Government Legislation And Market Structure Of Airline Industry Economics Essay

G e realwherenment Legislation And market place Structure Of Airline Industry Economics EssayOver the past(a) two decades the air duct industry has experienced major changes that has hazarded the b anele colourersuit structure and segmentation of the market. The Low- court Carrier (LCC) market has stolen ground on the established market, at a substantial rate. This essay go forth focalization on the Low-Cost Carrier (LCC) market and in particular leave behind look at the easyJet firm based in Luton, England. The essay bequeath asses the position that easyJet has acquired in the European airline market and the micro scotch factors that furbish up the firm. In add-on, the essay will provide an analysis of how past, current and afterlife prospects of the miserliness and how macro economic factors influence easyJets growth. Finally, based on analysis of the mention discussions raised through push through the essay, a set of recommendations will be make outlining possible str ategies that the firm could consider in disposition to prosper further. account statement of easyJetGreek entrepreneur Stelious Haji-Ioannou founded easyJet in 1995. The company was created to take usefulness of the deregulation of the European Airline industry and to flip customers a suffering woo option. The company along with Ryanair pi superstarered the no-frills airline. The reduction of costs lies at the plaza of the low-cost product line model, which aims to offer lower f atomic number 18s, eliminating some comfort and work that were traditionally guaranteed (Malighetti, Paleari Redondi. 2009). EasyJet was floated on the stock market in 2000. It has grown since beca determination into a leading European Low-Cost Carrier. The company provides airline go on short-haul and medium-haul point-to-point routes, in operation(p) primarily in Europe on over 400 routes.SECTION 1, MICROECONOMICSGovernment Legislation Market StructureIn the past the European airline industry was characterized by an oligopoly market structure, a form of imperfect contender in which a limited estimate of firms dominated the industry (Rubin Joy, 2005). However although airlines may use oligopoly market index number to balancerict competition, new innovative firms burn carve out a niche, which is the strategy of easyJet (Rubin Joy, 2005)In order to stimulate competition, during the 1980s the European consignment implemented the open skies legislation. This aimed to liberalise air excursion indoors the European Community and challenge the cartel of flag-carrying national airlines such(prenominal) as British Airways, Air France and Lufthansa which controlled 40% of the available passenger-kilometers on scheduled intra-European flights through symmetrical agreements, regulated by the International Air Transport Association (IATA) (Ghoshal, Lefefebure, Jorgensen Staniforth, 1988)As easyJets yearbook report in 2001 eludes to the market environment for too long, ga lore(postnominal) of Europes airlines suck in considered themselves immune from the realities of their operating environment. State aid, entrenchment at Europes busiest airports and gilt restrictive bilateral agreements have been used to pr counterbalancet proper competition from sweeping continental Europe.According to Rubin et al., (2005) although superior entry costs of aircraft acquirement and other capital requirements make entry difficult, the industry appears much contestable (e.g. imperfectly competitive but subject to potential entry if warranted by outlays or profits). This paved the way for the LCCs to enter the market, armed with completely various blood line models which have erode the dominant carriers market sh ar even at large hub airports. mannequin 1 shows how the UK in particular where easyJet ar based have taken to the LCC idea. foresee 1 Low Cost Carriers operating to/from major European countries by frequency in November 2005 fount OAG MAX Online. Febr uary 2006Competitive analysisThe airline industry is characterised by high levels of competition, at that placefore the profit valuation reserves can be result in low re period of plays. Because profit margins ar very small, during a recession or a lull in lease airlines can become bankrupt within a short space of time. In order for easyJet to sustain on that point profit growth they assert on very quick turnarounds in order to maximize there profit.In addition the expansion of the meshwork has made the pricing of fairs more transp arnt to the customer and has eradicated the live on agents fee, which has brought long cost savings for airlines. These costs have been passes onto to the passengers, which has triggered a boom in flight capacity. However, the inter earnings has also resulted in more determine equation websites for the toll nice customer to compare ticket outlays from different airlines. Customers like a shot do not have much loyalty towards specific airlin es, as they are more concerned with finding the cheapest hurt for their journey. However easyJet have now become one of the leading LCC airlines in the UK as illustrated by market share in Figure 2. Figure 2 Shows the assurance of both easyJet and Ryanair that have a large market share in the UK.Figure 2 Low Cost Carriers to/from the UKSource OAG MAX Online. inch 2006Major determinants of questThe demand for air travel is sensitive to changes in easyJets own prices, the price of link up goods, incomes and individual taste preferences. However the tip of sensitivity is dependent on varying market physiques.EasyJets own priceThe low cost carriers have profoundly changed the airline industry, by increase the demand for air travel. Alertness to latent demand, characterized by the passengers willingness to pay elasticized prices, which