The external and internal environment at Aer Lingus

The external and internal environment at Aer Lingus This paper proposes a new alternative strategy that Aer Lingus could potentially adopt. First and foremost the paper analyzes the external and internal environment regarding Aer Lingus. Here the strengths and weaknesses of the internal environment i.e the company are identified and a PESTEL analysis is conducted in order to assess the opportunities and threats concerning the external environment. Through this in depth analysis of both the internal and external environment we were able to devise three alternative strategies for Aer Lingus. 1. Aer Lingus move towards a Low cost carrier model. 2. Aer Lingus move towards benefit-oriented national flag carrier model 3. Aer Lingus continue with their current strategy and position of being in between an ultra low cost carrier and full service flag carrier in Europe while also adopting a low cost model on transatlantic flights; charging for ancillary services and increase the seat capacity on the planes by reducing the number of business class seats and increasing the amount of economy seats. After much deliberation the strategy we opted for was the third alternative. In considering the first strategy, we realized that it would be very hard for Aer Lingus to compete on cost as Ryanair occupies such a large share of the market, therefore making it very difficult for Aer Lingus to reach minimum efficiency levels. In evaluating the second strategy it came to our attention that with most of Europe in a recession, a flag carrier model would not be a desirable nor profitable strategy. Therefore we suggest that Aer Lingus continue with their current strategy and adopt a low cost approach on transatlantic flights, similar to the one they have incorporated to their European flights and also try to improve connections to Asia by finding a partner. This will enable Aer Lingus to access a new market and improve their profitability. External Analysis: The current economic climate has had a direct impact on the Irish airline industry. People have less disposable income and as a result Dublin airport has witnessed a decline in passenger numbers since 2008. Figures released by the DAA show a significant decline in passengers from 23.5 million in 2008 to 20.5 million in 2009; a decrease of 13% and it s expected that numbers will fall even further in 2010 to 19 million passengers. Ireland is one of the few European countries to impose a 10 travel tax on tourist travelling to Ireland. This along with the 40% increase in airport charges (which is being used to pay for Terminal 2) is considered to be one of the main reasons in the decline of seat capacity which dropped by 140,000 in April 2010 alone and the fall in Irish air traffic by 13% so far this year. Growth has returned to countries which have ditched this travel tax and reduced its airport charges. According to Canadian energy economist Jeff Rubin the maximum an airline company can pay for a barrel is $80 dollars, any higher and the company cannot make a profit, $80 dollars is the breakeven point. Oil prices have been steadily rising since January 2009 and economists have predicted that this year the price of oil will rise to $80 per barrel which could prove detrimental to the profitability of the airline industry. In April 2010 the eruption of an Icelandic volcano caused Irish air traffic to come to a halt. The closure of Irish airspace caused a sharp decline in trips to and from Ireland. In April 2010 The Central Statistics Office reported a decrease of 24.9% in trips made to Ireland and a decrease of 27.9% trips made by Irish residents made overseas in comparison with April 2009. (See Appendix A for an Aer Lingus analysis using Porter s Five Forces Model) Internal Analysis: When internally analysing Aer Lingus, we assessed their strengths, weaknesses, resources and capabilities. A major strength we perceive Aer Lingus to have is that they serve both regional and transatlantic hubs. This fact has positioned them between a low cost carrier and a flag carrier airline. Their partnership with Aer Arann has enhanced their short haul network. They have achieved certain advantages at no extra cost such as an improved network frequency, a deepened penetration in core Ireland and UK markets and a consolidation of long haul traffic in their Dublin hub. A major resource they possess is their network connectivity. Their long haul routes to the USA have been established with strong connectivity, such as New York, Boston and Chicago. They now connect to over 50 US cities. They also possess a large market share on key routes and are seen as a flag ship airline. Their large market share comes from their very competitive cost base. They also have potential for expansion on their long haul network. Valuable assets of Aer Lingus include their well positioned slots, their close to 1 billion in cash and their route network. These assets will ensure that Aer Lingus continue successful operations during a time in which the industry is facing an exceptionally tough trading environment which has progressively deteriorated in the last year or so. An important capability of Aer Lingus is their ability to compete with Ryanair, Europe s largest low cost carrier. Their prices are usually higher than Ryanair s prices, however sometimes not by much. Yet what makes them more attractive to many customers is that they fly into major airports, unlike Ryanair. Aer Lingus also managed to resist two take-over bids from Ryanair due to its strong ties to the Government. During our research we found there to be no airline in the top 100 brands, however, the Aer Lingus brand is well established and something that Aer Lingus themselves view as a main resource. Their brand boasts low fares and good service. Something which may be viewed as a weakness is the fact that this year Aer Linus have vacated some of their slots at Gatwick airport. They have