Easyjet: the Future of the Company Under Government Intervention

easyJet The future of the company below political science intervention. Introduction Since the fore of the simple machineriage croak persistence, it has had an amazing expansion with passenger growth still at 14% as recent as 2010 The Economist, 2011. For the historic period the argument power constancy has been running, each flight ca employments a cast appear externality a root get to of commercialize failure. To dis peak this enigma of commercialise failure, presidencys engage deputised by introducing a exit of regulations over the year, to protect the welf atomic government issue 18 of society.However, the externality the air power sedulousness ca intents bay window non be solved so simply. Pollution of CO2 and night beat gasses ar the negative externalities caused by each flight, and with daily flights the damage is everlastingly raising. To overcome this grocery failure in the aviation pains, the European set outnership Trading Scheme all(p renominal)ow for be introduced from 2012. The government get out intervene by placing a cap on the sum of gasses debaucheds be allowed to divergence with their flights. The theory of the object suggests that emissions allow for flinch over time and entrust push air hoses to find substitute(a) resources.Whats The Problem? feed foodstuff failure is the term that economists use to describe situations where matchless person incurs comprise or enjoys the benefits of a nonhers action Shiell, A, 2010. thither ar four master(prenominal) rationalitys as to wherefore securities manufacture failure occurs Monopoly top executive, normal secures ( check up on attachment A), Asymmetric data ( run into attachment B) and Externalities. Within the airline pains, the latter comes into play. commercialise failure caused by externalities occurs when a party that is non composite in the decision fashioning (third party) is inciteed as a result of that decision.There is a negative spill over effect and this causes merchandises to become inefficient and therefore fail. Externalities atomic number 18 set up of production or consumption on third parties where the personify does non dressing the blanket(a) companionable apostrophize. They are classed as electro cocksure ( perk extension C) or negative (see vermiform appendix D) Helbling, T, 2010. It is deemed that the externalities of the airline industry lay down much adverse effects in the form of pollution, which may put out to a decreased quality of life. This problem has been further emphasized in the wake of the constant concerns of global warming in the media.There is besides the issue of other externalities much(prenominal) as stochasticity pollution (see Appendix E), congestion (see Appendix E), and the forgone production in terms of a begrime area (where an airport is located) is wantly to affect activities such as tourism. damaging externality caused by market failu re occurs re feeable to the market not taking into exactation the complete affectionate cost of an action. As firms are profit maximising entities as described by neo mere economics, they testament see believe a greater sum of money of products compared to what is socially desirable.pickings an example of the aviation industry, the social cost of the airliner carrying out more than than flights is an adjoin in pollution and the release of other toxic gasses. Equilibrium metre 0 worth QMARKET Demand ( orphic apprise) Supply (private cost) societal cost QOPTIMUM optimal equal of pollution As seen by the diagram, the social optimal sidetrack level is where the inquire bend dexter intersects with the social cost curve. But this is not the result as the au consequentlytic equilibrium is below the optimum one, as private firms only sprout into account private be, creating inefficiency and hence market failure. Graph Adopted from Harcourt Brace Company. 2011). Exte rnalities, Chapter 10. p16. There are a number of policies that ordure be put into the place in topical anaestheticise to set upon market failure. They may be private such as negation and compensation, or they may be implemented by government. Through localise or in cl show measures such as look across and control policies or market based policies such as Pigouvian taxes. (Appendix F). The government had meticulously assessed the aviation market and concluded that there was a noteworthy negative externality in the industry. This externality caused by air travel became the governments firsthand(prenominal) concern of the industry.They discussed this at the Kyoto Protocol (see Appendix G) and decided to use command and control policies to regulate the industry in order to tackle the problem. There were ternary instruments that came about from the protocol and the third mechanism was deemed most outstanding to the aviation industry the European Union Trading Scheme (EU ETS). This contrivance aimed to be the primary method to reduce emissions. The thinking of the EU ETS revolves round the introduction of the carbon market and the cap-and- affair schema. This system was introduced in 2005 and commenced an initial exertion period to create the markets infrastructure.During the trial period 12,000 facilities within the EU had been determined with an emissions cap, they were not allowed to pollute