is not the attitude of the so-called traditional passengers, is among the key factors of easyJets success (Pels and Rietveld, 2004).Because of the their alternative business plan, easyJet are able to offer a trim back price to customers. The price choices and the ability of the airlines to understand the characteristics of the demand are decisive in the balance of the business model itself (Malighetti, Paleari, and Redondi, 2009)The Internet has also increased the foil of costs and allowed customers to compare prices instantly. at that place is now no loyalty, because customers will closely often than not choose the cheapest ticket. No-frills airlines tend to use simplify pricing structures based on demand regulated single fares or flexible return tickets without the high- cost premium fares required by mainstream airlines for to the full flexible travel (Baum, 1997). Lower fares have meant that those more frequent shorter holidays are not necessarily a more expensive option and the way towards more flexible booking arrangements has encouraged this development (Graham, 2006). scathe of related goodsThe price of flip-fl op goods and the consumers purpose of travel consistently affect the demand for easyJets services. There are numerous forms of substitutes that could cater for the customers inescapably such as travelling by car domestically or by cook internationally. The structure of demand, which guides the optimisation choices of the carrier, is influenced by the presence of competitors, and the passengers opportunities to opt for a substitute service (Malighetti, Paleari, and Redondi, 2009) Therefore if Eurostar lightd their prices to travel from London to Paris accordingly this would affect the demand for and the price customers are willing to pay to travel with easyJet.In addition airline passengers usually travel for different purposes, both leisure, business or to visits friends and family. Typically, business travelers have lower demand breeze, and high willingness to pay than leisure travelers. (Alves, and Barbot, 2009)IncomeThe demand for travel is also touch on by the average ho usehold income. If the household income increases so does the purchase of luxury goods such as travelling abroad. On this basis a elasticity multiplier of 1.1 is used to adjust air travel price elasticitys for short-haul flights (Deaton, 1975).TastesSECTION 2 MACROECONOMICSThis section of the essay will asses how past current and future prospects of the economy has affected easyJet.Monetary and Fiscal policyMonetary policies in the limit of interest judge affect the demand on the airline industry. high interest rates raise the retail price index by raising the cost of living. This has made borrowing from banks more expensive and joined with the current economic humour has had a negative impact on consumer spending.Therefore people have less disposable income to spend on travelling aboard.Figure 3 Relationship between Interest rates easyJets annual total profitSource Bank of EnglandAs Figure 3 illustrates, between 2005 and 2007 there was a sharp increase in easyJet profits. Ho wever, because of the recent economic recession the Bank of England have responded to the current climate by reducing their interest rates from 5.5% to 2.0% to try and stimulate the economy.EasyJet are affected by fiscal policies through the implementation of tax duties on air carriers. The government allocate these fees to fund for increased security take since the kinsfolk 11th terrorist attack and support operations at airpark facilitates. As the graph illustrates during the 2007-2008 period there was a sharp decline in profits due to the unexpected doubling of Air Passenger handicraft (APD) in the UK (easyJet Plc Annual report, 2007). Although the government use fiscal policies to try and arouse the airline industry, they ultimately decrease the already tight profit margin that easyJet operates under.In addition the future of the airline industry seems likely that there will be more taxes levied at easyJet and the airline industry as a whole. As easyJets annual (2008) report s states the European Union has now finalised the basis of aviations entry into the Emissions Trading strategy (ETS). This will require us, from 2012, to hold nose candy emission allowances to cover our CO2 emissions. ETS is a cap and trade scheme, diligence many sectors, and is designed to ensurethat carbon emissions in the EU are cut offd as expeditiously as possible.Crude oilThe airline industry uses kerosene, which is now ranked as the third highest petroleum because it is widely available and can withstand a wide range of temperature fluctuation. Therefore, the price of kerosene has an obvious and direct impact on the cost of easyJets and the airline industry as a whole, because it is one of the major costs occurred in the business.Figure 4 The relationship between Crude Oil and easyJets net profitSource U.S. Energy Information Administration, Independent Statistics AnalysisFigure 4 illustrates the relationship between crude oil prices and easyJets total revenue. As you can see from the graph there is a direct correlation between the two values. Crude oil has been rising astronomically since 2000. EasyJets annual report highlighted the affect that oil is having on their profits the price of oil, which make up some 14% of our costs for the year ended 30 September 2004 (easyJet Plc Annual Report, 2004). In 2008 the price of oil was still high on the agenda of easyJets annual report, which stated The price of can rose to unique levels and less well positioned competitors struggled to survive resulting in capacity exiting the market. In addition it is alarming to realise that the price of jet fuel has risen by more than 50% in the last year. This is directly affecting easyJets baseline profits