customers (13).
A joint frequent flier programme, e-services, improved cabin service, new corporate contracts for companies, a new range of flexible, changeable and cheaper fares are some fruits of these activities (14).
Air France defines its strategy referring to Mintzberg’s flexible approach, quickly adapting its intended strategy en route, according to the external changes. The carrier, for instance, has adapted the frequency and capacity of its flights, passenger and cargo, taking into account economic forecasts and the competitive situation of each destination. This analysis has produced positive effects in the French domestic market, affected by the High Speed Train competition. In Paris, for instance, many flights in the central hours of the day have been withdrawn.
The carrier is also focusing on cost containment (15), once again value chain analysis comes to play, primary and support activities are scrutinised in order to investigate where is possible to cut costs, and favour economies of scale and efficiency.
The organisation has decided to reduce costs reviewing its fuel-hedge policy and targeting its headcount: freezing recruitment, reducing the number of temporary workers, fostering mobility and aiming to further reduce workforce. The carrier is also pursuing cost-containment: reducing travel agent commissions, postponing to 2013 the order of new aircrafts, intervening in procurement and productivity.
These strategies applied at Business Units level, should allow the organisation to overcome the expected turbulences still forecasted for the current year.
The maintenance activity, which accounts for 4% of total revenues, has been recently affected by an increasing competition, but the heavy maintenance business is still developing and offers good future opportunities.
Air France–KLM diversifies its offer through its low-cost carrier Transavia, which also operates charter flights for tour operators.
Analysing the way external factors influence Air France strategy through the Porter’s five forces analysis emerges that the current competition is very high, many organisations have gone out of business and others are likely to follow suit in the next years. Low-cost companies are putting even more pressure for their aggressive pricing policy.
Power of buyers, air travels for business account for a tiny percentage of the overall ratio, Air France deliver services mostly appreciated by a business clientele whose price inelasticity is in question. Some social factor, such as ageing population and emissions, could negatively affect the demand for flights.
Power of suppliers, Air France, thanks to the merger with KLM and the partnership with Alitalia, could gain a more considerable bargaining influence when dealing with both Airbus and Boeing.
The Threat of new entrants is low, very high costs and reduced revenues are the main characteristics of the industry and considering the number of organisations driven out for bankruptcy it’s unlikely the serious risk of new entrants.
The threat of substitutes is increasing, railway and coach stations are centrally located, whilst airports lie miles away from city centres, and don’t require checking-in and boarding procedures.
Finally, also in the Air France–KLM case the SWOT and PESTLE analysis can provide very useful hints to evaluate the strategies pursued by the carrier with particular reference to the external influences and the opportunities and strenghts that the organisation can exploit to stay competitive in the market (Appendix 6).
It clearly emerges, from the above analysis, that technology has been crucial to develop and implement the strategies pursued by both Ryanair and Air France-KLM. It has allowed Ryanair to drastically reduce its costs and redesign its business: customers book and buy their tickets online, receive flight confirmation via text message or email, check-in online or through kiosks and print all by themselves boarding cards. Technology is also strongly used by Ryanair to improve its revenues, namely its ancillary revenues, selling through the internet accommodation, car rentals and insurance policies. Ryanair exploits technology mostly to reduce costs and increase revenues, rather than to offer better services, but, in the event the net should suffer any major failure the business would be paralysed.
Air France mainly resorts to technology to deliver better services to its customers, who can check-in also by mobile phone, receiving their boarding card, in the form of a barcode, via SMS or MMS. In the Paris-Amsterdam route is available the Smartboarding system, which combines biometric technology and thermal printing, allowing passengers to board without any ID.
Frequent fliers can access their accounts, offers and request their free tickets online.
Both organisations, of course, also benefit of the technology used at airports for delivery ground services.
The future of the airline industry is still subject to a wide range of threats. The fluctuation of the barrel price, terrorism threat, economic crisis and raising general costs, are most likely to continue to affect the industry’s future.
New taxes on emissions and local quality air in airport areas, not to mention other binding legal requirements, are likely to affect the industry on the revenue side.
In such grim scenery, governments’ temptation to raise protectionist barriers, making things worse, is, notwithstanding, possible.
The likely development of substitutes might represents a further threat for the industry, together with the European demographic ageing trend, in that elder people could be less likely to fly, preferring substitutes. Even deciding to fly these people would need additional services, both in-flight than on ground, requiring additional costs in order to be delivered.
Additionally, the threats of the present and past are likely to persist in the future.
The airline market is mature, although the risk of new entrants is low, competition is fierce and the industry shows high sensitivity to the external environment, which constantly hampers the stability of the industry, characterised by high costs and limited revenues.
Nonetheless, Europe is a politically stable region whose enlargement can still provide opportunities for development and consolidation.
Carriers properly invest in technology, to offer better services, reduce emissions and pursue cost-containment strategies.
Understanding the changing customers preferences it’s vital, whilst some carriers struggle to improve the quality of services, low-cost airlines attract the highest number of customers. Mergers and partnerships are the solutions many carriers are pursuing to consolidate.
Ryanair has attained very good results, but the low-cost market could slow-down in the next years, while costs will continue to rise. Ryanair needs to be ready for that and exploit its high seat density to stimulate its ancillary revenue portfolio, while pursuing cost-containment.
Expanding routes into more popular and Eastern Europe destinations and providing better customer service will be crucial to consolidate the low-cost leader position and face the threat of substitutes.
