Rationale And Motivation Behind Easy Jets Strategy Management Essay

According to Amy L. Pablo et al (2004, p.3) the successful Mergers &Acquisitions has eluded countless corporations during the last century. Failure rates are reported as high as 50-75 percent, although with typically debatable scientific specification and support. The main reason for the acquisition is considered by many authors like to be the company’s growth, reaching products, markets, technology or other items that you do not think about and have time, patience or loss of know-how to develop by its own growth. 

Easy Jet was founded by Sir Stelios Haji-Ioannou in 1995 with six hired aircrafts (Johnson et al 2008, P.228). Within a decade in 2006 it has 122 aircrafts flying on 262 routes while annual passenger turnover was 33million. While its latest reported Revenue has reached 2667m in 2009 with 54.7m profit. (Easy jet Annual Report 2009)

In November 2000 British Airway announced its plans to sell its low cost airline GO to help its plunging profits (BBC 16th November, 2000). Which Rod Eddington CEO British airways branded it as “taking a ruthless approach towards poorly performing routes and assets” According to Michael Harrison (The Independent, 17thMay 2002) Easy Jet announced acquisition of its rival low cost airline “GO” in total price value of £376 million.

Motivation and Reasons behind acquisition

A large number of motives for the acquisition are set in the literature, as well as put together and what managers claimed to be the cause of the acquisitions that when trying to explain what market forces that lead to business combinations. According to (Johnson and Scholes 2002) there can be many financial motives for acquisitions.

Acquisition of Go airline had enabled Easy jet to boost its years of organic growth in a single step to become Europe’s largest low cost airline. The rationale to combine two companies was a very wise decision for easy jet as both have almost identical operating routes strategy and organisational culture.

Acquisition of working Asset (Tangible and /Intangible):

There are two types of resources a company own tangible and Intangible which means physical and non-physical resources respectively.

One of main motive in acquisition of Go Fly was to acquire working assets including UK’s major airports bases such s Bristol airport, East midlands airport, and London Stansted airport with an addition of 27 planes to its fleet and 38 new routes. Human resource is also tangible asset which includes staff and management and their skills and knowledge holding and almost similar organisational culture as of EasyJet. Furthermore EasyJet objective was to acquire intangible resources which include patents, brands, business models, customers’ database and customer loyalty and value of these resources is part of goodwill which EasyJet acquires.

EasyJet’s Objective was to deploy all these resources under its orange logo and integrate them within it’s already in placed business model.

Financial and Operational Objectives:

Financial resources such as capital, cash, debtors, creditors, and supplier of money such as shareholders and banks are also part of working asset. It was a positive estimate that the deal with bring more customers and increase revenue both objectives were achieved with in first year of acquisition, according to EasyJet’s annual accounts (2003) shows there was a 67.2% change in passenger revenue and 68.9% increase in total revenue. On other end profits declined 33.90%. Due to post acquisition management costs including increased taxes and other expenditures.

Table: Motives for internal development

Environment

Capabilities

Expectations

EasyJet has lack of resources and time to grow organically within industry on fast pace.

Develop Europe’s largest low-cost airline.

Shareholders want continuous growth.

Go Fly was perfect and compatible target or acquisition because of almost identical culture and business model.

Compete with large airlines to develop competition.

Senior management ambitious.

Need mature resources to bring value to company

Cut cost to provide cheap fares.

Go Fly Acquisition brings value to earning per share and other resources.

Source: Adapted from Johnson (2008)

Possible Synergies Involved in Go Fly acquisition:

According to Thomson (2003) synergy is either a path to sustain growth or it is source to fill the gap between growths within organisation. All resources should be combined in such a way that they produce result of high magnitude. The following possible synergies involved in acquisition of Go airline.

Functional synergy:

Go Fly and easy jet have identical business model and strategy at some level, synergy was obtained with the objectives to acquire and use of operational airport bases of GO Fly airline and flight destinations which would help easy jet in expansion of its operations. But also that would a step forward towards becoming Europe’s largest low-cost airline. Furthermore this deal had a positive impact to generate value for shareholders and rise in earnings per share value.

Strategic and Management Synergy:

With the Acquisition of Go Fly competent and experienced staff and management were also acquired with in deal, which includes customer services of Go Fly. This had created managerial and strategic synergy across the organisation; with transfer of management from the company with same management culture it was strategically opportunistic situation for easy jet to implement its business plan across the expanded organisations.

Cost Synergy:

Easy jet’s directors believed that by enlarging easy jet with acquisition of GO Fly will offer its customers tickets on competitive prices and on a greater choice of destinations by raising competitions among airlines throughout in Europe. (Easy jet annual circular)

Conclusion:

Hence we can conclude that acquisition of Go Fly by EasyJet was a success in long term but not in short term as by fiscal year ended 30th September 2003 profits were declined by 33.9% due to increased tax rate due to goodwill acquisition. But in the mean while revenue was up by 68.9%. Later figure shows by the end of financial year on 30th September 2004 there was further 17.1% positive change in revenue and net profit was up by 26.9% to £41.1million.