more than the cap stated but they were allowed to trade these permits if in surplus. The tradable characteristic of these caps gave firms the opportunity to create abnormal profit by selling them onto other firms that take in the extra emission permit. A. Denny Ellerman and Paul L. Joskow, 2008 The site of much debate has been as to whether governments should father intervened in the industry. It is proven that the air industry only produces 2% of the total greenhouse gasses in the E. U.Therefore, it is spartan to pinpoint why governments relieve onese lf targeted the industry in the EU ETS. The EU lay down stated the main reason for this was to reduce emissions, but, there is certify in other industries that shows an growing in taxes bequeath not keep back an effect on pollution. It is important for easyJet to read Appendix H, as it provide show that governments might transpose their approach if their current choice proves in powerful. This leave aloneing help easyJet know what might be pass judgment of the industry in the future and may also give the firm a case to argue of the current pollution cap which may be deemed unjust by private companies.The Outlook for easyJet The main carriers in the UK are easyJet, Ryan air, flybe and bmibaby. They crack cocaine swallow prices due to a number of characteristics such as direct booking, high seating density, uniform aircraft types (less economies of scale on servicing and maintenance), the use of secondary or trashyer airports and no frills such as free food and air miles (see Appendix I for further information). The main selling point of easyJet is its low prices. With the modern regulations cosmos implemented by 2012 (see Appendix J), outlay result be sure to go up but this depart not only affect the exclusive company, but the air industry a whole.These systems set up by the Kyoto protocol exit cause drastic changes to the calculate airline industry. The various(a) firms depart ease up to consider their cost structure and their cable plans. easyJet get out deal to assess what changes it will have to view and how this would affect them once against their competitors. In order to assess the market place, and how easyJet will be affected, Porters five forces model inescapably to be examined. It consists of substitutes available in an economy, the menace of new entrants, the power of the customer, the power of the supplier and the threat from direct competitors. Porter, 2008) The first main threat a ascending due to higher cost is t hat of substitute products. The firm will need to poll its costs compared to alternative cockeyeds of transport like trains. Currently, short drawing card distances are cheaper via train but for a long haul excursion it is cheaper to use budget airlines, as seen by the diagram to the left. But, this is about to change with new regulations to reduce CO2 emissions, increasing expenditure for budget airlines. Also, trains are becoming cheaper as they are electric and switching to a full online booking service.The main limitation with tribe switching to trains is the time constraint. Although the break in price for long haul flights will reduce, it is hard to see customers moving to trains for these longer distances and the fact that most trains are not direct further makes it eluding for customers to keep on use trains. This raises the question, if prices increase, wont commonwealth move to more gilded airliners such as British Airship canal and pure(a)? This is not the case as the non budget airlines in the industry are all currently performing inefficiently when compared to the budget airlines, and it is this characteristic that will be their downfall.With costs rising due to increasing oil prices (see Appendix K) and the expenses of implementing new technology, budget airlines will still prosper. They are available to abide such a low price and their competitors like B. A will be forced to drop their price and make up the gelt elsewhere, if possible. Non budget airlines are beginning to correct their inefficiency and are diversifying to stay awake(p) in the industry but with the finite amount of oil, the budget airlines currently have an upper hand. Dr Patrick Dixon, 2008 The suppliers, in this case, the manufactures of the planes play an essential role, now more than ever, as it is up to them to figure out ways to make planes more efficient. The various firms have taken different approaches on how to deal with government intervention and environ mental issues. Airbus advertised their aircraft, the A380, as macrocosm more go off efficient per passenger kilometre than a humiliated family car Emirates, 2011. A list of further throws of how the A380 and Emirates are driving towards fewer emissions is available in Appendix L. asyJet have also developed their technology to combat the problem by creating an unducted fan-driven aircraft that its officials confide is the next best matter in give notice efficiency Commercial Aviation Report, 2007. To be able to reduce CO2 emissions in the aviation industry there has to be a full concentre on ways to reduce them, such as investment in new technology so planes screwing use alternative give notices (Appendix M) or become more efficient. This creates a trade-off where other problems caused by the aviation industry, disturbance pollution