Free Markets of the Airline Industry

Abstract

From the perspective of organizations in the airline industry in Europe, this paper discusses the extent of competitiveness of capitalist markets in a bid to determine whether the current organization operates in truly free markets.

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Free markets have a connection with capitalism. In Europe, airline organizations seek to secure the largest market share without paying attention not to phase-out some organizations from the market. Indeed, the goal of any competing organization is to ensure that it takes the businesses of all other organizations.

With reference to the European airline industry, the paper also confirms that the best competitive advantage is attained when an organization kicks all other organizations from operating so that it becomes a monopoly.

Introduction

Capitalist markets aim at increasing the profitability of organizations that are involved in trading goods and services. Since businesses in such markets aim at outdoing their competitors, organizations that are likely to succeed in the long-term are those that are effective in building their competitive advantage. Different approaches are deployed in building the competitive advantage of any organization.

Some businesses market their products through push-and-pull strategies, while others focus on pricing strategies, among other tactics. In the airline industry, many organizations focus on price reduction strategies and/or building customer experience to compete freely in the airline operational routes.

In free markets, organizations have the freedom to set prices for their goods and services based on the forces of demand and supply but not through authority, governmental, and price-setting monopoly forces.

This claim suggests that free markets differ from the controlled markets where “the government intervenes in the supply and demand through non-market methods such as laws that create barriers to market entry or setting prices directly” (Bockman, 2011, p.105). How competitive are today’s capitalist markets? This question forms the basis of this paper.

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The European Airline Industry

In the European airline industry, even though the flag carrier system helps to affirm national pride, it leads to the emergence of many airlines. This situation has the impact of creating excesses in the industry (Brueckner & Pels, 2004). To overcome these challenges, consolidation of the airlines through internal and cross border mergers becomes important.

In Europe, the airline industry has had its own vicissitudes. It suffers from high overhead costs, fluctuation of fuel prices, and high labor costs that keep on changing. Peck (2009) supports this assertion by adding that the industry has experienced “the rash of canceled flights, increased fees, bankrupt airlines, and fewer routes has frustrated both passengers and communities” (Para.2).

To overcome some of these challenges, some airlines have resorted to looking for mechanisms of gaining a higher competitive advantage by merging and consolidating so that they can take advantage of the economies of scale.

A good example of airlines, which have merged and/or engaged in acquisitions while operating in the European airline, is the EasyJet plc. Based in Britain and with its headquarters in London-Luton airport, EasyJet airline was inaugurated in 1995.

In terms of global and internal passenger carriage capacity, the company has emerged as the biggest airline in the UK. As Millward (2011) confirms, “it serves 500 routes between 118 European, North African, and West Asian airports” (p.16). The company had a workforce that exceeded 8000 people by September 2012. The main mode of expansion of the company is through acquisitions (Sumberg, 2011).

Its main secret of growth is the capitalization of low-cost air transport demand. According to EasyJet plc (2011), “the airline, along with subsidiary airline EasyJet Switzerland, now operates over 200 aircraft, mostly Airbus A319” (p.13). EasyJet comes second to Ryan airlines in terms of the cost of travel. With regard to easyJet plc (2011), in the fiscal year 2011, the company flew more than 55 million people.

Just like any other airline, the company is susceptible to operational challenges such as increasing the cost of fuel. To help cut on fuel costs, EasyJet announced a decision to build its own airliner, namely EcoJet. With prop fan engine features, EcoJet aims at adjusting fuel efficiency.

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Because of the February 2011 need to enhance competitiveness in comparison with other competing airlines, the company “painted eight of its aircraft with a lightweight, thin revolutionary nanotechnology coating polymer” (Sumberg, 2011, Para.4).

This coating reduced debris drag across the planets’ surfaces and hence the amount of power that was required to propel aircraft. This situation has the implication of reducing fuel bills (Sumberg 2011, Para. 5). According to EasyJet plc (2011), through this strategy, the company saved about 1 to 2 percent of the total fuel costs in 2011. This saving amounts to about 14 million Euros.

British Airways (BA) is another airline organization that experiences various operational fluctuations that have affected the airline industry in Europe. British Airways plc dominates the United Kingdom airline industry. The company is the main banner hauler in terms of the task force and global operations.

