London Metropolitan University BA (Join) International Tourism and Travel Management

Essay on the business environment of the aviation industry

By Cristian Passarello

1

Introduction Over the past 30 years the aviation industry has faced a great revolution, especially regarding

the economic and regulatory aspects of the industry. This essay assesses the current business

environment of the airline industry in the European ‘Open Skies’, by analysing how the

aviation sector has been deregulated in the 1990s. Furthermore, a PESTE analysis of the

European aviation industry is provided with the aim to highlight those factors influencing a

possible new airline entering the market with flights between London Stansted and Pisa

Galileo Galilei airports. Finally, this essay will cover the barriers and opportunities for a new

airline wishing to enter the market by focusing on the Porter’s Five Forces tool.

The Airline Business Environment in the Deregulated European Union From a historical point of view, governments have always regulated the airline industry; from

establishing airline safety standards to controlling flights frequency and routes. This situation

however, changed during the years. Indeed, Scharpenseel (2001, p.91-92) noted how the

European Union started to deregulate its airline market in 1993 with the setup of the Single

Aviation Market in the European Union, which allowed European airlines to operate

commercial flights without restrictions on market access, the setting of fares and capacity.

The establishment of a Single Aviation Market, which was concluded in 1997 (Shaw, 2007

p.53; Armstrong and Bulmer, 1988), let to an increase in both competition and opportunities

for the European airlines as well as ensuring the highest safety level. As a result, the number

of scheduled airlines and routes within the EU greatly increased (European Commission,

2007), which however does not always reveal the real level of air transport activity (European

Commission, 2006).

PESTE Analysis The PESTE analysis is an essential tool that provides an overview of macro divers of a

determinate business environment (Cunningham and Harney, 2012). Indeed, it helps

understand the context of the external environment by dividing the relevant factors into the

five following categories: Political; Economic; Social; Technological and Environmental.

Cunningham and Harney (2012, p.195) also reported how the critical factors that can be noted

from this type of analysis are those that have an important influence on the development and

sustain of “competitive advantage”.

The following tables show the PEST analysis of the European airline industry; indispensably

tool for a new airline keening to enter the European aviation market.

2

Political Factors

• Single Aviation Market (Deregulation)

• European Union Emission Trading Scheme (EU ETS)

• No national support available within the EU to support national carriers

• Passengers rights within the EU

Economic Factors

• Global recession in 2008 (Less people able to travel to Europe)

• European economies instability and differentiation (Northern European countries

have stronger economies than Southern ones)

• Fuel prices fluctuation (Could affect the operating costs of the airline)

• Competition with other airlines

• Changing markets

Social Factors

• Less disposable income per person

• Increased direct and indirect taxation

• Reduction in annual foreign holidays

• Reduced migration from eastern European countries

• Change in the perception of air travel

Technological Factors

• The internet and tools such as social media (Marketing and reviews)

• Rising videoconferencing tool (Reduces the need to travel for business)

• Electronic passport control

• Check-in online

• Cross-selling of other services such as insurance and accommodations

• Development of more capable passenger capacity and more fuel-efficient aircrafts

Environmental Factors

• Climate change

• Green-house gases emission (The aviation industry is responsible of the 2 per cent of

the total global emission)

• Noise levels controls

• Environmental protection laws

3

Newer Airline versus Established and more Bureaucratic Airlines Morgan (1997, p.12-19) provided information regarding the mechanisation of organisations.

Indeed, he noted how many institutions are following a mechanical management structure

where employees who interact with clients have to follow a determinate code of instruction.

‘Machine organisations’ have a hierarchical structure where there is only one way from the

bottom to the top of the chain structure. Although a mechanical approach can help an

organisation to operate in a functional way, it could also have negative consequences in some

environments.

