Free Business Essays - Budget Airlines: The Past, Present and Future
No-frills low-cost airlines are viewed as '. . . scheduled airlines which have purposely set out with a lower cost structure than scheduled airlines to achieve lower fares' [Mintel 1999]. This paper will look into such airlines in light of their history and their journey along the time line to present day and what is expected for them in the future. It looks into the influences on the origination of the budget airline market and their characteristics, market strategy, market share and development.
History
Airline Deregulation Act 1978 opened the foodgates to competition in the Airline Industry in the USA. This freed the airline industry of obligations to any regulations which it had been subject to since the 1944 Chicago Conference. This along with liberalization with Europe opened doors for ‘no-frills’ air carriers, giving them a chance to formulate and apply low-cost strategies. Most major American airlines have instigated supplementary low-cost airlines, a trend that managed to make its way over to Europe.
In 1971 an airline was founded in Texas, known as the Southwest Airline. This consisted only of two carriers but become a stepping stone for the American airline industry. `principal driving force behind fundamental changes made by US airlines in the past few years'A 1993 US Department of Transport study. Southwest Airline owed most of it success to two things; Efficiency and Pricing.
Southwest adopted successful time utilization where it took 15 minutes between flights to get old get old passengers off and new passengers on the plane, gaining 45 minutes flying time each day. This resulted from multi-tasking of employees between different job categories. They also had a winning price strategy; they did well in providing money’s worth quality for the prices they charged and made larger profits by cutting costs and increasing capacity making Southwest Airline on of the most successful in the world.
Airline deregulation was an inevitable occurrence; it had begun in the 1960s, the regulation of airlines was widely questioned by economists in various countries including the United States of America and the United Kingdom. They argued that regulating the Airline Industry restricted competition; it deprives companies from freedom of pricing and product differentiation, discouraged new entries in the market which made existing companies inefficient as they lacked competition and disadvantaged them of a chance to increase capacity.
Deregulation of the Airline Industry was believed to generate healthy competition in the market. It was alleged that the Airline Industry should be treated like all other industries and that the general anti-monopoly laws were sufficient to protect any consumer rights that might be at threat. On top of that there was severe consumer pressure and non-scheduled airlines, such as Southwest Airline, who were gaining market share rapidly. In 1977 Jimmy Carter was elected as president of the United States and on 24th October 1978 he passed the Airline Deregulation Act 1978. Up to 1985 the new law made gradual changes to the Airline Industry in the USA till finally the Civil Aeronautics’ Board was completely eradicated and all domestic fares and routes were free of controlling legislation.
1975 onwards the United Kingdom faced liberalisation similar to that in the US as the Civil Aviation Authority relaxed jurisdiction. 1976 the Deregulation of International Freight Charters played an important role. Deregulation slowly gained popularity in Europe, it gave carriers the opportunity to try out new domestic routes and cut down on the ones they regarded as unbeneficial. Liberalization of the Airline Industry in Europe became a popular topic of debate at both the European Parliament [Strasbourg] and the European Commission [Brussels].
The first significant step towards the deregulation of air transport between EU member countries was taken in 1983 as a directive based on former proposals that were approved, this wasn’t of much practical effect but it got the ball rolling. Unlike the American Airline Industry the European market did not respond to the idea of deregulation so quickly and from being partly liberalised in mid 1980s it took another 10 years for the European Airline Industry to be absolutely liberalised. 1991 saw a breakthrough in the European Airline Industry as RyanAir which had been a multi-fleet operation from Ireland expanded its scope as it followed in the footsteps of Southwest Airlines.
RyanAir pinched some market share from significant air transport carriers but its pet target market was surface travellers i.e. rail, road and sea travellers. The second breakthrough in the European Airline Industry took place in 1995 when new beginner EasyJet entered the Airline Market. EasyJet ascended fast and by 1998 it had £2.3 million on a turnover of £77 million. With a minimal workforce of 400 it managed to carry 1.7 million passengers. In Brussels in 1996 Virgin Group acquired 90% share in the Euro-Belgium Airline and changed its name to Virgin Express. Virgin Express took the airline market by storm and become the third major company in the low-cost airline industry in Europe.
