1. Economic Overview
The Airline Industry in the United Kingdom involves both Passenger and Freight transport by air, this report however will focus on Commercial Passenger Transport and the implications of this Industry on the UK economy. It is noted that the ‘UK Airline Industry grew by 0.5% in 2014 to reach a value of £11,587,700,000’ (Market Line Industry Report, Ref: 0183-0756) which correlated to 0.41% of the UK’s GDP in 2014 as demonstrated in the table below.
UK GDP £2,853,700,000,000 Figures Calculated based on
UK Airlines Industry Value £11,587,700,000 Measurements made in
% of GDP Contribution 0.41% December 2014
The Industry also provided just over 61,000 jobs within the UK totalling 0.094% of the ‘30.8million’ (Office of National Statistics 2014) labour force. Whilst the Industry’s impact based upon these two figures appears to be minimal the Airline Industry has been steadily building and redeveloping since the recession in 2008. The two tables below outline the progress that has been made by the Industry in its recovery in terms of both industry value and in pa ssenger flight numbers.
This steady increase could have been generated as a symptom of an aging population with over 16% of UK residents being 65 or older or perhaps due to the governmental policy to keep interest rates low to encourage demand within the economy or the simple cause of consumers having a greater deal of disposable income. However, Airline Companies have in the last few years invested heavily in brand renewal and advertising. It is suggested ‘that advertising adds at least £100 billion to UK GDP by increasing the level of economic activity’ and that ‘On average, £1 of advertising spend generates £6 for the economy’ (WARC Research Report Advertising Pays: How advertising fuels the UK economy). The way in which advertising can act as a catalyst within the Airline Industry has been previously demonstrated by British Airways during the 1990’s, advertising has become it could be argued ‘the main sustainable competitive advantage’ (MacGill 1994) within the Airline Industry. As demonstrated above the remarketing of Airlines does not only reinvigorate their existing brand but it also provides substantial disposable income for consumers which could explain the steady restoration of the Industry post-recession. Since 2010 spending on advertising campaigns has been kept to high levels by Airlines in order to promote business but also to implement some of the strategies that are discussed lower down in this report.
2. Analysis of the Structure of Industry.
The current structure of the Airline industry within the UK is an Oligopoly. This is demonstrated below through the market shares held by the largest four UK based Airline Companies.
The four top UK Airline firms that dominate the market are Virgin Atlantic Airways Ltd, British Airways Plc, EasyJet Plc & Flybe Group Plc. These four firms dominate a high concentration of the industry of 94% as demonstrated below by both the Concentration Ratio and the Herfindahl Hirschman Index.
Based on Economic Assumptions the Oligopoly nature of the UK Airline Market can be demonstrated as having demand as both ‘price elastic’ and ‘price inelastic’ (Gillespie 2014). Price of both goods and services are integral to the Oligopoly due to the ‘kinked demand curve’ (Gillespie, 2014) which could result in revenue falls whether prices are increased or decreased. If analyse is undertaken using Porters Five Forces the positives and negatives of an oligopoly become far simpler to identify.
The likelihood of a new entry within the Airline Market seems to be extremely slim due to the costs associated with setting up an airline company. There are in place very strict Domestic and European Legislation and Regulations that control and stipulate who can and cannot provide Passenger Transport and provide robust safeguards for safety and expertise. Not only is there a direct cost is purchasing resources in order to enter the market but also the substantial cost of specialised legal support staff to ensure the company is set up and can run legitimately and safely. It could however be possible that a foreign Airline could enter the UK market whilst already possessing both the resources such as planes and pilots; but also a legal team and support staff who can efficiently run the company without substantial outlay however due to the high concentration of big firms already this scenario does seem unlikely.
The power of buyers within the Airline Industry appear to be very slim due to the volume of ticket purchases each day. The also appears to be very little opportunity to negotiate upon price again due to the sheer number of purchases per any period and also the buyer is an individual customer rather than another firm who provides goods resources to the firm. It could be argued that perhaps corporations would have greater negotiating opportunities as they by their nature have a large buyer power. Another factor concerning the power of buyers is that of the cost incurred with changing or cancelling a ticket that has been purchased. However, with technological developments buyers have a greater power due to their ability to compare and book flights remotely up to years in advance. This flexibility on the part of the buyer gives them a greater power due to their ability to book with a competitor who has a lower price without having ever engaged other Airlines or enquired about his ticket. The firms EasyJet and Flybe have taken advantage of the more powerful buyer by offering considerably lower rates for flights and by offering convenient check-in options or luggage arrangements ultimately poaching what may have been a loyal customer of another Airline.
Airlines face a considerable problem when choosing suppliers due to the very nature of the service the Airline provides. Suppliers range from Fuel Providers to Cabin Crew or cleaners. The first issue faced by Airlines is the sheer number or suppliers they must deal with. The second issue faced by Airlines is the need to specialist staff such as pilots. The number of people able to become pilots each year must be very remote but if the Airline wishes to expand or needs to replace a retiring pilot they face a serious candidate drought if people have simply stopped desiring to become pilots. Even if specialist staff can be found Airlines face the other challenge of having to pay specialist staff wages which will hopefully keep them loyal to the firm removing the extra costs of recruiting again. Airlines also face problems when attempting to purchase fuel due to the limited companies who can provide the quantity but also the quality that Airlines demand due to their needs. The suppliers exercise a lot of indirect control over the Airlines due to being one of the only businesses who can cater to their needs.