Those mechanical organisations are often called bureaucratic and Doganis (2006, p. 233)

noted how usually bureaucracy is present in state-owned airlines. Indeed, the consequence of

political interference, over-staffing and repeated changed in management control lead to a

situation where taking decisions and adopt new strategies result slow and problematic, which

can have negative impacts on customers. Although this form of management (where decisions

are usually taken at the top of one airline management structure) could have been accepted in

the previously regulated market, it is completely unsuitable in the deregulated and highly

competitive market of today where a more dynamic structure is needed.

A new airline entering the market has a flatter hierarchy and usually wants to offer lower

prices than its competitors. However, the more established airline(s) could “refuse to allow

passengers to transfer from the new entrant to their own services” as noted by Armstrong and

Bulmer (1988, p.191-192). As a result, the new entrants should focus on providing a

customer-oriented approach also because established airlines have cost advantages over new

airlines. Furthermore, they could overcome those barriers by using less crowded airports

(Grimm et al., 2006).

Analysis of the Opportunities and Challenges of a new Airline entering the Deregulated EU Market

Overview of the Two Airports and their Access to the City Centres London Stansted Airport is located 48 km northeast of London and it is mainly used by low-

cost airlines such as Ryanair and Easyjet. Passengers arriving at this airport can reach London

by choosing between taxis, car-hire services, different bus services such as National Express

and Terravision (which operates 24/7) and lastly by taking the Stansted Express train; the

fastest method. Centre London to Stansted airport with the bus services takes about one hour

and it is the cheapest mode with the cost of a single-way ticket range between £6 and 8£,

whereas a taxi could charge up to £99 (London Stansted Airport, 2014; Terravision, 2014;

4

Stansted Express, 2014). Finally, based on the author experiences, reaching the Centre of

London and vice versa by using the bus services results tiring and unpleasant, but at the same

time it is the more affordable option available.

Pisa Galileo Galilei Airport, on the other hand is located on the coast of Tuscany at one

kilometre from the centre of Pisa and approximately 80 kilometres from Florence (Pisa

International Airport, 2018). Although walking to the centre of Pisa only takes about fifteen

minutes, there are few types of transport that connect the Airport to the main cities of

Tuscany; The basic method is the local bus service which operates regular routes between the

airport and the centre of Pisa in about ten minutes with fares under €2.50 for one way.

Alternatively, passengers can take the regional train, which goes straight to Pisa central

station in less than five minutes and costs about €4.50. Finally, there are private bus

companies that connect the airport with the main cities of Tuscany, as well as local taxi and

local car-hire services outside the airport, which however have higher costs (Campagna et al.,

2012; Pisa International Airport, 2008). Indeed, reaching the centre of Pisa and Florence

results to be easy and affordable.

As a result of this analysis, it seems that although Pisa airport may be a convenient choice for

a new airline, Stansted airport might not be the best option due to its far distance to the centre

of London and to the high number of incumbents already operating on the airport.

Competition At the moment, the only airline company that operates between Pisa airport and London

Stansted airport is the low-cost airline Ryanair, which operates on average, four direct daily

flights (Skyscanner, 2014). However, there are other important airlines such as Easyjet and

British Airways, which although being more expensive, run direct flights between Pisa and

London Gatwick and Heathrow Airports from which is easier to reach the centre of London

compared to Stansted airport (Skyscanner, 2014). As a result, the new airline would have to

compete mainly with the two-mentioned low-cost airline and the more business-oriented

British Airways.

Furthermore, travelling between London and Pisa can be done mainly by air as all the other

forms of transport would require an extensive amount of time and would cost much more. As

a result, the new airline entering the market with this route will only have other airlines as

competitors and no other forms of transport.

