Easy Jet Airline is one of leading low-cost British airline established in 1995. Easy Jet has seen a rapid expansion, operating domestic and international service on 500 routes between Europe, North Africa and Asia. Its successful strategies based on low-cost, no frills model which derive from the a concept that demands for short-haul air transportation is price elastic. That means if the price of plane tickets are being reduced, more people will fly.
Major determinants of demand
The demand for a particular good or service depends on a variety of factors. Key influences include the price of substitutes; especially goods that are close substitutes, and the price of complements, the levels of consumer income, consumer’s expectation.(â€¦â€¦)
The availability of alternative modes of transportation for air travel are increasing, in particular ownership of automobile and the railway development. These close substitutes might be a threat a number of traditional airline companies, dominating short journey sector (less than 3 hours). However, it is extremely difficult for rail transport to challenge a low-cost airline company like easyjet. For example, Euro star’s cheapest tickets to Paris is £149, whereas Easy Jet’s prices start from £17.99
Airline costs per passenger, and rail fares, from Barcelona
As demand law, when other factors on demand remain unchanged, a higher price for a product will lead to a lower quantity demanded. The price elasticity of demand measures the responsiveness, or sensitivity, of the demand for a good to changes in its price when other influences on demand are held constant. It is defined as the percentage change in quantity demanded resulting from a given percentage change in price.
For example, if a 1% increase in price leads to a 1.5% drop in quantity demanded, the own-price elasticity of demand is 1.5. In this case, since the percentage fall in demand is greater than the percentage rise in price, total spending on the good will decline, and the demand for it is said to be “elastic”. If, on the other hand, a 1% price rise causes a smaller percentage decline in the quantity demanded, the own-price elasticity will be less than one, and demand is said to be “inelastic”.(â€¦â€¦.)
The demand for air travel should be distinguished among markets for: business and leisure travel; long-haul and short-haul travel; and international and long-haul travel. Accordingly, to examine the sensitivity of the demand for air travel to its price, separate estimates of the own-price elasticity of demand are gathered for each of these distinct markets.
Since the alternative modes of transportation for long distance are not widely available, it is considered that the demand for air transport will be less elastic for long-haul flights than for short-haul flights. Moreover, international travel tends to be spread over more time than domestic travel due to globalization, so that the plane ticket is more expensive than domestic tickets. globalization makes international travel especially business travel less sensitive to changes in ticket prices. On the other hand, travelers for leisure are more likely to postpone trips to specific locations in response to higher fares, or to shop around and looking for more affordable fares. Therefore, it is concluded that the demand for air transport for leisure travel will be more elastic than business travel.
Price Elasticity of Supply and Demand
The relationship between demand and price of traveling by air can be both elastic and inelastic. To a large extent it depends on the type of customers traveling. For example a family planning a vacation that requires air travel, if the price of an airline ticket is extremely high, they are more likely decide to delay the trip until the prices are lower. This shows that leisure air travel is considered elastic. However, if a business customer needs to travel across the country by the next day, they will need a plane ticket regardless of the ticket price. For business travel, the price of airline would be considered inelastic because it is a necessity. The current market for business travel has a big part in the supply and demand within the airline industry. More so in the economic downturn with the price of oil rapidly increasing, the cost of an airline ticket is consequently has risen and the demand for leisure travel has fallen. In addition, another reason for the decline in demand is that after 9/11 there has been growing concern over in-flight safety. Another factor that influences the price of an airline ticket is the date that it is purchased. If there is an emergency, the customer may need to book a ticket on the day of travel or even purchases a ticket close to the departure time. The fact that there are still many unsold tickets is disregarded and the price will be higher.
Market structure of Airline industry
There are many factors impacted on the recent poor financial performance of traditional airlines, including the effects of 9/11, the global economic recession, the increasing growth of low cost airlines that operate under a different business model, and the recent surge in fuel prices. As described below, several simultaneous factors are transforming the global airline industry. The growth of low-cost airlines: The increasing growth of the market share of low-cost, low cost fares during the last few years is one of the most significant trends in the industry, and has presented a considerable threat to the viability of network of traditional carriers. The response of the traditional network airlines to the growing low cost airlines challenge will be critical to determining the future structure of the airline industry, both in the United States and in Europe.
