Strategic Analysis Of EasyJet’s Relocation To Berlin In The Context Of Brexit And German Airline Industry

Critically analyzing the external environment and industry competition in Germany

The following report is based on strategic level of planning revolving around the organization EasyJet in UK. Even though the global airline industry is rapidly growing with increasing number of low cost carriers (LCCs), environmental changes, such as Brexit has large impact on the airline industry. In 2016, the people in UK voted in a referendum to leave EU. Obviously, this decision has implication for UK air transport, especially in terms of traffic and from EU27 (Alexandre 2011). While focusing on the economic impact, it is expected that Brexit could deliver an economic shock to UK including a weaker currency as well as slower economic growth and investment. It has also been observed that growth of world air travel has averaged approximately 5% each year over the last three decades (Oliveira Cabral 2016). However, it is important to focus on the fact that EasyJet is probably the first carrier that might have to deal with the large market barrier in EU States.

As put forward by Köhler et al. (2014) full-year tax profits of EasyJet is expected to fall by a sharper as expected 28%.  In addition to this, the company is dealing with the pressure of relocating its head quarter to EU State. Thus, growths of airline organizations located in EU confirm that EasyJet could make a decision of choosing Berlin of Germany as headquarters office. Due to the significant growth in airline in Germany, the industry contributes € 47.9 billion to Germany GDP (Michl 2016). These number compromises of € 22.2 billion directly contributed through the output of the aviation sector including airline, airport, and aerospace as well as ground services. Besides such growth, there are other significant opportunities that EasyJet could avail establishing its headquarter in Berlin.

 

Figure 1: Logo of the Organization

(Source: Easyjet.com 2017)

The competition in Germany’s airline industry has recently been high due to the new policies formed by the government. In order to develop a much stronger base for airlines to link Germany competitively with the international market, the government eliminated the burdensome taxation and ensured cost-efficient airport infrastructure to meet the increasing demand and enable access to modernized air traffic management systems. As put forward by Bäder (2015), the low cost airline acquired significant market in Germany and they have stirred up air travel within Europe by radically cutting fares in exchange for eliminating several traditional passenger service. The low cost airlines earn revenue in a number of ways in Germany; such as, they eliminate free onboard meals and fly cheaper and less congested secondary carriers. These airlines focus on short flights and keep a maximum utilization of aircraft. To compete with these cheap airlines, the main airlines have cut their fares on competing routes. Sometimes, they could be 20% more expensive than the discount airlines, which means the overall trip cost could be the same or even cheaper the than the major carriers (Chen and Pawlikowski 2015).  

Porter’s Five Forces analysis

In Germany, the airline has more extensive network, which is more attractive to customer and provide large economies of scope of the carrier. Thus, the airline carriers in Germany such as Germanwings, Air Berlin, TUIfly and Condor tend to exploit each other’s network as well as to reinforce the competitive positions of all alliance partners. As put forward by Pearson and Merkert (2014), forming an alliance with a carrier could be an efficient way for the competitors to divide the market between them. As the government in Germany has withdrawn the taxation policies, the secondary airports with the ample slot capacity attract the low cost carriers. Hence, by offering inexpensive services, less busy airports in Germany are able to attract substantial volumes of traffic. Hence, the airports understand the considerable economies of scale and enhanced consumer satisfaction. Hence, Merkert and Morrell (2012) commented that low cost carriers exploit this opportunity challenging the traditional carriers.

Porter’s five forces analysis

Threats of new entrants- (Moderate)- As put forward by Dobruszkes (2013), the market has high economies of scale and bureaucracy is involved in establishing a new airline in Germany. However, the government of the nation had withdrawn additional tax policies to make the industry more competitive compared to global level of competition. In such context, Mayer, Ryley and Gillingwater (2012) also mentioned that entry barrier is lower in such deregulated market. Nonetheless, few organizations such as Condor and TUIfly have got into the market through merger. Thereby, the threats of new entrants into the market remain moderate in German airline sector.

