Factors Affecting the Future Performance of European Low-Cost Carriers
Various environmental factors influence European low-cost carriers. The impact of these external factors on low-cost carriers creates opportunities as well as threats to which individual carriers need to respond. The ability to understand the external factors and identify the impact on the firm and the low-cost carrier industry in Europe determines the success of the individual firms in tapping into opportunities and alleviating threats. These environmental factors fall under political, economic, socio-cultural, technological, legal, environmental, and industry competition classifications.
Political Factors Deregulation of the aviation industry paved the way for the emergence of low-cost carriers. Deregulation refers to the process of removing restrictions for airlines in taking particular routes (Dempsey & Goetz, 1992). This implied a number of things. One, airline companies can now operate more freely internationally. Another is the easier entry of new players into the industry leading to heightened competition. Prior to deregulation, traditional full-service or national carriers dominated the market.
After deregulation, small firms filled the service gap of existing players to provide low-cost air transportation. Last is the increase in the market for air transportation that gave consumers more options. Apart from creating low-cost airlines, deregulation also supported the growth of low-cost carriers by operating on economies of scale, which means the operating cost of managing its aircrafts decreases with more customers (Dempsey & Goetz, 1992). In the recent years, the leading low-cost carriers, Ryanair, easyJet and Air Berlin have been growing and expanding through acquisitions and strategic alliances.
The ability of low cost carriers to continue operations via economies of scale, to maximise the deregulation opportunities, within the growing magnitude of operations and changing dynamics of competition while handling other external factors (Binggeli & Pompeo, 2002) is something that would determine the future operations of low-cost airlines in Europe. Liberalisation of aviation relaxed ownership rules. This enabled low-cost carriers’ access to flag carriers set for privatisation and other airlines unable to cope with the intensity of the competition.
This also allowed low-cost airlines to provide air transformation on existing routes and establish new networks not served by full service carriers (Dobruszkes, 2009). There are also limits to acquisitions and low-cost carriers have to deal with anti-competitive issues in acquiring airlines. Servicing new routes creates the issue of balancing economies of scale and addressing new markets. Low-cost carriers need to build the market for its new networks fast to operate on economies of scale (Binggeli & Pompeo, 2002).
Successfully achieving growth and expansion goals within the context of anti-competitive limitations and building markets in new networks are challenges, with political underpinnings, that would affect the future of low-cost carriers. Political stability of new markets, particularly in Eastern Europe is a key factor determining future prospects for low-cost carriers in Europe. The existing markets in Western, North Western, and South Western Europe are largely saturated (Marvel, 2008). The only way for low-cost carriers to move is outwards to tap into new markets.
The political situation in Eastern Europe has more or less stabilized. The continued stability of countries in Eastern Europe to give way for economic development needed to create a market for low-cost carriers is a factor affecting the future direction and state of European low-cost carriers. Economic Factors The economic recession that commenced in the United States has spread to Europe. The credit crunch adversely affected the property market leading to the piling up of bad credit and limitations in accessing capital loans and limited investments.
Although the leading low-cost carriers have sufficient capital that serves as security until economic recovery (Marvey, 2008) the smaller low-cost airlines do not enjoy a similar position. Low-cost airlines experiencing heavy losses due to the recession are likely to close or if holding a potential for growth in the long-term could lead to acquisitions by the top low-cost carriers. The leading low-cost airlines would likely continue to grow in the future to dominate the market by maximising the limits of acceptable acquisitions under anti-competitive rules.
However, expansion at the time of recession comes at the risk of experiencing problems such as employee upheaval (Binggeli & Pompeo, 2002) that in turn affects performance. There are also possible changes in the existing business models of low-cost airlines because expanding now would mean expanding operations although not as efficiently as under economies of scale and minimum marginal costs. Exchange rate volatility also affected the cost structure and pricing of low-cost airlines operating internationally. The weakening of the British pound affected the operating costs of Ryanair and easyJet.
This then affects the pricing of low-cost carriers. (Marvey, 2008) However, even with its rising costs, low-cost carriers are likely to still have a market by taking on customers that have become more conscious about price. Nevertheless, low-cost carriers need to balance lost customers in increasing prices with new customers from full service carriers. The slowdown of the property market that affected many industries such as construction led to unemployment and loss of income that translated into decreases in spending, including air travel for both business and leisure (Mintel, 2009a).
