The Profitability and Growth of Low-Cost Airline Carrier, Easyjet

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Summary

Owing to a simple pricing structure, easyJet has grown to be one of the most renowned and reputable airlines operating over shorter distances in Europe. The airline operates a one-way pricing strategy. In other words, at any given point in its routes, a single price is used. The pricing strategy is such that it remains fairly low but increases exponentially as the date of departure nears (Alamdari & Fagan, 2005).

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The airline company employs three main pricing strategies in order to meet the needs and demands of its customers even as the harsh economic climate prevails. First, there are no last-minute deals accepted by the airline company. it prefers handling all the ticketing processes well in advance. Second, easyJet values a system whereby demand is controlled by price since only a single class is offered by the airline (Pitfield, 2005). Hence, the pricing system is the only variable that dictates demand. Third, the first offering time for tickets is significantly varied by the airline firm. This goes alongside controlling the duration within which tickets are on offer.

Contrastingly, the first two pricing strategies are not common to conventional airline pricing systems, especially for low-cost aircraft. Apparently, it offers a competitive edge for EasyJet since it enables it to stand out from other market rivals. As is common with most low-cost airlines, the last-minute deal is a common experience. In most cases, other airlines will make use of reseller services (Pitfield, 2005).

Over and above the pricing strategy at easyJet, the airline company has a preference of using location as an important tool for controlling demand. There are quite a number of classes that are used in this process. The company has a strong conviction that the use of a single class may not be a profitable venture since it will permit a scenario whereby price remains to be the only variable that dictates demand for services offered. This literature review lays more emphasis on the various pricing strategies that have been adopted by easyJet in addition to the competitive strategies that the company has put in place in order to minimize the effects of hard economic times in addition to the growing market competition from both the small and large operators.

Pricing strategies

The past five years have witnessed rapid penetration and development of low-cost airlines into the European market. One of the notable players in this field has been easyJet airlines among others such as Ryanair. Over 20 percent of the short-haul capacity was accounted for by the low-cost carriers over the summer period alone in the United Kingdom. Towards the close of the last century, the short-haul capacity carriers were already dominating over 58 percent of the total carrying capacity (Koenigsberg, Muller & Vilcassim, 2008). This was a marked rise of about 17 percent which later rose close to 96 percent. Of great significance is that the lost cost carriers were largely responsible for this tremendous carriage capacity in the region, one of which was easyJet airlines. At this point, it is imperative to mention that the pricing strategy has been the major demand tool for customers seeking travel services from various market players.

As for the case study of EasyJet, the airline has not only penetrated the various European destinations, it has also grown tremendously both in terms of trips per given period of time as well as haulage capacity. Needless to say, revenue growth has been impressive and far much better than for large operators. The perception of consumers towards parting away with low fares is still the driving force for demand. However, EasyJet has gone beyond just that.

For consumers to understand and acknowledge the low price mechanism being employed by the airline company, the use of extensive advertising has been a valuable tool, besides, the company is continually working on improving its customer care relations by developing a system of quick response to queries from its clients(Koenigsberg, Muller & Vilcassim, 2008). Customer satisfaction is key for any business growth. Media coverage has been and is still used to reach out to both current and prospective customers. The media has played the role of communicating both the availability and essence of low-cost affairs. Nonetheless, the possibility f very low fares as purported by easyJet has been refuted by some critics arguing that the company has merely managed to create a mental perception that low fares are actually there when it is a thin pipe dream. Such anecdotal evidence that extremely low fares are not possible in practice has left easyJet in an uneasy position. Consequently, the airline has found itself struggling to boost its public image as part of marinating profitability and consistent revenue generation. If such evidence is anything to go by, then easyJet has an uphill task of reinforcing its current pricing and competitiveness in the otherwise dynamic and rival airline market.

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The harsh economic climate has compelled easyJet to devise pricing strategies that are consistent with the need and demands of its customers. In order to achieve this target, the revenue manager alongside other company executives opted for a six-week booking period for its clients. The management at easyJet thought that the given period would be adequate to detect the evolutions of fare such that a clear fare mechanism would be set up that would also allow customers to take advantage of the low rates by the onset of the booking process. As a matter of fact, EasyJet creates early demand of its services by offering cheaper fares when the booking deadline is still far. As a strategy of countering terrific competition from other market rivals in addition to the need of maintaining company profitability in course of the recession, the company has found this pricing strategy to be one of its own kind and stand above other promotions offered by other low-cost airlines. Moreover, in the process of counterchecking airline fares on specific flight numbers, the management at easyJet decided that it would be meaningful as well as profitable for consumers who are already price conscious to go after the lowest return fares. Hence, the availability of a cheaper flight during different time duration over a given range of time was noted down.

