European Management Journal Vol. 17, No. 1, pp. 20–38, 1999
Ó 1999 Elsevier Science Ltd. All rights reservedPergamon
Printed in Great Britain
0263-2373/99 $19.00 1 0.00PII: S0263-2373(98)00059-0
Case Study
easyJet’s $500 Million
Gamble
DON SULL, London Business School, and Commentators, Constantinos Markides,
Walter Kuemmerle, Luis Cabral.
This Case Study details the rapid growth of easyJet
which started operations in November 1995 from
London’s Luton airport. In two years, it was widely
regarded as the model low-cost European airline
and a strong competitor to flag carriers. The com-
pany has clearly identifiable operational and mar-
keting characteristics, e.g. one type of aircraft,
point-to-point short-haul travel, no in-flight meals,
rapid turnaround time, very high aircraft utiliz-
ation, direct sales, cost-conscious customer seg-
ments and extensive sub-contracting.
easyJet’s managers identified three of its nearest
low-cost competitors and the strategy of each of
these airlines is detailed in the Case Study. But
easyJet also experienced direct
retaliation from large flag car-
riers like KLM and British Air-
ways (Go). These challenges
faced easyJet’s owner,
Stelios
European Management Journal Vol 17 No 1 February 199920
Haji-ioannou, as he signed a $500m contract with
Boeing in July 1997 to purchase 12 brand new 737s.
The Case is followed by critical analysis from three
Commentators in the field. ª 1999 Elsevier Science
Ltd. All rights reserved
It was July 1997, and Stelios Haji-ioannou — owner
and chairman of easyJet — glanced at his $500m con-
tract with Boeing to purchase 12 brand new 737s. As
he signed the contract, Stelios steadied his shaking
hand. The words of Richard Branson, chairman of
Virgin Atlantic airline, flashed through his mind: ‘the
safest way to become a millionaire is to start as a
billionaire and invest in the airline industry.’
With the Boeing contract, signed before easyJet
reached its second anniversary, Stelios (as he was
called by everyone) committed to triple the size of
easyJet’s fully-owned fleet from six to 18 airplanes in
EASYJET’S $500 MILLION GAMBLE
the span of two years. When easyJet was launched
with a party in London’s Planet Hollywood two
years earlier, no one had predicted the company’s
rapid growth. In its second year of existence, easyJet
was widely regarded as the model low-cost Euro-
pean airline and had helped shake-up the once cozy
European airline industry. With more than two
million passengers, ten European destinations
served, and sales of more than £60m in 1997 Stelios
had ample room for celebration. And yet several
challenges loomed.
Turbulence in the Airline Industry
Historically, the European airline industry had been
heavily regulated by individual countries to protect
their own national carriers, called flag-carriers. These
flag-carriers, many of which were State-owned,
dominated domestic travel in their national markets.
Despite significant government subsidies, most flag-
carriers accumulated losses due to high-cost struc-
Table 1 Financial Performance of Major European Flag-carriers
Sales (million$) 1996 1995 1994 1993 1992
British Airways $14,043 $13,036 $12,057 $10,589 $9350
Lufthansa 12,551 11,817 11,321 10,670 10,435
Air France 7656 7132 11,059 9170 n/a
KLM 5024 4625 4456 4205 3988
SAS 4667 4688 4464 4105 3181
Alitalia 4373 4325 4051 3425 3149
Swissair 3497 3333 3327 3534 3604
Iberia 3081 2907 2801 2720 2733
Pre-tax profit/(loss) (million$)
British Airways $1075 $983 $549 $506 $311
Lufthansa 377 416 220 (5) (171)
Air France 6 (142) (749) (1131) n/a
KLM 56 328 273 48 (282)
SAS 226 333 151 90 110
Alitalia (165) (190) (93) (175) (25)
Swissair 1 3 2 5 14
Iberia 116 41 (242) (363) (252)
Profit margin (%)
British Airways 7.7 7.5 4.6 4.8 3.3
Lufthansa 3.0 3.5 1.9 0.0 (1.6)
Air France 0.1 (2.0) (6.8) (12.3) n/a
KLM 1.1 7.1 6.1 1.1 (7.1)
SAS 4.9 7.1 3.4 2.2 3.5
Alitalia (3.8) (4.4) (2.3) (5.1) (0.8)
Swissair 0.0 0.1 0.1 0.1 0.4
Iberia 3.8 1.4 (8.6) (13.3) (9.2)
British Airways, KLM and Air France close the financial year in March, so their calendar year figures are those of the following
March (e.g. March 1997 for 1996 figures).
