bestjet b - market competition final version may 2006

8/12/2019 BestJet B - Market Competition Final Version May 2006

1/13

BestJet B:

The European budget airline industry: origins, growth,market and competition

May 2006

__________________________________________________________________

Allan Kinross prepared this case. It is intended to be used as a basis of class discussion rather to illustrate the

effective or ineffective handling of an administrative situation

1


2/13

Introduction to the European budget airline industryAfter 9 years of spectacular growth and success, at the beginning of 2006 the European low costbudget airline sector still faced a number of challenges. Though the industry had consolidated with

easyJets ac!uisition of "o and #yanairs ta$eo%er of &u'', e%ery month in the new millenniumseemed to see the start up of new budget airlines and new routes or bases being announced.There were o%er () in autumn 200*. +eading players, easyJet and #yanair, had orders betweenthem for o%er 00 aircraft re!uiring both to more than double in si'e in the face of growingcompetition from new entrants, a fight bac$ by established airlines and powerful tour operators. -nthe two and a half years to ctober 200*, a%erage seat prices had continued to fall, and #yanairhad not managed to sell all of its /free seats on offer in special promotions. #e%enues were underattac$ from etreme o%ercapacity and costs were hit by high fuel prices. -n the future, would therebe enough 1profitable growth for all, and where would that growth come from3 &y early 200) thedecline in a%erage fares had stabilised and #yanair and easyJet announced encouraging financialresults. 4espite the continuing rise in the price of fuel in 200) and 2006 few budget airlines wentban$rupt and low cost airlines epanded their networ$s.

Market size and growth rate

The initial eplosi%e growth of low cost airline passenger numbers reflected the unsatisfied demandfor a range of leisure acti%ities which was not met by either high5fare traditional airlines or infleiblecharter firms.

Most passengers who fly with low-cost airlines arent defectors from the incumbents. Rather, lowerprices encourage people to fly when they would otherwise have gone by road or railor not at all. Mostof these passengers are on vacation; some are workers or self-employed business people commutingon a regular basis. he overall air traffic in a market typically rises sharply when a low-cost carrier

breaks into it, our analysis shows.

4espite fi%e earlier years of phenomenal growth, budget airlines continued to grow spectacularly in2002 and 200, despite the fact that this was a time of etreme difficulties for traditional airlinesafter the trauma of 7eptember , and the effects of recession, particularly on business tra%el, theoutbrea$ of 7A#7 and the -ra! conflict. -n these two years, budget airline seats increased by ()8on routes within, and to and from, the :, and ()8 in the rest of Europe. 2 &y 4ec 200, budgetairlines accounted for nearly )08 of seats on : domestic flights, and *08 of seats between the: and mainland Europe. ;hat started off as the : phenomenon had in 200 spread tomainland Europe.


3/13

wait three years before reconsidering these taes. The European nion also dismayed the budgetairline sector with a proposal that all passengers unable to tra%el because of cancelled oro%erboo$ed flights would be entitled to compensation ranging from @200 to @600, well in ecess ofsome budget airline fares. Early summer 200 also saw stri$es in rance and other countries bypublic sector wor$ers o%er pension reforms.


4/13

Fompetition is not Cust with other airlines. n some routes in Europe, high speed rail ser%icesrepresent direct competition to airlines on Courneys up to * hours in length, along with, to a lesseretent, cars and buses. ;ill business tra%ellers in the future prefer a first class rail ser%ice from citycentre to city centre, a%oiding traffic to and from airports and security5related delays3 -n 200*,some "erman train fares were slashed to compete with cheap flights.

!ompetition between budget airlines"#

ther low cost airlines represent direct competitionG howe%er by the end of 200 the differentstrategies pursued by low cost airlines continued to result in little head to head competition.Fonsolidation was howe%er ta$ing place. EasyJets ta$eo%er of "o in 2002 had combined thenumber two and number three players and it had ended competition between the two companieswith the most similar strategies, which had led them into head to head competition on some routes1> routes in all. -n early 200 #yanair surprised the industry by announcing that it was to ac!uirethe loss5ma$ing, fourth largest player, &u'', from its parent, 4utch national carrier :+B.