Airlines by their very nature as transport providers face a threat from substitutes. Although substitute methods may be can be costlier or time consuming there are consumers who will opt for these substitutes depending upon their circumstances. The biggest substitute threat for Airlines are Cruise liners, who have the ability to take consumers across oceans to reach their destinations. Cruise liners offer added luxury that commercial Airlines cannot match; the ability to have a room, swimming pool and restaurants on board may for many consumers be a more pleasant way to achieve their commute even with the added time and possible expense. For flights that travel over land there is also the threat of substitutes from coaches or car rental agencies. Again some consumers may prefer to travel across countries by themselves in a hire car, again even at the cost of the trip taking longer and being more expensive. Substitutes for Ai
rliners benefit from similar benefits as buyers in that the ease at which you can now compare and book various forms of travel Airliners are no longer the only option for long distance travel. Airliners do however retain an advantage in the duration of their flights. As mentioned above a consumer may prefer the idea of a luxury Cruise liner however the duration of the trip makes it unviable. Airliners have the unique ability to offer consumers the ability to cross the globe within a 24-hour period; a unique and advantageous attribute that balances out the dangers of consumers booking more comfortable or private alternatives.
As is mentioned above the UK Airliner Industry is highly concentrated by four large firms who dominate 94% of the market. Similar to substitutes above there are considerable competition and rivalries between Airliner firms however this is dependent upon which specific market they are in. If a firm carries out only domestic flights, then they are less likely to be in competition with a firm who predominantly charters flights to Europe and beyond. The main competition appears to be within the four big firms mentioned above. Although all offer different flights and destinations consumers can be led by price to holiday or travel to somewhere else. This is especially prevalent if two firms specialise in short-haul flights or similarly long-haul flights. Another big rivalry within the UK market comes from foreign companies who charter flights to the UK from their domestic country and will then accept a charter back to their domestic country intruding on the markets of UK firms. This competition however exists within other countries by UK Airliner firms and so is accepted as common competitive practice. A newer trend in rivalries is that of price matching through the internet. Each firm has realised that consumers will look online for deals or for alternatives to Airliners and so to combat this all the big companies have increased their exposure online in the hope that consumers will come to them looking for a deal. Many of the big companies also have deals with price comparison websites in order to receive more coverage upon them, although this increases rivalries and competitiveness ultimately the consumer benefits due to cheaper fares and better service and this allows the dialog to begin and for hopefully that consumer to become a repeat customer.
3. Analysis of strategies of firms in the Industry.
The Airline Industry in the UK does not use one strategy exclusively. There are various strategies that a firm can choose to implement however all decisions must not be taken likely. A Cost-Leadership strategy provides you with the benefit of being ‘the lowest-cost competitor within an industry’ (Henry, Understanding Strategic Management 2011), a cost-leadership strategy can also safeguard a firm from price wards, buyers who are intent to push the price down, new entrants into the industry and also from substitutes due to the firm’s low cost position. A cost-leadership strategy does have some serious flaws however such as the strategy can ‘prove expensive as the organisation continually updates its capital equipment’ (Henry, Understanding Strategic Management 2011) and also the danger that competitors can imitate the actions or products the cost leader made produce. A cost-leadership strategy is followed by Ryanair, who are not included above as one of the main firms within the industry upon market share. Harry Segal comments that ‘despite widespread consumer apathy towards the Ryanair brand, there remains significant underlying support for continued growth of the self-styled ultra-low-cost carrier’. The reason for Ryanair implementing this strategy is ‘that price is the most influential factor governing which airlines people choose to fly with’ (Segal, 2014).
A differentiation strategy is ‘aimed at a broad market and involves the organisation competing on the basis of a product or service that is recognised by consumers as unique’ (Henry, Understanding Strategic Management 2011). British Airways in the 1980’s began a differentiation strategy with the desired goal to be that British Airways ‘attract considerable attention on the global stage’ (Balmer, Stuart, 1999). British Airways set out to differentiate themselves from their competitors by excelling at customer service and customer experience. They set out to achieve this by enrolling all staff on an ‘ambitious and exhaustive training program entitled “Putting People First,” the primary accent of which was one of superior customer service’ (Balmer, Stuart, 1999).
Lord Marshall the then CEO of British Airways explained his strategy as “What effectively we had to do was throw away the past—the aircraft fleets and their on-board service, the airport facilities and passenger-handling systems, the reservations procedure and sales process—in fact, the entire inherited corporate identity. All we had left, mentally, were the customers and it was their choices and preferences—identified by consultation, market research, and personal dialogues—that formed the base for re-building.” (Balmer, Stuart 1999). Differentiation strategy’s carry a substantial amount of risk due to it often being the brand that is altered. If existing consumers no longer feel confident in the product or feel that the differentiated product is too expensive they will find a substitute firm and buy their produce. The other danger is always that buyers will no longer demand a differentiated product, this can be due to technological advancements such as the internet providing price comparison websites or it can simply be that the consumers no longer demand your product. British Airways managed to differentiate themselves and currently nearly thirty years have the biggest market share in the UK market.
