Acquisition of EasyJet plc. by British Airways plc.

Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

List of Tables/Figures:

Table 1 Consolidated Cash Flow Statement Easy Jet Table 2 Consolidated Cash Flow Statement British Airways Table 3 Consolidated Profit and Loss Account Easy Jet Table 4 Consolidated Profit and Loss Account British Airways Table 5 Gantt Chart

Figure 1 Porter’s Generic Strategies Figure 2 Ansoff’s Product-Market-Matrix Figure 3 Expansion method matrix Figure 4 Testing Suitability Figure 5 Industry/product life cycle Figure 6 The BCG Business Matrix Figure 7 The Prescriptive Strategy Process Figure 8 General Nature of Environment by Emery and Tryst Figure 9 The Emergent Strategy Process

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Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

List of Tables and Figures II

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

Bibliography 9

Appendix 10

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Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

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

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Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

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

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Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

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

Due to the major strategy change with the entry in the low-cost segment of the airline market BA now focuses on different objectives as well as on its core business. The main objective of BA can be seen as increasing its profit after the sudden shocks of September 11 ^th 2001. Obviously, by the acquisition of Easy Jet BA will be able to enlarge its profit in the middle and long term. Figure 4 identifies five different options testing the suitability of the strategy. We want to examine the life cycle analysis, the competitive positioning and the portfolio analysis. Industry Life Cycle analysis

With regard to the industry life cycle (Figure 5), we can state that the low-cost carrier market is situated at the moment still in the growth stage but not far away from maturity. This becomes obvious when we keep in mind that there are approximately 57 low-cost carriers competing in the European market. Furthermore, the beginning of the growth stage of the low-cost airline market can be seen in 1997 after the complete deregulation of the European market.

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Corporate Strategy & Operations II Acquisition of EasyJet by British Airways

Competitive Positioning

With assistance of the industry life cycle, we can state that the competitive positioning of Easy Jet can be perceived as viable due to the actual growth in this market. Nevertheless, the pricing of the fares has to be comparable to those of its competitors and it has to be clarified that Easy Jet is a low-cost carrier offering no extra in-flight service. Portfolio Analysis

‘The Boston Consulting Group Business Matrix’ (Figure 6) provides the opportunity to identify the market share of the company and the growth rate of the market. Regarding Easy Jet’s low-cost market, we can say that the market is still growing. Moreover, with its fleet of 72 aircraft Easy Jet is serving 153 routes within Europe (www.easyjet.com). This massive penetration is associated with growing passenger numbers - up to 18.6% between September 2002 and September 2003 - and a relatively high market share (www.businessweekly.co.uk). Consequently, Easy Jet can be seen as a ‘Star’. Nonetheless, Easy Jet has to increase its market share to be converted into a ‘Cash Cow’ after the growth rate of the market declines.

2.2.2. Acceptability

As major criteria for acceptability, we can name the business risk and the attractiveness to stakeholders. The most essential examination of the business risk is the cash flow analysis (Lynch 2003 p. 514). Cash Flow analysis

With regard to Table 1, we can state that EJ’s cash flow from operating activities decreased as well as the cash for the year. However, the main focus of attention should be the cash flow statement of the acquiring company. British Airways’ cash flow from operating activities recovered after the sudden shocks of September the 11 ^th 2001 (Table 2). Furthermore, the cash for the year increased significantly from £ 4 million in 2002 to £ 158 million one year later. Break Even analysis

The second examination of the business risk is the break-even analysis. In contrast to the cash flow analysis, the main focus is now directed to the acquisition’s target, Easy Jet. Lowcost airlines like Easy Jet as well as full service airlines on short haul flights achieve their break-even load factor at 70% (www.bbj.hu). In 2003, Easy Jet’s load factor was 84.1%

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