Competitive rivalry (High)- The competitive rivalry in German airline market is high because of the increasing presence of low cost airlines. The industry has an intensive rivalry among the low cost airlines to achieve market leader status. In addition to this, it has also been learnt that fixed cost of airline is expected to be high, which could intensify the rivalry. The existing airline such as Germanwings, TUIfly and Air Berlin are considered as the low cost carriers that intensify the competition (Köhler et al. 2014). In addition to this, the low cost airlines also have to face changing behavior of the consumers because the consumers could easily switch between airlines. Thus, the exit barrier also remains high.

Threats of substitutes (Low)- Threats of substitute services in airline industry is low in German airline sector.  Hence, the substituted forms of transport could be road, rail and marine. However, the low cost airlines offer low price than the high-speed train in Germany. Furthermore, the people in German prefer airway instead of boarding a train; this is because the economy in Germany is stable and high. Due to economic stability, the culture of the nation is developed and people prefer comfortable mode of transportation rather than congestion in rail.

Level of competition after relocation

 

Figure 2: Porter’s Five Forces

(Source: Michl 2016)

Buyer Power (High)- As the number of the low cost airlines is high in Germany, the customers have the options. The customers could switch to any brand if they are not satisfied from the existing service providers. In addition to this, buyer power is high due to the presence of online booking system. Moreover, the passengers are price sensitive, which means if they are not satisfied with the price, they might take the same quality of service at low price available.

Supplier power (High)- The labor and employees cost could contribute more than 40% of an airline’s total costs (Baumgarten, Malina and Lange 2014). Hence, the supplier power is boosted by the strong presence of duopoly upstream, Boeing and Airbus. On the contrary, the suppliers have little control over the increasing fuel price.

Level of competition after relocation

Resource

Financial- The annual report of the company reveals that EasyJet had a profound reserve that enables the organization to respond quickly to the opportunities such as the recent bid for Great British Airline.

Physical

EasyJet owns 137 aircrafts with Europe’s most modern as well as fuel-efficient fleet. An option of 88 aircraft to be considered when required builds a stiff barrier for new entrants and finally it gives them a competitive advantage. Stocking fuel a year in advance is a significant market strategy for an airline industry (Obermeyer, Evangelinos and Püschel 2013). This obviously proves their financial power and keeps them away from short-term oil price, which EasyJet stocks for an entire year.

Strategic capabilities of EasyJet

The strategic capabilities of EasyJet have been assessed with the help of VRIO framework in the following.

VRIO Framework:

• Value- Exploits opportunities and neutralizes threats
• Rarely-Possessed by one or few others in the industry
• Inimitability- Expensive, difficult to imitate or substitutes
• Organization – Ability of the organization to exploit the capability

Capability	Value	Rarity	Inimitability	Organization
Low cost model	YES	YES	NO	YES
Value Proposition	YES	YES	NO	YES
Popular Route Network	YES	NO	NO	YES
Strong Branding	YES	YES	YES	YES

Table 1: VRIO Framework of EasyJet

(Source: Vidovic, Stimac and Vince 2013)

It has been identified that low cost model is certainly valuable due to the price elasticity of air travel.  Even though, some of the European low cost airlines utilize such model, it is usually not very difficult to imitate (Alderighi et al. 2012). Thus, the existing low cost model brings only a temporary competitive advantage in its expansion plans.

The value of proposition of convenience of EasyJet’s at low prices is undoubtedly valuable. It is observed that travelers are seeking convenience in air travel.  It is also considered that they have become more cost conscious over the past few years. Thereby, while this attractive value proposition could be considered rare in EU, it is easy for other cost carriers to initiate to focus on their levels of service as well as convenience (Malighetti 2015).

Critically discussing EasyJet’s resources and competencies

The existing network of EasyJet usually consists of largely demanded routes for both leisure and business in Europe. Nevertheless, these routes are used by several full cost airlines and it is not difficult. In addition, it may not be difficult or complex for other airlines such as Ryan air to begin as well as construct a similar route network.

EasyJet has very effectively branded itself as the top most airline brand, which is convenient, reliable as well as affordable. Hence, most travelers in Europe could at least identify EasyJet’s signature bright orange plane (Bush and Starkie 2014). In some of the large countries, EasyJet has become the first option when they have to travel by air.

Furthermore, other competitors enjoy the level of brand awareness as well as preference; However, it is extremely difficult to emulate; thereby, expansion strategy of EasyJet can be considered as the significant move to capitalize on its strong as well as mature branding in the coming future.