National carriers lost a significant market share due to the emergence of prominent ‘no-frills’ competitors in Europe. From 1993 to 1997 their market share fell drastically from 75% to 60% of the entire Airline Industry. The IATA Corporate Air Travel Survey showed that 70% of air travellers would rather travel for a lower price and get no frills than pay more for airline service on short distance flights. They rated in order punctuality, scheduling and pricing as most important services at 65%, 52% and 37% in order, followed by seating and ‘frequent flyer’ programmes and least were food and lounges at just 8% and 7% preference respectively [adapted from Trade Travel Gazette 1998].
‘No-Frills’ Airlines Today
Today, no-frills airlines integrate innovative strategy in an attempt to win over a wider customer base. There is tough competition in the market brought in owing to the liberalisation. The European Airline Industry is marked by a few prominent hauliers.
RyanAir
RyanAir is perhaps the biggest name in the no-frills airline industry. It was an independent Irish venture. In 1985 it inaugurated services between Ireland and the United Kingdom. Post-liberalisation it was reinitiated as a vigorous price competitive haulier. Its first success was marked by its triumph over ferry traffic between the Irish and other ports. By 1997 RyanAir had the biggest telemarketing centre in Ireland and by June had entered the New York-Ireland stock exchange. At the moment RyanAir fulfils all the requirements of a no-frills airline, it has a large online database for ticket bookings, large single-class cabins and free seating on all flights, fast check in and the only services offered are a selection of beverages to purchase and a duty-free trolley. It covers a large network over 11 countries with 45 operative routes. RyanAir is a prime example of a success, also the most successful open Irish company. It is expected to acquire the largest number of new age aircrafts known in Irish history.
EasyJet
EasyJet’s success story is quite different from that of RyanAir in the sense that, unlike RyanAir, EasyJet was a completely new entrant in the airline transports market. It is also a fairly young company as it was established in 1995 November by Stelios Haji-Ioannou. It followed completely in the footsteps of US complements Southwest Airline and ValueJet. EasyJet’s motive was to formulate more demand for air travel by dropping prices.
It operated from Luton airport in an attempt to attract more passengers as it was easily accessible to travellers from Northern London and the Midlands. Its objective was to save on costs such as handling and landing by using a secondary airport. Now EasyJet services are available from more major airports such as Liverpool, Gatwick, Stansted and Geneva. Amsterdam became another major EasyJet centre in 2000, this came at the disadvantage of KLM, a major Dutch carrier, which faced setbacks due to loss in jobs and its own Stansted-based budget carrier ,Buzz, meeting intensifying fuel prices and diseconomies of scale.
EasyJet operates on a smaller scale than RyanAir with 35 routes but functions from destinations where competition is not as fierce and there is possibility of growth. EasyJet is a ticketless airline, with 95 per cent of sales through direct-sell reservations and the remaining 5 per cent at the airport [Aircraft Economics 1996]. EasyJet saves up to 25% of its flight cost just by dropping costs that are incurred into travel agent commissions and global booking systems [Rigby 1997].
EasyJet’s tactic is to charge minimum prices but make up profits by generating additional passenger load. The biggest money maker for EasyJet is the non-refundable tickets policy. In term of in-flight services EasyJet too, like RyanAir, only offers snacks and drinks for purchase. All employees dress in the casual orange uniforms; the orange plays a significant part in EasyJet’s marketing technique as it is an eye catching campaign which stands out and attracts customers and also promotes a friendly environment. “The corporate culture at EasyJet is a carbon copy of the Southwest approach in the USA, with an emphasis put on fun and friendly working environments to foster greater employee and customer satisfaction.” [Gilbert 2001]
Debonair
Established in 1996, Debonair was a short-lived venture. Regardless of it following EasyJet’s strategy to target the holidaymakers by offering attractive low prices an operating from Luton, a low cost secondary airport, Debonair was wiped off the budget airline market in its early development phases. Debonair’s failure was a consequence of changed strategy where the target market was shifted to business travellers and highlighting `style, urbanity and quality' [Gilbert 1997].