At the beginning of 200*, out of some 00 routes ser%ed by o%er (0 budget airlines, only ) to 20or so routes saw direct competition between one low cost operator and another. As #ay ;ebsterof easyJet said,


5/13

EasyJets strategy had been !uite different from its fellow competitors #yanair and &u'' who hadsteadily epanded organically the number of destinations they ser%ed. 7ince 999, EasyJetsstrategy had been to concentrate growth on increasing fre!uency on eisting routes to eistingdestinations and pence. -n contrast, 7 low costleader 7; had unit costs of (.2 pence per as$. EasyJets re%enue is higher than #yanairs at ).0per as$ compared to #yanairs .9( pence, gi%ing easyJet a profit margin of 2.>8 compared to#yanairs 2*.98. -n 2002 and 200, much of easyJets organic growth was centred on moreepensi%e primary airports. Fompared to #yanair, easyJet has significantly higher input costs,particularly passenger charges, landing charges and other airport related costs associated withflying to maCor rather than secondary airports.

Input costs and process costs-t is also thought that #yanairs staff costs are lower than easyJets due in part to higherproducti%ity and easyJets higher ependiture on customer ser%ice related staff. -n 2002, therewere some labour relations problems at easyJet and pilots complained about long hours. EasyJetwere pioneers of internet boo$ing and eploiting the benefits of yield management systems andpricing models. -n 2002, distribution costs fell further as the percentage of seats sold on theinternet increased )8 to 9.*8. -ts decision to purchase Airbus 9s instead of &oeing ((spro%o$ed concerns about increased aircraft related costs with a split fleet. -n spring 200*, easyJeteperimented with a fully automated chec$5in system.

erice -ualityAfter the operational problems in the summer of 2002, a newspaper article suggested that /many

passengers who said they were on the whole happy with easy&et nonetheless complained aboutthe attitude of staff.6 owe%er, on balance for e%ery negati%e comment there seems to be apositi%e one and easyJet do seem to ha%e ta$en some steps to impro%e ser%ice performance bydeploying more aircraft on stand5by, by in5sourcing some acti%ities, and by employing more chec$5in staff at their main base +uton and at other airports. EasyJet claimed that the 200 7$ytra airline!uality sur%ey found that there was %ery little difference between easyJets ser%ice and traditionalairlines economy class ser%ice and that it beat traditional airlines on the friendliness of cabin crew.7ome problems with crew shortages, delays and cancellations continued in summer 200, though.-n July 200* a significantly larger cabin baggage weight allowance was introduced.

!onclusion

1Easy$et takes a difficult route, Peter !artin, 5inancial imes, /22$%%$16

assengers epress anger "ut not surprise, !arianne Brun3Covet, 5inancial imes , 1%282$%%$


6/13

The announcement of a K*> million half year loss in Bay 200, prompted . At the end of Barch 2006 #yanair operated an entire fleet of0 new &oeing ((5>00 aircraft with firm orders for a further new aircraft 1net of planneddisposals to be deli%ered o%er the net 6 years. #yanair made a profit of @26> million on re%enuesof o%er @. billion for 200*5). 7ome commentators ha%e suggested that in 200) it was probablythe most profitable airline in the world. -n 4ecember 200), #yanair had cash pile of K.) billion.

$yanair+s strategy#yanairs strategy and public face is inseparable from the persona of its chief eecuti%e, Bichael+eary. There are contrasting %iews about the ma%eric$ Bichael +eary. -n 2002, Bichael+eary said that he was determined #yanair would stic$ to the template of its role model,7outhwest Airlines, cheap point5to5point flying from secondary airports, rather than shadowing andundercutting the maCor carriers as, he said easyJet increasingly seemed to be doing >. e belie%ed

that #yanair would )wipe out) point5to5point competition in Europe within fi%e years. e belie%ed#yanair would dominate the low5cost sector, and there would be four maCor carriers in the topechelon 5 &A, Air rance, +ufthansa and easyJet, which by that time would ha%e epanded intolong5haul and airline partnerships. 9 The fact that #yanair generally fly to secondary airportsmeans that they are not often in direct competition with established carriers. There seems to befurther opportunities for them to epand on this strategy without facing direct competition. A $ey to#yanairs success is that many of #yanairs passengers are tempted by the price of its seats,ma$ing trips that they would not otherwise ha%e considered or made.

