For a while already, the airline industry is suffering. This hits not only the traditional full service airlines, but also the low-cost carriers that challenge them. This has led to various profitably warnings, bankruptcies and industry-wide drops of share price over the last years.
As Europe’s most dominant low-cost carriers, also easyJet and Ryanair suffer. Fuel prices, drone issues, Brexit and the like, have made their lives difficult too. Nevertheless, for the biggest part, their stories so far are success stories. Their vigorous low-price and low-cost orientation has led them to grow significantly over the past decade, often at the expense of traditional airlines and other low-cost carriers. In a relatively short period of time they have gained a strong position and their number of destinations, flights and passengers keep on growing year over year.
Their success can be explained using two words: focus and alignment. Both airlines have an outspoken price-orientation in their offerings and have aligned their entire companies to realize that price-orientation as effectively and efficiently as they can. As a result, they offer something that customers appreciate (a low ticket price) and that other airlines have a hard time copying (low operational costs).
This January’s Q1 results by easyJet and recent profitability warnings by Ryanair, though, put up the question how far a company can go in focusing and aligning their business on offering a low price. More generally, it begs the question how focused and aligned a company can be on just one value orientation (in this case price) while ignoring other value orientations (quality, delivery and flexibility). Have they gone too far perhaps?
When we compare easyJet and Rynair, the latter has clearly the most outspoken price orientation of the two. Ryanair goes at length to lower their costs and prices and pride themselves on being the lowest fare/lowest cost carrier in Europe. You just have to look at their FY19 half year results to see this. It breathes lowest fare/lowest cost on every page and slide.
In the light of January’s results, the question is how far can Ryanair (or any other company) go in this. The recent strikes of Ryanair cabin crew and pilots show that personnel is on the edge of no longer accepting further cost reduction measures that concern them. Furthermore, over the last half year, Ryanair’s share price development is amongst the worst in the industry.
Their less extreme rival, easyJet, on the other hand, seems to be still doing fine. They suffered quite substantially from the Gatwick drone issue and their load factor (% of capacity filled) has slightly dropped, but the number of passengers has grown 15.1 % between Q1 of 2018 and 2019, their total revenues with 13.7 % and their trading outlook for 2019 remains positive. So, all in all they seem in better shape now than Ryanair.
Of course, no one can predict the future and who knows what tricks Ryanair’s O’Leary still has up his sleeve. And there may be various other explanations that can be given. But this quarter’s figures, combined with the resistance shown by employees are an indicator that you can also go too far in focusing and aligning your business around a single value orientation.
In good old Michael Porter’s terms, you don’t want to be “stuck in the middle” by having a non-differentiating mixed offering that no one gets. But you also don’t want to go too far from the middle, end up beyond the edge of the cliff and drop into the ocean.
There is one important caveat. Or actually two. More extreme cost cutting and price reductions are still possible if it can be done without hurting the two main stakeholders here: customers and employees. If cost-cutting can be done without worsening employees’ working conditions and without making traveling even more unpleasant, then there is still room for further lowering costs and prices. In other words, as long as no one suffers from it, Ryanair and easyJet, as well as any other company within or outside the airline business can still go lower.
This post was published earlier here on my forbes.com page.
Image credit: Getty