The demand, basically stimulated by offer, should be renewed promptly and regularly to prevent declining markets.
The cost efficiency strategy pursued has been positive and needs to be maintained.
The intended merger with another carrier would sustain Ryanair image in the stock market, possibly allowing the carrier to enter the value-oriented segment of the market without losing its dominant position in the low-cost one.
Nonetheless, improving service and flying to some more central destinations will allow the organisation to lure a wider clientele.
On differentiating its offer Ryanair should consider to enter the charter market, thanks to its 100% internet activity and the declining volume of sales of travel agents, this market could reveal to be very lucrative.
Air France–KLM is pursuing good BUs strategy through its different activities, which provide several sources of revenue. The route taken by the carrier focusing on cost-containment, adapting its network and increasing productivity, shows the ability to promptly adapt strategies to external changes, the new cheaper and flexible European fares system, still offering high customer service, is evidence of it.
Technology should better exploited further to introduce ancillary services aimed to increase revenues.
Continuing to tightening partnerships and cross-border consolidations will allow the organisation to further redeploy its schedule and save costs, while offering a wider network.
(1) Started in 1987, with the application in the airline industry of the competition articles art. 85 and 86 of the Treaty of Rome, and became effective in 1997.
(2) That is, the widespread uncertainty generated by the attack for the market, although not supported by objective economic macroindicators.
(3) Whilst some analysts at Goldman Sachs were also predicting further increase till $ 200 a barrel.
(4) In May 2008, harsh opposition from the Associations representing the European Airline Industry notwithstanding, the European Parliament’s Environment Committee (ENVI) maintained its original proposal.
(5) The EU has adopted antitrust and merger rules impending government financial support to national carriers and deciding on merger processes. Other important aim of the EU regulation is avoiding that free competition could be endangered thru price-fixing, output limitation and sharing market or consumers.
(6) The regulatory framework of the single European aviation market is basically formed by Regulations, immediately binding and having force of national law for the Member States as they stand and Directives, which, in general, need to be incorporated by the national law, which can partially change the content but not the essence of their principle. Are also part of the European Legislation: Decisions, Case Law and International Agreements.
(7) As stressed by Mintzberg, strategy doesn’t develop in a predictable way, strategy’s implementation is not separated from its formulation and the possibility of innovation needs to be constantly considered and monitored.
(8) This is allowed by the Irish law. Ryanair also refused to negotiate with IMPACT in 2004 when pilots expressly requested its intervention, following changes to their terms and conditions. Ryanair have had and still has union problems throughout Europe
(9) Ryanair currently owns 29.8% of Aer Lingus and has tried to acquire control of the carrier; the current “tender offer” has been blocked by the EU Commission on competition fears. Ryanair, who filed an appeal with the CFI, is now expecting the final decision on the case.
(10) This process is carried out through two different processes; the first is aimed to examine the “primary activities” immediately related to the product realisation (operations, service, sales & marketing, logistic). The second step examines “support activities”, that is those activities that even though are contributing to add value cannot be easily linked with a specific component of the organisation (procurement, technology, human resource management and infrastructure).
(11) Stansted, Belfast, Frankfurt – Hahn and Gerona.
(12) “A structured approach aimed at generating ideas which are studied and then launched”.
(13) Air France has also set a website, www.bluenity.com, allowing all of its customers to meet, share tips and broaden their personal network.
(14) The new offer includes a Voyageur class, changeable, a Premium Eco and a Premium Affaires class, these thickets include 23 kg of checked baggage, newspapers and breakfast and, most of all, reduced fares. But it’s not all, customers buying a Premium Eco ticket: can express their preference for a window or aisle seat when booking, use reserved check-in desks, use allocated security checks areas, call specific phone lines, board first, access reserved lounges, enjoy luggage priority delivery, earns more miles for the frequent fliers programme.
(15) This move, typical of the whole industry, has also been strongly recommended to its associates in the IATA Annual Report.
The EU aviation legislation includes regulation concerning:
1) Economic Policy
2) Air traffic management
5) Environmental matters
6) Social matters
7) Passenger Protection
8) External Relations
Aviation Authorities and organisations
Commission for Aviation Regulation (CAR)
Irish Aviation Authority (IAA)
Air Accidents Investigation Branch, Civil Aviation Authority, CAA International Ltd, NATS
Direction Générale de l’Aviation Civile. Under the authority of the French Ministry of Transport, the DGAC is in charge of the security of air transport and of air space in France.
DGTL Directoraat-Generaal Transport en Luchtvaart. Under the authority of the Dutch Ministry of Traffic and Public Works, the DGTL is in charge of the security of air transport and of air space in the Netherlands.
International Authorities and Associations
Department of Transport (DOT)
European Association for Aviation Psychology (EAAP)
European Aviation Safety Agency (EASA)
European Civil Aviation Conference (ECAC)
European Federation of Airline Dispatchers Associations (EUFALDA)
European Organisation for Civil Aviation Equipment (EUROCAE)
European Organisation for the Safety of Air Navigation (EUROCONTROL)
European Regions Airline Association (ERA)
European Union at the United Nations
Aeronautical Radio, Inc. – Industry Activities (ARINC)
AeroSpace and Defence Industries Association of Europe (ASD)
Airport Consultants Council (ACC)
Airports Council International (ACI)
Air Transport Users Council (AUC)
Association of European Airlines (AEA)
International Civil Aviation Organisation (ICAO)
International Air Transport Association (IATA)
European Low Fares Airline Association (ELFAA)