5

Market Segments Visit Britain (2014) reported how people travelling between the two destinations do it mainly

for holiday, business purposes and VFR. People travelling from Pisa to London result to be

mainly male between 25 and 34 years old, although new trends suggest an increase of people

aged 45-54. Pisa Airport is one of the fastest growing airports in Italy with about 4,479,690

passengers in 2013. People travel to Pisa mostly during the summer months likely due to its

close position to the Tuscan Riviera. However, many passengers fly to Pisa airport for short

city-breaks in both London and the near located Florence, both famous destinations for

cultural tourists. Additionally, the route Pisa – London Stansted is the most used with 301,403

passengers in 2013 (Enac, 2014; Anna Aero, 2008).

Finally, both Pisa and London host several conferences and are home of important

universities. As a result, business travellers may need to visits those destinations several

times per year, which can be seen as a positive factor for the establishment of a new route

between the two destinations.

Prospect of Growth and Seasonality The United Kingdom economy results increasing and as a result, it is likely that more people

will take holiday trips (BBC News, 2014a). On the other hand, the Italian economy is

struggling due to the country high unemployment rate (BBC News, 2014b). However,

according to Campagna et al. (2012) the number of passengers and routes from Pisa airport is

increasing. Indeed, between the year 2000 and 2010 the number of passengers increased of

226 per cent with July and August being the two months with the highest passengers’

movement. On a daily analysis, Saturday results to be the day with the highest movement of

people, followed by Sunday and Friday, respectively. Finally, according to these data, it is

predicted that the market will keep growing in the low-term future, which can be seen as a

positive factor for the new entrant.

Difficulty of Entry Despite the deregulation of the European aviation industry, entering the market for a new

organisation, surely can still be seen as challenging. Indeed, Porter (2008, p.8-9) argued that

although new entrants “bring new capacity and a desire to gain market share that puts

pressure on prices, costs, and the rate of investment necessary to compete”, already

established companies have seven main advantages on new entrants, which will be assessed

below. Furthermore, Lynch (2006, p.95) pointed out that new entrants usually enter a new

market when the profit margins are attractive and the threats of entry are low. Finally, Grimm

et al. (2006) noted how the Michael Porter’s Five Forces is the most popular analytical model

for an organisation to analyse the competitive environment.

6

Economies of scale: Are particularly important in some industries. In fact, when a company

produces on a large scale, its unit costs of production usually go down. This poses a

disadvantage to those new entrants, as they would have to enter the market on a large scale in

order to obtain the same level of costs of the already established corporations (Lynch, 2006,

p.95; Johnson et al., 2005). Supply-side economies of scale are likely to be introduced by

already established airlines confirming their monopoly at the disadvantage of new entrants

(Czerny et al., 2008). Conversely, Porter (2008, p.10) noted that the demand-side benefits of

scale arise when more customers want to pay for a determinate product or service, which in

result discourage buyers to purchase from a new entrant. Thus, a new small airline would find

it difficult to establish itself on the chosen route due to the presence of airline such as Ryanair,

which benefits from a large economy of scale and operates on the same route.

Capital requirements: The initial capital investment needed to enter the market can differ

based on technology and scale (Johnson et al., 2005). The need of investment can often put

off new entrants willing to access the market. Especially when the capital goes to

unrecoverable expenditures such as R&D and risky marketing. However, if a market result

highly profitable, a new entrant will likely obtain financial capital from investors. It is the

case of the airline industry where although new aircrafts are expensive, they have a great

resale value (Porter, 2008, p.11).

Access to distribution channels: Johnson et al. (2005) pointed out that many organisations

have control over distribution channels due to customer loyalty or because are owner of the

distribution channel (vertical integration). Sometimes it can happen that the access to

distribution channels result quite difficult and therefore organisations need to find different

ways. For example, low-cost airlines have ‘bypassed’ the classic distribution through travel

agencies by selling their services directly on the internet (Porter, 2011, p.11). Additionally,

Balobaba et al. (2009) noted that when a new airline enters a new market, cannot be awarded

more than two flights per day, which is not enough to establish an important position at a

major airport. This is also due to the restrictions posed by busy airports (Grimm et al., 2006).