SAS, Alitalia and Iberia accounts are unconsolidated, while all others are consolidated.
Swissair figures are for Swissair Ltd only, not the parent company SAir Group.
The exchange rates used were those applicable on 27 March 1998 (e.g. £/$ 5 1.68, DM/$ 5 0.55).
European Management Journal Vol 17 No 1 February 1999 21
tures and operational inefficiencies. Even in 1996,
after several years of buoyant demand, most flag car-
riers provided disappointing returns (Table 1). The
flag carriers’ strong position had historically deterred
new entrants, and there existed very few inde-
pendent scheduled airlines, apart from charter-flight
operators which catered to the needs of seasonal leis-
ure travelers.
During the late 1980s the European Union (EU)
initiated a liberalization program to increase compe-
tition in the European skies, with major regulatory
changes beginning in 1992. By April 1997, any EU
carrier was allowed to provide a passenger service
without restriction in any domestic route of an EU
member-State. This liberalization was modeled after
industry deregulation initiated in the US by the 1978
Airline Deregulation Act. The US deregulation had
attracted several hundred start-up airlines, but only
two of the airlines founded in the 1978–92 period
were still flying in 1997. European deregulation also
opened the door to new entrants, and approximately
80 new airlines entered the market in 1995 and 1996
EASYJET’S $500 MILLION GAMBLE
alone. Of the 56 airlines launched in 1995, 17 went
bankrupt in their first year of operations.
Industry experts predicted that deregulation would
spawn fewer new competitors in Europe than lib-
eralization had in the US. Potential low-cost entrants
faced significant legal obstacles to gaining regulatory
approval from the Civil Aviation Authority (CAA),
and also incurred 40 per cent higher costs on average
than their US counterparts, due to higher airport
charges and relatively inflexible labor conditions. As
a result, low-cost competitors were slower to make
inroads along European routes than they had been
in the US. A 1996 EU report examining the impact of
airline deregulation found that only 6 per cent of all
routes within the EU were served by more than two
airlines, with 30 per cent served just by two and 64
per cent still in monopoly status. easyJet and other
low cost start-ups, however, planned to introduce
competition along lucrative European routes.
Birth of an Airline
Stelios, 31, was the second son of Lukas Haji-ioannou
a legendary Greek-Cypriot shipping tycoon. Lukas,
who came from humble beginnings, began his career
trading raw materials in Saudi Arabia, before moving
to Athens to enter the shipping industry in the late
1950s. During a world-wide shipping crisis in the
1980s, Lukas accumulated a fleet of 52 super-tank-
ers — then the largest such fleet in the world —
which he later sold at significantly higher prices. Ste-
lios, who grew up in Athens, moved to London in
1984 to obtain a Bachelor Degree from London School
of Economics and a Master in Shipping from City
University Business School. Upon his return to
Athens, Stelios joined the family shipping business,
and at the age of 25, created his own specialized
tanker company, Stelmar, with a fleet of five tankers.
Stelios’ first interest in the airline industry was
almost accidental. In May 1994, on board an Athens –
London flight of a Virgin Atlantic franchisee, he was
approached by a shareholder in the franchise who
tried to persuade him to invest in the company.
Although Stelios decided not to invest in the com-
pany (which soon after went bankrupt), he remained
intrigued by the idea of a European low-cost airline.
