Flying Company
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During the past ten years we have witnessed the birth of a new way of making business, low cost airlines. The way these work is quite simple, they offer low prices in exchange for suppressing many of the traditional services offered to customers. Other characteristics that sustain these kind of companies are; “unique travel fee; frequent and short flights; suppression of intermediaries (tiquets are bought online); use of secondary airports (minor operatively costs); less number of employees needed; reduction of the number of aircraft models (simplification of the maintenance)” .
Nevertheless, before we enter to discuss our particular case we think its necessary to point out some of the main features of this new and booming industry. The first that catches our attention is the fierce rivalry that exists, ” where competitors are tempted by industry conditions to use price cuts or other competitive weapons to boost unit volume”, and the huge power that buyers enjoy, because “the item being purchased is sufficiently standardized that costumers can both find other suppliers easily and switch to them at virtually zero cost “.
However, after its initial boom now its time for the sector to face a new challenge, deal with the new problems that are arising while being loyal to the basis of the new business model. In this context, we are going to choose a Spanish low cost company, and analyse the main problems it has to face, and what we think it should be done in order to overcome these. The chosen company is Vueling, created 3 years ago, with 57 routes, with more than 8 million passengers, and which during the last months has seen how the value of its shares reached their minimum price, at the same time that it quantified massive losses.
Nevertheless, most low cost companies share this situation. During the past years low cost companies have increased a lot their offer and, in order to fill the planes got involved in a price wars (all this in a context with continuous increases in the price of oil).”Last August they reached a 40% of the market, but in behalf of their own profitability, slightly similar to dying of success” . In spite of these, Vueling will have to reduce its rate of growth, increase its prices, and reduce its costs.
An additional problem that many annalists point out refers to the fact that Ryanair is the cost leader of the market (due to its low labour costs and its policy to fly to secondary, and much cheaper, airport), and no other company seems to find out the formulae to displace it from that position . Because of this, the rest of the companies have to find the way to differentiate their products from their competitors, and make them worth of a higher price. In the case of Vueling, many analysts coincide that the measures adopted by the managerial team of the company contributed to increase the uncertainty around the company, they were half way in between low cost and traditional airlines (tickets were going to be sold not just online, but in travel agencies, passengers are assigned fixed seats, it flies just to principal airportsÐ) and which they decided to call ” New Generation Airline “.
Therefore we believe that the managerial team, which has recently been changed, should, first of all, abandon this price of wars which has damaged so severely the financial situation of the company, an then they should ask themselves the next couple of questions. What kind of company we want to be, is it a low cost company, a traditional airline, or maybe a hybrid inbetween the previous two firsts? And then, how can we differentiate our offer from the one of our competitors?
As w have previously mentioned, a new managerial team was soon appointed, due to the quarrel between the principal shareholder of the company “Inversiones Hemisferio” and the previous directive board about how the company should face the immediate future. The reaction of the market was extraordinarily fast, “with an increase of a 3,5% on the value of the shares”. This was the answer of the market to the calls from the new managerial team for a new strategic plan, abandoning definitively that worthless war of prices.
Though there have been several public apparitions from the new president of the company stating there would be significant changes in the airline strategy, the reality is that until now very little has been done to put a definite end to the previous situation .
Arrived to this stage we are going to comment on what we think it should be done to overcome this critical situation. The starting point for our analysis is going to be the appointment of the new managerial team. We believe that from then on the company should have taken advantage of the positive welcome of the market to make a much more aggressive strategy breaking completely with its past strategy.
Therefore,