Differentiation: Lynch (2006, p.96) noted how long-established organisations could create

barriers of entry for new companies by differentiating their product or services. Indeed, new

entrants would have to spend more money in order to obtain a valuable place on the market.

Additionally, in the airline industry, the concept of product differentiation goes far beyond the

basic difference of class-distinction. Indeed, airlines can charge different prices based on the

services provided, which would have different production costs as noted by Balobaba et al.

7

(2009). As a result, the new entrant could differentiate its service from the low-cost

competitor operating on the same route.

Experience: Incumbents airlines usually can benefit of their experience on the market, which

allows them to operate on a more efficient way and therefore are advantaged compared to

new entrants (Porter, 2008, p.11). Indeed, experienced organisations have advantages related

to the cost and customer/supplier loyalty (Johnson, Scholes and Whittington, 2005).

Expected retaliation: Refers to how the already established organisations may react to the

decision of a new industry to enter the market. The decisions adopted by a new entrant are

often shaped by the expected retaliations of incumbents (Porter, 2008, p.12). In the airline

industry, overcapacity can lead to retaliation from already established airlines (Hitt et al.,

2009), which could deny to passengers the interchangeability of tickets (Armstrong and

Bulmer, 1988).

Government intervention: Lynch (2006, p.96) pointed out how government have endorsed

legislations in order to protect organisations. Within the EU, the European Commission has

worked closely with European government with the aim to reduce the number of barriers for

new organisations. In the European aviation industry there are several limitations, which

could affect a new entrant such as the EU Emissions Trading Scheme (EU ETS), which was

extended to the aviation sector with the aim to reduce greenhouse gases emission (European

Commission, 2014) and regulations on safety and passengers right. Finally, those barriers will

not limit the new entrant since it will only operate on a single route.

Conclusion It is clear that over the past thirty years, that the aviation industry has seen a radical change in

its regulatory aspect. Indeed, the deregulation of the airline sector has eased the establishment

of new airline companies on the market. During the years, many new companies have

appeared on the market in the past twenty years, especially low-cost airlines. Although some

of them have failed to establish themselves on the market, some of them have been able to

surpass the initial barriers and become highly profitable organisations.

Although the deregulation of the aviation marked has increased the number of company

operating in the industry sector, there are still many obstacles such as the introduction of new

legislations such as the EU ETS and others concern to the noise levels of aircrafts operating

on airports close to the centres. In conclusion, on the route between Pisa Galileo Galilei and

London Stansted airports, a new entrant will probably struggle to enter due to the strong

8

establishment of the low-costs airline Ryanair, which operates several flights per day on the

same route and the presence of both Easyjet and British Airways, which operate flights from

Pisa International Airport to the more central London Gatwick Airport. Finally, if a new

entrant wants to enter the market using this route, it should focus on differentiating itself with

seasonal services due to the higher level of passengers in the summer months.