It was not until he flew on Southwest Airlines — a
successful low-cost competitor in the US — that
Stelios felt ‘he had found the right concept’ for a
European airline. Stelios intensively researched
Southwest, meeting with founder and CEO Herb Kel-
leher and buying 250 copies of Nuts — a book docu-
menting Southwest’s success — for distribution to
potential employees and customers. In the summer
of 1995, Stelios presented a business plan for a low-
cost European airline to his father, who was won
over by the idea and invested £5m in the venture. ‘If I
European Management Journal Vol 17 No 1 February 199922
didn’t bring the concept to Europe,’ Stelios explained,
‘someone else would.’
easyJet’s operations clearly mirrored the model pion-
eered by Herb Kelleher at Southwest Airlines: one
type of aircraft, point-to-point short-haul travel, no
in-flight meals, rapid turnaround time and very high
aircraft utilization. This concept promised significant
cost savings relative to flag carriers (Table 2). How-
ever, easyJet’s founder modified the model to benefit
from Southwest’s experience:
‘The main reason for these modifications was that Southw-
est had been in the business for 25 years whereas I was
starting from a clean piece of paper. You have better
opportunities to do things differently if you start from
scratch.’
For instance, Stelios completely avoided travel
agents, and relied exclusively on direct sales, in con-
trast to Southwest which derives 60 per cent of its
revenue through travel agents. Stelios also designed
easyJet to completely eliminate tickets. Stelios
Table 2 Cost Comparison Between a Flag-carrier
and a Low-cost Airline in Europe (Example of Lon-
don – Paris Route)
Cost item (£) Flag- Low-cost
carrier airline
1. Ticket sales costs £3.50 £0.80
2. In-flight service costs £1.30 £0.00
3. Pilots and cabin crew costs £4.00 £1.50
4. Fuel, maintenance, insurance £6.00 £7.50
5. ‘En route’ charges £1.00 £1.00
6. Airport charges £9.50 £7.00
7. Aircraft rentals £7.80 £3.00
8. Overhead costs £17.00 £5.00
Total costs £50.10 £25.80
Cost assumptions
1. Include travel agent commissions, reservation agents com-
missions and/or computer reservation systems. Flag-carrier
sells 80 per cent of tickets through travel-agents, low-cost air-
line 0 per cent.
2. Include cost of meal and other in-flight amenities.
3. Include salaries and benefits of pilots and air hostesses.
4. Flag carriers enjoy economies of scale and use their superior
purchasing power.
5. Include costs of navigation etc. which are identical for all air-
lines.
6. Flag-carrier flies main airports (Heathrow – Orly); low-cost
airline flies secondary airports (Stansted – Beauvais).
7. Flag-carrier leases new Boeing 747-400 aircraft; low-cost air-
line leases old Boeing 737-200.
8. Estimation of overhead costs is based (a) for the flag-carrier
on allocating a proportion of BA overheads to the European
region and (b) for the low-cost airline on Ryanair’s total over-
heads.
General assumption
Load factor (68 per cemt) and aircraft utilization is the same
for both airlines.
Of the 56 airlines
launched in 1995, 17 went
bankrupt in their first year
EASYJET’S $500 MILLION GAMBLE
decided to fly easyJet’s 737s using their maximum
seat capacity of 148 seats. While Southwest offers
drinks and its famous peanuts for free, Stelios
reckoned that in-flight frills add very little to passen-
gers’ satisfaction and therefore developed the
‘nothing for free, all for sale’ idea. easyJet passengers
even paid for soft drinks and snacks — only the in-
flight magazine was free. Stelios summarized his
philosophy: ‘When someone is on a bus he doesn’t
expect any free lunch… I couldn’t see why we cannot
educate our customers to expect no frills on board.’
Stelios and Managing Director Ray Webster also tried
to recreate Southwest’s culture of teamwork and
cooperation. Southwest pilots would often help cabin
crew clean up an aircraft to ensure on-time takeoff.