Measuring the company’s operations from the context of passenger carriage capacity, BA ranks second after EasyJet. The company is headquartered at waterside within Heathrow airport. The inauguration for the BA headquarters took place in 1998 (Duffy, 1999). Designed by a Norwegian architect, the main offices accommodate 2,800 people. The company operates three main hubs, namely London metropolis, Heathrow, and Gatwick.

British Airways offers airline services in over 160 destinations in 7 continents. Heathrow is the major operation zone for BA, despite its many operations in Gatwick. BA CityFlyer, which is a subsidiary of British Airways plc, mainly dominates the London city airport operations.

BA also operates flights from Manchester airport. However, due to reduced productivity, internal and worldwide operations beyond London were terminated when BA Connect was given out to willing buyers. This situation forced people who were traveling to the UK and/or other international destinations to transfer to London. Over 40 percent of all operations at Heathrow are reserved for BA.

The suggestion is that the company dominates airline operations from the airport (Bamber, Gittell, Kochan, & von Nordenflytch, 2009).

Upon the company’s privatization in 1987, Benady (2008) asserts that it acquired immense privileges in comparison with its competitors, such as a reservation of 43% of landing slots together with departures at Heathrow airport.

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This observation implies that the bottom line in the success of any organization that operates in the European airline industry is based on its capacity to acquire a higher competitive advantage.

Apart from BA, Air France also serves the European markets. It has its headquarters in Tremblay-en-France. The company operates as a supplementary of Air France-KLM, which has also established the SkyTeam international airline coalition.

By 2013, the airline had served about 36 destinations across the globe. It carried an excess of 59,500,000 passengers by 2011. The organization was established in 1933 through a merger with several airlines, including Air Orient, CIDNA, and SGTA (Brueckner & Pels, 2004).

Throughout the cold war period (1950 to 1990), Air France constituted one of the airlines that provided flights in Germany. The company served as the main national courier until the time when it merged with KLM in 2003. From 2001 to 2002, the company ferried more than 43.3 million people to earn an estimated revenue of 12.3 billion pounds.

In 2004, it was ranked the largest European courier that controlled more than 25.5 percent of the airline market (Brueckner & Pels, 2004). The company was also leading across the globe in terms of income making. Air France includes the Boeing and Airbus fleets.

For short-haul routes, it deploys Airbus A320. However, in 2009, the company also introduced an A380 series between New York and Paris routes. Its subsidiary, HOP, operates all domestic fleets together with European-scheduled fleets.

Competitiveness of Capitalist Markets

In capitalist economies, industry and private firms get hold of businesses and production aspects, which operate them to make optimal profits. Wealth amassing, remuneration work, and aggressive bazaars distinguish such economies. In the capitalist economy, parties that make trade transactions are involved in the setting of prices for exchanging assets, goods, and services (Harvey, 2014).

The airline industry in Europe experienced immense government deregulation in the 1990s. This move was to ensure that the industry could solely set prices for its services in a bid to make the airline markets capitalist, and hence competitive. In the airline industry, two types of capitalism can be differentiated, viz social-market economy and a free-market economy.

Free-market financial systems include an entrepreneurial system in which the cost of services and merchandise are established by cost-effective policies of demand and provision of commodities. The policies are permitted to reach the equilibrium point without any intervention of the government in ways such as price control.

Free-market economy fosters the development of competitive markets encourages private ownership in a bid to enhance the existence of highly productive enterprises. This model manifests itself in the airline industry through the permission of the organizations that operate in the industry to set their own prices without any governmental regulation.

A social-market economy constitutes a free-market economic system in which governmental interventions to control prices are kept at minimal levels. In the airline industry, any governmental intervention manifests itself in the form of regulations on labor rights, social security, and employment benefits.

With these regulations, the airlines make the final decision on the best prices, which assist them in covering the costs imposed by the government to protect workers in the industry whilst making substantiated profit margins.

As revealed before, to ensure that an airline industry covers its fixed and variable costs competitively, it must seek ways of becoming large enough so that it can take the advantages of economies of scale. Some such ways encompass acquisitions and the formation of mergers.