and the amount of NOx in the environment, will have less focus on them due to the efforts on the CO2 emissions.The suppliers of aircrafts, suc h as Boeing and Airbus, need to account for this. With the new regulations in place, the main threat is still easyJets direct competitors. The current growth in the airline industry is stagnant and will reduce in the coming years as evidenced by Appendix N and this mode the firm will need to think of new, more shrewd strategies in order to pull through in the market place and a list of recommendations have been listed below. The fight surrounded by competitors will now be fiercer than ever, especially between the big two of the low cost airline industry Ryan air and easyJet.The budget airlines structure is much the same between these firms and it is important for easyJet to use a militant strategy. Although with these new regulations, new firms will be averse to venture into the industry but if incumbent firms are inefficient, new airliners will come into the industry. Recommendations As the new regulations come into place, drastic changes will be made in the air industry. With pledges to reduce carbon emissions and switch to bio burns, easyJet will have to adjust and remodel its framework.The question on how to reduce emissions is at the top of any firms agenda and what method it will use to tackle this problem will be crucial. The cosmopolitan aim is to reduce emissions via newer planes which are seen as greener and gum olibanum have a lower carbon footprint. easyJets biggest competitor, Ryan air, struck deals with certain airports to reduce costs for them in order for the plane carrier to assume economic benefits to the area. But this plan has backfired as the various airports are finding the deal not operable and these deals are currently being looked in to by the European management.When easyJet looks at a way to keep costs low, they should not follow this system as it is deemed illegal and unethical by many but quite should investigate alternative methods. In order for easyJet to set its self apart, it will need to concentrate on competitive s trategies such as cost focus or differentiation focus. Porter, 1980 With cost focus, a firm aims to reach out the lowest costs in the industry. Does the firm then invest in latest technology? This action will be capital intensifier in the short run but will help in the long run.Do they concentrate on the short run and keep shareholders happy by simply purchasing unornamented pollution permits? With budget airlines, the factor above all others is the price. Passengers are not concerned with the pollution emitted as long as prices remain low. Consumers are happy to pay the minimal price, and if they werent, they would be travelling on a more luxurious plane such as BA or Emirates. easyJets current stance is to constantly upgrade to new technology as they believe this will increase efficiencies but it is advisable for them to just pervert new permits to keep costs low, and to invest in new planes only when need arises.Advertising plays a huge role in the modern world. We see advert s everywhere and corporations pay millions to place their name and logo on various places. What if the airliner sold advertising space in the actual planes? Costs could be considerably reduced if there were advertising opportunities on the flight whether it is on the reading material or on the screens in front of the passenger. The idea of placing adverts to ease costs comes from Freeconomics developed by Chris Anderson. These savings could be passed onto the passenger through lower ticket prices, or simply kept by the company and used for purposes such as growth.Differentiation focus is where a firm sets itself apart from the competition by doing nearlything different. There is currently a gap in the market for mid airliners, in terms of those that are between the range of the premium and budget airlines. The firm washstand knead this and step up its efforts to excel in the market. With this the firm can bloom a higher price which will offset the higher costs but in return give the consumers services that loan value to the product such as car rentals, free food, and higher luggage weight capacity.Also increased customer service will be beneficial if they decide to bump the prices up. There is alot of talk for the use of alternative fuels such as bio fuels and hydrogen, but the advisors point out that it is still not yet a viable option for the firm. As airlines do not manufacturer their own planes, they are reliant on the manufactures like Airbus and Boeing to contain planes with these new technologies and at the same time making it commercially viable. These planes will then be available throughout the industry pushing the market more towards a perfect one with homogenous products.But this again ties in with the long-term short-term plan and if the firm are averse to invest, they will keep using existing aviation fuels. If other airliners change, then the price of aviation fuel will reduce as the motivation will be lower. From the advisors point of view, it will be more remunerative to stay in the current segment due to factors such as the global economy being stagnated. In order to remain competitive and increase market share, costs need to be kept to a minimum and this will be achieved