Essay About Low-Cost Part And Airline Industry

Easyjet
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Competition is the name of the game when it comes to capitalism which is the main sociopolitical system in the world. Through competition among continents, countries, industries, and companies the resources are effectively distributed and efficiency is maximized. This maximization of efficiency is probably the most critical element in the field of “operations management”. Operations management has become a science and is blended with the other functions of a business like marketing and finance. A very competitive industry where the management of operations makes or breaks a business is the airline industry and especially the low-cost part of it. In the low-cost airline industry the service provided has been almost commoditized and the companies are trying very hard to be profitable while being competitive, in order to please their stakeholders like investors and customers. A well known low-cost airline is Easyjet which operates in several European countries and has been founded by serial entrepreneur Sir Stelios Haji-Ioannou in 1995.

Easyjet’s goal is to be the leading low-cost airline in Europe while providing exceptional value to its passengers. This is a difficult goal but the company uses various operations management strategies to accomplish it. These strategies are going to be analyzed in order to understand the positive and negative aspects of each one and also will be contrasted to what the direct competitors do similarly or differently. When it comes to low cost we have identified eight different strategies being used by Easyjet that help lower expenses. These strategies contain use of the Internet to reduce distribution costs, effort to maximize the utilization of the substantial assets like aircraft

, ticketless travel, not offering a free lunch on board, efficient use of airports, paperless operations, economies of scale, and few management layers. The quality and value provided to the passengers is being accomplished by strategies like having satisfied employees, the use of the Internet for convenience, centrally located airports, and tight flight schedules.

Legendary investor and businessperson Warren Buffett has said: “Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about. Spurts don’t work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing.” His words are a great introduction to start analyzing Easyjet’s cost-cutting efforts that have been implemented from the first day the airline commenced operations.

The common practice of most airlines and other companies of the traveling industry is to work through agents. Agents make the arrangements for travelers and then receive a commission from the revenues they generate for each company. This strategy like any other has advantages and disadvantages. One advantage is that the traveling agency business is highly fragmented and the airline companies don’t have to rely on just a few agencies to fill their seats on every trip. Some disadvantages are that sometimes the acquisition of customers becomes very costly and the company doesn’t control the process. Easyjet was one of the first airlines to use the Internet as a focal distribution channel and it sold its first seat online in April 1998. Since then the Internet became the primary distribution channel and now approximately 98% of the seats are sold online and only 2% by phone. By not using travel agencies as its primary distribution channel, Easyjet manages to be able to plan and control the costs through the customer acquisition process like U.S. discount airline Southwest does. Another advantage after making this operating decision comes from marketing. By having to advertise only one possible potential customer entry point Easyjet can save money by organizing large scale campaigns targeted to that medium only. Also it can optimize the online seat booking process in order to achieve the highest possible efficiency, because on the Internet every action can be tracked. The trade-off with having a single-channel distribution system is that when an error occurs the company loses all the business until the problem is remedied and also the customers get aggravated. This online only strategy may be a double-edged sword but as the Internet penetrates a larger part of the population through the years, Easyjet will be there to take its share of these potential travelers.

The airline industry is an asset intensive industry with high operating leverage. This means that companies have high fixed costs which are associated with the repayment of debt used to finance their aircraft

and the depreciation expenses recognized every year on those aircraft
. In order