Surely, as facts are very clear despite post acquisition issues acquisition of Go Fly was a successful deal. (EasyJet Annual reports 2003 and 2004 see Appendix B and C)

Question 2

Recommend a strategic development plan for EasyJet from 2010 onwards justifying the recommendations made using TOWS and Ansoff matrices.

Overview of current situation of EasyJet

EasyJet by end of year 2010 is having continuous growth strategy with legacy of its basic business model of low-cost airline providing economical air travel to convenient airports around Europe. It’s advantages network and improved consumer demand has driven strong revenue performance. Total revenue has grown to £2973 million with a change of 11.5%, Profit after tax has grown to £121 million with a change off 70.4%. There is increase of net 15 aircrafts in fleet of EasyJet. (EasyJet Final report 2010)

Current situation of Low-cost airline Industry in Europe:

As EasyJet is growing in a steady organic pace rest of industry is not standing still other competitor companies such as Ryanair, Fly be etc are aggressively changing their strategy to fulfil their objectives to become Europe’s largest low-cost airline. According to (Air observer 2010) Air France has moved an extended partnership agreement with Fly be and add its AF code to its 45 routes between UK and France and 17 UK domestic routes. This deal has brought blow to all other major players within low-cost airline industry and pushed them towards changing their operational strategies. (Air observer’s blog, 2010)

Swot Analysis:

Strength, Weakness, Opportunity and Threats analysis are used to evaluate company’s external environment while strength and weakness are internes environment and opportunity and threats are external environment, PESTEL analysis is integrated to evaluate external environment of EasyJet.

Strengths:

EasyJet is a strong intra-Europe network with over 500 routes within 29 countries. It operates Europe’s 45 major routes and has 20 strong bases around EU. Its Management is focused, aggressive and innovative. EasyJet has effective business model which coherently delivers low fares and use of secondary and regional airports make it possible to cut cost and faster turnaround. It has strong balance sheet and growing cash flow with in system. Pioneer to use internet as point of sale with proven results. Along with all these strengths use of cost efficient way such as e-tickets and use of smaller aircrafts has made EasyJet environmental friendly airline.

Weaknesses:

EasyJet has many internal weaknesses such as use of regional and secondary airports cut the cost but it also demotivates potential customers because of their distances from main cities. Company is exposed to airport regulations and passenger compensations. EasyJet brand is strictly related to low-cost travel so maintaining that situation is challenging. It is too exposed to out sourcing to maintain companywide operations. EasyJet has limited slot at major airports which could be problem in future and could lead company with limited service.

Opportunities and Threats:

Opportunities become available in result to external changes in environment as well as threats, PESTEL analysis is one of most effective way to analyse external environment in detail. Please see Appendix A for further explanation.

Main Objectives to start new routes

EasyJet has stated in final report year 2010 that its planning is to achieve non-uk customers market share from 53% -57% , To achieve growth in market share in no- UK market and to embed “Orange Colour across Europe” its is very important to enter new markets rather than just wait and see. EasyJet has to have very aggressive strategy to achieve its goals. Further ore EasyJet has to target flexible and growth oriented airports to achieve these objectives.

It has been identified that there are many airports which could provide efficient and fruitful opportunity to EasyJet to enter new markets. Further more, to start a Easy bus services from West London to Luton airport, perhaps Heathrow central bus station could be worth consideration will be a growth oriented strategy.

Strengths

Strong Intra-Europe Network.

Focused and innovative management.

Strong Balance sheet.

Growing cash flow.

Leading Low airline flew to primary airports in EU.

Weaknesses

Distances from secondary airports.

Limited slots on major airports.

Huge number of overturning raise issue of high carbon footprints.

Brand Licensing

O-Opportunities

Relaxed EU regulations on travel (Visa free between member states).

Public preference towards low-cost travel.

Advancement in to next level technologies.

S-O

20 New routes launched this winter.

Steady market share increase.

O-W

Expand coverage in Eastern Europe.

Deploy new technology

Threats

Government Polices and new legislation.

Economic inflation.

Aggressive low-cost strategies of Competitors.

New entrants in market.

Emerging technology.

S-T

Penetrate in new markets such as Lithuania.

Introduce new products such as premium service for elderly customers.

T-W

Benchmark with competitors such as Ryanair, BA etc.

Table: TOWS analysis

Source: Adapted form Johnson (2008)

Ansoff Matrix

Ansoff Matrix is used to focus on EasyJet’s existing products and Potential products and market, this will also consider ways to grow in existing markets and potential new markets. There are four possible product market combinations.