9

References Anna Aero (2008) Pisa topping Italian airport growth rankings; Ryanair now serves 28 destinations [Online]. Available at: http://www.anna.aero/2008/09/19/pisa-topping-italian-airport-growth-rankings/ (Accessed: 29 April 2014). Armstrong, K. A. and Bulmer, S. (1998) The Governance of the Single European Market. Manchester: Manchester University Press. Balobaba, P., Odoni, A. and Barnhart, C. (2009) The Global Airline Industry. Chichester: John Wiley & Sons Ltd. BBC News (2014a) ‘UK economy grows by 0.85 in first quarter’, BBC News Business, 29 April [Online]. Available at: http://www.bbc.co.uk/news/business-27203433 (Accessed: 1 May 2014). BBC News (2014b) ‘Italy’s economy: The mountain Matteo Renzi must climb’, BBC News Business, 25 February [Online]. Available at: http://www.bbc.co.uk/news/business-26266118 (Accessed: 1 May 2014). Campagna, M., De Montis, A., Isola, F., Lai, S., Pira, C. and Zoppi, C. (2012) Planning Support Tools: Policy Analysis, Implementation and Evaluation: Proceedings of the Seventh International Conference on Informatics and Urban and Regional Planning INPUT 2012. Milan: FrancoAngeli. Cunningham, J. and Harney, B. (2012) Strategy and Strategists. Oxford: Oxford University Press. Czerny, A. I., Forsyth, P., Gillen, D. and NIemeier, H. M. (2008) Airport Slots: International Experiences and Options for Reform. Aldershot: Ashgate Publishing Limited. Doganis, R. (2006) The Airline Business. 2nd edn. Oxon: Routledge. Enac (2014) Dati di Traffico 2013 [Online]. Available at: http://www.enac.gov.it/repository/ContentManagement/information/N853051579/Dati_di_traffico_2013.pdf (Accessed: 2 May 2014). European Commission (2006) Analysis of the EU Air Transport Industry. Luxembourg: Office for Official Publications of the European Communities. European Commission (2014) Climate Action [Online]. Available at: http://ec.europa.eu/clima/policies/ets/pre2013/index_en.htm (Accessed: 2 May 2014). European Commission (2007) Flying Together. Luxembourg: Office for Official Publications of the European Communities. Grimm, C. M., Lee, H. and Smith, K. G. (2006) Strategy as Action: Competitive Dynamics and Competitive Advantage. Oxford: Oxford University Press.

10

Hitt, M. A., Ireland, R., Hoskisson, R. E. (2009) Strategic Management: Competitiveness and Globalization. 8th edn. Mason: South-Western Cengage Learning. Johnson, G., Scholes, K. and Whittington, R. (2005) Exploring Corporate Strategy. 7th edn. Harlow: Pearson Education. London Stansted Airport (2014) Stansted to Central London [Online]. Available at: http://www.stanstedairport.com/transport-and-directions/stansted-to-central-london (Accessed: 28 April 2014). Lynch, R. (2006) Corporate Strategy. 4th edn. Harlow: Pearson Education Limited. Morgan, G. (1997) Images of Organization. London: Sage Publications. Pisa International Airport (2008) Come Arrivare [Online]. Available at: http://www.pisa-airport.com/ (Accessed: 28 April 2014). Porter, M. (2008) On Competition: Updated and Expanded Edition. Boston: Harvard Business School. Scharpenseel, M. F. (2001) ‘Consequences of E.U. Airline Deregulation in the Context of the Global Aviation Market’, Northwestern Journal of International Law & Business, 22 (1), pp. 91-92. Northwestern Law [Online]. Available at: http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1543&context=njilb (Accessed: 28 April 2014). Shaw, S. (2007) Airline Marketing and Management. 6th ed. Aldershot: Ashgate Publishing Limited. Skyscanner (2014) Pisa to London [Online]. Available at: http://www.skyscanner.net/transport/flights/psa/lond/140514/140514/airfares-from-pisa-to-london-in-may-2014.html?rtn=1 (Accessed: 1 May 2014). Stansted Express (2014) Welcome to Stansted Express [Online]. Available at: https://www.stanstedexpress.com/ (Accessed: 28 April 2014). Terravision (2014) Stansted Airport Bus – London [Online]. Available at: http://www.terravision.eu/london.html (Accessed: 28 April 2014). Visit Britain (2014) ‘Market and Trade Profile Italy’. Available at: http://www.visitbritain.org/Images/Italy%20-%20Jan%2014_tcm29-14698.pdf (Accessed: 29 April 2014).

Figures Cover Page: Johnson, E. (2013) Credit Suisse [Online]. Available at: https://www.credit-suisse.com/ch/en/news-and-expertise/news/economy.article.html/article/pwp/news-and-expertise/2013/09/en/over-time-all-carriers-will-become-low-cost.html (Accessed: 2 May 2014).

