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In the News

Brexit means - low-cost long-haul strategy?

Penny Brooks

30th March 2017

You may be depressed by the triggering of Article 50 today, or you may be celebrating. One thing is clear; businesses now need to look at wider alternatives than easy access to the free market of the EU to gain earnings.

Low cost long haul - a leveller?

Arguably, the Free Market aided and abetted the stunning growth of the low-cost airline, since EasyJet took off in 1995. Their market has been based very much on the European short-haul flight - of course, they fly to destinations outside the EU, but the vast majority of flights with European budget airlines is within the European Union. Last year Ryanair overtook Lufthansa to become Europe's biggest airline by passenger numbers. Free movement of capital, trade and people and EU competition laws must have helped to establish the market for these businesses.

So, it is interesting that IAG is now looking for business opportunities in the wider world. IAG owns British Airways, Iberia and Aer Lingus, and has decided to launch a low-cost long-haul airline called Level, which will offer 'budget' flights to four destinations including Los Angeles and Buenos Aires at "even more affordable" prices from June. Level will operate out of Barcelona. As reported on the BBC website, IAG says it sold 52,000 tickets in the 24 hours after Level's website went live last week.

This should be good news for consumers as the budget airlines have proved "very stiff competition for traditional airlines", according to the travel agents' body Abta. But Abta also points out that passengers may be less willing to put up with a cramped cabin for flights that take many hours - as well as paying extra for food and checked baggage.

Time will tell. I suspect that, 20 years ago, may pundits thought that cramped cabin space, and paying extra for food and checked baggage, on a flight to Greece or Spain would never catch on. In the same way that they never thought that the idea of Prague and Vilnius as stag party destinations was possible.

The article linked here covers a huge range of business strategy issues, and is a good one to give to students, asking them to list the topics they could use it to illustrate. They could start by looking at the nature of competition in this market, the quiet success of Norwegian airlines, and then using Porter's generic strategies to analyse the difficult position of British Airways as it tries to decide whether it is a low-cost mass-carrier airline, or a more differentiated business for customers who have certain expectations of what the service levels should be, which may no longer be realistic. They might go on to assess whether it is a good idea for IAG to use different branding for Level, their new low-cost long-haul baby, and then the impact of technology in this market, with the arrival of Boeing's 787 Dreamliner in late 2011 described as a 'gamechanger'.

Plenty here to distract us from the endless imponderables of Brexit....

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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