by Graham Morgan
01 Aug 2005
The emergence in the 1990s of low-cost airlines and the expansion of the European travel market has shown how competition can significantly affect the structure of an industry.
Ryanair and easyJet are now well-established and their on-going success will depend upon a continuing ability to attract customers and maintain operational efficiency. This must be done in the context of increased competition from schedule and charter airlines that now recognise the effectiveness of the business model adopted by the low-cost carriers. This article examines how the balanced scorecard might be used to maintain the low-cost carriers' competitive edge.
The business model adopted by low-cost carriers can be viewed as having three broad elements on which success is based:
- route network development
- brand development and marketing effectiveness
- low-cost operations.
These aspects can be seen to be structural as they reflect major decisions and developments which set the context for operational performance and day-to-day management.
The route network is the product dimension of first importance to customers. Before European air travel was deregulated in the mid-1990s, the market was neatly divided. Schedule carriers focused primarily on business travellers with 75% of the market, the other 25% being provided by charter airlines as part of the package holiday industry. Low-cost carriers use aircraft which for European routes are generally larger than those used by schedule airlines and routes the balanced scorecard must be selected to provide high load factors, ie percentage of available seats sold.
Routes chosen should be new routes or those served by high-cost carriers, and have appeal to leisure and private travellers. This approach allows low-cost carriers to use secondary airports at major European cities or regional airports which provide overseas homeowners greater access to properties with minimum travel in the destination country. Another major aspect of the route network decision is the departure airport. Low-cost carriers' use of secondary airports in the UK provides convenience to travellers, and important cost savings for the company.
Another important factor in the development of the route network is to avoid direct competition from other low-cost carriers. In 2002, of 128 low-cost routes, only 17 involved the same departure and destination airports - and Ryanair and easyJet adopted distinct positions in the market. While Ryanair has become the 'least-cost provider', easyJet has positioned itself to have a significant appeal to the business traveller by flying three times a day to major cities such as Amsterdam, Madrid, Paris, and Zurich from London's Luton and Gatwick airports, which are generally viewed as more accessible from London than Stansted (Ryanair's base airport). The success of the route network strategy is supported by the fact that easyJet carried 11 million passengers in 2004, operating 153 routes to 44 European airports.
Brand development and marketing effectiveness is essential for a product which has a high level of market acceptance which is evidently the case with the low-cost carriers' route network strategy outlined already.
There are two major factors which have allowed both Ryanair and easyJet to capitalise on product strengths to become leading UK brand names. First, the accepted practice in the industry of discounting prices just before departure dates was reversed so that fares are initially low and rise as departure dates approach. This practice, especially when supported by aggressive promotional campaigns such as '200,000 seats at 99p - must be booked before September 200X' promotes the company's central market message in an extremely effective manner. This strategy is particularly effective since the average price paid per seat is greatly in excess of the 'loss leader' promotional price and is comparable to that obtained by traditional charter airlines. Secondly, the brand is promoted by the adoption of direct selling to the customer either via the telephone or the Internet. The customer deals with Ryanair or easyJet and not the travel agent, with a consequent increase in brand identification. The removal of the latter from the purchase transaction also provides a significant cost saving since no commission is paid.
Low-cost operations are in part based on the cost advantages of operating from secondary airports, and the direct selling strategies outlined above. These cost advantages in relation to schedule airlines are enhanced by aircraft fleet utilisation decisions. Firstly, increased number of seats per aircraft provides a considerable reduction in passenger unit costs. Secondly, the daily flying time per aircraft is increased significantly. Thirdly, the elimination of free in-flight passenger services, particularly catering, removes a cost which is not necessarily value-adding to the customer and allows faster turnaround times between flights. The final factor providing significant cost savings are crew compensation and utilisation factors based on the higher usage time of aircraft. Lower costs and high load factors permit the low-cost carriers to offer fares 50 to 70% below those offered by schedule airlines. Binggeli and Pompeo1 have estimated that the cumulative cost savings for a lower cost carrier such as Ryanair are reflected in the cost per available seat kilometre (ASK) statistic. They estimate that in 2001, this cost to the top three major schedule airlines was 12 cents (US) compared with 4.5 cents (US) for Ryanair. On this basis, Ryanair's breakeven load factor is 55%.
The scorecard approach
In maintaining the competitive position arising from the business model of the low-cost carriers, it is necessary for management to develop a set of performance measures which focus on key aspects of performance. The balanced scorecard provides a framework which can be utilised to develop a multi-dimensional set of performance measures for strategic control of the business. The Balanced Scorecard as shown in Figure 1 has been developed to reflect important aspects of the low-cost carrier's business model outlined above.