As part of sticking to a pricing policy to the letter, three elements were born in mind. Firstly, a business traveler is conscious of price movements. For this category of travelers, pricing was given the first consideration before the schedule timing. Secondly, a weekend leisure traveler would be controlled by his or her availability to travel. Lastly, the mid-week leisure traveler was perceived to be the most sensitive customer in terms of price consideration.

Ticketing policy

A one-way ticketing policy has been the operating philosophy of easyJet since its inception. As already mentioned, it operates with a single market price (Koenigsberg, Muller & Vilcassim, 2008). Usually, the ticketing process begins with the lowest price. A rise in price may be executed over and above the set margin especially if ticketing sale on a particular flight tends to move at a faster rate than expected. On the other hand, low sales than expected will trigger the lowering of baseline prices below the set standards.

Although this ticketing technique has been criticized by some industry players, it is a relatively open system to customers. The latter is capable of understanding what value they derive from the tickets bought, bearing in mind that it is upon them to set the pricing levels at any given duration of the booking process. In addition, customers will have the confidence to ‘shop around’ without much fear since the airline offers only one price. Moreover, there will be lesser restrictions on ticketing. More confidence in the purchasing of tickets by consumers will be enhanced since they will almost be totally sure that a drop in price will not be possible unless the expected demand drops below normal (McAfee & te Velde, 2006). As a result, consumers will tend to purchase their tickets with little ado. Such a transparent system appears to be a viable marketing tool for accelerating decision-making by clients.

According to some of the well-known theories in marketing that concern decision-making by consumers, it is quite obvious that it takes a process for the latter to come up with any tangible decision before making a final choice.

There are quite a number of marketing theories, concepts and models that are applicable in the EasyJet airline. To begin with, it is vital to understand that the consumption experience of consumers at the company is largely driven by how best the very customers make their decisions (Gummesson, 2002). The myriad marketing principles applied by the marketing team at easyJet are clear evidence of why consumers will choose their ticketing system against those of the competitors. The low-cost fare perception has made consumers to easily identify themselves with the brand name of the company which has remained to be a very strong marketing tool over time especially in reaching out to new customers who may not have had prior traveling experience with the company.

From the utility theory of the decision-making model by consumers, it is proposed that the purchasing decisions made by consumers are heavily dependent on the anticipated outcomes of the very decisions made (Doganis, 2006). In this regard, consumers are treated as actors who are rational in their decision-making process and will only settle on what will bring optimum benefit and satisfaction to them. Hence, the management at easyJet is quite aware of this fact.

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Nonetheless, it is definite that consumers may not always be rational in decision-making. Better still, they may equally fail to fully recognize the various inputs which affect their overall decision-making patterns. In addition, they can fairly estimate frequencies of events but the process of translating the latter into probabilities is typically cumbersome for consumers. Although the utility theory of the decision-making paradigm by consumers has been embraced for a long, it has notable limitations that cannot be elaborated by the given marketing model. A more simpler and satisfactory backup of the utility theory is the one referred to as satisficing. According to this model, consumers tend to stop the process of decision-making once their immediate needs are met. This can be used to explain the loyalty nature of customers attached to EasyJet airline. They no longer need to make further decisions on whether to purchase tickets and related from the company since their buying needs have already been satisfied. The marketing department easyJet has largely utilized a marketing theory referred to as consideration. This theory has it that consumers are of equal importance to the brand name of a company. In other words, customers act as a subset to the company upon which all decisions are made.

As customers continue to attach more importance to purchasing travel tickets from easyJet, the management of the company is equally enforcing the theory of involvement. The airline has to intensely involve its active and prospected consumers (Gallego & van-Ryzen, 1994).