Merging is done in the attempt of an organization to gain the benefits of the strong points of other organizations to increase collective performance. In this effort, merging organizations play the role of selecting the most talented people from both organizations while relieving the less effective and innovative persons from the merger (Moran, 1999).

This attempt aims at ensuring that the merging organizations are able to deliver goods and services to clients in a more competitive manner. Organizations that form a merger believe that employing people who have different organizational experiences give the resulting merger the advantage to develop the capacity to tap and benefit from a wide range of talents and knowledge bases (Dessler, 2004).

This way, a merger is able to innovate and create a wide range of products, which, while traded, translate into increased profitability. Nevertheless, this strategy brings together people who have different cultures.

To resolve cultural conflicts and to secure the competitive advantage, merging organizations must establish partnerships in a bid to create a common culture by helping employees to understand that different people have different abilities and beliefs. Such differences should not be permitted to influence the way people relate with one another (Ollapally & Bhatnagar, 2009).

Employees of one organization should not consider themselves inferior in comparison with persons from the other organization that forms the merger. This observation suggests that staffing for a merger needs to be done based on merit while considering the fact that the goal of merging entails enabling an organization to achieve more capitalist gains both in the short-term and long run.

Capitalist markets aim at increasing profitability levels of organizations operating in any industry either solely or through mergers to form alliances, just like the case of Air France and other airlines organizations that operate in the European markets. Indeed, through merging and acquisitions, EasyJet, Air France, and British Airways are able to maximize their profits to improve their competitive edges.

For profit-making organizations, just like the three airlines, the higher the efficiency, the higher the probability that the organizations will be profitable and deliver optimal benefits to all persons who have stakes in them, including employees. From the nonprofit making perspective, efficiency is measured based on “the relationship between the effectiveness of fundraisers and organizational expenditure” (Collins & Jerry, 2008, p.67).

For the case of freely traded corporations, efficiency is measured from the paradigms of the capacity to optimize profits from the context of the capital that is acquired from debts and equities. Indeed, according to Collins and Jerry (2008), for freely traded organizations, efficiency is best measured based on the returns on investment ratio.

Efficiency and effectiveness imply more gains to all organizational stakeholders. Management of the three airlines cannot ignore stressing on increasing competitive advantage by increasing organizational, operational efficiency, and effectiveness if it has to build an organization that has the capacity to have a long-term performance. Failure to accomplish this task, organizations cannot even deliver optimal welfare to its employees.

Such failure has the impact of lowering the productivity of the employees due to low motivation levels. In a capitalist market, all stakeholders invest in activities that lead to increased personal capital accumulation (Harvey, 2014). This observation implies that even employees in an airline industry are more motivated if the increased profitability of an organization that has employed them translates into increased personal gains in terms of higher salaries and wages.

With the deregulation of mergers that operate in the European airline industry, each organization develops policies for increased profitability while employees respond to such policies by working harder to achieve higher gains in terms of salaries and commissions, especially in the case of air ticket vendors.

The cases of EasyJet, BA, and Air France reveal well the degree of competitiveness of capitalist markets in a bid to promote the free market in the airline industry. The French government-owned 44 percent while the private sector owned about 37 %. However, in 2004, the French government sold its stake of 18.4 percent so that its ownership of the merger was just about 20%.

Perhaps, this situation had the effect of reducing the government’s say on the setting of prices and other regulations for the merger so that the Air France-KLM merger started to operate under the principle of social-market economy.

This change has the impact of making the organization more effective in its operations not only because it acquired higher economies of scale, but also because its operation became principally guided by principles of supply and demand.

It stopped risking losing its clients due to higher air travel fares. The regulation of prices in the airline industry is meant to ensure that an organization makes certain profit margins so that it does not sink into losses or exploit clients.

The Concept of Free Markets and the Airline Industry in Europe

European organizations that operate in the airline industry promote free-market economy while also adopting strategies that can make one organization outdo the other in terms of carriage capacity, the number of operational routes, and promotion of customer experience.