Such features as style, urbanity and quality to some extent can be considered as ‘frills’ which took away the entire concept of running a ‘no-frills’ airline bringing Debonair on the same market as large hauliers rather than the budget airline industry. Frill airlines were already suffering and Debonair being a new entrant could not prosper in the airline market with a constantly falling market share [Gilbert 1997].
Virgin Express
In April 1996, the renowned Virgin Group acquired 90 percent shareholding in the former Euro-Belgian Airline for £60 million and the company was renamed to Virgin Express [Gilbert 1997]. Virgin Group owner Richard Branson described the Virgin Express’ plan, `We intend to build Virgin Express into Europe's premier low-cost, no-frills, quality short haul scheduled airline. We plan to take on the major state-owned carriers and provide customers with the kind of value-for-money experience which has so long eluded them in Europe’ [Richard Branson cited from Crumpe 1997].
Jonathan Ornstein, along with his team, was appointed in charge of the running of Virgin Express by Richard Branson to ensure its success, owing to Ornstein’s reputation from his accomplishment in the US where he saved deteriorating carrier Continental Express. Its Brussels base is integral to its strategy as it provides access to routes to various Southern European countries and targets business travellers by offering affordable prices on their regular routes.
Virgin Express is partly travel agent managed but there is pressure on being pro-direct retail by the chairman, as saving money on travel agent cuts can add to investments made in order to improving the brand. Brand Loyalty is a key reason behind Virgin Express’ success story, which arises from the good reputation of its US counterpart Virgin Atlantic one of the biggest and most successful names in the Airline Industry.
GO
Go was a fairly recent venture launched in May 1998 as a low-cost subsidiary by UK’s leading carriers British Airways. The main operating hub for Go is Stansted Airport. Go targets a niche market of travellers looking for cheap air fares whilst maintaining the image and standard of the airline they travel. Go can fulfil this requirement as it banks off the goodwill of British Airways and the £30 to £50 million investment.
British Airways’ motive behind the launching Go was to avoid the misfortune faced by prominent US hauliers which concentrated on the intercontinental travel market while Southwest Airline concentrated on the local traffic and resulted in big airlines losing local market share first in Texas and then the seasonal market in California[Gilbert 1997]. Go’s business plan is based on a six month study by Barbara Cassani [CEO] of the US budget airline industry.
It operates 18 Boeing 737s over a widespread network runs between mediocre airports and provide similar in-flight services to those of RyanAir. It takes a much different approach on outlook and image to EasyJet and highlights instead the high standard aspect of the company; by means of smartly, semi formal dressed cabin crew it portrays a classy and professional image. Go retails on a ticket less, first come first serve basis. It attracts customers through offering discounts such as £2 off every booking made online. It draws through customer services like their ‘call back’ system which users can access through the Go website, go-fly.com, where they can access a call centre which connects them to a call centre and a representative talks them through the online booking process and other queries.
Buzz
Buzz was introduced as a KLM project. It covers 11 countries including Paris and Frankfurt. It uses efficient Boeing 737s as well as some less efficient BAe aircrafts. Their stand is that everybody is a separate individual with separate needs and is treated in accordance, some people want extra benefits while others don’t. Buzz hence faces diversity in target markets; their policy is to try and target various markets i.e. employ price discrimination strategies to generate higher profits.
Buzz practices a flexible pricing scheme; they offer low prices but not hidden prices. They do not want to make promises of all low priced seats if they can not live up to them. They quote individual prices for journeys depending on the destinations, aircrafts and seats and all prices vary depending on what extra services the passengers want to get from ground and cabin staff. Like Go, Buzz also offers a £2 discount on internet bookings [Gilbert 1997].
Strategy and Progress Over Time
Deregulation of the airline industry in the US was a key influence on the low-cost strategy that was adopted by the Airline Industries in both the US and then Europe. Competition entered the Air Transport Market in three vital stages. [Buzzavo, 2005]
1970s-1980s: Concept of Differentiation
Pre-deregulation the airline industry was primarily an Oligopoly model, where a few mostly unrivalled airlines such as British Airways, Air France and Lufthansa marked the Airline Industry. Fare prices were still controlled by the Civil Aeronautics’ Board [CAB] into the early 1980s and European Airline Industry was only fully liberalized in 1990s. Initially Airlines started off with product differentiation strategies as they were deprived of price control.