Discussing how they can be utilized gaining competitive advantages upon relation to the new EU member state-Germany

In order to implement its value proposition in new EU state-Germany and differentiate from its competitor, it is necessary that the organization maintain its ability to operate at a low cost in spite of the rapid expansion plan. In addition, the branding strategy of EasyJet is unique and difficult to emulate, which strengthens the brand position of EasyJet in Germany’s airline market. Moreover, EasyJet is second largest airline service provider of UK after Ryan Air, the brand which already has a strong brand reputation, might gain popularity in German market. In addition to this, the company has a strong financial background, which could help them to avail any significant opportunity available in Germany.

The decision of relocating headquarters in Germany also has an impact on maintenance costs. However, an increase in its maintenance provides EasyJet with additional bargaining position to negotiate with maintenance providers. The mission of the company is to provide its customers with safe, good value, point-to-point air services. However, based on the external environmental analysis, it can be mentioned that EasyJet might be able to accomplish their objectives and implement the vision because the government in Germany is favorable towards the development and competitive nature of airline sector. In addition to this, headquarter of the company is relocated to Germany, EasyJet will get the benefits of being the part of EU airline competition. This means the airline sector in Germany has become competitive due to the presence of low cost airlines. Thus, before relocating to Germany, EasyJet had become foreign low cost airline but once it is located to the capital of German, it will gain control over nature airline services, which eventually benefit the organization itself.

Reframing the vision statement and mission statement of EasyJet for the new strategic change if required

Vision and Mission Statement:- To offer the customers with safe, good value and customer-based services and offer the customers with a consistent and reliable product. To achieve this, the company needs to improve a lasting relationship with the suppliers.

Strength EasyJet has a strong brand name in the airline business and is very efficient even with their low prices. They use a single aircraft that helps in bulk purchases and maintenance and an electronic process of sales and operating policies enables flexibility within the management. They have a flat corporate structure and fast aircraft turnaround time that is capable of efficient airport use (Bush and Starkie 2014). They cater to some of the busiest routes within the European Union (EU).

Weaknesses Their route is limited to short-haul flights, which fly within the EU. They have very few customer loyalty programs and limited offers on accompanying services. They lack business class seats and services. Their overall internet sales are unappealing for the elderly, the disabled people and the people who are not willing to use credit cards for online payments (Malighetti,  Paleari and Redondi 2015).

Opportunities Globalisation is helping in providing a platform for continued air travel demand. The enlargement of the European Union has opened up new markets in that region. Due to the ongoing recession caused by the Brexit, travelers are a wary of costs and would be willing to choose low-costs airlines (Diaconu 2012). During low travel seasons, they have the possibility of leasing out their airplanes. As competitors have begun downsizing, this gives EasyJet the opportunity to stand out with their convenient price ranges.

Threats The ongoing war in the Middle East hints at fluctuating fuel prices for the airlines company. Governments tend to raise airport charges so that they can fund other infrastructural projects. This is a major setback for the airline industries. Other threats, which can hamper business, are recession, terrorism and natural disasters (Wit, and Zuidberg 2012).

Table 2: SWOT analysis of EasyJet

Source:

Recommending changes required to its current business level strategies

One of the most important factors they need to tend to is their customer loyalty programs. To ensure there is goodwill created amongst their customers, they need to provide such service, which makes customers, choose them over any other airline. Their low cost model is effective right now, but such business models are easy to copy and other emerging airline companies would ape this very concept. Thus, they have an edge on their competitors on a temporary basis. They cater to some of busiest routes in the EU; however, many other full cost airlines provide such routes as well. EasyJet would be looking to improve their technological aspects. Introducing automated bag drops and gates would be a huge bonus for them. Such services are considered reliable and effective in the end. EasyJet has successfully branded itself as being the most reliable, affordable and convenient airline, so they should upgrade their technologies. They should consider expanding their fleet. Such a strategy would have an impact on maintenance costs yes, but that in turn would give them a bargaining power over their competitors to negotiate with maintenance providers. Hence, their strategic approach for the future would be to capitalize on their strong brand presence and make a mark on the European Union.

References and Bibliography 

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