$yanair+s business model#yanairs cost leadership position is based on a completely no frills approach and ruthlessness withrespect to costs. -n particular, #yanair sa%es costs by flying to cheap secondary airports fromwhich they normally etract %ery cheap landing charges and passenger fees. According to onereport,20#yanair recei%ed si'able inducements to set up bases in continental Europe, particularly atits first continental base at &russels 7outh Fharleroi. At small secondary airports, aircraft can beturned around in ) to 20 minutes and there is little or no congestion. Fabin crew collect boardingpasses at the gate. or a number of years #yanair operated elderly ((5200 aircraft. These arenow being replaced and supplemented by new, larger, fuel efficient ((5>00s, which ha%e loweroperating costs per seat mile than A20s and ((5(00s. #yanair had managed to buy its new ((5>00s at record low prices at the bottom of the aircraft mar$et 2. -n the report for the half year to7eptember 2002, Bichael +eary emphasised the benefits of the new aircraft,


7/13

maintenance, fuel performance, and technical reliability of the *+*- has e#ceeded evenoeings initial estimates, means that our costs will continue to decline over the coming years aswe take delivery of /+ more *+*- aircraft.0 %erall, it is claimed that #yanair has reached aposition of critical mass that /has loc$ed5in lower future unit operating costs. 22 -n late 200*, #yanairannounced that it would introduced in flight entertainment at a cost to passengers of between @)5(.-n 200) it intensified its direct challenge on Alitalia by starting up domestic routes within -taly, and it

indicted that it may do the same in other European countries such as 7pain.2

Marketing and yield management#yanair generates significant income from the sale of snac$s and be%erages at prices 2)5)8more epensi%e than ri%als li$e easyJet. 7ubstantial additional re%enue 1almost 08 of re%enuealso comes from the sale of tra%el insurance, hotel and car hire boo$ings through its website.

erice -uality

The : Airline sers Founcil, which collates airline passenger complaints, report for 2002 branded#yanair as the worst airline for customer ser%ice to which #yanair responded by calling them < abunch of half wits=. This was widely publici'ed in newspaper articles. The press and angrypassengers ha%e complained that #yanairs lean and mean approach to flight operations also

applies to customer ser%ice. -n the middle of 2002, there were concerns raised about internal!uality issues. There were allegations that /the low cost carrier is e#ploiting a legal loophole toforce pilots to work beyond the recommended limit of flying hours. ne pilot was reported assaying, 00s significantly lowered thea%erage age of their fleet. #yanair claimed in August 200 that the Association of EuropeanAirlines ran$ed #yanair number one European airline in terms of punctuality, least cancellationsand fewest lost bags. -n 200) it claimed to be the most punctual maCor airline in Europe.

!onclusion

;hen as$ed about the future of #yanair, Bichael +eary said,


8/13

Hottingham East Bidlands Airport to destinations including &arcelona, Hice, ?alma, aro, Balagaand they soon added routes to "ene%a, Bunich, Bilan 1&ergamo, +yon and Alicante. &B-babywas also the first budget airline carrier to fly from ;ales, and it initially based two &oeing ((aircraft at Fardiff airport. "o, who easyJet too$ o%er, also had set up a base at East Bidlands andin middle of 200, &B-baby and easyJet were in direct competition on routes to &arcelona,"ene%a, aro and ?rague.

or the 200) summer season, &B-babys epansion means that it flew 6 aircraft from ) bases1Hottingham East Bidlands, Fardiff, Banchester, &irmingham and 4urham on a total of *9 routesto 2) destinations 1including : domestic ones, of which Edinburgh was one. 7ee Ehibit fordetails of routes. Ho separate results were a%ailable for &mibaby and the parent company has notdisclosed whether it is still loss5ma$ingG howe%er the parent company, after ) years when thehighest profit margin recorded was .*8, suffered its worst e%er performance for the 2002 financialyear, with an operating loss of K2.(m, following an operating loss of K29m the pre%ious year whenit was hit by eceptional charges of K(m. -t lost K2m in the 200 financial year. -n June 200,&B- and Iirgin Atlantic admitted that they had been in tal$s about a merger, that both groups hadconducted due diligence in%estigations but that there had been / insurmountable barriers o%er%aluations and go%ernance. BaCority shareholder 7ir Bichael &ishop has an agreement with

+ufthansa that they will buy his maCority sta$e in the airline at an agreed price should he wish tosell. -n 7eptember 200), #yanair announced that it would set up its 6 thbase at Hottingham EastBidlands, gi%ing this airport three low cost carriers with bases there.