Stelios and Ray believed the easyJet’s operational
model could be copied, but that their corporate cul-
ture could create a sustainable advantage that com-
petitors would have difficulty emulating.
easyJet Takes Off
easyJet started operations in November 1995 from
London’s Luton Airport, with two leased aircraft, 16
teenagers as reservation agents
and another company’s
operating license. Stelios
recalled the company’s start-
up.
‘I was trying to start an airline
without anybody who knew any-
thing about airlines! On day one, it
was me and my Finance director — everybody else was a
subcontractor! We were the ultimate virtual airline!’
Stelios launched an extensive PR and advertising
campaign with the slogan: ‘Fly to Scotland for the
price of a pair of jeans!’ easyJet’s £29 one-way fare
for the 50 minute flight from London to Glasgow cost
a fraction of the price charged by British Airways
(BA) on the same route and was significantly cheaper
than the rail fare. Most industry experts initially dis-
missed easyJet: ‘Europe is not ready for the peanut
flight,’ one senior BA executive predicted. Despite
initial skepticism, the first easyJet flight was full, and
the company soon added two more destinations in
Scotland — Edinburgh and Aberdeen. The routes
between London and these three Scottish cities rep-
resented almost 30 per cent of the 14 million domestic
UK passengers in 1995, allowing easyJet to rapidly
reach critical scale.
To support easyJet’s rapid growth, Stelios recruited
several seasoned airline executives, including Ray
Webster — formerly General Manager Strategic Plan-
ning in Air New Zealand — who joined easyJet as
Managing Director with full responsibility for the
day-to-day management of the airline. easyJet also
European Management Journal Vol 17 No 1 February 1999 23
hired several young professionals who were enthusi-
astic about the company’s concept. Stelios and his
family invested an additional £50m in the following
two years to fuel expansion. At the end of 1996
easyJet purchased four second-hand aircraft to
replace its fleet of leased aircraft.
easyJet in 1998
By early 1998, easyJet owned a fleet of six Boeing 737-
300s, each of which was emblazoned with easyJet’s
phone number 0900 292929 painted in bright orange,
and flew 12 routes in five countries (Table 3).
easyJet’s headquarters were in ‘easyLand’ a bright
orange airplane hangar adjacent to the runway of
London’s Luton airport.
easyJet’s management team occupied two Spartan
rooms opposite the reservation center. Ray Webster
and Stelios sat in one corner of the first room —
dubbed ‘commercial,’ which they shared with mar-
keting, finance, business development and IT staff.
The other room, called ‘operations’ was occupied by
the flight and cabin crew managers, the chief pilot,
the quality and service standards manager, flight
operations staff and two engineers. Fourteen easyJet
managers reported directly to
Ray Webster, who reported to
Stelios (Figure 1). The easyJet
staff consisted of 45 managers
and administrators, 90 cabin
crew and pilots, and 133 reser-
vation agents.
Until early 1998 Luton airport served as easyJet’s
exclusive hub. Stelios initially chose the United King-
dom as easyJet’s base because it offered lower labor
costs and more sophisticated consumers than most
Continental European countries, and he selected
Luton airport as easyJet’s hub because it was close to
London (30 minutes from central London by train)
and charged lower airport fees than London’s major
airports — Heathrow and Gatwick. Although
Luton’s convenient location and low costs had con-
tributed to easyJet’s initial success, the airline’s
Table 3 easyJet Destinations
London (Luton) to: Glasgow
Edinburgh
Inverness
Amsterdam
Barcelona
Nice
Palma
Geneva
Liverpool to: Nice
Amsterdam
EASYJET’S $500 MILLION GAMBLE
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European Management Journal Vol 17 No 1 February 199924
EASYJET’S $500 MILLION GAMBLE
demand was beginning to outstrip Luton’s capacity.