also taken two of their Airbus A320 s out of operation and reduced their fleet size to just three at Gatwick. They deferred two A320 aircraft from this year to next year. And also state there to be some savage pay cuts for the Irish flag carrier. This was a result of the cost and capacity management in 2009. The significantly higher than expected cost of terminal 2 at Dublin airport mean that Aer Lingus flight prices will also be higher than expected. This may cause a knock on effect to passenger numbers and ultimately profits. Evaluation Criteria: When we assessed Aer Lingus s profitability we found that their return on equity has deteriorated even further from 2008 when it was -14.4% to -18.4% in 2009. We then assessed the efficiency level of the airline by computing their sales to assets ratio. In 2008 the efficiency level was 0.64, this improved to 0.69 in 2009. Aer Lingus have the 16th largest market share in the European airline industry, with a weekly departing seat capacity of 300,000. Their main competitor, Ryanair, occupies the largest share of the European market with approximately 1,900,000 weekly departing seat capacities. With the introduction of the Greenfield cost reduction programme Aer Lingus were able to reduce their cost base by 7.4%, setting a benchmark for the European Airline Industry. At present the average price of an Aer Lingus ticket is 77 compared with Ryanair s average price of 44. Strategic Alternatives: One possible way for Aer Lingus would be to move more towards becoming a low cost carrier (LCC). In order to be able to compete with the players in this niche, Aer Lingus would have to make further adjustments to its business model. The Irish competitor Ryanair proves that there is great potential in the low cost carrier market, as they are still both growing in passenger numbers and revenues and maintaining to be profitable even in times of global economic crisis. But such bottom line figures are results of focused streamlining of the airline business model. Almost every complementary service is charged extra, operations are kept to a bare minimum or outsourced wherever this seem lucrative, flights are not interconnected but only point-to-point, and the costs for fleet maintenance and procurement is greatly reduced by the use of only a single type of aircraft. Also over the last few years there has been massive consolidation in the airline industry, especially with respect to LCCs. This underlines the fact that the pressure in this market segment is particularly high. To get into this segment Aer Lingus would have to restructure its flight network, personnel, fleet, and ground operations, but even then it is questionable whether or not Aer Lingus would be able to match or outperform close competitors such as Ryanair. In exhibit [no.B1] the current differences in cost structure between Aer Lingus and Ryanair can be observed. Although the general structure is fairly similar, especially with respect to staff costs, airplane maintenance and Airport and handling costs Aer Lingus faces much higher costs than Ryanair. Overall, this direction could prove to be a risky and somewhat too challenging endeavor. Too many, too important aspects would have to be changed, which is unlikely to happen when taking into consideration that there will be internal politics involved, particularly when it comes to cuts in the field of staff expenses, Aer Lingus biggest disadvantage. (S ee Appendix B.1) Aer Lingus could also try to move to the other end of the scale, namely that of the benefit-oriented former national flag carriers. These airlines maintain extensive hub-and-spoke networks which allow them offer a big variety of different connections. The flights are complemented with different amenities such as free meals and luggage. In addition to the sheer transport service, an overall experience is created and valued by the customers. Flag carriers generally make their money through business customers who are typically not very price sensitive. Aer Lingus already owns the necessary timeslots and connections to provide an extensive network and its fleet could also potentially be modified to provide the more enjoyable flight experience that luxury customers are used to (See Exhibit B2). Also it is questionable if Aer Lingus is actually large enough to maintain a network that can match the advantages of airlines competing with a similar model. Despite the fact that Aer Lingus may h ave some experience with the type of flight that the potential competitors offer, this knowledge might not transfer as easily throughout the whole business, excessive cost for the same amount of benefits might occur. Also with the general economic climate, which is likely to persist over the coming years, even business travellers are increasingly price sensitive or do not fly at all, which makes this market segment significantly less attractive. (See Appendix B.2) A third strategic alternative Aer Lingus could consider is continuing with their current strategy and position of being in between an ultra low cost carrier and full service flag carrier in Europe while also adopting a low cost transatlantic model. Taking into consideration Air Asia s model of low cost, long haul flights between Asia and Europe, we feel that Aer Lingus could apply this same model to their transatlantic flights. They could implement a no frills approach on these flights by adopting an ancillary service. Passengers would pay a basic premium price for their flight ticket. Any extras on board the flight such as meals, the use of a TV, pillows, blankets, drinks etc. would incur an additional charge. We feel that by increasing the capacity of their current fleet, they could increase revenue, and potentially increase their market share. Both Aer Lingus and Air Asia use the same aircraft on long-haul flights, being the Airbus 330-300. However, Air Asia has managed their passenger numbers more efficiently. They have 12 business class seats, compared