flybe

&ritish European, or flybeas it re5branded itself, is a relati%ely small pri%ately owned regional airlinethat has been forced change due to the huge shift in the airline industry brought upon by the budgetairlines. lybe has adopted some of the features of low cost airlines, a K) online boo$ing discount,tic$etless tra%el, and a K.)0 credit card fee, and tic$et changes for a fee. -t offers headlinediscount K9 to K29 one way fares from and to mostly : regional and secondary airports such as

Jersey, "uernsey, Eeter, &irmingham, &ristol, and Hewcastle. Their main bases are at&irmingham, 7outhampton 1increasingly so, Eeter and &elfast Fity, with Horwich added in 200).

They rarely 1* routes compete on routes directly with low cost airlines. They mainly fly the moreepensi%e5to5operate &Ae *6s or A%ro regional CetsG howe%er their lower passenger capacitymeans that they ha%e fewer seats to fill on less popular routes. They are not single class but offerlybe Economy ?lus for business tra%ellers and they ha%e partnerships with Air rance andFontinental Airlines. They also sell through tra%el agents. -n 200, they introduced further newroutes and destinations, mainly from regional airports to destinations in the : and mainlandEurope. &y summer 200 they had added routes to Bilan, "ene%a, 4ublin, -bi'a, &ergerac andToulouse. They lost K2> million in the 2 years to Bar 2002, but made a profit of K0. million in theyear to Barch 200. K22.) fresh capital was inCected to support the mo%e to a low cost airline and$eep the airline afloat and a trade sale or stoc$ mar$et flotation of the airline was being sought by

200(. A K2 to K million loss was forecast for the 2005* financial year as the airline sought toreplace its fleet of regional Cets with &oeing ((5(00s or Airbus 9s. ow the airline could fillthese planes from small regional airports was an unanswered !uestion, yet it restructuring seemedto ha%e paid off and it managed to ma$e a profit of K0.*m in the half year to 7ep 200*. -n the endit decided on >05seater &ombardier M*00 turboprop aircraft which it claimed were fuel efficient anden%ironmentally friendly. &y 200) its route profile had changed, with : and -reland domesticroutes accounting for only *68 in 200) compared to >08 in 200. -n 200) rance and 7painaccounted for 28 and (8 respecti%ely.

Virgin Express

+1B&7 pours cold water o2er 8irgin 4tlantic !erger, Kevin 7one, 5 6262$%%+

8


9/13

Iirgin Epress was part of #ichard &ransons airline stable that included Iirgin Atlantic and Iirgin&lue, the low cost Australian airline. Iirgin Epress operates 1mostly ** seat &oeing ((500s and flies from the main &russels international airport and claim to ha%e one of the lowestcosts per a%ailable seat $ilometre of European airlines. They also claim to ha%e one of the bestpunctuality records in Europe with o%er 908 of flights lea%ing and departing on time. -t has abusiness model which has seen the growth of business passenger traffic, with o%er 608 of

passengers on many routes flying on business, with an a%erage of )08 o%erall. -n many waysthey are more similar to traditional airlines, and they are different from other low cost airlines in that

flights can be boo$ed through tra%el agents 1who are paid 98 commission

seating is assigned at chec$5in

they code share with other airlines

recently, howe%er, the airline stopped offering a free sandwich, coffee and soft drin$

The Iirgin Epress mission statement is /reat everybody as you would like to be treated yourself,which seems to be supported by its approach to customer ser%ice, problem resolution andcustomer retention. Fustomer 7er%ice seminars are organised three or four times a year for allmembers of the Iirgin group of companies in order to ensure that /e%ery Iirgin product and ser%ice

meets the customer ser%ice epectations of the Iirgin brand.2

They ha%e had a turbulent 65year history, finding it difficult to be consistently profitable. -n 200,after a loss of K*m they were forced to cut bac$ flights and routes significantly, though there wasa resurgence in 2002, with June 2002 re%enues 9(8 higher than the pre%ious year as they focusedon the busiest and most profitable routes. -n summer 2002 they forced to ma$e a swift retreatfrom the "erman mar$et after their announcement that they were to set to set up base at:LlnD&onn airport was followed by similar announcements by the much more powerful players.They announced disappointing figures for the three summer months in 200, with profit down fromK*.6 to K.(m, the airline saying that it was being s!uee'ed by low cost ri%als and a price warinstigated by traditional carriers. #e%enue was down 68, despite an increase in passengers flownof (8. #e%enue per passenger $ilometre was down 228. They lost K2.(m for the full 200 year

