1. Introduction to the firm and its market
EasyJet plc is a low-cost carrier model British Airline based at London Luton Airport.
The company was established in 1995 by visionary founder Sir Stelios Haji-loannou.
Using their effective low-cost model, the company had witnessed significant expansion both in UK and outside UK by a series of acquisitions of major European airline companies. Purchasing shares of Swiss Charter airline TEA basle in March, 1998 and establishing their associate company EasyJet Switzerland was there initial acquisition goals to increase their base outside UK, followed by buying a few other companies landed them to become number one and number two network position in strong markets and enabled customers fly across 802 routes around 31 countries at present (EasyJet, 2018).
EasyJet plc was one among the few companies that can be titled as the winners in the great economic recession in 2008 due its strategic low-cost carrier model.
Even during the recent Brexit the company had faced problems with weakening of pound against USD and Euro and also faced operational difficulties in European countries.
Figure 1: Number of passengers on United Kingdom (UK) airlines in 2016 Source: Civil Aviation Authority (UK); GOV.UK; Department for Transport (UK), Statista
Fig 1 shows the number of passengers in UK airlines. It is very evident that EasyJet has a strong customer proposition compared to other airline companies that function in the UK.
Figure 2: Annual turnover of the air transport industry in UK from 2008 – 2015. Source: Eurostat, Statista
From the above figure it is clear that the gradual increase in the overall airline industry is a positive sign of economic development. As increased turnover results in increased revenues for the companies which thus enable them to widen their market, increase employment and also enables customer to connect with wider locations.
In addition, this connectivity between cities and markets enable countries with different economies to come together and thus attract various business relations and foreign direct investments to the economy. This economic analysis focuses on the EasyJet performance over the last 9 years in the UK market.
2. Macro Economy Overview
EasyJet’s main market is based in the United Kingdom, a country that holds a great position both in terms of economy and military power. Major economic shock the country faced was the global financial crisis in 2008 and minor being the recent Brexit.
2.1 Gross Domestic Product
GDP measures the market value of all goods and services produced in the country in a given period of time. Consumption, investment, government spending and net exports are the 4 major components that constitute a GDP of a country.
Figure 3: GDP UK from 2007-2016. Source: OECD
Figure 3 shows the GDP of UK economy from 2007-2016. After 2007 there was a significant reduction in GDP growth rate particularly in 2009 with a reduction of -4.3% with GDP value of 34600 USD per capita, it was due to the global financial crisis in 2008. It was only after 2010 the market had achieved a recovery stage and showed a positive growth in GDP.
There was a significant reduction in consumption during the post-recession period. It can be classified on the basis of consumers spending on discretionary and non-discretionary products. Figure 4 shows the reduction in consumption pattern at the time of recession, there was about 9% and 3% reduction in consumption of discretionary and non-discretionary (Gittins et al, 2012 pg. 4) products respectively which thus resulted in shifting the aggregate demand curve to the left for goods and service.
Figure 4: Consumption of discretionary and non
-discretionary from 2008 q1-2011 q3 Source: ONS
It was only in quarter 3 in 2011 there was a positive increase in consumption. Bank of England had reduced the interest rate to 1.5% (Bank of England, 2012) aimed to reduce the cost of lending and thus increase the consumer spending. Cutting down the Value added tax from 17.5% to 15% was also a plan that the government opted to increase the consumption and thus boost the economic growth (Anon, 2009). Recent Brexit also affects consumers spending urge as depreciating pounds leads to an increase in the price of consumer goods.
Figure 5: Household consumption expenditure in the UK from 2005-2016 Source: Statista
From Figure:6 & 7 it is clear that rate of investment both business and gross capital formation had drastically reduced in 2009 due to the financial crisis which resulted in reduced confidence among investors and banks to spend money on new investments. It was only after 2010 there was a slight increase in Business Investment due to reduce interest rates but the growth was in a very slow pace. Post-Brexit also slows down the investment growth in UK. But recent statistics shows that gross fixed
Figure 6: Business Investment UK Source: ONS
capital formation was 81.1 billion in the second quarter of 2017 which shows that there was an increase in investments by 2.5% compared to Q2 2016 years’ growth. This change had occurred because some companies wrongly classified their investments (Jackson, 2017). Reduction of corporate tax rates also increased investments in UK in the coming years.
Figure 7: GFCF Source: The world bank
2.1.3 Government Spending
Figure 8: General government spending total,1000usd/capita Source: OECD National accounts for statistics
Above figure depicts that general government spending was significantly higher during the post-recession period, it was done to support the economy from negative impacts of financial crisis. Governments Austerity program in the end of 2010 showcased a further reduction in the overall spending (Pimlott et al, 2010). The recent autumn budget states that the government had plans to increase there spending by Investing 6.3 billion pounds for the development of NHS and also had plans to invest in National Productivity Investment Fund to support greater innovations for future (HM Treasury, 2017).