In early 1998 easyJet opened a second hub in Liver-
pool, and Business Development Manager Liz Savage
noted ‘we could not fly more than seven to eight
planes from Luton in the foreseeable future.’
easyJet defined its target customers as ‘people who
pay for travel from their own pockets.’ In particular,
easyJet targeted three cost-conscious customer seg-
ments: travelers visiting relatives, leisure travelers
making brief trips, as well as entrepreneurs and man-
agers working for small firms. While easyJet gener-
ally ignored the large market of business travelers, it
did serve companies such as Vauxhall, Tesco, and
ICL, which were located near the Luton airport. In
addition, the company targeted route-specific cus-
tomer segments such as English teachers in Spain,
and the large British expatriate community in south-
ern France.
Because easyJet completely eschewed travel agents,
the company relied heavily on a variety of alternative
marketing channels to raise awareness among poten-
tial customers. The company spent up to 8 per cent
of revenues on newspaper, magazine, and radio
advertising to reach customers directly. The company
also sponsored special promotions, such as providing
a dedicated phone line for fans of London’s Totten-
ham Hotspur football (soccer) team. The company
also actively sought public relations opportunities.
‘Whenever there is an opportunity to make some
news,’ Marketing Director Tony Anderson explained,
‘we do it.’ easyJet’s marketing focused on its low
fares and punctuality, emphasizing both its low
prices and impressive record of on-time departure.
stelios summarized easyJet’s marketing strategy, ‘we
make limited promises, but make sure we consist-
ently deliver on them.’
easyJet’s processes for buying tickets, checking in,
and boarding were streamlined to minimize com-
plexity for both customers and easyJet staff. To buy
a ticket, customers called a local call-rate number,
and were connected to one of easyJet’s reservation
agents located in a central call center in easyLand.
Calls from non-UK customers were handled by
Spanish-, French-, or Dutch-speaking reservation
agents in Luton. Reservation agents were paid solely
on commission (£0.80 per seat sold), and could expect
to sell 60 to 90 seats in an average eight hour shift.
All customers were required to pay by credit card,
and received a six character booking reference num-
ber. This booking reference was the only information
the passengers needed to board the plane, and no
ticket was sent to them.
Passengers were requested to arrive at the airport one
hour before departure, versus the two hours rec-
ommended by most other airlines. When a passenger
arrived, easyJet ground agents simply confirmed the
passenger’s name and reference number, checked
their bags, and gave them a plastic boarding card,
which numbered from 1 to 148. There were no preas-
European Management Journal Vol 17 No 1 February 1999 25
signed seats, and passengers boarded in order of
their card number.
Sub-Contracting Entrepreneurship
In a typical airport where easyJet operates, as many
as half a dozen sub-contractors would be involved in
delivering the so-called ‘easyJet product’ (Figure 2).
easyJet confined its role in providing the planes, the
pilots and cabin-crew and managing marketing and
sales. Everything else — from the check-in procedure
to the on-site customer information desk — was
handled by sub-contractors. As a start-up with lim-
ited resources, an uncertain future and serious dis-
economies of scale, easyJet initially relied on sub-con-
tractors out of necessity. Even in early 1998, however,
after easyJet had acquired its own operating certifi-
cate and attained the size at which most airlines bring
operations in-house, Stelios insisted as a matter of
principle on employing as many sub-contractors as
possible:
‘We believe relationships with entrepreneurial companies
out there to make a profit, are more efficient than having
a bunch of employees yourself. By creating various profit
centers, large companies are just trying to emulate the sub-
contracting system. But our sub-contractors are real profit-
centers with real CEOs trying to make real money! If they
are not good enough they will be out of business. Market
forces eliminate any inefficiencies in the sub-contracting
system!’
easyJet’s ability to meet its operational targets, such
as ticketless check-in, the 20 minute turnaround, and
the safety and punctuality of the airline all critically
depended on the performance of sub-contractors.
