Evaluation of Easyjet Cost Leadership Competitive Strategy
Word Count: 2,418
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Executive Summary
The purpose of this report is to identify and critically evaluate how Easyjet has
utilised its cost leadership strategy to arrive at its current market leadership
position. The report also analyses the advantages and limitations of this cost
leadership competitive strategy and goes ahead to offer appropriate
recommendations for future improvement.
The report finds that Easyjet’s cost leadership strategy is characterised by no
frills services, capacity optimization, faster flight turnarounds time, short-haul,
and direct flights to major European airports. This strategy has helped the airline
to gain a large market share, grow its profit and revenue base, optimise the utility
of its core resources, and most importantly, increase its bargaining power
customers and suppliers. Even so, the strategy has attracted regular labour
union wrangles and financial losses in some competitive routes.
In mitigation, the report encourages Easyjet to standardise its aircraft seating
arrangement so as to simplify its ticketing and in-flight services in line with the no
frills philosophy and eliminate the pre-allocated seats practice. In addition, it is
recommended that the airline should create new revenue streams by diversifying
into new lucrative European routes. This will cushion against huge labour costs
and mitigate regular labour union wrangles.
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Table of Contents
Executive Summary................................................................................................2
1.0 Introduction.......................................................................................................4
1.1 Company Background...................................................................................4
1.2 Purpose and Scope of Report.......................................................................4
1.3 Competitive Strategy and Competitive Advantage.......................................4
2.0 Cost Leadership Competitive Strategy.............................................................5
2.1 How Easyjet Utilises Cost Leadership Strategy............................................5
2.1.1 Faster Flight Turnaround Time and Flexible Flight Planning..................6
2.1.2 Short-Haul, Direct Flights........................................................................7
2.1.3 No Frills Services (Not Offering In-flight Extras).....................................7
2.2 Benefits of Easyjet’s Cost Leadership Strategy............................................8
2.2.1 Optimised Operational and Financial Management Efficiency...............8
2.2.2 Increased Revenue and Market Share...................................................9
2.2.3 Increased Bargaining Power...................................................................9
2.3 Limitations of Easyjet’s Cost Leadership Strategy........................................9
2.3.1 Constant Wrangles with Trade Unions.................................................10
2.3.2 Low Profit Margins................................................................................10
3.0 Conclusions and Recommendations..............................................................10
3.1 Recommendations......................................................................................11
References............................................................................................................12
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1.0 Introduction
1.1 Company Background
Easyjet is a short-haul, low-cost carrier headquartered in Luton, UK. The airline
employs about 9,000 workers to operate more than 200 aircrafts, in more than
600 flights to over 130 airports across 30 countries, mainly the UK and Southern
European countries (Anderson, 2014). During 2013/14 financial year, the airline
realised £4,527 million in revenue, a 6.3% increase from the previous year, £581
million in operating profit, a 21.5% increase from the previous year (Easyjet,
2014, p. 6), and £450 million in net profit, a 13.1% increase from the previous
year (p. 7). Arguably, this profitability margin reflects the more than 60 million
passengers it carried during the 2013/13 financial year.
1.2 Purpose and Scope of Report
This report identifies and critically evaluates how Easyjet has utilised its cost
leadership strategy to arrive at its current competitive position. It does so by
drawing on relevant theoretical frameworks and examples of actions taken by the
airline in pursuit of this competitive strategy. The advantages and limitations of
this current competitive strategy and actions taken thereof will also be analysed
relative to the current business environment. Finally, appropriate
recommendations will be offered for future improvement.
1.3 Competitive Strategy and Competitive Advantage
Every company boasts of a competitive strategy that differentiates it from its
rivals and helps it achieve its strategic competitiveness goals. According to
Mintzberg and Waters (1985), a competitive strategy is the way an organisation
unbundles its unique resources, core competencies, and superior capabilities to
build competitive advantage over its competitors. According to Porter (1985),
organisations gain competitive advantage through adopting one of the following
strategies: differentiation leadership, cost leadership, differentiation focus, and
cost focus. The cost leadership strategy, for instance, entails producing at very
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low costs and passing on the benefits to the consumer in terms of product low
prices (Johnson et al., 2011). Irrespective of the strategy adopted, an
organisation must ensure that its competitive strategy can help them achieve
sustainable competitive advantage over their rivals.