with Aer Lingus s 24 and 365 economy seats compared with Aer Lingus s 303. If Aer Lingus were to adopt Air Asia s more efficient method they could increase their seat capacity by 15%. (See Appendix B.3) Recommended strategic alternative and its execution: We have highlighted in the previous section three alternative strategies that Aer Lingus can take. We believe that shifting to a no-frills model is not convenient for Aer Lingus because of the greater bargaining power held by Ryanair, which is the European leader of no-frills carriers (it has reported a net profit after taxes of $612.2 million for the first quarter of 2010). Moreover Aer Lingus would not be able to reach the minimum efficient cost to make a profitable low-cost business because it would not be able to develop a learning curve in the short-term. On the other hand, shifting its business model to a western legacy carriers one is not a winning move because at the moment this business model is proving to be unprofitable (American airline has reported a net loss of $359 million for the third quarter 2009, which included the impact of approximately $94 million in non-recurring charges related to the sale of certain aircraft and the grounding of leased Airbus A300 aircraft pr ior to lease expiration. Excluding those non-recurring charges, the third quarter 2009 loss was $265 million or $0.93 per share). We think that Aer Lingus should continue with their current strategy while also incorporating a low cost transatlantic model based on that of Air Asia. In detail Aer Lingus Group Plc should offer enhancements including better food and faster check-in times to customers willing to pay more. In a switch that brings it closer to EasyJet Plc, which attracts a higher proportion of business flyers, Dublin-based Aer Lingus will adopt a hybrid model somewhere between a discount and full-service carrier. Aer Lingus also adds more short-haul routes through a franchise deal with smaller Irish carrier Aer Arann, while seeking to boost long-haul connections by increasing the number of code-share partners. Moreover the agreement with Aer Arann cover 12 routes, giving Aer Lingus new services to Bristol, Blackpool, Cardiff, Durham and Doncaster/Sheffield in England, together with Glasgow and Edinburgh in Scotland. While the flights use by Aer Arann, being ATR 72 turboprop planes, are branded Aer Lingus Regional, with tickets sold through the larger carrier s Web site. Aer Lingus also needs to improve connections to Asia by finding a partner with daily flights to the region. The airline may rebuild its base at London s Gatwick airport should demand improve after paring services and cutting the number of planes stationed there. Luton, England-based EasyJet is the largest carrier at Gatwick, and has attracted more time-sensitive flyers than Ryanair by operating to airports that are generally closer to major European cities than those used by its rival. Aer Lingus is already reducing wages and slashing its workforce by almost a fifth, and more jobs may have to go as the airline braces for a decline in sales in what will be an extremely challenging. The Irish government holds 25 percent of the carrier s stock, with Ryanair owning about 29 percent following two failed takeover attempts. Likely Benefits and Limitations of Strategic Alternative: Aer Lingus has been hit harder than most as the Irish economy struggles to emerge from the worst recession since World War II. That is why a pure low-cost model was limiting its ability to maximize revenue. Through establishing a low cost transatlantic model, Aer Lingus will have access to a new market which has been created as a result of the economic struggle. Moreover since the recession in Ireland is to last longer than anywhere else world, it is impossible for Aer Lingus develop new routes on its own. Through agreements and alliances, Aer Lingus is able to reach new airports and acquire a new market share at a lower cost by sharing fixed costs. In that way the company will increase its profits by raising the number of its itineraries as well as by differentiating its customer target. In fact, Aer Lingus has joined transatlantic routes by deals with UNITED and Jet Blue carriers and regional routes by their agreement with Aer Arann. Question 2 GTSI From our reading of the GTSI case study we consider the main problem to be that the company expanded too quickly: The Company was too ambitious in implementing such complex systems such as the ERP and GEMs systems and similarly in its 007 strategy. The main reason for the failure of the ERP system was that instead of being run as a corporate project it was run as an IT project. The system was initially supposed to have cost them between $3-5 million and was to take between 12-24 months to complete. Instead the system ended up costing them $60 million and took 5 years to complete and in the process 3 CIO departed. The company seemed to have lost sight of the goal of implementing this system which was to act as a means of lowering costs when in fact by trying to complete this system they ended up driving up the costs which was inevitably detrimental to the profitability of the company. Instead of treating the ERP system as a sunk cost the company kept investing money into it and then e ventually in 2005 launched the system before they were certain if it would be effective or not, stating that the company could learn by trial and error . The launch of the ERP system coincided with the launch of the new GEMS system which in addition was a failure. Because the system failed there was a huge back log in orders and nothing was shipped for two months. In an attempt to rectify this problem GTSI solely concentrated on large orders which only accounted for 20% of their customers, leaving the other 80% extremely dissatisfied. This resulted in a huge increase in customer complaints which in turn lowered staff morale which lead to the increase in employee turnover and proved