as Table 1 demonstrates. (IATA Website, 2010)Table 1 This weeks price of aviation jet fuelPercentage change vs.1-Jan-10Index*$/bcts/gal$/mt1 week ago1 month ago1 year agoJet Fuel Price241.788.4210.5696.73.7%1.6%50.3%Sourced from Platts * 100 in 2000 (87 cts /gal)Increases in fuel prices have an obvious affect on the operation, but they also trigger economic recessions, which in turn result in a substantial decline in demand for air travel and air cargo. However, like many other industries that rely on crude oil high prices forces them to cut down their use or look for alternative resources. In order to tackle this worry easyJet have bought fleets of new airliners. To offset this, we are concentrating both on operating the most fuel-efficient aircraft and reducing costs elsewhere (easyJet Plc Annual Report, 2004). The new aircrafts are more fuel-efficient enabling them to reduce the expenditure on fuel. In addition, when fuel prices are raised it also affects the consumers decision on whether to fly at all or look for substitute modes of transport.gross domestic product GrowthGDP growth has historically been a key determinant of the leisure travel demand and it continues to play an important role in many prodigy models (Graham, A. 200 6). EasyJet and the airline industry are affected by the overall condition of the national and international economy. When there is a healthy economy the nations expenditure on travel increases. However, when there is an unhealthy economy the buying habits of the consumer waterfall because travelers will have fewer resources available to travel for pleasure.Figure 5 The relationship between GDP and easyJet net profitSource speckle for National StatisticsAs the graph illustrates 2002 and 2003 there was a sharp decrease in easyJets profit. A statement from the annual report attributes these facts to the War in Iraq, economic uncertainty and the SARS epidemic all adversely affected sentiment about travel, both business and personal (easyJet Plc Annual Report, 2003).However, A fundamental weakness in comparing travel growth to economic growth is that ignores the important influence that travel cost or price can play. The travel cost will determine the amount of income that needs to be spent on travel (Graham, A. 2006).Recent reports have suggested that the UK and the rest of Europe are slowly emerging from the recent recession. This should help to tot up to easyJet reaching its projected growth forecasts.ConclusionBased on the old analysis of discussion that was raised I will now replete recommendations and describe possible strategies easyJet could consider to increase their net profit.The current economic conditions have had an adverse affect on the airline industry as a whole. The near future may see more mergers of airlines in order to survive or heavy consolidation of their routes. The future of easyJet is heavy reliant on outside influences. However, because the easyJet company is based on a low-cost business plan coupled with the fact that population is rising, one could argue that they are in a better position to endure the storm and increase market share. In order to take proceeds of the current situation easyJet need to face a number of problems.T here is no question that the price of fuel is playing a authoritative role in the underlining profit of the easyJet company. Both in terms of the reduced profit margin and the overall affect the price of oil can have on the overall economy, history has shown us that it can impart to the manifestation of recessions. However because the price of oil is set externally it is out of easyJets control, therefore there is need to explore alternative avenues of curtailing the effect that oil prices has on the easyJet company.One solution to reducing the affect that oil prices has on easyJet is by investing in more fuel efficient aircraft that reduce the amount of miles per gallon. As technology is moving forward at a unprecedented pace new airliners are becoming more aerodynamic, apply lighter materials and pilots are utilising more cruise control technologies so that the exercise of fuel is used more efficiently. In addition, investing in more fuel efficient aircrafts will reduce the am ount of money that will need to be paid in 2012 when the new Emissions Trading Scheme is enrolled, which is designed to ensure carbon emissions are reduced as efficiently as possible.Another alternative method to curbing the affect oil prices is to invest in research and development of alternative fuels. Although this may initially require large investments, but if alternatives are found easyJet will be ideally placed to be one of the first airlines to take advantage of new technologies and pass the savings onto their customers.In recent years easyJet has grow its operations around Europe especially in Italy, France and Spain with nearly one-half of easyJets passengers now originating from outside the UK (easyJet Plc Annual Report, 2008). However, these expansions may have caused their operations to lift in their overall efficiency. Because of the nature of easyJets business plan, the company relies on very quick turnarounds at airports and highly efficient operations in order to maximise their profit margin. Therefore it would be beneficial for easyJet if they were to focus on economies of scale by making their operations more lean in order to increase profit margins.Because customers are becoming price sensitive to airline prices, another strategy that could prove beneficial is to target the business class who will have less of a price elasticity compared to leisure travellers who do not necessarily have to use easyJets services. In order to appeal to the business class easyJet will need to offer more flexible and more frequent services to the major business capitals in Europe.