2.0 Cost Leadership Competitive Strategy
The cost leadership competitive strategy concerns itself with being the lowest-
cost producer relative to rivals. According to CIM (2011) and Porter (1985), the
cost leadership strategy has to do with exploiting the gains of economies of scale
and scope by producing a wide variety of standardised products and services
and in large volumes. In theory, the cost leadership strategy is based on the
notion that if the selling prices of a specific organisation’s products are close to
the industry selling price average, then becoming the lowest-cost producer will
offer the highest benefits to the organisation in terms of increased market share
and revenue (Lau, 2002). In practice, however, cost leadership is associated with
an organisation that standardises all its products as a way of lowering the costs
of production so as to realise a reasonable profitability margin even after selling
at relatively low prices (Clulow, Gerstman & Barry, 2003). Sometimes
organisations that adopt the cost leadership strategy offer very competitive “mass
sale” discounts to maximise sales and grow market share (Hooley, Piercy &
Nicoulaud, 2008). This indicates that products and services of organisations that
adopt the low cost leadership strategy have relatively little traces of
differentiation, customisation and innovation. Again, organisations that adopt the
cost leadership strategy usually sell to the mass market where differentiation and
customisation are not highly valued. Finally, and while drawing on views from
Goll, Johnson and Rasheed (2008) and Powell (2001), it is justifiable that a cost
leadership strategy is more suitable to organisations that have relatively superior
cost advantage over their rivals.
2.1 How Easyjet Utilises Cost Leadership Strategy
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The hallmarks of Easyjet’s cost leadership strategy are high aircraft utilisation,
quick turnaround times, pay-for-fight extras, direct, no frills flights. As Gilligan and
Wilson (2009, p. 417) show, the airline employs strict cost-cutting measures such
as not offering connecting flights, in-flight snacks, and charging for any extras
such as priority booking, flying young fleet of similar aircrafts. This keeps
operating costs at low levels and this benefit is transferred to customers in the
form of lowly-priced air tickets.
2.1.1 Faster Flight Turnaround Time and Flexible Flight Planning
The average flight turnaround time for Easyjet flights is 25 minutes. A faster flight
turnaround time is better indicated by a consistent annual growth in gross seat
revenue of more than 1% in the last five years. For example, the gross seat
revenue growth in 2014 was 1.2% to reach £62.40 million from the £61.64 million
realized in the previous year (Easyjet, 2014, p. 12). Moreover, a faster flight
turnaround time is captured by the airline’s high capacity utilisation of core
resources including aircrafts, employees, capital and technology. It is therefore
not a surprise that airline grew its passenger numbers by 6.6% to reach 64.8
million in 2014, one of the industry highest especially for airlines that do not offer
connecting flights (p. 10). Furthermore, Easyjet’s faster flight turnaround is
highlighted by the airline’s extremely low total cost per seat of £0.24 (p. 16),
increased profit per seat by 12.8% (p. 3), increased total revenue per passenger
by 0.5% to reach £70.40 million (p. 6), increased flight planning capability,
decreasing cost per passenger by 0.8% to reach 42.40 (p. 6), and a decreasing
flight expenditure (9% of total revenue raised) in 2014 (p. 8). Arguably, and while
drawing on ideas from Kupka and Jamart (2009) Wei and Hansen (2005), it is
justified to assert that these operational and financial improvements were made
possible by the airline’s decision to use identical aircrafts, that is, the Airbus A319
which form about 68% of the entire fleet and A320 which form about 32% of the
fleet. This reduces the learning curve for flight crew and other staff especially
during boarding and disembarking from aircrafts.
