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.(……)
The availability of alternative modes of transportation for air travel are increasing ownership of automobile and the railway development. The close substitutes might be a threat of traditional airline company, dominating short journey (less than 3 hours) However, the rail is hard to challenge low-cost airline company. For example, Euro star’s cheapest tickets to Paris is E149. Easy Jet costs from E17.99
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 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 results in a 1.2% decrease in quantity demanded, the own-price elasticity of demand is 1.2. 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”.
the demand for air travel demand should distinguish 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 availability of alternative modes of transportation that are reasonably close substitutes for air transport diminishes with distance travelled, it is expected that the demand for air transport will be less elastic for longer flights than for shorter flights. Further, international travel tends to be spread over more time than domestic travel, so that the airfare is a smaller proportion of overall trip costs, which makes international travel less sensitive to changes in ticket prices. In addition, leisure travellers are more likely to postpone trips to specific locations in response to higher fares, or to shop around for those locations offering more affordable fares. Consequently, it is expected that the demand for air transport for leisure reasons will be more elastic than business travel.
Price Elasticity of Supply and Demand
The demand with price of traveling by air is both elastic and inelastic to large extent depending on various customers who it is that is traveling. Say, a family is planning a trip just to take a vacation by air traveling, if the price of an airline ticket is extremely high, they are more likely decide to delay on the trip until the prices are lower. This shows that leisure travelling by aircraft is considered elastic. However, if a business customer needs to travel across the country by the next day, he will need a plane ticket regardless of the ticket price. For business travelling, the price of airline would be considered inelastic because it is a necessity. The current market has a big part in the supply and demand in the airline industry. in economic downturn with the price of oil rapidly increasing, the cost of an airline ticket is also rising and the demand for leisure travel is falling. In addition, another reason of demand declining is that after 9/11 people were afraid there would be another terrorist attack involving a plane .Another factor in the price of an airline ticket is the date it is purchased. If there is anemergency, customer need to booked a ticket on the day before travelling or purchases a ticket close to the departure date, even though there are unsold seats available 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 possessed 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:
- Easy jet Use the Internet to reduce distribution costs Maximize the utilisation of the substantial assets and maximize utilisation of each aircraft and therefore, significantly reduces the unit cost.
- Ticketless travel .Passengers receive an email containing their travel details and booking reference instead of get a paper ticket when they book online. This helps to lower significantly the cost of issuing, distributing, processing and reconciling millions of tickets each year.
- No free lunch because everybody always jokes about airline food so why bother to provide it 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 and, 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.
- Efficient use of airports easyJet flies to main destination airports throughout Europe with high effienciency, but gains efficiencies through rapid turnaround times, and progressive landing charges agreements with the airports. By reducing turnarounds time to 30 minutes and below, easyJet can achieve extra trunaround on the high-frequency routes, thereby maximizing utilisation rates of its aircraft.
- Paperless operations Since easyJet has simplified its working practices by delivery the concept of the paperless office. The management and administration progress of the company is undertaken entirely on IT systems of the company which can be accessed through secure servers from anywhere in the world enabling huge flexibility in the running of the airline.
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.
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 vulnerability of oil-importing countries to higher oil prices varies mainly depending on the degree to which they are net importers and the oil intensity of their economies. According to the survey implemented by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would lead to the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. Inflation would increase by half a percentage point and unemployment rate would also go up. The OECD imported 20% more than previous year in 2004, which account for more than half its oil needs. 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 would suffer the least, 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.
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