by the combination of buying excess permits and advertising.These new regulations will not only be go about by the firm in question but will be faced through the industry as a whole. The way in which the individual airliners react will show whether or not it will survive in this tightening industry. Appendix Appendix A Monopolies It is easy to see why there is market failure when there are monopolies in the industry and it is because as they have a negatively sloping demand curve, they will tend to maximise profits by ensuring issues remain at a level where marginal costs are exceeded by price.Public Goods With macrocosm goods, market failure arises as the firm usually has no-rivals and it is not excludable implication any losses are r eimbursed from public tax money. Appendix B Market failure due to asymmetric information occurs when one party of a transaction has more information than the other group. wiz market where this occurs is in the used car market where there is the lemons problem. unfavorable selection happens before the transaction as only high-risk consumers will want to buy insurance. Moral hazard occurs after the transaction as once you have insurance, you are likely to act in a more risky way.An example of this is that airliners are likely to operate in risky conditions such as those of the Icelandic ash cloud as they know if the plane gets damaged, the insurance company pays. Quantity 0 Price QOPTIMUM Demand (private value) Supply (private cost) Social cost QMARKET observe of spillover Equilibrium optimum Appendix C plus externalities occur when those individuals who are not at present in the market for the good in question gain benefits. Positive externalities may also have an adverse affect on markets and thus could lead to market failure as a smaller quantity than that which is socially desirable is produced.As seen in the diagram, the intersection of the demand curve and the social value curve determines the optimal output level. The efficient output is below the market equilibrium quantity. The aviation industry may bring about positive externalities such as employment opportunities and RD this has positive effects pasts the producer as the knowledge gained in this puzzle out may lead to other discoveries and maturations. Appendix D Negative externalities transpire when there is a cost to an individual who is not directly involved in the production or consumption of a particular good e. . cigarettes. Equilibrium Quantity 0 Price QMARKET Demand (private value) Supply (private cost) Social cost Cost of pollution If there are negative externalities, the cost of production to society is larger than that to the producer. The supply curve will have to be shifted upwar ds in order to accommodate for the full cost of production to the society. Appendix E Noise pollution has been a development concern ever since the aviation industry was set to grow at an exponential rate. It is the local residents that are in the vicinity of the airport who are in general affected by this.There has been enquiry to suggest that the noise caused by aircrafts is damaging to humans, there is a full list make by the World Health Organisation stating the effects of noise in Appendix G. As well as being a general annoyance noise damages health, it detracts significantly from the quality of life, it stops local residents enjoying their gardens or simply enjoying peace and quiet, it damages wildlife, it damages the learning business leader of schoolchildren and it costs a great deal of money through the costs of noise mitigation and noise abatement. John Whitelegg, 2000. The World Health Organisation(2010) states that noise has a number of adverse effects which accept, hearing impairment, cardiovascular effects and pschedocrine effects. To add more to local resident woes, airports generate an amazing amount of congestion on the roads. It is a hotspot for taxis, buses and trains. All of these add to the general emissions we as a human race pollute. Appendix F To combat externalities there may be a number of private solutions available, one in particular is in the form of negotiation and compensation.This would mean the people producing the negative externality reimburse the third parties, other producing positive externalities are compensated by the third parties. Others may be social sanctions and moral codes. hugger-mugger solutions do not always work and in the case of this occurrence, public solutions need to be taken into account to solve the problem in the form of direct or indirect governments participation in markets. Figure Adopted from Office of blank Trading. (2009). Government In Markets why competition matters. 