easyJet managers accordingly devoted significant
time and energy to overseeing relationships with
subcontractors. Alan Marking, Chief Engineer,
explained:
‘Our role really is to manage contracts and transport
people. We do the cerebral activities, the sub-contractors
are the fingers, and the contract is the communication
Figure 2 easyJet Sub-contracting System — The
Luton Example
EASYJET’S $500 MILLION GAMBLE
down to the fingers. We don’t own the fingers, but we have
some control over them. Arrogantly speaking, we are the
thinkers, they are the doers.’
easyJet was generally satisfied with its suppliers, but
some periodic disappointments did arise. In one case
an aircraft was delivered late, at the very last hour for
a scheduled takeoff and flight personnel consistently
complained about their schedules, which were
arranged by an outside company.
easyJet had initiated a number of programs to
improve relationships with its suppliers. The com-
pany led regular workshops, role-reversal exercises,
and simulations with sub-contractors to clarify
easyJet’s objectives and expectations. In addition,
easyJet had designed an innovative system for evalu-
ating suppliers’ performance. Sub-contractors were
evaluated not only on quantitative criteria (e.g. per-
centage of on-time flights), but also on qualitative fac-
tors such as their understanding of the easyJet con-
cept. The results of these evaluations were
incorporated into a rigorous rating matrix, which was
then used to determine the suppliers’ compensation.
Marking noted:
‘I am trying very hard to convert the contract with Mon-
arch Engineering into a partnership agreement where they
want to work with us rather than just doing what the con-
tract says. We want them to understand our point of view,
but we can only expect them to do that if we understand
theirs… sometimes, however, you have to use the baseball
bat technique to achieve your objective.’
The Competition
In 1997, easyJet managers identified Debonair, Ryan-
air and Virgin Express as their three closest competi-
tors. Although all of these airlines offered low fares
for short-haul flights, each pursued its own variation
on the low-cost theme (Table 4). These four competi-
tors generally avoided head-to-head competition
with each other on routes, and most destinations
were served by only one low-cost airline (Table 5). A
few routes, such as London – Barcelona, however
were apparently large enough to bear more than a
single low cost carrier. In deciding whether to enter a
new route, the carriers estimated the route’s expected
profitability based on incumbent competitors’
(including trains and charter flights) offerings and
load factor, demand patterns and other information
on the possible destination. As all four rivals were
aggressively increasing their aircraft fleet (Figure 3),
they sought after to identify profitable new routes
and to serve them first. In contrast to easyJet, its three
low-cost competitors went public in 1997 and pub-
lished detailed financial accounts (see Table 6 for
each competitor’s 1996 financial performance and
Figure 4 for shareholder returns).
Debonair
Incorporated in England in October 1995, Debonair
Holdings was easyJet’s most visible competitor. Deb-
European Management Journal Vol 17 No 1 February 199926
onair used Luton airport as its main hub, and their
headquarters were located only 500 m from easy-
Land.
Debonair was founded by Franco Mancassola, a 58-
year-old American. Mancassola spent 25 years of his
career in the airline industry, rising through a series
of senior management positions in Continental Air-
lines, World Airways, Mid-Pacific Airlines and Dis-
covery Airways. Debonair commenced operations in
June 1996 under the simple philosophy of ‘lower
fares with minimal restrictions and no compromise
on comfort.’ Its first two leased aircraft served three
routes; from London Luton to Dusseldorf, Munich
and Barcelona. One month later, delivery of a third
aircraft allowed the airline to add Madrid and Newc-
astle to its network. During the following three
months Debonair continued its rapid expansion by
leasing two more aircraft to bring its fleet to five BAe
146-200 aircraft. The larger fleet size enabled the air-
line not only to fly to Copenhagen and Rome, but
also to take advantage of the EU’s April 1997 deregu-
lation and transport passengers within lucrative
foreign markets, such as Germany where Debonair
flew between Munich – Dusseldorf and Spain
(Madrid – Barcelona). Debonair’s rapid expansion
slowed in the first half of 1997, however, when man-
agement discontinued two routes (Luton – Newcastle
and Barcelona – Madrid) citing insufficient demand.