The most obvious competitive advantages Easy Jet had are delivering low-cost and maximizing margins. easyJet keeps costs low by cutting off the unnecessary costs and ‘frills’ which is in ‘traditional’ airlines. This is done in several major ways: firstly, easy jet take advantage of the Internet to reduce distribution costs and then maximize the utilization of the substantial assets and maximize utilization of each aircraft and therefore, significantly reduces the unit cost
Secondly, Easy Jet launched paperless operation and ticketless travel which means passengers receive an email containing their travel details and booking reference instead of get a paper ticket when they book online. This lower the cost of issuing, distributing, processing and reconciling millions of tickets each year. At the same time, Easy jet simplified its work practice by delivery the concept of paperless operation and a well designed information system allows management and administrative job carried out through its IT systems of company. The no-frill service on board is another reason for Easy Jet to keep cost low, because everybody always complain about food on board so why bother to provide food if people don’t want it? Cutting off free catering on-board decrease cost and unnecessary bureaucracy and management. It is also an important differentiator between easyJet and other airlines and a potent reflection of our low-cost approach. Passengers can purchase food on-board if they need it . ironically, Easy jet have won awards for our catering service. The new concept of a ‘simple service model’ also reflects a more general need about eliminating other unnecessary, costly services. pre-assigned seats, interline connections with other airlines and cargo/freight carriage are the characteristics of traditional airline result in high complex to manage cost.
Moreover, easyJet use airports effectively by flying to main destination airports throughout Europe with high frequency and obtain efficiencies through rapid turnaround times. By cutting off turnarounds time to 30 minutes and below, easyJet can gain extra turnaround rates on the high-frequency routes, thus, maximizing utilization rates of its aircraft. Easy Jet made an agreement with airports about progressive landing charges.
easyJet currently has operating various bases throughout the UK and mainland Europe. It is a truly European operation and was one of the few airlines to take advantage of the reforms offered by the single European aviation market.
Fuel cost is one of the biggest and volatile single cost for Easy Jet therefore fuel efficiency is very important to Easy Jet. In 2009, Easy jet saved 1.2%of fuel they burn through the improvement of fuel efficiency and new flight planning system. Easy Jet have aimed a 3% improvement in fuel burn, which will deliver 20million by 2012. It is crucial for Easy Jet to manage cost effectively so that it can continue to offer competitive fares profitably. Easy jet plans to make at least 190million of cost reduction by the end of 2012, which will allow Easy Jet to offset inflationary pressures and produce 1 per seat benefit to the bottom line. The crew efficiency will be improved by 10% through route and crew optimal tools and a new roster system.
Transport economics in general, especially air transport has been viewed as the laboratory of economic activity. Flourishing transport derived by booming economy, as an increasing economic activity, expanding industrial production and booming trade relation will inevitably lead to an ever-greater need for transport. A decline of the same parameters will reflect on a decreasing demand for transport. Within the transport industry, air transport seems to be more sensitive to such economic environment. In the face of recent financial crisis that affected world economic growth and international trade, airline industry are affected by this crisis.
The EU’s air transport system has been considered as a very important factor of the Union’s economy. In the meanwhile, it is quite sensitive to economic environment and economic development in other industry. In 2008, the worldwide financial downturn had increasingly resulted in a global economic crisis. At the same time, the impacts of this crisis for air transport sector reflected on obvious decline of air travel demand because of less transported passengers and goods, reduction of supply through reduction of frequency, and lower company profits.
Figure3: GDP Yearly Growth from 1990-2008
Inflation and Oil Price Impact
The inflation rate in Europe was 0.90% in February of 2010. Inflation rate reflected on a general rise in prices measured against a standard level of purchasing power. The effective measures of Inflation are the CPI which measures consumer prices, and the GDP that measures inflation in the whole of the domestic economy. Oil prices are pushing up inflation across Europe. And oil price really matters to the health of global economy. The global economic downturn in 2000-2001 resulted from higher oil price since 1999, and global GDP growth have decreased. Higher oil price are contributing to high level of cost and unemployment and accelerating budget-deficit problem. The impact of high oil price on oil-importing countries varies mainly depending on the degree to which they are net importers and the oil intensity of their economies.. European countries are highly dependent on oil imports, which would suffer most in the short term, their GDP went down by 0.5% and inflation increasing by 0.5% in 2005. The United States suffered with GDP declining by 0.3%,mainly because its domestic production meets a bigger part of share of its oil needs. Japan’s GDP decreased 0.4%, with its low oil intensity compensating for its almost high dependence on imported oil.