Another attribute in the pricing strategy and competitive advantage of the company is that a one-way basis has been adopted as the only model of selling tickets. This implies that passengers wishing to travel to and fro using the same airline must purchase one-way tickets twice. This is a competitive advantage for EasyJet since short-stay trips can be booked by passengers who do not have the need of catering for return tickets no matter how much they are flexible. This is a sharp contrast to some airlines which tend to compel consumers to purchase return tickets against their will.

In spite of this ticketing philosophy that appears impressive and a cutting for the airline company, limitations of this system are inevitable. It is pertinent for a planned booking profile to be put in place by the airline with the aim of ensuring the prevalence of average fare that is consistent with the load factor to the satisfaction of its consumers. A cost-plus pricing basis can then be used as the admissibility element when setting up this mean fare. For the management at easyJet, the management of revenue will then be a lighter task to execute since the former procedure will have taken care of the managerial role of boosting revenue for the airline company.

Competitive advantages

There are myriad opportunities presented by the internet. In practice, there are equally innumerable business fortunes that have either been gained or missed out in the internet owing to a host of hyperbole skirting the World Wide Web. Owing to this fact, modern e-commerce has witnessed several domestic and multinational companies stamping their presence on the internet, fundamentally as a channel of marketing their products and services and also registering their publicity to their wider pool of consumers (Desiraju & Shugan, 1999). Unfortunately, there are countless websites today that vaguely appear as a token presence on the internet. As such, they fail to serve the core purpose of internet marketing and e-commerce. It is against this backdrop that easyJet Airlines has taken full advantage of the internet to set a competitive edge against its potential rivals both in the high and low-end market.

Another competitive advantage of easyJet is the fact that it runs on purely new aircrafts contrary to other operators in the industry who still use old planes. It is characteristic of low-cost operators to make use of old aircraft as a commensurate factor of cutting down on overheads. Although it may be relatively cheap to purchase an old aircraft, maintenance costs may be quite overwhelming. As for EasyJet, running low-cost airline transport is not congruent with using old machines that do not add value both to the company and clients (Piga & Filippi, 2002).

The use of new aircraft has also enabled the company to operate on highly competitive routes with optimal returns. Realistically speaking, this is a competition for the company regardless of the harsh economic climate that has continually hit the industry. Its entry into the more competitive market which was initially a preserve of the high-cost players has seen its fleet grow beside the rising number of clients who travel over short distances.

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The business model

The Company has instituted a built-in business model within its establishment that makes sure that a rigorous competitive structure is always in place. Normally, the ability to minimize the cost of operation is usually top on the management agenda because it is the only direct method of improving growth in revenue (Carpenter & Hanssens, 1994). Most airlines, whether low or high cost have frequently found it quite tricky to reduce overheads in the midst of providing high-quality services to consumers. As for EasyJet, this has been one of its strongest points. The company has on several occasions, assumed an unconventional approach in hacking away unnecessary overheads. For instance, the use of contemporary 737 planes has been deemed to be cost-effective rather than using the old and refurbished aircraft that only multiplies maintenance costs. Moreover, using the new aircraft does not demand complicated training of the crew since it is only one type that needs similar knowledge of operation (Pels & Rietveld, 2004).

Consequently, a cost-per-seat model has been devised by EasyJet, a business practice that is completely missing among other operators. Better still, the company boasts of far lower costs than other similar operators in the market due to strict observance of the cost reduction measures that are equally consistent with the policies of the company (Barbot, 2005). For example, the airline company upholds the idea that business class only works towards accelerating operating costs; hence, easyJet has no provision for type of travel class which has the potential of significantly reducing the number of seats. The business class will also expand the costs incurred in meeting the cabin crew expenses. Avoidance of the business class has, therefore, been a profitable venture for the airline.

Another cost avoidance strategy and a competitive edge for easyJet is the elimination of agents in the chain of distribution for ticketing services. It is common knowledge that the longer the chain of distribution, the lower the marginal returns. Although other operators have so far followed suit, easyJet implemented this plan earlier at an earlier date.

The use of tickets has also been discouraged by EasyJet. Fact that customer service and satisfaction remain be an instrumental practice and attribute to any business enterprise, the management at easyJet noted that there were countless customer concerns and high levels of dissatisfaction that would likely emanate from delays occasioned by the slow process of ticketing. This would also be aggravated by the surplus time needed by customers to pick up the very tickets. As a result, easyJet has so far abolished the physical ticketing process and instead embraced quick online processing and confirmation of ticketing. A rather positive effect of online ticketing is the consequent decongestion of airports. In addition, utilization has been increased over and above minimizing turnarounds (Franke, 2004).