This did not, however, prevent cost control practices. Cost control was already becoming inevitable as competition progressed and the economy faced rising fuel prices. Alongside, there was also stress on the quality and services promotion to attract a larger customer base. Brand loyalty became another prominent aspect of the industry’s business plan. The earliest progress made in this respect was the introduction ‘frequent flyer’ schemes, introduced by US based United Airlines, where people could gather points on the miles they travelled with certain airlines and the points could then be traded in for free flights or upgrades, etc. This became fast catching trend and is used now not only to gain loyalty but also to observe consumer behaviours and preferences and therefore plays an important role in marketing research.
Product Differentiation covered a vast variety of services being introduced and/or promoted in order to draw customers. The industry experienced incredible innovation and creativity, in fact some companies quite distinctive approaches to product differentiation e.g. The Virgin Group owned airline Virgin Atlantic offered in flight massages on North Atlantic route flights between the US and the United Kingdom amongst other attention-grabbing services. Like all highly competitive industries, the Airline Industry too was caught in a fierce imitation cycle where competitors move fast in imitating innovative strategies as they hit the market to rob their competitors of advantage of the employed strategy.
1990s: Globalization
Product differentiation developed through the 1980s and the 1990s, this brought new opportunities along with substantial pressures for the Airline Industry as it entered globalisation. Airline focuses changed notably like prioritizing core activity over non-core projects such as company owned hotel chains, to toughen the foundation of the company by focusing management and financial resources to it. To manage a steady flow of passengers the hub-and-spoke strategy was adopted; flights were converged at high frequency airports. To control stokes [flow] entering the hubs [airports] companies reverted to acquisitions of minor airlines and mergers.
Alliances, mergers and acquisitions were key steps taken to face the force of globalisation. Cooperative schemes between companies for traffic management on various routes and also on other services such as ‘frequent flyer’ schemes and ground services, etc were prevalent all over. Some eminent worldwide networks that emerged then included Sky Team, One World and Sky Team, a lot of which have continued to expand to date.
2000s: Low Cost Strategy, Distribution and Promotion
Low Cost-Low Pricing Strategy
Deregulation of the Airline Industry was a gradual process that started in 1970s in America and 1980s in the UK. But it was from the 1990s that actual effects stood out on a global level. The application of ‘low-cost’ strategy was popularised by new entrants who made their way into the market from 1990s onwards. They broke all fare related norms followed by the earlier existing companies and moving into the 21st century the industry experienced incredible levels of growth.
Europe fare prices, specifically UK, remain higher in comparison to the US but that is due to the higher initial cost in the Europe. European marketing strategy is generally pro pricing over differentiation. Their differentiation is price related. RyanAir and EasyJet strategy is merely price and promotion oriented. They believe that on short haul and low budget differentiation can realistically only be done on price as the costs are usually cut on the extra services that standard airlines provide.
However, not all European airlines are purely price strategy focused. Go stressed a great deal on quality. Go believes in reaching a good balance between price and quality. There strategy is similar to that of companies like clothing company Zara; they provide quality at affordable prices. They believe that price should not come at the risk of reputation. Go banks off the reputation of parent company British Airways and by lowering standards Go would jeopardize its reflection. There are market segments that give some priority to standards and image.
Distribution
Efficient distribution also plays an important role in budget airline strategy. RyanAir and Virgin Express use same distribution technique as Southwest, they sell through both direct sales and travel agents. Using travel agents does increase costs but it also provides opportunities to expand as many people use travel agents because of convenience. Using travel agents also saves them some promotion expenses that they might have to incur otherwise.
Recently, however, both American and European carriers are cutting back on travel agent use as there have been variations in commissions. Virgin Express has faced some trouble with travel agents as they pay a 35% commission but still have problems as they are not on the GDS and difficult to contact. As Virgin Express is ticket-less travel agents have billing difficulties and thus to evade the hassle they avoid making Virgin Express bookings.
