This document discusses the political, economic, and competitive factors that have impacted the European airline industry. It analyzes how deregulation, wars, and terrorism have changed the industry politically. Economically, it explores how recessions and rising oil prices have affected profits. Competitively, it examines the low-cost business model of carriers like Ryanair and EasyJet and how they have gained significant market share through low fares. The future prospects discussed maintaining cost advantages for low-cost carriers while major airlines will face challenges competing on price.

1. The World Airline
Industry :
A European Perspective

3. Political
 Drawing on the political factors in PESTEL performed
on airline industry. There are three major components
that have bought change to this industry. Those are
 Deregulation
 War and
 Terrorists.

4. Deregulation
 The US airline Deregulation Act 1978 and Air
transportation Deregulation in Europe 1978- 1997
 In the aftermath of deregulation, the development of
airline industry rises dramatically. Especially for the low
cost airline, there are hundred of them were found in the
US. One of the winners was Southwest Airline- today
American’ s most profitable airline. In Europe, low cost
airline carriers such as Ryanair and EasyJet are expanding
very rapidly.

5. War
 After few years of deregulation in the US the world
airline industry recovered.
 However, Gulf war strongly hit the airline industry.
 From 1990 to 1993 the air carriers suffered four years of
losses totalling over US$ 22 billions (The World Airline
Industry Case Study).
 People were afraid of flying, which led to a decline in
passenger traffic.

6. Terrorists
 The world airline industry was severely shaken by the
terrorist events of 11th September 2001
 After that, the security level was increased at all the
airport, that result in high cost put into airline
industry, due to more personnel and further expensive
security applications.
 More security leads to increase waiting times, makes
air transportation less attractive.

7. Economical
 Economical can be another major factor for the airline
industry.
 Due to the rate of war and terrorist event, the growth
rate of economy dramatic slowdown, capacity in
Europe outstrips demand, which gains the low yield to
the airline industry.
 Moreover, oil prices increase also affect their profits

8. Social
 The social sector, which are strongly from employment
perspective and safety.
 After September 11th 2001, not only American airlines
struggled but also most European airlines laid off
thousands of people during the past year.

9. Technological
 Technology in airline industry is fast moving, however
it’s very costly.
 Alliance gives the opportunity to the major airline to
offer customers a global route coverage.
 Shared check- in system and online ticket book also
give the airline industry significant support.

10. Ecological
 Ecological factor consist of recycling, the level of
pollution and attitudes to the environment.
 For the airline industry, pollution tends to be very
important.
 In the early of this year, London Heathrow Airport
announced, third runway and the sixth terminal will
be built up and they will be operated by 2020.

11. Legal
 Legislation for the airline consist of employment
laws, company law, tax law and their regulation.
 Redundancy, Landing right, health and safety, that are
all the airlines should be considered as legal factor

12. Future Development on Airline
Industry
 Gulf war, world trade centre disaster, Iraq war, have
major impact over the airline industry.
 Economical and political factor has always been and
continues to be the two major external environmental
drivers influencing the airline industry.
 From 2004 until present, airline industry recovered
and it become more attractive for investor.

13.  The future development for a major airline will pay
more attention on alliances with other companies.
 Secondly, price differentiation, which to access
different target group of customer.
 Moreover, the major airline should have direct link
with business area, which low cost airlines do not have.
This is can be an advantage for the major airline.

14.  Low cost airline is growing too fast leads to the loss of
their competitive advantage.
 Security and cost cuts might cost their customers.
 Therefore they should improve their image
concerning security, services, quality and alliances
with other companies, in order to attract more
customers.

17. Business Model of Low Cost
Airline
 Low cost airline has distinct business model, which is
different from major airlines.
 It will offer the minimum standards of service and very
low price for the shot distance flight.
 This model perfectly fits into Porter’s theory, which
states that a company offering a low price product to a
small and specialized group of buyers or the company,
seeks a cost advantage.

18. The unique business model of low cost
carrier contents:
 A single passenger class
 Single aircraft (airbus A320or boeing737)
 Unreserved seating
 Secondary Airport
 No-frills service
 Point to point and short-haul flight and more
frequency
 Online ticket booking
 Fast turnaround time

19.  That is the business model for cost airline to achieve
cost advantage.
 The low cost airline structure can be defined by three
key components, which are
 simple product,
 position and
 low operating cost.

20. Simple product
 ‘No Frills’ extra payment for food and drink on
board.
 All the service are kept as simple as possible.

21. Position
 For low cost airline they are positioned on non-
business class.
 Short-haul and point to point traffic with high
frequencies.
 Using secondary airport

22. Low cost operating
 Low wages.
 Low landing fee.
 Low costs for maintenance to ensure the cost
advantage.

23. Cost item Cost per seat reduction (a discount
from the operating cost per seat of a
conventional scheduled carrier)
Product design
Use cheaper secondary airports -6%
Minimal station costs and out-sourced handling -10%
No free in-flight catering -6%
Higher seating density -16%
Process design
Higher aircraft utilization -3%
No agents’ commissions -8%
Reduced sales/reservation costs -3%
Smaller administration costs -2%
Total cost reduction -59%

24. Competitive Strategy
 Porter (1980) has described three general types of
strategy that are often used by businesses.
 These three strategies are defined along with two
dimensions
 Strategic scope
 Strategic strength
 In particular he identified two competencies that he
felt were most important: product cost and product
differentiation

25. Cost Leadership
 Low cost airline has a distinct business model, which
maintain their low cost advantage over the major
airline.
 They cost even less than 50% compare with full-service
carriers

26.  To achieve the low operating costs per passenger, low
cost airlines need to have as many seats on board as
possible, to fill capacity as much as possible, and to fly
the aircraft as often as possible.
 Further more, some of the low cost airline such as
Ryanair run the unique ticket less phone and internet
booking system to reduce the agencies cost. It saves
cost for both company and passengers.

28. Future Prospects for European
Airline Industry
 Low cost airline as part of airline industry has
significant leading position in price and cost which the
major airline can not compete with.
 In Europe, most successful low cost airlines have
operated primarily in domestic, it currently hold one
third of the airline industry market share.

29.  Secondly, there are around 50 low cost airlines in
Europe and still new players enter in low cost
competition, it will result in the supply over the
demand, therefore some of the player will be out of the
competition.
 It is very hard for them to expand by adding long-haul
flight and increase the quality of the service.

30.  To sum up, low cost airlines should maintain the
existing business model and take the cost advantage to
compete with major airlines.
 However by increasing the size, low cost airline will
lose their cost advantage, therefore low cost airline will
have to fight hard to persist in the future

31. Conclusion
 The outlook for the airline industry is one of aggressive
growing sector. External environment could directly
affect its profitability and operation. PEST analysis
through Macro-Environment identify the major
external environment drivers, which influence the air
line industry. Technology in airline industry is fast
moving, it will bring the changes in the future

32.  The future for airline industry is bright and it also
holds many challenges. The emergence and growth of
no frills, low cost airline have radically altered the
nature of competition within the industry. For low cost
airline should continue maintain the existing business
model by reduce the cost to improve their product.
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