Airline industry is one of the fragile industries in the market.

Since the tragic events of September 11th some of its profound consequences are coming to light now. As events have been unfolded it has been thought inevitable that the airline industry would suffer heavily, stocks have been devalued and ticket prices are all time low. The national airlines have certainly been forced to retrench, cutting the number of short haul European destinations where costs are too high. Sabena, Belgians national airline and one of the oldest in the world has gone out of business. Swissair has had similar liquidity problems and has had to be bailed out by the Swiss government. Low cost however, have for the most part averted many problems that could be associated with consumer confidence and have remained profitable. Key PlayersThe key player f the no-frills/low cost airline are:Ryanair- carrying 15 million passengers a year through the UK and Western Europe. In late January Ryanair acquired Buzz, the low cost of KLM for 14.95 million. An Irish entrepreneur founded the company in 1985. EasyJet- EasyJet is Europe's leading low-cost airline. Since its first flight in November 1995, the airline has grown from a Luton base offering two routes from Luton to Glasgow and Edinburgh, served by two Boeing 737 aircraft, to one that offers 125 routes from 39 European airports, operating 72 aircraft (November 2003). The phenomenal growth of EasyJet was boosted by its merger with Go-fly in August 2002, making the combined company Europe's Number 1 low cost airline. In October 2002, the airline signed a deal to purchase 120 Airbus, which will facilitate the airline's ongoing growth strategy. During the financial year to 30 September 2003, the company reported pre-tax profits of 52.0 million on a turnover of 932 million and carried 20.3 million passengers. The airline's shares were formally admitted to the London Stock Exchange on 22 November 2000 at a price of 310 pence per ordinary share. The growth of the low-cost/ no frills airline globally has been one of the most success stories of commercial aviation, mainly in the US and Europe. This is particularly as development has been at a time when both deteriorating global economic conditions and the effects of increased terrorism have severely dampened air transport demand . It is estimated that overall the number of low-cost airline will increase in the future. Low-cost airline mainly operate within the UK and Western Europe. There is expectation to expand eastward as the expansion of the European Common Market itself proceeds over the next few years. According to Mintels report the overall air transport market in Europe will grow substantially in the coming years. Low cost airline have made significant growth due to value for money and affordable transport. GrowthOne of the key element of the emergence of the low fare airline is because of increasing number of air travellers discontent with the flag carriers. They have used their monopoly power. Figure 1 : Scheduled passenger uplift of main low-cost airlines, 19972002199719981999200020012002% changeOOOOOOOOOOOOOOOOOO19972001EasyJet3011,7662,9842,8455,98317,747***5,796Go**-3711,5951,7283,715--Flybe (formally British European)1,7071,9272,0751,6782,4883,000****76Ryanair (approximate)*3,0004,0004,9004,9008,10014,932398Virgin Express*1,7951,7002,1962,9762,4232,37832Five Forces AnalysisBarriers to EntryEntry into

this industry is very hard and costly. When a new company wants to enter it must consider the following factors:-Cabin crew-Ground staff-Maintenance-Cost of planes-PilotsIn order to carry passengers, cargo, or mail, air operators based in the European Economic Area (EEA) must hold an Operating License granted by the Member State in which they have their principal place of business . There are number of requirements needed in order to qualify for an Operators License:-Safety arrangements-Insurance agreements-Nationality of control-Finance situation-Place and nature of businessThe basis of air operator licensing in the United Kingdom is the European Council Licensing Regulations . Low cost airline find it hard to compete with bigger airlines in getting slot in major airports e.g. Heathrow, Manchester. This is where the bulk of the flights take off and where most of the passengers go. British Airport Authority (BAA) control major stake in Heathrow, Manchester, Edinburgh, Gatwick. Because no frills cant compete in terms of financial situation they have to use small and less busy airports e.g. Liverpool, Luton. SLOTSAt any airport there are limited number of available take off and landing slots each hour of the day. This number is limited by the safety consideration. A growing number of European airports do not have enough slots to satisfy demand from airlines. In this situation, the possession and allocation of slots is a crucial issue-affecting airline. It will be very hard for a new airliner to find a suitable airport. Under the current system, which is organized by the International Air Transport Association (IATA) an airline has the right to continue to use a slot assignment to it. Once an airline operates from an airport operates from an airport at a specific time it obtains the right to use that slot in the future. This becomes important at airport where the demand for the slots is greater than their supply with new entrants having little chance to obtain slots at suitable times of the day to compete with existing airlines. Overcrowding market and very strong competition deters potential new entrants. As mentioned earlier there are many no frills airline competing with one another. The established players like Ryanair and EasyJet are buying smaller airlines. Recently EasyJet bought out GO in order to increase its market share and much better access to European routes. New entrants have to invest large financial resources to compete. The CAA says that an airliner most be able to show that it can float on its budget for the first three months without any income coming in. Loss leader is required in order to join the low cost market. BA came in late with GO and it cost them 20 million. Already a couple of no frills airlines have gone bust. Costs are soaring: fuel, insurance premiums, security cost, passenger taxes- ticket prices are falling to the point where few carriers can make money. Buzz, the loss making low cost offshoot of KLM was bought out by Ryanair. Although there are many competitors in this industry, which may indicate that it is easy to enter, this is far from the truth. The real stumbling blocks come only after they have entered into the market. Financial aspect is one of the high deterrent of this industry. Industry CompetitorsThe low cost airline industry is dominated by EasyJet and Ryanair. Between them they have a customer base excess of 35 million. There are other competitors in this industry like Jet2, BMI, FlyBe but are much smaller. Whereas EasyJet and Ryanair operate from various small airports Jet2 and others only operate on a small scale from certain airports, this limits the number of customers they can attract. Recently EasyJet ordered over 100 Boeing