EasyJet and Go do direct selling at airports and online. E-marketing is another successful distribution strategy airlines use as they are cheaper to apply and convenient to implement by the company and use by the customers. Distribution expenses are a dominant part of total costs incurred which are significantly minimized through the use of Internet Communication Technology [ICT]. According to Rod Eddington, CEO of British Airways, they spent £1.1 billion on distribution which was the largest expense after fuel and labour and use of ICT distribution reduced these significantly [Buhalis, 2003].
Promotion and Advertising
Distribution is also linked partly to promotion. Promotion plays an important role because it causes awareness. Providing a service is useless the users are conscious of its existence. This is especially integral to strategy of new companies as they need to let people know thye have entered a market.
EasyJet is a good example of a company that advertised its product efficiently and cheaply. All their promotion is handled within the company by its managers, this enables them to not only save on advertisement expenses that they would otherwise bear by using an advertising company but also act fast as they can actually launch a promotion within 4 hours of initiation of a plan. Another source of promotion for EasyJet is the national press; they have done immense promotion with important papers such as The Mirror and The Times. The Times Campaign offered 300,000 discounts on seats [Gibert, 1997].
Go is another airline that is exceedingly depending on promotion as their focus apart from low pricing is image advertising. This is linked to their differentiation strategy as they differentiate themselves from other low cost airlines on the basis that along with low prices they provide quality travel.
RyanAir has a large advertisement budget and they mostly promote their low prices.While the older companies were busy with applying the differentiation tactics and entering partnerships and agreements to gain ground on the global plane, new entrants targeted a large consumer base by applying completely opposite tactics i.e. low cost and low pricing strategy. They applied the ‘cutting corners’ technique to avoid costs and thus charged cheaper air fares. In cutting corners they dispense the airlines of certain services [on ground and in flight] or ’frills’ which they considered unnecessary for short haul routes. This was a welcome compromise as a vast majority agreed that they would rather pay less for a short haul flight than pay more and get snacks and beverages and thus ‘no-frills’ airlines were initiated.
Previous Airlines companies prospered when air travel was considered an elitist indulgence. ‘No-frills’ airlines gave flying a new outlook; it was made more accessible, affordable and available.
Market Share
No frills airlines achieve low cost services by ‘cutting corners’, multi-utilization of employees and operating from low congestion, secondary airports. Use of secondary airports by budget airlines helped develop flight networks running parallel to those used by conventional carriers. The low cost network like the conventional have their own major carriers which mark the ’no-frills’ air transport market [Neufville, 2005].
US Market
In the United States of America the budget airline culture was pioneered by Southwest Airlines in Texas. It started out with just two aircrafts operating between two abandoned airports in Dallas and Houston.
Regardless of its small scale initiation Southwest Airline’s success earned it a good reputation. As of 2001 Southwest Airline was officially the 4th largest airline in the entire Airline Industry, and not only the low cost airline market, derived from a passenger base research [IATA 2002 adapted from Neufville, 2005]. At the end of 2002 it had an international record breaking $10 billion market capitalisation [Neufville, 2005].
American ‘no-frills’ airline industry was dominated by Southwest Airline for most of its existence. From 2003 onwards, however, a few significant carriers began emerging in the industry which brought Southwest Airline face to face with competition in its own field, low budget air travel, which it had to date more or less monopolised.
Southwest is still, however, the predominant low budget short haul carrier with a market share of 20.81%. It is followed closely by Delta Airlines at 18.84% and the US Airways at 10.54%. [HILLSBOROUGH COUNTY AVIATION AUTHORITY, adapted from TAMPA INTERNATIONAL AIRPORT MONTHLY MARKET SHARE, March 2005. http://www.tampaairport.com/about/facts/activity_reports/2005/marketshare_mar2005.pdf]
European Market
RyanAir is the European Airline Industry what Southwest has been to America. In 2002 it was recorded to have the second largest market capitalization, after Southwest Airline, at $4.5 billion [Neufville, 2005]. This was double that of British Airways, perhaps the biggest airline in the European market. Within only 10 years of induction it showed to be promising and following very closely in the footsteps of Southwest Airline.
The second major competitor in the European market for budgeted airline transport is EasyJet. It operates on a network more integrated with the main air network as it operates form secondary airports in England to primary airports in other cities such as Munich and Paris.