The aim is to ensure that the organizations have the ability to build strong corporate brand inventories and elements to induce customer satisfaction. Customer satisfaction is a critical element of retaining existing clients and/or attracting new ones in a bid to build a competitive edge for any organization (Yelkur, 2007). Customers who possess good organizational reputation share it with other people.

This aspect creates the urge amongst potential customers to experience the service or product that is offered by an organization. Brand inventories are aimed at availing a comprehensive profile of the manner in which merchandise and services that are sold by a given organization are branded and marketed. In the airline industry, price is an important aspect of any brand.

In a capitalist market, the recognition of the extent to which an organization meets the satisfaction of its customers is critical in aiding to channel employee efforts to meet the anticipated needs and perceptions of the provided services.

To this extent, marketing scholars such as Yelkur (2007) and Farris, Neil, and Pfeifer (2010) perceive customer satisfaction as an aspect that forms the dominant business strategy that may affect the profitability of an organization positively if it is cutely developed.

Given this merit, European airline organizations such as EasyJet, BA, and Air France develop metrics of measuring customer satisfaction whilst determine various marketing factors that induce the same contentment (Porter, 2008).

In the process of optimizing its profits as a strategy for enhancing its success, easyJet experiences challenges that are similar to what is encountered by any organization that operates in a free market business environment. EasyJet has declined from offering food services free of charge in case of flights that take more than two hours.

There is also intense competition from other service providers such as BMI Baby, Jet2, BA, Air France, and Ryan. The competitive forces influence the company’s pricing policies, thus making some of its routes less profitable. The fact that competitive forces affect its pricing policies implies that the organization operates in a free-market.

External competitive market forces create pressure on easyJet’s profit margins, especially in some of the most popular routes. Amid the strategies deployed by the company to cut the cost of fuel, the escalating international prices threaten the operation of the company.

Since governments do not put any effort to shield any organization from instating the principles of demand and supply of fuels and other input resources in the European airline industry, it is clear that free-market principles are upheld in the industry.

Although free markets have a close link with pure capitalism, the situation is different in most airline organizations that operate in the European region. BA, EasyJet, and Air France engage in corporate social responsibility, which technically involves the sharing of profits with the communities in which the organizations base their operations.

Perhaps, the European airline markets are not essentially free to the extent that major players attempt to reduce competition so that they can freely regulate air ticket charges. Major international couriers belong to global alliances. For this reason, the alliance of European-based airline mergers has the potential for misaligning alliance structures with the possibility of creating localized negative impacts (Brueckner & Pels, 2004).

For instance, Air France and KLM both belong to different worldwide alliances. They potentially lower the competitive advantage of other organizations that form the merger. Any price has to be collectively agreed upon by all stakeholders. Specifically, KLM has an alliance with Northwest, which joined the SkyTeam alliance (Brueckner & Pels, 2004).

Traditionally, SkyTeam partners included Delta and Air France. The overall impact was the creation of a big alliance that could bring together the global biggest airlines. This arrangement produced high economies of scale so that the biggest alliances could control air travel prices in the European market by exploring low costs strategies. This situation disadvantaged small airlines.

Although AIR France, BA, and EasyJet operate in a free market airline industry in the European region, alliances that involve the largest mergers reduce the capability of the organizations to set their own prices.

Indeed, although forces of demand and supply are crucial in the setting of prices in the airline industry, an organization cannot set prices at levels in which it cannot make profits. It can offer services and goods at the most competitive prices, as evidenced by the case of Air France–KLM merger.

Conclusion

Organizations that seek to succeed in the long term must invest in business strategies that enable them to gain a competitive advantage over time. One such strategy involve implementing organizational policies around the perspectives of capitalism to deliver optimal gains to shareholders.

However, in the airline industry, where large alliances come together to form mergers, smaller organizations encounter challenges in terms of competition because of their low economies of scale.

This observation implies that even though airline organizations such as Air France-KLM have the freedom to set prices without any influence from the respective governments, smaller companies such as EasyJet experience challenges that are attributed to low economies of scale.

Hence, they are forced to set prices at levels that have been set by large organizations for them to continue operating in the industry. From this perspective, the paper has confirmed that even though all airline organizations in the European markets follow capitalist policies, the operational environment is 100% guided by the principles of the free-market.

Reference List

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