Debonair targeted business travelers, and attempted
to combine high levels of comfort and customer ser-
vice with low fares. ‘Our strategy differs substantially
from easyJet’s,’ Mancassola explained, ‘our approach
is low cost but definitely not no frills.’ In early 1998,
Debonair’s fleet consisted of seven Bae 146-200s,
which were considered the quietest passenger jets
made. The aircraft were configured with a single
class cabin, where all seats were separated by 330,
versus the 290 seat pitch which was the industry stan-
dard in economy class. Inexpensive fares, more leg-
room, and quiet jets were three of Debonair’s key
selling points to business travelers, who made up 58
per cent of the company’s passengers.
Debonair achieved the apparent paradox of low fares
and comfortable service by focusing on operational
efficiency. In particular, the airline concentrated on
point-to-point markets, operated a uniform fleet of
low-cost aircraft to minimize maintenance costs, con-
centrated service operations in the UK to minimize
labor and operating costs and sub-contracted func-
tions, such as maintenance and the check-in process.
Moreover, Debonair tried to achieve high levels of
aircraft utilization by operating its Bae 146s for
10 hours and 15 minutes a day on average, while BA
was operating its own Boeing 737 for only 7 hours
per day.
Debonair’s strategy emphasized rapid expansion
over short-term profitability. In fiscal year 1997, Deb-
onair, reported a pre-tax loss of £15.7m. Debonair
EASYJET’S $500 MILLION GAMBLE
Table 4 Comparison of the Four Low-cost Airlines (February 1998)
Airline Size of fleet and type of Capacity Selling method In-flight Hubs Destinations
aircraft per aircraft frills
easyJet 6 Boeing 737-300 148 seats Direct sales No Luton Scotland (4)*
Liverpool Amsterdam
Nice
Barcelona
Palma
Geneva
Debonair 7 BAe 146-200 96 seats Direct sales (38%) and Yes Luton Barcelona
Travel agents (62%) Munich Copenhagen
Rome Dusseldorf
Madrid
Ryanair 20 Boeing 737-200A 130 seats Travel Agents No Dublin Ireland (3)**
Stansted Glasgow
England (9)***
Brussels
Paris
Stockholm
Virgin Express 12 Boeing 737-300s 148 seats Travel agents No Brussels Heathrow
4 Boeing 737-400s 170 seats Rome Gatwick
Rome
Barcelona
Nice
Madrid
Copenhagen
Milan
*Destinations in Scotland are: Glasgow, Edinburgh, Aberdeen and Inverness.
**Destinations in Ireland are: Kerry, Cork and Knock.
***Destinations in England are: Leeds, Liverpool, Manchester, Birmingham, Luton, Cardiff, Bristol, Bournemouth and Gatwick.
executives attributed the loss to one-time startup
costs necessary to enter markets before rivals, and
forecasted a profit of £3m in 1998 and £16m in 1999.
‘We have moved ahead of deregulation to claim our
territory in Europe,’ Mancassola explained, ‘profits
will come soon.’ Half-year results for fiscal 1998,
however, failed to justify Mancassola’s optimism: in
early 1998 Debonair announced a pre-tax loss of
£5.5m for this period, attributed mainly to the
strength of Sterling and higher-than-expected adver-
tising expenses.
Ryanair
Operating a fleet of 19 owned Boeing 737-200A jet
aircraft, the Irish carrier Ryanair was considered by
many industry analysts the best-established Euro-
pean low-cost airline. Based in Dublin and London’s
Stansted airport, Ryanair offered over 100 scheduled
short-haul flights per day in late 1997, and served
nine locations in England, four in Ireland and Glas-
gow, Cardiff, Paris, Brussels and Stockholm.