RyanAir holds 6% market share in the entire European Airline Industry and is expected to go up to 10% by 2010. It makes up for 75% of the total European ‘no-frills’ industry [smartmoney.com, January 2007,]
In May 2006 low-cost airlines made up to 16.3% of the entire European Airline Industry. UK made up for 28.4% of the entire European ‘no-frill’ airline market. [BUSINESS WIRE, 2006]
Future Perspective
Budget Airline future looked bright in Europe but the same can not be said for the American Budget Airline Industry. The Airline Industry faced some set backs owing to some public eye terrorist attacks but the effects on the travel industry in the United States after the September 11 terrorist attacks were far worse than what Europe ever experienced. “As a severe downdraft grips U.S. airlines, their European rivals have found a rare patch of smooth skies” [Eric Pfanner, International Herald Tribune, 15th August 2002].
Despite the terrorism scares European are alleged to be moving towards a more lenient stance over the European Airline Industry, which they earlier believed was destined to failure and unprofitable. Meanwhile the American Airline Industry appears to be suffering due to over capacity and restrictive labour agreements. The accumulated expected loss of US carriers for the year 2002 was $5 billion as a result of the terrorism alert. [Eric Pfanner, International Herald Tribune, 15th August 2002] US Airline Industry was so severely affected that many airlines had to file for protection under chapter 11 bankruptcy.
James Oberstar, a congress expert on transportation, passes judgment on American budget airlines. He criticizes US Airways for taking over Delta Airlines. His stand is that the new trend of mergers in the Airline Industry is not beneficial reason being they benefit only the airline managers and Wall Street while the travellers’ rights are exploited. [Don Phillips, International Herald Tribune, December 2006]
The European Airline looks more promising. The main carriers RyanAir and EasyJet are running efficiently and receiving fruitful returns. They reinvest their profits to acquire new aircrafts to increase capacity and expand their air travel network. RyanAir increased profits by 26% between 1999 and 2001 bringing annual profit to £72 million and passengers by 13% to 5.6 billion[ryanair.com]. Budget airlines along with increasing market share have managed to expand the entire airline market in Europe by augmenting new sectors of the public into the customer base.
Based on Porter’s five force model Budget Airlines may not return high short term profits because of high set up costs and advertisement expenditures but the long term seems to have potential for being profitable [Gilbert 2007]. The threats imposed by rivals from other industries such as rail travel and video conferencing have been as successful against air travel as was predicted. Financial Times said in an article “business travel will continue to increase but says travelers will be making less-frequent but longer. This is because technology such as improved video conferencing will replace short face-to-face meetings” [Roger Bray, Financial Times, 25th Jan 2006].
There have been minor set backs in the UK since August 2006 due to the terrorist threats at Heathrow Airport in London which resulted in cabin luggage size restrictions as well as restrictions on the items passengers were allowed to hand carry. This is a disadvantage for ‘no-frills’ airlines because their motive is to try and get passengers to hand carry as much luggage as possible to avoid delays at the airports [BBC News, 2006, http://news.bbc.co.uk/1/hi/business/4794069.stm].
On the other hand buyers have more buying power, this owes mostly to the cheap fares. Rivalry and healthy competition are expected to increase. Companies that continue to offer low fares and good service will prosper as long as they keep their costs under control.
Conclusion
In conclusion, Air Transport market has developed greatly over the past twenty something years post deregulation of the airline industry from the existing regimes which controlled it. Airline Industry has gone through a revolution where conventional practices were challenged by what emerged as what was a similar but yet completely diverse market, the ‘no-frills’ airline industry. It became a fast growing market; it not only took away some market share form the existing airline industry but also reached out to market segments that the regular carriers had not targeted yet.
In the United States of America, where market was inaugurated, the new industry reached its peak but faced with some misfortunes countered some major set backs. It, however, provided models for the rest of the world in the form of some very successful short haul, low budget hauliers like Southwest Airline and ValueJet. European market adopted American models and derived more gainful ventures like RyanAir, EasyJet and Virgin Express, to name a few, which appear to have a promising future as they employ strategy marked out by their American counterparts and some innovation.
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