The problem of fuel rates/ cost is one of many factors all airline companies faced with. The price of a barrel of oil has been a huge impact on airliner and global airline industry. According to the statistics, the cost of fuel has been made up by 31% of the total cost of business of airline companies. The aviation industry is always sensitive to the change of fuel price. In the economic recession, the number of the passenger would scare away if airline company rise the ticket price, despite of the situation of fuel price surge. Therefore, the only ways for airline company to minify the loss because of the higher oil price are strengthening management, cutting cost and efficiency improving, instead of simply raise the price.
Another financial risk exposure in the airline industry is interest rate. Interest rate risk is important to airline companies in terms of the cost of debt finance. Higher financial leverage ratios are dominant in the aviation industry because of its capital intensive nature and high cost of equity. High earnings volatility made cost of equity increase. Equity can be less attractive due to lower price earnings ratios found in the airline industry. In the meanwhile, cost of debit is closely related to the interest rate changes. Therefore, the impact of interest rates on general business could be large consequential effect. Moreover, high interest rates result in higher cost of distress, this is especially for the airline industry.
One of the most difficult balancing acts that airline companies faced is the challenge of balanceing global warming and remaining competitive position in marketplace. The airline industry is responsible for 2% of the world’s man-made carbon emissions and 6% of the Uks. It has already achieved a great deal in keeping emissions down,and it is continuing to take its responsibilities seriously through industry-wide initiatives, in-depth research, roadmaps, not to mention new airframe and engine technology.In 2005,the climate impacts of aviation have finally landed on european political agenda.because the air travel is the worst climate choice of all transport modes, per passenger kilometer of aircraft emits tree times more than cars. Per tonne kilometer of freight, aircroft measured about an order of magnitude worse than lorries. the UK Climate Change Act, passed last November called into question how quickly the industry could deploy into new aircraft and fleets the technological advancements it was claiming were going to help it deliver a percentage reduction in CO2 emissions. Airline companies must act quickly to lower its own CO2 emissins to meet goverment regulation,many people argued that the climate change policies will destory the development of aviation industry. However, the study shows that climate change legislation could be designed in a sustainable way.
Survival of the Easy Jet’s Low-cost Model
Low-cost airline model has proven to be successful, and has been copied by the many airline company worldwide. Low-cost airline model is based on strict adherence to several major principles: point to point flight, maximization of flying hours, short-haul, use of secondary airports, no-frill, and no delay, which result in low cost, low fares and high demand and capacity utilization. ( Macario et.al.2007) Although the air transport market is heavily impacted by the economic crisis, in turn, economic recession provides a potential opportunity to low-cost airline company. Easy Jet announced a profit increase in 2009. Low cost airline companies are increasing their market share compared to traditional airline.
Potential strategies for Easy Jet
Firstly, Easy Jet should build stronger air transport network. Although Easy Jet has a leading presence on Europe’s top 100 routes, it still needs to strengthen its positions in the key market and focus on the routes customers find the most attractive, at convenient times. Easy Jet needs to continually manage schedule quality and fine-tune its network. Which means it will offer customers the opportunity to arrive when they want and when they want. It will allow Easy Jet get increasing market share of flight and have higher load factors than its competitors. Increasing frequency and stability on major routes with launching new the route mix offer more choice to its customers based on market research. For instance, Easy Jet launched flight with daily return flight from several cities in UK to many European cities. As the demand declines through the summer months, it should manage its schedule and move assets to leisure routes in order to maximize its capacities. In addition, unnecessary cost created by overnight stops could be avoided by base management, in order to improve efficiency and maximize revenue.
Secondly, it is important to listen to customer and understand their need and then design schedule and service to match. the relative effective way to get close to its customers is to collect all customer data, which provides a fast and intelligent view on trends in customer’s travelling habits. With these customer databases, it allows marketing department tailor marketing emails according to individual customer purchasing patterns and preferences.
Moreover, build increasing customer experience to appeal business travelers. Departure time is vital for customer and ensuring customers arrive at their destination on time is a key to delivery of a winning customer proposition. In a recession economic environment, Easy Jet has potential opportunity to increase share of the business travel market due to many corporate tend to low cost air travel company to cut business cost.
How a rise in fuel prices affect the airline industry