2.1.4 Net Exports
Figure 9: Net Trade Million USD 2007-2016 Source: OECD, National accounts at glance
From the above figure it is clear that UK economy was always a trade deficit country. In 2010 the country has faced its largest deficit with importing 3.8bn pound more goods and services than it exported. It was the largest after the the collapse of Lehman Brothers in 2008 (Pimlott, 2010). The recent decision of Brexit also results in widening of trade deficit due to weakening of pounds.
2.1.5 Effects on AD, LRAS AND SRAS curves
Post-recession results in negative growth in overall economy in terms of reduced consumption, reduced investments reduced government spending and reduced exports. All these factors result in reduced demand for goods and services which makes AD curve to shift to the left (A to B) which results in reduced price which further makes production costlier and less profitable which reduces the supply making SRAS shift left (C to A).
Figure: Shift in AD and SRAS curves Source: Self Drawn
2.2 Unemployment rate
Figure 10: Unemployment rate, total % of labor force Source: OECD, Labor market statistics
During post-recession period UK had faced a steep but then a short period of unemployment and reached a peak of 8% at the end of 2011 which was its highest peak after 17 years. The other main reason of unemployment was the shift of economy from manufacturing to service sector (ONS, 2016). By the end of 2015 the economy overcome unemployment to an extent, though the wage growth was less. But the workers were happy as the inflation rate was zero during that period hence, it didn’t affect workers living standards (O’Connor, 2015).
Figure 11: Inflation rate Source: Statista, ONS
Figure 12: UK inflation Source: ONS
From the aforementioned figure, post-recession had resulted in decreased demand for goods which in turn pushes down the rate below the 2% target in 2009.
Whereas inflation rate was at its peak in 2011 due to reduction in interest rates and tax rates which increased demand for goods. The sharp fall of inflation in 2015 was due to falling oil prices and Bank of England’s decision, not to increase rate till the economy has attained growth (Cadman, 2016). Weakening of pound and increased oil prices had pulled inflation above the 2% target in 2017.
3 Financial Performance of EasyJet Plc
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 1797.2 2363 2667 2973 3452 3854 4258 4527 4686 4669 5047
Profit 152.3 83 71 121 225 255 398 450 548 427 325
ROCE 11.7% 5.7% 3.6% 6.9% 9.8% 11.3% 17.4% 20.5% 22.2% 15% 11.9%
Table 1: EasyJet Revenue, Profits and ROCE (FY 2007-2017) Source: EasyJet annual repots
Table 1 gives a clear picture of the financial performance of EasyJet in various years. In 2008, even though there was significant boost in revenue, the profit of the company was slashed to 83million pounds. Acquisition of GB airways for a deal of 103mpounds (Done, 2008), strengthening of Euro and increased oil prices are the reasons for the reduced profits. Post-recession also causes a reduction in profit due to overall reduction of economic growth which resulted in the reduction of both business and leisure air travels. From the year 2011 the company has started showing a positive increase both in revenue and profits by increasing their operation in Europe short-haul low-cost airline market. In 2015, when the company celebrated its 20th anniversary was the year the company attained its highest profit and highest ROCE with 22.5%. Which was followed by their expanding bases in UK with 20% market share and also their growth in European market enabled them to achieve this (EasyJet Annual Report, 2015 pg.17,18). Terrorist attack in Paris in 2015 was a downsize in reduced business for a short term (Powley, 2015). Post-Brexit has resulted in reduced profits due to weakening of pounds against dollar and euro.
3.1 Oil Price and Foreign Ex-change rate
Figure 13: Crude oil import price USD/barrel Source: OECD, Spot market and crude oil import cost: Crude oil import costs and index
Figure 14: Exchange rates after 2016 Source: Thomson Reuters DataStream
EasyJet is directly affected by variations in Exchange rates in purchasing of fuel. Fuel is one of the significant component which adds to the running cost of EasyJet, so any fluctuation in the oil prices causes greater revenue changes for the company. As fuel price is associated with US Dollar, a strengthening of USD against GBR results in price hike and reduced profits. From the figure given above it is clear that even though the fuel price had reduced in 2009, after 2015 the company couldn’t benefit much from this. Mainly because recession as well as post-Brexit resulted in weakening of GBR against USD which makes fuel costlier for EasyJet (Rodionova, 2017). Increasing fuel price in 2017 also makes fuel much costlier for UK airline companies. Exchange rate weakening is shown in Figure 14 after EU referendum.
4 Market Structure and Competition
Aviation sector plays a crucial role in the development of UK economy contributing 3.4% to the GDP and providing 961000 jobs (Oxford Economics, 2014 pg.4). Airline industry had undergone significant change in their market structure after the global financial crisis in 2008. The low economic growth had paved way to the so called low cost carrier airlines which provide cheap air tickets to customers than the traditional legacy airlines. After 2011 when the economy had regained growth there was an increase in both long-haul and short-haul air services with 29% growth alone in short-haul air services (Department for transport, 2017 pg.10).
Even though there are many players in the markets EasyJet holds the largest market share in this low cost industry in UK followed by BA, Ryanair and Thomson fly.
When calculating the market concentration using the 4 firm model from figure 15 we can see an oligopolistic market structure with 78% market concentration.