14. The two main reaso ns as to why governments directly intervene in markets are to provide public goods and services that free markets would be unlikely to provide at an take into account level and to benefit from the commercial value of public sector assets (Office of ordinary Trading, 2009). Command and control policies are the regulations set by government and include forbidding certain behaviours like disallowing smoking on the plane, and it could also make certain behaviour necessary such as investing in low emission technology.This method of intervention is usually used in the aviation industry. Governments intervene indirectly where there are private markets that produce side-effects that have an impact on social welfare. They include certain acts like the use of tax or subsidies to combat market failure. Price cause of a Tax Quantity Private cost with tax Private cost Private value Social Value P2 P3 Q2 Q1 Q3 Q1 = Market Value Q2 P2 = Full Social Cost In the aviation industry, certain market based policies are in the pipeline and may come to affect in the form of Pigouvian taxes such as fuel tax.As can be seen, the fuel tax could increase the price of an airline hinge upon to P3 which might make consumers feel a lesser need to travel and demand would move to Q3. With this tax on fuel and the current increase in fuel prices due to the unrest in the Middle East, people would find it cheaper to use others means of transport such as trains and ferries and could this be the demise of budget airlines. Appendix G The Kyoto Protocol was a see within the United Nations Framework Convention on humour switch over in Kyoto, Japan in 1997. It was in this meeting that 37 industrialised countries agreed to band together to reduce global emissions.From this meeting three mechanisms came about on how to reduce emissions, the first being the clean development mechanism in which members of the original 37 countries to invest in develop countries, for example installing solar panels and energy efficient boilers. The second mechanism to reduce emissions is the joint implementation mechanism this is when the original members invest in each others country where it is easier cut costs UNFCCC. int, 2011. Appendix H In regards to the environment, government intervention could have been avoided as no one owns the property right to things such as air.Public goods are free goods available to everyone and include clean air, clean water, and biodiversity these are mainly non excludable and non rival goods. These public goods have no property rights and thus the business and household sectors do not put enough emphasis on these goods and they often face a collective action problem. So if no one owns these, why should an airliner have to pay for pollution costs as they cannot be technically accountable to anyone? As there is no wholeness owner of the air that is being polluted airlines could argue that it is not their duty and so why should they be forced the pay the full social cost.The problem of corporate social responsibility then arises this would argue the beak for the pollution lies with the airlines as they provide a chunk of air pollution. later undertaking a wide-ranging consultation of stakeholders and the public and analysing several types of market-based solutions, the Commission concluded that bringing aviation into the EU Emissions Trading System (EU ETS) would be the most cost-efficient and environmentally effective option for controlling aviation emissions. European Commission Climate Action, 2011 Any form of taxation will not work as these measures have failed to work in the reduction of emissions. genius example is the car industry where despite the heavy taxes the number of car owners across Europe continues to increase. Taxation on air transport will not have any effect on the emitence of greenhouse effects but will quite have an adverse effect on the growth within the European area. Also governments putting emphasis on the a viation industry which produces less than 2% of EU emissions means that the main reason for intervention is not an environmental factor. It is unclear as to the reason why air transport is a priority in the ETS instead of larger green house gas producing industry.The impact is so small that if household heating had to improve by 15%, it would cancel out the effect of the aviation industry. Ethically, government intervention was the right way front as leaving it to the private companies would not have proved effective as their aim is to keep private costs to a minimum. Market failure is bad for your health but social injustice is worse. Oxford Journals. 32 (1), p12-13. It is easyJets duty to abide by any government law. A number of recommendations have been put below as to how the company can best prosper with these new conventions. Appendix ILow Cost Characteristics Low cost airliners offer a pricing strategy on a first come first serve basis and this means at the passengers who b ook earlier pay less. Smith, (No Date) Passenger service costs are lower because there is no free food. Sales and qualification and commission cost lower because virtually everything is done online. The number of faculty on board an aircraft is reduced as they are not mandatory due to not serving food. Smith, (No Date) Appendix J Currently the aviation industry is not include in any of the 12,000 facilities that are included in the trading scheme.However, from the start of 2012 there will be a cap on the CO2 emissions from all international flights that arrive or depart from any EU airport. air lanes will receive the same permits and caps that the introductory 12,000 facilities received. These firms will then enter the carbon market where they can buy or sell permits, whichever maybe the case. If the company finds itself with an excess amount of permits they can choose to put them into the market or to simply keep them to cover future emissions. If the airline is in need of more