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2.1.2 Short-Haul, Direct Flights
Easyjet is better known for its point-to-point route network operations that
discourage connecting flights. Just like Southwest Airlines and Ryanair, the two
other world’s leading low-cost carriers, Easyjet prefers the point-to-point network
instead of the traditional hub and spoke approach and this goes well with the
short-haul, direct flights tactic (Kupka & Jamart, 2009). It is therefore not a
surprise that the airline has only a single code share agreement with the Russian
Transaero Airlines especially for its LGW-DME route (Transaero, 2013). Short-
haul direct flights ensure that all Easyjet flights are fully booked and this
eliminates waste while at the same time enhancing revenue per seat margins.
Moreover, the short-haul direct flights approach is also consistent with the faster
flight turnaround time concept which according to Mason (2001) and Pels and
Rietveld (2004) ensures Easyjet aircrafts drop passengers in a major airport and
picks others immediately for another major airport through the day. This cuts on
time wastage and aircraft clutter in its hangars. Further, and as Martin and
Roman (2008) posit, short-haul, direct flights enhances the level of flight and
crew scheduling as well as optimisation of aircraft, hangar, and gate utility. This
is helped by the fact that Easyjet, unlike Ryanair, prefers to operate its direct
flights within major airports point-to-point network (Calder, 2006). For example,
Easyjet flies to major European airports such as Charles De Gaulle in Paris, main
Dusseldorf airport in Dusseldorf, and Gatwick in London (Easyjet, 2014). This
saves customers money and time in the form of less car connection charges and
time since most (not necessarily always) major airports are close to major cities.
2.1.3 No Frills Services (Not Offering In-flight Extras)
Easyjet does not offer in-flight extras such as snacks and drinks. The hallmarks
of this no frills approach is not offering in-flight extras such as snacks, meals, and
drinks to passengers (Gilligan & Wilson, 2009). Ideally, this approach goes
contrary to the traditional value-added in-flight services provided by legacy
airlines such as British Airways (Kupka & Jamart, 2009). The no frills service is
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highlighted by the airline’s decision to request for narrow galleys and relocation
of a lavatory to an empty space in the rear to create more seating space. This
increased the number of seats from the normal 140 for A319s to 156, something
that is unheard of among legacy airlines that serve in-flight meals (Alamdari &
Fagan, 2005). Even so, any Easyjet passenger that wishes to have in-flight
meals or a preserved seat especially in the front and over-wing berths which
have more leg space does so via the Easyjet Bistro programme at an additional
fee. This fee forms part of the airline’s ancillary revenue. Such ancillary charges
are also offered in the airline’s chartered flights offered to low cost holiday
destinations (Easyjet, 2014). Arguably, the ancillary fee offsets the lowly priced
air tickets. Such ancillary revenue will likely grow in the future courtesy of the
airline’s new pre-allocated seat policy which replaces the past speedy boarding
tactic (Milmo, 2012). While this tactic may be seen by many as a new revenue
generation stream, it is consistent with Hooley, Piercy and Nicoulaud (2008)
description of the no-frills approach because it saves passengers the past woes
of having to endure long queues to catch a seat with more leg room.
2.2 Benefits of Easyjet’s Cost Leadership Strategy
2.2.1 Optimised Operational and Financial Management Efficiency
The low-cost strategy helps Easyjet to maintain a high awareness and control of
its operations. According to Martin and Roman (2008), faster flight turnaround
times, no-frills services, short-haul, direct flights enhance an airline’s level of
awareness of all its entire value chain. In turn, increased value chain visibility
points to optimised operational and financial appropriation efficiency (Mintzberg,
1978). The newly introduced pre-allocated seat policy where a customer pays
additional fee for preferred seats will most likely boost the airline’s revenue kitty
and this will definitely offset the low profit margins gained from lowly priced air
tickets (Milmo, 2012). Finally, Easyjet’s faster flight turnaround time optimises the
utility of flight crew and other employees.