+i$e easyJet, Iirgin Epress flies aircraft to maCor European destinations, 6 in all from &russelsinternational airport. -n the middle of 2002, they announced a logo change from Iirgin Epress toIirgin, so that Iirgin Atlantic, Iirgin &lue and Iirgin Epress would all ha%e similar logos ma$ingthe concept of


10/13

features of their ser%ice such as connecting flights. n the other hand, as budget airlines growthey may ha%e to replicate some of the national carriers characteristics such as larger si'e, widergeographical co%erage, and increased fre!uency of flights N all without adding the compleity,costs and bureaucracy of the national carriers.)

According to :e%in 4one, traditional airlines belatedly wo$e up to the pent5up demand in the leisure

mar$et by changing their fare structure to ta$e account of what they see as


11/13

Although Bc:insey say that /viable new routes from $ondon are scarce,* 7imon Falder aneperienced tra%el Cournalist,** predicts further epansion after liberalisation in Bay 200* intocountries Coining the E such as ungary, ?oland,*) Fyprus and, perhaps later, e%en Tur$ey. Thehuge aircraft orders by easyJet 120 and #yanair 10 certainly seems to suggest optimism andthat both will continue to pursue aggressi%e growth strategies.

-n late 200*, there were concerns about etreme o%ercapacity, falling fares and rising costs.;inter 200* was forecast to be a /bloodbath as marginal carriers were forced into ban$ruptcythough the epected se%ere price war ne%er materialised and a%erage fares actually rose at#yanair. owe%er there were concerns that the sha$eout or restructuring of the industry may bedelayed between 2 to 6 months particularly since some new entrants 1notably in "ermany werebac$ed by well capitalised parents or supporters who could ride out any difficulties in the short tomedium term. 4espite the continuing rise in the price of fuel 200) was a relati%ely calm year in thebudget airline industry and the industry continuing to grow strongly particularly within and from"ermany. 4e%elopment continued outside the E with new routes started to Horth Africa, Tur$eyand #ussia.

'+Hyped hopes for Europes low-cost airlines, Urs Binggeli & Lucio Pompeo, he !cKinse" #uarterl", $%%$, umber '

'';o Frills< the 0ruth "ehind the 6ow-Cost re2olution in the skies, 0imon 4alder,


12/13

E(hibit " Main $outes o. the main low cost carriers at /ugust 0112

EasyJet & Go BMIbaby Ryanair Virgin

Austria 0alGburg *raG, Klagenfurt, 0alGburg, LinG

Belgium Brussels Brussels CharleroiJ Brussels*

Czech Rep Prague Prague Brno

Denmar 4openhagen Aarhus, )sb>erg 4openhagen

!rance ice, L"on, Paris 47*,Paris OrlyJ/ routes,oulouse, !arseilles

Paris 47*, ice,oulouse,Bordeau=

BiarritG, 4arcassonne, 7innard,!ontpelier, antes, imes, Paris,Pau, Perpignan, Ceims, 0t. )tienne,0trasbourg, oulouse, La Cochelle,Limoges, CodeG, Bergerac, Poiters,ours, *renoble, oulon

ice, Bordeau=

Germany Berlin*($8 routes),Dortmund* (1%) ,!unich, 4ologne2Bonn

Frankurt !ahn*3 +6 routes ",Damburg Lubec;,, Berlin,5riedichshafen, LeipGig iederrhein7usseldorf, )rfurt, LeipGig

Damburg

Greece Athens " rom O#t 2006 Athens

Irelan" Belfast, 0hannon and4or;, Knoc;

4or;, 7ublin,Belfast, Knoc;

4or;, 7err", Du$lin (2% routes)*,Kerr", Knoc;, &hannon (')*

Italy Bologna, !ilan, Come,


13/13

E(hibit 0: !omparatie reenues, costs, load .actors and pro.it margins in 011245

yanair

year toMar#h

200

asyet

year to&e 200

(2007)

&outh

8est200

(2007)

etBlue

9ear toDe# 200

(2007)

:;

#harterirms76

British

nternet

$ookins

/:- /6./- 6-

6%-

::.-

:.'-

lo( rising

bestjet b - market competition final version may 2006

Documents