harmful to their reputation. The reason for the failure of the 007 strategy was that it was simply far too ambitious and it did not take into account the impact of doubling the sales force and revenue in such a short period of time would have on the organizational structure. Also because the company operated in a defined market the implementation of this strategy caused their operating expenses to increase significantly. The company undertook too much by trying to implement the 007 strategy and the GEMS and EPRS systems simultaneously. In being too ambitious with their plans they ignored the individual execution required for the strategy and systems therefore nothing was implemented effectively. The company was nearing bankruptcy when GTSI jumped from a net profit of $10.3 million in 2004 to a $16-million net loss by 2005. Moreover the Bank did not extend GTSIs credit facility leaving the executives at GTSI with two months to find a new credit facility. The reaction of its partners was not good. Some of its long-term partners are going to end their relationship as well as customers questioning whether they should continue to do business with GTSI. GTSI s reputation dropped as well as its stock price. In fact GTSI was quoted into NASDAQ Stock Exchange and when its assets and liabilities were degraded, its rating fell down. In this situation the best solution for the company is trying to retrieve its reputation, so it could increase its stock price. By selling some core assets, the firm could get back some liquidity to guarantee for its liabilities to the Bank. Moreover it could ask for some help from the Government which could acquire some of GTSI s stocks and enable it recover some of its past reputation; particularly, by becoming partly a public company, GTSI stocks rating rise as well as its market price. The second step which we consider very important is to develop a centralized training system to make the employees familiar with the new ERP system, so that the company can really exploit the potential of its investment in this IT system. Finally, we state that a common organization culture and strong leadership is necessary to overcome the attrition within the current organization and to make the coordination between GTSI s activities easier. Question 3 Shenzhen After studying the case of Shenzhen Filtroil, the main problems we have identified are the two dysfunctional relationships between (a) Liu and Qian and (b) The American owners, Randolph and Leahman and the Chinese partners, Liu and Qian. Communication is severed and the merged factory Dongwon Filtroil is not operating as a single team. Relationships are a key component of the business so once trust and communication were not there anymore problems occurred. The main reason is the fact that Liu does not feel appreciated and does not feel that his work is recognised. The firm have a huge reliance on Liu as he is the only one who knows the zinc formula. Liu therefore plays a crucial role in the business and once he recognizes just how important he is he becomes greedy. During a conversation with Qian, Liu demands to be paid (RMB) 15,000 a month, 30% commission instead of his current 5% and also to get a new company car. Qian fails to understand the change in Liu s attitude since they had been such good friends. They should be equals in their business relationship as they both own a stake in the company. However, Liu finds Qian too controlling and untrusting by the way that he checks his products when it is not even necessary. He tells Qian that he needs to stop worrying about his workers and concentrate on his own workers. Due to these issues their relationship becomes more and more dysfunctional. Another reason for their relationship problems is that Qian sees Liu as someone who was in a lot of debt and could barely feed his family. He is of the opinion that Liu should be happy that the merged factory Dongwon Filtroil has enabled Liu to live a better life and send his daughter to a good school. Realistically Qian always felt that Liu should be appreciative of anything he has gained from the merger. He didn t value the important role Liu plays in the company s success with his zinc formula. The relationship between the American owners and the Chinese partners is strained because Randolph and Leahman were kept in the dark for a long time about the tension that was building in the Chinese factory between Liu and Qain. The lack of communication meant that problems were left unsolved and the Chinese partners were left dwelling in the difficult task of keeping the business going. We have considered two solutions to the above problems. The first involves fixing the internal relationship issues without any changes to who works in the business. This can be done by improving communication. Liu and Qain need to become more aware of their responsibilities to the business and stop relying on the American owners to fix their relationship problems. They could put contractual agreements in place that tackle the hold-up issue that Liu has created. This would then establish potential to reinstate trust in the company. At the end of the day we have realised that it is not money that Liu really cares about it is about his work being appreciated. If he had a greater stake it would improve communication and also allow both Liu and Qain to act as equal partners as opposed to one controlling the other. This solution will take time and will need the dedication of everyone involved in the business. Another solution is one proposed at the end of the case. Continue working with Liu and give him the raise he requested. Then hire someone to learn Liu s trade secrets. This would then allow Qain and the American owners to make the zinc formula themselves. They could then get rid of Liu by offering to buy him our or force his resignation if necessary. This solution means that they do not have to address the current major issue that is Qain and Liu s relationship.