11

Figure 1: Google (2014) Centre London to Stansted Airport [Online]. Available at: https://www.credit-suisse.com/ch/en/news-and-expertise/news/economy.article.html/article/pwp/news-and-expertise/2013/09/en/over-time-all-carriers-will-become-low-cost.html (Accessed: 2 May 2014). Figure 2: Airports Guides (2014) Location of London’s Airports [Online]. Available at: http://www.london-lgw.airports-guides.com/lgw_airport_maps.html (Accessed: 2 May 2014). Figure 3: Google (2014) Pisa International Airport to Pisa [Online]. Available at: https://www.google.co.uk/maps/dir/Pisa+International+Airport,+Piazzale+D%27Ascanio,+1,+56121+Pisa,+Italy/Pisa+PI,+Italy/@43.7070297,10.3778212,14z/data=!3m1!4b1!4m13!4m12!1m5!1m1!1s0x12d59180c9f0b2d1:0x790c25e1cb0e3017!2m2!1d10.397882!2d43.689089!1m5!1m1!1s0x12d5919af0f6598f:0xaab80fb5a78478c8!2m2!1d10.4016888!2d43.7228386 (Accessed: 2 May 2014). Figure 4: Google (2014) Pisa International Airport to Florence [Online]. Available at: https://www.google.co.uk/maps/dir/Pisa+International+Airport,+Piazzale+D%27Ascanio,+1,+56121+Pisa,+Italy/Florence,+Italy/@43.7734641,10.518464,10z/data=!3m1!4b1!4m13!4m12!1m5!1m1!1s0x12d59180c9f0b2d1:0x790c25e1cb0e3017!2m2!1d10.397882!2d43.689089!1m5!1m1!1s0x132a56a680d2d6ad:0x93d57917efc72a03!2m2!1d11.2480006!2d43.7710332 (Accessed: 2 May 2014). Figure 5: Project Mapping (2013) Stansted Bus and Coach Network [Online]. Available at: http://www.projectmapping.co.uk/Reviews/Resources/Stansted%20bus%20%26%20coach.jpg (Accessed: 2 May 2014). Figure 6: Vamos 2013 (2013) Pisa Airport Bus Lines [Online]. Available at: http://vamos2013.isti.cnr.it/venue_travelinfo.php (Accessed: 2 May 2014). Figure 7: Enac (2014) Pisa Airport Passenger and Cargo Statistics. ‘Dati di Traffico 2013’ [Online]. Available at: http://www.enac.gov.it/repository/ContentManagement/information/N853051579/Dati_di_traffico_2013.pdf (Accessed: 2 May 2014). Figure 8: Visit Britain (2014) Visits by Mode of Transport. ‘Market and Trade Profile Italy’. Available at: http://www.visitbritain.org/Images/Italy%20-%20Jan%2014_tcm29-14698.pdf (Accessed: 2 May 2014). Figure 9: Visit Britain (2014) Visitors Demographics (ooos). ‘Market and Trade Profile Italy’. Available at: http://www.visitbritain.org/Images/Italy%20-%20Jan%2014_tcm29-14698.pdf (Accessed: 2 May 2014). Figure 10: Visit Britain (2014) Seasonality by Journey Purpose. ‘Market and Trade Profile Italy’. Available at: http://www.visitbritain.org/Images/Italy%20-%20Jan%2014_tcm29-14698.pdf (Accessed: 2 May 2014).

12

Appendix

Figure 1: Centre of London to Stansted Airport

Figure 2: Location of London's Airports

Figure 3: Pisa International Airport to Pisa

13

Figure 4: Pisa International Airport to Florence

Figure 5: Stansted Bus and Coach Network

14

Figure 6: Pisa Airport Bus Lines

Figure 7: Pisa Airport Passengers and Cargo Statistics

Figure 8: Visits by Mode of Transport

15

Figure 9: Visitor Demographics

Figure 10: Seasonality by Journey Purpose