Existing Products

New Product

Market Penetration

Product Development

Existing Markets

7.6% of Europe’s market

Over 100 Primary airports.

New Service from London Luton to Kaunas airport Lithuania.

Market Development

Diversification

New Markets /related

New links to airports in Lithuania

New Easy Bus service from West London to Luton airport.

Product diversification is not recommended strategy because existing product is strategically success.

Table: Ansoff Matrix of Product Market

Source: Adapted from (Luck. 2008)

The Plan to implement new strategy

EasyJet could enter market of Lithuania but starting a service from Luton airport to Kaunas airport international, Kaunas is one of largest city in Lithuania and its only approx. 60miles from Capital Vilnius. This strategy will allow EasyJet to enter Eastern European markets and this could be used as a low-cost base with in Easter Europe to cut cost of bases on other primary airports.

Future Strategy Recommendations for EasyJet

After using TOWS analysis and Ansoff matrix to evaluate the current products, existing markets and new Products and New markets development. Analysis show EasyJet with existing products of low-cost airline with other related services products is proven successful strategy. New markets in Eastern European country Lithuania and New easy Bus service from West London to Luton airport is a recommended strategy to work on. This strategy will help in achieving basic objectives of airline to become largest low-cost pan European airline.

Appendix A

PESTEL Analysis

External forces play a vital roles on how an organisation set its business strategy, PESTEL analysis is a framework that categorizes environmental influences as political , economic, Social, technological forces with two additional sub categorize which are environmental and legal.

We will analyse external forces which had impact on easy jet’s future business strategy.

Political:

Policies made by government of a country or in broader term policies made by EU Parliament influence business strategy of all organisations. European Politics has provided new opportunities and made it easy for Easy jet to expand its destination countries as under Schengen Treaty and European Union Member states visa free travel with few exceptions and limitations. These Euro treaties have made travel easy in almost all countries of Europe. Prospective new member countries such as Cyprus, Romania etc would have positive impact of Easy jet’s customer turnover. In the mean while recent increased security measures in airports have threaten low-cost airline industry to save time over such regulations which could affect Easy jet’s no time wasting policy.

Economic:

Current Economic situation has extended impact in most parts of the world especially in Europe. Buying power of people has significantly decreased; Customers of large airlines in Europe prefer to travel by means which could save money and time this could be taken as opportunity for low-cost airlines such as easy jet, but rise in fuel prices are threats for low-cost airlines to keep the cost low while providing same quality service to customers. Furthermore Due to this economic crunch obtaining easy loans has become difficult for companies, this can exploit strategy which exists in growth conditions and does not in recession, economic forces are always influenced by Political forces so both are inter related to each other.

Social:

The Socio-cultural environment encapsulates demand and tastes, which with fashion, disposable income etc. Demand to travel by airplane can change in upward or downward direction and it is highly influenced by regional situation such as summer season brings lucrative opportunity for low-cost airline industry in Europe and tourism is high in demand but in winter its opposite. Travel demand is influenced by regional social and cultural events. Elderly Age group customers always choose to travel by comfortable airlines where help and assistance is available to better standards and changing attitude of public are threats to demand of low-cost airline such as EasyJet.

Technology:

New technology is an opportunity as well as a threat to east jet. Customers require having information on the tip of their fingers, which indicates towards advance Mobile technology. Easy jet is already using Internet as its frontline product sale strategy but in coming years advancement in information technology can affect its business or a large scale, Furthermore, fuel efficient and environment friendly jet engines and on board business support such as teleconferencing.

Environmental:

In the beginning of 21st century word ‘Global warming ‘floated on international forums and in Europe as well, people as well as governments got concerned about rapidly changing weather pattern which leads to legislation all across in Europe and other countries to protect environment. European legislation on environment made it compulsory for airlines to reduce carbon footprints, noise reduction of engines which could threats to increase the maintenance cost of airline companies such as easy jet. Waste management is also part of legislation which requires recycling the waste properly. Complying with all of these laws will be a good practice for EasyJet although it is a opportunity as well because publically image of company and reputation will get higher as a green company.

Legal:

Legal is directly relates to all laws and regulations which threat company do business very freely and in the mean while some laws protects company’s interests. Competition law forbids airline companies to use unfair mean to gain advantages over its competitors in the mean while provides good opportunity as well to grow organically.

Whereas Health and safety laws are real threats to airline companies because these can lead to closure of its business on health and safety issues. Claims from employees and customers are always affect EasyJet’s reputation among public which could decrease in demand. Employment laws also threat airline companies because they allow employee unions to call for strikes on issues related to salaries and other rights and this threats company daily operations and business.