plane in order to supply the demand and expand its routes in Europe. EasyJet and Ryanair are fighting vigorously to compete with one another. It is estimated that over the recent years the average growth of the low cost market has been 30% . According to Mintel Report some part of the growth has been derived from massive free give aways of seats. The impact of September 11th did have an effect on the growth of the industry but low budge carriers avoided much of the worse. EasyJet flew 1.9 million people in October, almost an 18.2% increase over October last year. But it has still lagged behind archrival Ryanair, which carried 2.1 million passengers in the same period. Ryanair load factor the proportion of seats filled fell to 84% last month from 89% a year earlier. EasyJet notched up a load factor of 85.5%, up from 89% 12 months ago . What Ryanair does is it gives away free seats just to fill up the seats. They can however recoup this money if the customer spends on the plane. All the players in this industry have same strategy, to give the customer the lowest fair as possible while making the maximum profits. This industry service can be differentiated easily. The EasyJet brand is strongly associated with its simple, no-frills service. This is targeted at both the leisure and business market. The companys staff have shed some light n what EasyJet stands for, in the form of a statement of the organizations value: Orange Culture, this means being up for it, passionate and sharp . Regulation barriers are decreasing, therefore increasing competition in Europe. The fixed costs in this industry are high. Examples of fixed cost are labor, maintenance. As Michael Porter states When both entry and exit barriers are high, profit potential is high but usually accompanied by more riskBargaining power of SuppliersSuppliers can exert bargaining power over participants in an industry by threatening to raise price or reduce the quality of goods and services . There are limited numbers of suppliers for the budget airline industry. If we look at the fuel suppliers then we see that only handful of oil giants like BP and Shell supply to the aviation industry. The price of aviation fuel is directly related to the cost of oil. Airline industry is fragmented hence suppliers have the upper hand. If any of the airline wanted to buy planes then there is only 2 companies in the world that make them, they are Boeing of USA and Airbus of Europe. Most of the time airlines stay with the same supplier as changing over is expensive. The airline industry has a part to play in to the supplier but is not important customer of the supplier group. There is no substitute for fuel. Because the airline industry heavily relies on suppliers this leads to raising the power of suppliers. Labor is also part of the supply chain. If the labor market is shortage then this will have a knock-on-effect. The threat of staff unionization is also a problem as we have seen the case with British Airways recently. Power of buyersBuyers compete with industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other-all at the expense of industry profibility . The buyers of this industry are the passengers; there is limited power they pose. They cannot effect the pricing of the tickets. Within the budget airline all the products are standardized. Buyers know they cant find anything alternative. If there is economic depression then customers opt for cheaper flight tickets. Customers have the Civil Aviation Authority (CAA). The aim of the CAA is to:-Provide protection against the consequences of travel

organisers failure for people who buy package holidays, charter flights and discounted scheduled air tickets. -License airlines and ensure compliance with requirements of European and UK legislations relating to financial resources, liability and insurance of airlines. Threat of Substitute ProductSubstitute limit the potential return of an industry by playing a ceiling on the prices firms in the industry can profibility charge . There is no substitute product for this industry although customers can travel to mainland Europe by sea or land which is expensive and time consuming. Recommendations based on the opportunities & threatsThis section will be analysed by using PEST analysis. PoliticalThe widening and deepening of the EU over the next few years could have many important implications for airlines: These might include-The inclusion of Balkans states will make them more stable and accessible to tourists increase demand for such destinations. -Moves towards a federal government for the EU will likely mean attempt to create heightened competition on a Europe-wide basis. -Airlines are now able to operate a base out of any European Country, given many more opportunities for expansion. -Deregulation as the market increases in size, therefore economic of scale may ariseEconomicCurrent nearly all of Europe is in recession with the exception of Britain-Decrease in passenger numbers since September 11th-Increase in cost of security, specially after September 11thSuppliers are also experiencing sharp downturnSocial-Pubic are lead to the prospect of cheap flights when they see promotion but the actual cost is much higher for the day and time when they want to fly out. -People are reluctant to fly specially after September 11th-Industry needs to rebuild confidence of the customerTechnological-More and more customers are buying their ticket online rather than phoning up. This saves the industry a lot of money due to fewer call center staff. -E-commerce is used therefore less infrastructure is requiredReferences-Financial Times, www.ft.com-PORTER, M.E. (1980) Competitive Strategy Techniques For Analysing Industries and Competitors. The Free Press-MINTEL (2003) No-frills/Low-cost Airlines. Mintel-TRAN, M. (2003) EasyJet passenger number soars. The Guardian, 7th November, p12-The UK Civil Aviation Authority,Available at: http://www.caa.co.uk/default.asp [Accessed 12th November 2003]-The Economist, May26th, the squeeze on Europes airfares-Flight International, Available at: http://www.flightinternational.co.uk/ [Accessed 20th November]