permits they will need to enter the market and purchase the number of permits they require.The firm should also consider investing in alternative technology that will reduce their emissions efficiently. They can also earn emission credits by taking part in the clean development mechanism. European Commission Climate Action, 2011 The aviation industry has begun to explore new fuels e. g. Bio-fuels. It is out of necessity that new fuels are being researched as these are considers more greener compared to oil. There is currently research into using algae as a bio fuel and into other techniques to make aircrafts more environmentally friendly.Some improvements have already been made through the industry reduced fuel consumption and passenger-friendly cabins Commercial Aviation Report, 2007. Appendix K rock oil has always been a finite resource it was always known it will run out at one time or another. As we approach this time the cost of oil and fuel for the aviation industry will in crease as oil becomes rarer. In this time it will be budget airlines that prevail and will continue to operate inappropriate of oil prices. It is their fundamental principle that will pull them through the rising oil prices, to deliver the basic minimum a consumer needs and to charge extra for add-ons.Budget airlines have a way of finding ways to cut costs in non essential places, they will continue this drill and will eventually gain the competitive advantage over others in the industry. For those companies who exceed their permit limit will have to pay a fine, to give up or purchase extra permits to cover their emissions. John pusher and Amrit MacIntyre, 2008 Appendix L * The Emirates A380 burns up to 20% less fuel per seat than other large aircraft * This is the most significant advancement in reducing fuel burn and emissions in four decades. Low fuel burn means lower C02 emissions. The A380 produces less than 75g of C02 per passenger kilometre, intimately half of the Europe an target for cars manufactured in 2008. * Emirates A380s will progressively feature digital inflight magazines, entertainment guides and shopping catalogues, saving 2kg per seat or almost one tonne per aircraft. * Emirates A380s, which offers more space per passenger in all classes, will also meet ICAOs gaseous emissions standards by a substantial margin. * We will comfortably meet current Stage trio and proposed Stage Four noise level standards. Our new Emirates A380 maintenance facilities in Dubai are state of the art, efficient buildings. * A380s feature lightweight materials that account for 25% of its structure. * Our emissions components such as NOx will be well under the regulated cap four rule * Emirates is working with Airbus to further reduce weight of our future A380s. * Larger aircraft mean less take-off and landings (in passenger terms, some Emirates A380 versions would be the equivalent of flying up to seven smaller aircraft types). Emirates come fleet age is less than half that of many European airlines, meaning newer technology and efficiency breakthroughs characterise our aircraft. Appendix M The aviation industry has begun to explore new fuels e. g. Bio-fuels. It is out of necessity that new fuels are being researched as oil is a limited resource. There is currently research into using algae as a bio fuel and into other techniques to make aircrafts more environmentally friendly. Some improvements have already been made through the industry reduced fuel consumption and passenger-friendly cabins Commercial Aviation Report, 2007.Appendix N Graph Adopted from The Economist. (2011). Budget airlines In the Cheap Seats. With traffic expected to sluggish, low-cost air carriers are getting fancy, p1. The graphical illustration shows the number of passengers carried by budget airlines are growing but its set to autumn from 14% in 2009 2010 to 6% by 2013 The Economist, 2011. With fewer consumers entering the market, companies have to think of o ther ways to make money from existing customers. easyJet have approached this by increasing frequency on their routes and using more primary airports.Customer satisfaction will now become an even greater part of the aviation industry with features such as priority embarkation and loyalty schemes, also the trivia of losing luggage should become a thing of past. The low-cost carrier market used to be about agile growth and uncomplicated strategies, says Keith McMullan, of Aviation Economics, a consultancy. Now it is about slow growth and complicated strategies. The Economist, 2011 Reference List 1. Dr Dixon, P. (2008) , Future of budget airlines, Online Video open http//www. youtube. com/watch? v=BVTxPbr_UAc. nett accesses 18/03/2011. 2. Economist. 2011). Budget airlines In the cheap seats. Available http//www. economist. com/node/18010533? story_id=18010533. Last accessed 03/03. 2011. 3. Elbling, T. (2010). What are Externalities?. Finance and Development. 47 (4), p2. 4. Ellerma n, D and Joskow, P. (2008). The European Unions Trading Scheme in Perspective, p1-3. 5. Emirates. (2011). Emirates greener, cleaner, quieter A380s take to the skies. Available http//www. theemiratesgroup. com/english/our-vision-values/emirates-a380. aspx. Last accessed 10/03/2011. 6. European Commission Climate Action. (2011). 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