Low-cost carriers have to contend with declines in air travel. In addition, low-cost carriers also have to compete with alternative modes of travel such as the rail (Mintel, 2007), which is growing in track distance and destinations across Europe. Low-cost carriers would have to beat the train through first mover advantage in Eastern Europe and Russia. The low-cost airline able to establish itself in this market would likely experience growth in the future.
Increases in jet fuel are a serious problem for low-cost airlines because this hikes their operating cost and they cannot do anything about the price (Marvey, 2008). Increases in jet fuel prices would challenge the current business model of low-cost airlines. They have to pass on to consumers the additional cost but they also have to consider the impact on market share (Mintel, 2007; Mintel, 2009a). Low-cost airlines have to find a way of retaining their low-cost structure even with increases in jet fuel prices. There are likely to be trade-offs and opportunity costs in the process.
Socio-Cultural Factors Air travel in Europe is well developed with the region having well-developed tourism industries and strongly connected business networks across European countries, with Eastern Europe remaining a developing area. People would travel if they have the opportunity. There would always be a market for low-cost airlines (Marvey, 2008) except that the frequency of travel depends on economic factors. Low-cost carriers can also create new markets by establishing new routes to provide the opportunity for people to travel.
Eastern Europe that provides new routes for low-cost carriers would likely be a battlefield for carriers in the future. Technological Factors The shift to more efficient aircraft by low-cost airlines means higher expenditures in the short-term but increased revenue in the long-term. The use of efficient aircraft, usually of a single model (Marvey, 2008), is necessary for low-cost airlines because of the fast turnaround of aircrafts moving from one destination to another. Although providing short flights, this also means greater frequency of travel.
Aircrafts need to be fit and reliable. Moreover, using a single model of aircraft would mean the development of specialised knowledge by the maintenance crew (Mintel, 2007). Necessary upgrades would comprise future decisions of low-cost airlines. The Internet has enabled low-cost airlines to offer air transportation directly to passengers in their websites. There is heavy reliance on Internet bookings since majority of ticket sales in low-cost airlines occur online (Mintel, 2009b). This makes low-cost airlines vulnerable to security issues.
Partnerships with online retailers leading to network access would also increase the vulnerability to security. This issue requires consideration by low-cost carriers. Legal Factors Legal factors have strong impact on the future prospects of low-cost airlines. Anti-competition laws would affect the acquisitions of low-cost airlines so that carriers need to weigh acquisition options depending on the strategic goals in the long-term. Customer protection laws would also continue to affect the cost structure of low-cost airlines from compensation for claims under these laws.
Advertisement regulations based on consumer protection would also regulate the manner that low-cost airlines promote low prices. (Mintel, 2007; Marvey, 2008) Environmental Factors Environmental cost would increase costs for low-cost carriers in the future. As airlines become participants of the carbon emission trade, low-cost carriers would have to shoulder additional cost for carbon emissions (Marvey, 2008). Since no existing viable alternatives to jet fuel are likely to emerge in the next decade, the cost of carbon emission would become a constant item in the cost structure of airlines.
This would become a challenge to the business model of low-cost airlines especially when considered together with solar energy and other alternatives available to railway transportation (Mintel, 2007). Industry Competition It is certain that competition would become fiercer in the future not only for low-cost airlines but also for the entire air transportation. Low-cost carriers expand to service more and more routes previously dominated by full service airlines. There are also moves to incorporate service features to provide additional value to consumers in order to achieve differentiation.
However, full service airlines are also adopting the low-cost business model by acquiring ailing low-cost airlines. (Forsyth, 2005; Mintel, 2007; Marvey, 2008) This means greater overlaps in the markets serviced. With saturation in existing markets, the race to Eastern Europe would be crucial for leading players. Improvements in railway transportation would also pose further threats to low-cost carriers resulting in multiple competition dynamics faced by low-cost carriers. Alternative Future Scenarios for European Low-Cost Carriers
One future scenario that European low-cost airlines could face in the future is the turnaround in the economic recession. The strongest impact would be on the increase in consumer spending for air transportation. Improvements in the economic condition would mean vibrancy in the other sectors such as tourism (Mintel, 2009a) as well as business investments and transactions in different countries leading to a rise in the volume of air travellers for business and leisure. The volume of passengers would again increase enabling low-cost airlines to achieve economies of scale and low marginal costs.