On a final note, easyJet can improve its competitiveness in the highly dynamic and volatile economic climate by ensuring that its human resource managerial policies are sound and consistent with supportive corporate culture (Gudmundsson, 2004). It is vital for the management at easyJet to recognize the relative importance of its employees in the chain of production. In fact, services rendered to the airline customers can only be appreciated by the latter if employees feel to be part and parcel of the company’s success. In any case, using employees as core elements in internal advertising cannot be overstated here. It is against this background that employee motivation should never be ignored or underestimated at any given point in the lifetime of a business organization.

There are motivational theories that when well employed, will result in upward mobility in organizational growth and performance. For example, employees can be motivated through a well-defined process of setting goals for the organization. Studies have revealed that people tend to be motivated to work when there are certain goals to be achieved after a given period of time. This type of motivation is well explained by Locke’s goal-setting theory (Osterman, 2000). At this point, it is undisputed that a firm can attain its short, medium and long-term goals once they have been set. Nevertheless, it implies that employees will only be motivated when they are part and parcel of goal setting.

A firm should work on a myriad of projects that require employees who are motivated, resilient and competent enough. Goal setting is a way of motivating employees that comes with its own cost if it is to be successful (Carpenter & Hanssens, 1994). Firstly, there are five core principles that human resource management should bear in mind for this theory to be fruitful: the set goals should be clear, challenging, demonstrate a high level of task complexity, have a feedback system and also demonstrate commitment (Boxall & Purcell, 2011). These are internal and external marketing theories and measures that easyJet can adopt and implement in order to remain afloat in a hostile business environment.

References

Alamdari, F., Fagan, S., 2005. Impact of the adherence to the original low-cost model on the profitability of low-cost airlines. Transport Reviews. 25: 377–392.

Barbot, C., 2005. How do low-cost carriers compete amongst themselves and with full-cost carriers? 9th Air Transport Research Society Conference, Rio de Janeiro.

Boxall, P & Purcell, J. (2011). Strategy and Human Resource Management (3rd ed.), London: Palgrave Macmillan.

Carpenter, G. S. & Hanssens, D. M. (1994). Market Expansion, Cannibalization, and International Airline Pricing Strategy. International Journal of Forecasting, (10): 313-326.

Desiraju, R. & Shugan, S. (1999). Strategic Service Pricing and Yield Management. Journal of Marketing. 63: 44-56.

Doganis, R. (2006). The Airline Business, (2nd ed). London: Routledge.

Franke, M. (2004). Competition between network carriers and low-cost carriers retreat battle or breakthrough to a new level of efficiency? Journal of Air Transport Management 10: 15–21.

Gallego, G. and van Ryzen, G. J. (1994), Optimal Dynamic Pricing of Inventories with Stochastic Demand Over Finite Horizons. Management Science, 40: 999-1020.

Gudmundsson, S.V. (2004). Management emphasis and performance in the airline industry: an exploratory multilevel analysis. Transportation Research, 40: 443– 446.

Gummesson, E. (2002). Total relationship marketing, Oxford: Elsevier Science. Koenigsberg, O., Muller, E. & Vilcassim, J.N. (2008). EasyJet pricing strategy: Should low-fare airlines offer last-minute deals?, Quantitative Marketing and Economics 6(3): 279-297.

McAfee, P.R. & te-Velde, V. (2006). Dynamic pricing in the airline industry. In: Hendershott, T.J. (Ed.), Handbook on Economics and Information Systems, Amsterdam: Elsevier.

Osterman, P (2000). Work reorganization in an era of restructuring: trends in diffusion and impacts on employee welfare. Industrial and Labor Relations Review, 53(2): 179-196.

Pels, E. & Rietveld, P. (2004). Airline pricing behavior in the London–Paris market. Journal of Air Transport Management 10: 279–283.

Piga, C. & Filippi, N. (2002). Booking and flying with low-cost airlines. International Journal of Tourism Research 4, 237–249.

Pitfield, D.E. (2005). A time-series analysis of the pricing behavior of directly competitive ‘low-cost’ airlines. International Journal of Transport Economics 32,15–38.

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