Acquisition of EasyJet plc. by British Airways plc.

by

Sebastian Meyer

Semester 2, 2003/2004

1. Introduction 1

2. Major Strategy Change Proposal 1

2.1. Nature and Content 1

2.1.1. Reaffirmation of practical nature of proposal 1
2.1.2. Generic Basis of Competition 1
2.1.3. Strategic Direction and Risk/Reward 2
2.1.4. Implementation Method 2

2.2. Justification 3

2.2.1. Suitability 3
2.2.2. Acceptability 4
2.2.3. Feasibility 5

3. Implementation Plan 6

4. Strategic Management Process 6

4.1. Current Strategy Process 6
4.2. Reasoned Proposals for Change in Process 7

Bibliography 9

Appendix 10

1. Introduction

The present assignment should formulate a proposal concerning a major strategy change of British Airways, which will be in our case the acquisition of the low-cost carrier Easy Jet. After the formulation of the major strategy change proposal, this work provides an implementation plan as well as a strategic management plan.

2. Major Strategy Change Proposal

2.1. Nature and Content

2.1.1. Reaffirmation of practical nature of proposal

In recent years, the number of low-cost carriers in Europe has increased noticeable. Especially the market for short haul flights within Europe has enlarged so that there are today approximately 57 providers competing for customers (www.discountairfares.com). Predictions of experts suggest that in the near future there will be a collapse in the low-cost airline business and only the biggest and strongest will be able to survive. The proposal of the author is that British Airways (BA) takes over the London based low-cost airline Easy Jet (EJ) in order to participate in this fast growing market. In this way, BA will be able to reparate its mistake from August 2002 as Go Air was sold to Easy Jet. Even after the collapse of the low-cost line of business, BA’s low-priced subsidiary will be capable to increase its market share and to remain competitive.

2.1.2. Generic Basis of Competition

Michael Porter developed the ‘Generic Strategies’, which provide three main options of selecting a strategy fitting for each company. Figure 1 illustrates the different strategy alternatives, which are cost leadership, differentiation, cost focus and differentiation focus which can be recognized as one strategy. Regarding our case, the author decided to select the ‘Cost Focus’ strategy. For the case of BA and EJ, we have to say that the ‘Cost Leadership’ strategy would not be suitable. It is obvious that low-cost airlines offer low fares. Consequently, the costs have to be reduced in order to achieve profit. However, the reputation of BA can be described as excellent. This is the reason why the new BA low-cost airline will have to have higher standards than its competitors. Furthermore, Easy Jet will remain an own brand in order not to influence BA’s image negatively. Nevertheless, the new airline will be a low-cost airline with focus on costs even if it does not hold the cost leadership. The ‘Differentiation’ as well as the ‘Differentiation Focus’ strategy will not be taken into consideration due to the fact that low-cost airlines do not have a large possibility to differentiate itself from others by better in-flight service.

2.1.3. Strategic Direction and Risk/Reward

The strategic direction and risk/reward can be identified and explained with the aid of the well-known Product-Market-Matrix by Ansoff, which is from 1965 but still state-of-the-art. The aim of this matrix is to systemise and to organize different product and market strategies. These four strategies are identified as market penetration, product development, market development and diversification (Figure 2). For our case, we can state that BA enters the low-cost airline market, which is a new line of business. Furthermore, the product BA is operating with is still aircraft. Consequently, we can classify the strategic direction of BA in the Ansoff Matrix to the position bottom left, which is identified as market development.
As a result of the new market the airline enters and the associated problems that can occur the risk can be seen as medium to high. The expected rewards of these strategies are on the one hand the development of new markets, the attraction of new target groups and the opening of new channels of distribution. On the other hand, the possibility exists of exploiting synergy potential (Welge 1999 p. 436).

2.1.4. Implementation Method

For the implementation of the new strategy the author chose the Merger&Acquisition (M&A) method (Figure 3). For our case the author is proposing an acquisition of Easy Jet by British Airways in order to obtain full control of the company. Obviously, an acquisition which is not well executed might fail and cause damages at both companies concerned. Acquisition is a tried and tested method to get immediate access to new products or markets. Furthermore, acquisitions can be seen as a ‘low-cost’ alternative to organic growth if the share price of the target company is lower than the estimated company value. As a third advantage, we can state that the acquiring company takes over the target firm as well as its ‘human capital’- the company’s employees (Picot 2002 p. 309). Regarding our case, this clarifies that British Airways is capable of obtaining the market specific know how of Easy Jet’s staff which will be valuable in order to stay competitive in the low-cost carrier market. On the other side risks exist like the possible problem of integrating the new company. Nevertheless, the brand Easy Jet will be sustained and departments for purchasing, accounting and perhaps services will be combined to realize synergetic effects. Besides, a further disadvantage for acquisitions can be the long period after the acquisition until the shareholder value increases (CS II Lecture 19.04.2004).

2.2. Justification

2.2.1. Suitability

[...]