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2.2.2 Increased Revenue and Market Share
Easyjet has effectively grown its share of the European air travel market courtesy
of its cost leadership strategy. At the moment, the airline enjoys a market
leadership in the UK, the second largest carrier in France, third largest carrier in
Italy and Portugal, a strong presence in Germany, Netherlands, Spain, and
Switzerland (Burns, 2014). Specifically, the airline has increased its market share
in major European airports such as Gatwick (49%), Edinburg (29%), Nice (26%),
Malpensa (40%), Geneva (41%), and Basel (52%) to effectively strengthen its
leadership position in terms of passenger flown (Easyjet, 2014, p. 26). Ideally,
this large market share is consistent with Hooley et al. (2008) assertion that one
of the main aims of adopting a cost leadership strategy is to increase revenue
and market share.
2.2.3 Increased Bargaining Power
As a low-cost seller, Easyjet enjoys a superior bargaining power over its
customers and in extension, its suppliers. With most mature markets in Europe
undergoing a period of increasing economic hardships (Bamber et al., 2009), the
cost leadership strategy is increasingly being viewed by many industry analysts
to be a very appropriate measure to strengthen the dwindling bargaining power
especially among large companies including legacy airlines such as British
Airways and Air France (Burns, 2014). Though the bargaining power of frequent
flyers remains substantial strong (Calder, 2006), airlines such as Easyjet and
Ryanair that offer no frills services are likely to lock-in their customers and reduce
their switching options (Ryans, 2013). Moreover, a low-cost strategy that
embraces just in time (JIT) philosophy compels core suppliers such as labour
unions, e-systems vendors, aircraft manufacturers and fuel retailers to cut down
their prices since only what is needed is bought. For example, Easyjet may
qualify huge discounts from Airbus since it is one of the largest customers of
Airbus’s A319s and A320s.
2.3 Limitations of Easyjet’s Cost Leadership Strategy
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2.3.1 Constant Wrangles with Trade Unions
Easyjet’s cost leadership strategy was formed on the premise of minimal union
involvement. The airline hoped to cut down its operation costs by engaging lowly
paid labour and subjecting it to lengthy working hours under meagre working
conditions (Malighetti, Paleari & Redondi, 2009). However, this attracted a lot of
criticism from labour unions forcing the airline to change tact and accommodate
trade unions in the management of its human resources. As expected, this has
increased cost overheads associated with employee benefits while at the same
time forcing the airline to increase its workforce in line with the maximum working
hours in a week. Actually, Bamber et al. (2009) show that it is very hard to expect
a low-cost carrier such as Easyjet to offer high quality services, at low prices,
while at the same time proving a fair return for shareholders and maintaining a
good rapport with unions.
2.3.2 Low Profit Margins
By continuing to pursue a cost leadership strategy, Easyjet exposes itself to
financial losses. Michael (2013) and Tretheway (2004) warn that the cost
leadership strategy may occasion losses especially now that very many new
entrants have flooded the low-cost market, bargaining power of buyers remains
substantially high while crucial suppliers such as labour unions, aircraft
manufacturers, fuel retailers, and e-system vendors consolidate their power. With
the increasing economic woes being experienced in Europe, a low cost strategy
may proof to be unsustainable in the long run. Actually, just as Johnson et al.
(2011) warn, Easyjet has even abandoned some loss making routes in Luton,
Bristol, Belfast, and Newcastle back in 2009.
3.0 Conclusions and Recommendations
Easyjet’s cost leadership strategy is better known for its no frills services,
capacity optimization, faster flight turnarounds time, short-haul, and direct flights
to major European airports. This strategy has earned the airline a greater market
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share, increased revenues, huge profitability, and increased bargaining power
over customers and suppliers. However, the airline faces challenges related to
labour union wrangles and financial losses in some competitive routes.
3.1 Recommendations
In recommendations, Easyjet should simplify its air tickets and its services in line
with the no frills philosophy. While the pre-allocation of seats policy is good it
may antagonise some frequent flyers who fail to secure the few preferred seats
with larger leg room. To this end, the airline should liaise with Airbus to
standardise all seats and ultimately simplify the ticketing and reduce check-in
time. On the same note, and in line with the spirit of the cost leadership strategy’s
mass selling premise, Easyjet should diversify its services to more lucrative
European routes. This will open up new revenue streams for cushioning the
increasing labour costs and therefore eliminate the constant wrangles from
unions campaigning for improved terms of services for their members.
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