Some firms chose to follow a focus strategy and focus on a section of the market (usually a niche market) such as Nissan producing electric cars. The niche fulfils many roles as it allows the firm to enter a new market through selling the niche item, it opens other markets up to the firm and it also provides exposure and notoriety as the two strategies prior to this one do.
Many modern firms are choosing a hybrid strategy, that is to say a low-cost strategy by using differentiation within its produce. The differentiation does not have to be wildly different nor a new product. The idea of the strategy is to open up new markets and income streams to a firm, a fine example of this principle is that of UK Supermarkets beginning to sell clothes and t. v’s as well as clothing and food. The four big firms within the UK Airline Industry are currently implementing hybrid strategies, all with different aims and different markets they want to exploit. This trend is not only happening in the U.K but also in other European Countries with Harry Segal reporting that ‘Hand luggage-only fares from traditional full service airlines such as British Airways, Air France and KLM are set to challenge the market share of established low-cost airlines. Along with the Norwegians budget long-haul flight from London to New York. The competitiveness within the UK Airlines market is giving firms no choice but to compete and diversify into new and existing markets in order to satisfy a larger market share than is already occupied.
4. Evaluation of chosen firm’s sustainability targets
Flybe’s sustainability targets are focused upon two key areas, the environment and their local economy. The Flybe corporate website has a whole page dedicated to its plans for its sustainable future and detailed information as to how it wishes to achieves its targets. The first target Flybe has is to have what they call a ‘Green Fleet’ which has begun with a ‘multi-billion-dollar investment’ (www.flybe.com/corporate/sustainability/green_fleet.htm). It list
s aircraft that it has already purchased; The Bombardier Q400 which boasts a 30% improvement in fuel efficiency against the aircraft that it replaced, details of which are not provided. Flybe does promote that they are ‘among the world’s largest operator of the Q400’s, which is among the most environmentally-sensitive passenger aircraft available’ (www.flybe.com/corporate/sustainability/green_fleet.htm). Flybe currently have forty-five Q400’s in their fleet and have the open option to purchase fifteen more, so far having invested $788 million in just 2007 alone. Flybe also boast of a short-haul low cost to the environment plane, their Embraer 195 along with a fleet of eleven Embraer 175’s. Flybe wish to be at the ‘forefront of the efforts by the airlines to reduce the environmental impact of air travel and promote sustainable growth in the aviation industry’ (www.flybe.com/corporate/sustainability/green_fleet.htm). The main cost to Flybe in fulfilling this target is monetary. Flybe has invested heavily over the last ten years and have grown into ‘Europe’s largest regional airline’ (www.flybe.com/corporate/sustainability). The benefits of fulfilling this target will be lessened air pollution and wasted fuel but also a more reliable and cost effective fleet of planes which will allow Flybe to continue to pass savings down to its consumers. However low operating costs is not the only benefit to be had out of achieving Flybe’s targets for sustainability; 'What does social responsibility have to do with shareholder value? A lot today, and more tomorrow’ (Longhurst, Advertising and Sustainability). It is also going to impact upon the company’s image with both consumer and shareholder. (Longhurts, Advertising and Sustainability) comments that ‘that there is a disconnection between what advertisers are saying and doing on the issues and what they are communicating through advertising’. The costs however are central to this last point; if your consumers find out that you have been lying or twisting the truth as to what you have achieved they are instantly going to become disenfranchised in your firm. Your public image will suffer not just amongst your consumers but also your peers and any other potential consumer who is passionate about climate change. Not only are there costs to failing to fulfil on your firms promises but there is also opportunity cost which runs parallel to the money that has been and will be invested in this sustainability project. Any money and time spent on sustainability also comes with an opportunity cost which may be vital to the business as a whole. You may have invested £10million to the sustainability project but if by doing so you have jeopardised the commencement of flights from Bristol to Barbados. With the extra revenue made from the reinvestment into Barbados Flybe may find that at a later date they may have been able to invest £25million. The opportunity costs of investing large quantities of money on future equipment is the other uses that money could have fulfilled.
Along with their work towards Fuel efficiency Flybe is also passionate about preventing Noise omissions as much as they can. They currently work within the local communities surrounding their main bases and with ‘airport owners, local housing planners and air traffic controllers to ensure that those living under flightpaths do not suffer excessive disruption’ (www.flybe.com/corporate/sustainability/green_fleet.htm). This community programme provided by Flybe has many benefits that could benefit the firm in the future. By working within the local communities and ensuring that their lives are more enjoyable Flybe will have created an already motivated workforce for any positions may become available. Flybe by trying to ensure a better quality of living around their sites are also attracting people to come and live close to the fleets and these people may one day become future consumers of the Flybe product. By ensuring that the surrounding areas of different Flybe sites are pleasant places to live and that living there is sustainable they are adding sustainability and hundreds of new potential consumers who will by products and continue the sustainability cycle.
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