Coming out from the recession, there would be preference for low-cost airlines because of guarded consumer spending. The likely ripple effect of turnaround in the global economic recession would also mean growth in the economies of Eastern European countries to create a market for low-cost airlines. Low-cost airlines can tap into the Eastern European market by acquiring existing airlines to control existing routes and/or establish new routes. However, the alternative scenario is the little or slow change in the economic recession in the future. The turnaround could take years to achieve.
In this situation, low-cost carriers may have to deal with rising costs spilling over to its pricing. This weakens the advantage of low-cost carries in the market for economy transportation, especially since full service airlines are adopting aspects of the low-cost structure. Low-cost carriers would continue to have trouble in maintaining their low-cost business model. Another future scenario is the uptake of air travel across Europe, particularly Eastern Europe. The entry of low-cost airlines in Easter Europe would provide the market with the option to travel to other European destinations (Marvey, 2008).
With more players tapping into the same market, the competition would benefit consumers by having more choices so they can select low-cost carriers offering a route to their desired destination at the price they can afford (Forsyth, 2005). Eastern Europe as a market for low-cost airlines comprises a significant opportunity for market expansion. However, the alternative situation could be the greater attraction of visitors going to Eastern Europe instead of developing Eastern Europe as a market. This involves limited market expansion.
The uptake of air travel could be slow depending on the economic growth in Eastern European countries and the popularity of air travel. In this case, low-cost carriers would have to spend to develop the market in Eastern Europe through strategies that would make air travel attractive not just based on price but as a cultural norm. A third future scenario for low-cost airlines is the increase in industry players or competitors. The demand for low-cost air travel in emerging markets and ease of entry due to deregulation and liberalisation would increase the number of low-cost airlines (Forsyth, 2005; Dobruszkes, 2009).
These would likely start by targeting niche markets and operating on limited number of unsaturated routes. The new players could be small airlines based in Europe or existing low-cost airlines based in Asia and expanding into Europe. The alternative scenario would be the consolidation of low-cost airlines under the industry leaders through mergers and acquisitions (Forsyth, 2005; Dobruszkes, 2009) to enhance competitive strength. This is already starting with the leading low-cost airlines acquiring smaller low-cost airlines as a means of entering or dominating markets and routes.
Full service airlines are also adopting the low-cost structure by acquiring low-cost airlines to take a share in the market for economy air transportation. The future scenario could a limited number of large low-cost air carriers. Implications of the Scenarios for the Organisations in the Industry A turnaround of the recession would have a positive impact on all low-cost carriers. The industry leaders, Ryanair, easyJet and Air Berlin could then re-establish their market share in existing markets and race to establish their market share in Eastern Europe.
Otherwise, a slow recovery would mean the focus on managing the increasing cost structures while increasing promotions. The industry leaders hold the edge because of their bigger capitalisation giving them the flexibility to explore ways of stimulating market growth. Popularity of air travel in Eastern Europe would mean a ready market for low-cost carriers. Ryanair has an edge because of its bigger capitalisation that it can invest on acquisitions. This gives Ryanair an edge in negotiations. Otherwise, slow uptake of air transportation would mean low-cost carriers have to build a market.
Air Berlin has an edge because of its experience as a charter airline targeting tourists. Entry of new players means that leaders need to defend their positions, especially strong competitors from Asia. The industry leaders are likely to survive the entry of new players. In consolidation, the leaders need to select strategic acquisitions. Ryanair has an edge because of its capitalisation. However, it has to contend with full service airlines adopting the low-cost business model by acquiring low-cost airlines.
References Binggeli, U. & Pompeo, L. , 2002. Hyped hopes for Europe’s low-cost airlines: Europe’s most successful no-frills carriers are making a lot of money. But as they mature, they will have problems expanding. The McKinsey Quarterly, November(2002), pp. 87+. Dempsey, P. S. & Goetz, A. R. , 1992. Airline deregulation and laissez-faire mythology. Westport, CT: Praeger/Greenwood. Dobruszkes, F. , 2009. Does liberalisation of air transport imply increasing competition? Lessons from the European case. Transport Policy, 16(1), pp. 29-39. Forsyth, P. , 2005.
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