Figure 15. Ten most used passenger airlines at model UK airport Source: Dept. of Transport UK
Oligopolistic market can be well determined using Kinked Demand curve model using price and quantity. Consider the case of EasyJet and Ryanair, if EasyJet increases their ticket price to 70GBP there rival Ryanair will not follow it as this increased price results customers in buying more Ryanair flight tickets rather than EasyJet tickets. On the other hand, if EasyJet decreases their price to 50GBP Ryanair will follow its trend and it thus leads to price wars and reduced profits for the firms. So from Figure 16 it is clear that if EasyJet increases price, the demand curve facing it will be highly elastic resulting in Q shifting to Q1 whereas if the firm reduces the price, demand will be inelastic shifting Q to Q2. So the chances of earning profits are very less if EasyJet increase or decrease its price hence both the companies face a Kinked demand curve.
In order to balance this situation companies relies on non-price competition tactics like more baggage allowance free meals and so on (Mankiw et al, 2014).
Figure 16. Oligopolistic Kinked Demand Curve Source: Self Drawn
Business and Leisure travels:
Demand for business and leisure travels varies. People usually book tickets for leisure when the rates are cheap whereas business travelers book tickets as and when needed. Hence, demand for leisure travels are more elastic compared to business travels.
Price of substitute goods:
The major substitute for airlines in UK is the improving rail network. Though its not a threat in long-haul, in short-haul services like travelling from London to Edinburgh train cost around GBP 65 whereas for EasyJet it comes almost the same but when seeing the time factor people prefer flight the most. Whereas the launch of High speed 2 rail network (Powley, 2017) and Virgin Hyper Loop One in the coming years which can take passengers to London to Scotland in 45mins could be a serious threat to the airline industry in future (Powell, 2017).
Barrier to Entry:
Barrier to entry is relatively high in airline industry specially in an oligopolistic market. The main barrier is the high capital intensive nature of the business, legal certifications and to give competitive prices a firm should achieve economies of scale which is very difficult for a new firm to achieve this status in a shorter period.
Strategy plays a key role in any business for their smooth running and achieving organizational goals. EasyJet’s strategy is based on a sustainable low cost business model which helps them to give the customers the best price and best service. It is achieved through the following ways.
• Building number one and two positions in strong UK airports:
EasyJet has number one and two position in UK’s busiest airport. Which include 47% and 43% of short-haul capacity in London Gatwick and Luton airport respectively.
(EasyJet annual report, 2017 pg.12)
• Efficient cost management
EasyJet improves seating capacity of airplanes by efficient configuration in its structure. The use of single young fleet of airplanes specially the Airbus A320 enables them to attain cost effectiveness both in maintenance as well as training for the flights. EasyJet also plans to invest in more efficient Airbus fleets by the summer of 2018 with A320 NEO and A321 NEO flights (EasyJet Annual Report, pg.8).
In 2009 increased oil price was a major threat for airline companies. EasyJet on the other hand achieved optimum fuel efficiency through new flight planning system which makes them saves 1.2% of fuel used during that period (EasyJet Annual Report, 2009 pg.15).
• No frills model
EasyJet uses a complete, no frill model which enable them to give competitive prices to customers by reducing catering service on board, eliminating business class and maintaining a single class across the flight which enables complete utilization of flight and reducing entertainment services on the go.
• Efficient utilization of Digital Technology
EasyJet widely depends on technology to achieve cost efficiency. It can be seen from its past paperless model of tickets. EasyJet’s award winning app enabled them to give better customer experience and the latest ApplePay payment method also provides greater convenience to the customers (EasyJet, 2018). At present around 20% of booking are through mobile and use of mobile boarding pass has also increased rapidly year after year. Increase in the use of internet also enables airlines provide customer cheap rate by eliminating third party and agent commissions.
• Working closely with Global Distribution Suppliers and travel management companies have enabled the company in getting many business passengers (Strickland, 2012).
In 2017 the overall business passengers have increased by 3.6% (EasyJet annual report, 2017 pg.15).
• Post-Brexit also caused problems relating to its operation in European countries, but it has successfully overcome it by acquiring AOC (Air Operators Certificate) and had established a new airline EasyJet Europe in Austria, thus enabling uninterrupted flying in and out across the EU (EasyJet Annual Report, 2017 pg.11).
6 Conclusion & Outlook
As a company, EasyJet is performing both in UK as well as in European markets. Its performance can be analyzed by their increased passenger growth year after year with around 80million passengers in 2017 (EasyJet annual report, 2017 pg.3). Figure 17 shows the market share of airlines which clearly states increasing growth of low cost airlines from the early 2000’s. The company is predicted to face competition from traditional airlines in future by their launch of low cost models. Recently IAG has launched Level airline which will come in the category of low-cost long-haul airline which will start its operation by the end of 2018 (Martin, 2017).
Figure 17: Airline market share Source: FT, OAG
According to OECD the growth in UK is predicted to reduce in 2018 and 2019 with 1.2% and 1.1% respectively (Giles, 2017). This reduction affects the cost of the airline industry in terms of weakened sterling. On the other hand, a strong financial performance and increased market shares in European market enables the company fight legacy and low-cost rivals efficiently and effectively in the coming years.