Appendix B

Easy Jet Financial review (year ended 30 September)

2003

£million

2003

%

2002

£million

2002

%

Change

%

Passenger revenue

880.00

94.40

526.3

95.4

67.2

Non-ticket revenue

51.8

5.6

25.5

4.6

103.1

Revenue

931.8

100.00

551.8

100.00

68.90

Ground handling charges, Including salaries

-95.20

10.20

-48.80

8.80

95.30

Airport charges

-149.30

16.00

-73.50

13.30

103.10

Fuel

-120.60

12.90

-55.20

10.00

118.40

Navigation charges

-72.00

7.70

-37.80

6.80

90.50

Crew costs, including training

-96.80

10.40

-57.80

10.50

67.40

Maintenance

-89.10

9.60

-52.50

9.50

69.70

Advertising

-27.70

3.00

-19.40

3.50

43.20

Merchant fees and incentive pay

-13.70

1.50

-9.10

1.60

50.30

cost of integrating businesses of easyJet and Go Fly

-7.90

0.80

-7.10

1.30

11.90

Other costs

-78.60

8.50

-58.20

10.70

34.70

EBITDAR

180.90

19.40

132.40

24.00

36.70

Depreciation

-19.90

2.20

-18.70

3.40

6.50

Accelerated depreciation of Older Boeing

737-300 aircrafts

-10.20

1.10

_

_

_

Goodwill amortisation

-17.60

1.90

-3.10

0.60

469.30

Aircraft dry lease costs

-82.70

8.80

-41.00

7.40

101.40

aircraft long-term wet lease costs

-2.10

0.20

_

_

_

Group operating Profit (EBIT)

48.40

5.20

69.60

12.60

-30.40

Net Interest receiveable /(payable)

12.20

1.30

10.50

1.90

15.70

Committed contribution to Deutsche BA

-13.00

0.10

-1.40

0.20

-2.20

Amount written off Investments

-7.80

0.90

-7.10

1.30

8.60

Income before tax

51.50

5.50

71.60

13.00

-28.00

Tax

-19.10

2.00

-22.60

4.10

-15.30

Retained profit for the year

32.40

3.50

49.00

8.90

-33.90

Source: Adapted From EasyJet annual Report and Accounts 2003

ABBRIVATIONS USED

EBITDAR : Earnings Before Interest, Taxes, Depreciation, Amortisation And Rest

Appendix C

Easy Jet Financial review (year ended 30 September)

2004

£million

2004

%

2003

£million

2003

%

Change

%

Passenger revenue

1029.30

94.30

880.00

94.40

17.00

Non-ticket revenue

61.70

5.70

51.80

5.60

19.10

Revenue

1091.00

100.00

931.80

100.00

17.10

Ground handling charges, Including salaries

-111.30

10.20

-95.20

10.20

16.90

Airport charges

-191.40

17.50

-149.30

16.00

28.20

Fuel

-146.90

13.50

-120.60

12.90

21.80

Navigation charges

-87.70

8.00

-72.00

7.70

21.80

Crew costs, including training

(including initial costs of £6.4 million)

-126.80

11.60

-96.80

10.40

31.00

Maintenance

-102.00

9.30

-89.10

9.60

14.50

Advertising

-30.50

2.80

-27.70

3.00

10.10

Merchant fees and incentive pay

-13.60

1.20

-13.70

1.50

0.70

Aircraft Insurance

-19.80

1.80

-21.20

2.30

-6.60

cost of integrating businesses of easyJet and Go Fly

–

–

-7.90

0.80

-100.00

Other costs

-71.70

6.60

-57.40

6.20

24.90

EBITDAR

189.30

17.40

180.90

19.40

4.60

Depreciation

-19.20

1.80

-19.90

2.20

3.50

Accelerated depreciation of Older Boeing

737-300 aircrafts

-6.10

0.60

-10.2

1.10

40.20

Goodwill amortisation

-17.10

1.60

-17.60

1.90

-2.80

Aircraft dry lease costs

-96.40

8.80

-82.70

8.80

16.60

aircraft long-term wet lease costs

–

–

-2.10

0.20

-100.00

Group operating Profit (EBIT)

50.50

4.60

48.40

5.20

4.30

Share of operating profit of

The Big Orange Handling Company

0.2

–

–

–

100

Net Interest receiveable /(payable)

11.50

1.30

10.50

1.90

15.70

Committed contribution to Deutsche BA

–

–

-1.30

0.10

-100.00

Amount written off Investments

–

–

-7.80

0.90

-100.00

Income before tax

62.20

5.70

51.50

5.50

20.80

Tax

-21.10

1.90

-19.10

2.00

-10.50

Retained profit for the year

41.10

3.80

32.40

3.50

26.90

Source: Adapted From EasyJet annual Report and Accounts 2004

ABBRIVATIONS USED

EBITDAR : Earnings Before Interest, Taxes, Depreciation, Amortisation And Rest