In 1985 Ryanair began operations by offering full-fare
flights between Ireland and England. The company
European Management Journal Vol 17 No 1 February 1999 27
rapidly expanded its routes in the following six years
and enjoyed substantial growth in passenger volume
between 1985 and 1991. Despite its rapid growth,
Ryanair suffered consistent losses resulting from
poor cost control and inadequate information sys-
tems. In 1991 a new management team restructured
the company to compete as a low-fare, no-frills car-
rier. Management focused operations on a few key
routes, slashed fares to levels significantly below
those of competitors Aer Lingus and British Midland,
and introduced productivity-based pay for all staff,
including pilots and flight attendants. In 1994, Ryan-
air began standardizing its fleet by purchasing used
Boeing 737-200A aircraft to replace its leased fleet.
Ryanair’s low-cost service generated significant
demand growth in every route it entered after 1991,
and industry analysts dubbed this demand increase
the ‘Ryanair Effect.’ According to the International
Civil Aviation Organization, the number of sched-
uled airline passengers traveling between Dublin and
London, for example, increased from 1.7 million
passengers in 1991 to more than 3.3 million passen-
gers in 1996. Ryanair’s own annual scheduled pass-
enger volume has increased from 945,000 in 1992 to
EASYJET’S $500 MILLION GAMBLE
Table 5 Sequence of Low-cost Airlines’ Entry into new Destinations
Destination Daily flights from Range of one- easyJet Debonair Ryanair Virgin Express
base way fares
London Luton 2–4 $81–245 Jan-86
Liverpool 1–3 $81–245 May-88
London Stansted 9–11 $81–245 Nov-88
Knock (Ireland) 1 $108–273 May-91
Cork (Ireland) 3 $95–273 Oct-91
Birmingham 3–6 $81–245 Nov-93
Manchester 4–5 $81–245 May-94
Glasgow 8–12 $66–200 Nov-95 May-94
London Gatwick 6 $56–98 Nov-94 Mar-97
Barcelona 7–10 $99–234 Jun-96 Jun-96 Nov-94
Madrid 4 $69–217 Jul-96 May-95
Edinburgh 4–5 $66–200 Nov-95
Milan 1 $69–136 Dec-95
Aberdeen 1 $74–208 Jan-96
Amsterdam 3–4 $66–200 Apr-96
Nice 5–7 $99–234 Jun-96 Apr-96
Leeds 1–2 $81–245 May-96
Bournemouth 1–2 $81–246 May-96
Cardiff 1 $81–247 May-96
Dusseldorf 1 n/a Jul-96
Munich 1 n/a Jul-96
Copenhagen 3 $69–136 Oct-96 Sep-96
Rome 10–12 $69–137 Nov-96 Sep-96
London Heathrow 8 $56–98 Oct-96
Inverness 1 $74–208 Nov-96
Paris Beauvais 3 $108–273 May-97
Brussels Charleroi 2 $108–273 May-97
Bristol 2 $81–245 May-97
Stockholm 2 $136–341 Jun-97
Kerry (Ireland) 1 $108–273 Jun-97
Geneva 1–2 $99–234 Dec-97
Palma 1–2 $99–234 Dec-97
Dates in bold indicate first move into the specific destination.
Figure 3 Low-cost Airlines: Increase of Aircraft Fleet
European Management Journal Vol 17 No 1 February 199928
EASYJET’S $500 MILLION GAMBLE
Table 6 Financial Summary of easyJet’s Three Main Competitors
P&L Ryanair Debonair Virgin Express
(year ended 3/97) (year ended 3/97) (year ended 12/96)
$000 $000 $000
Turnover 186,927 23,806 180,038
Operating expenses 155,854 50,156 178,172
Operating profit 31,073 (26,351) 1865
Other income (expenses) 1210 (1) (716)
Profit (loss) before tax 32,283 (26,352) 1150
Taxation 11,433 66 874
Profit (loss) after tax 20,850 (26,418) 276
Minority interest 0 0 144
Profit (loss) for the period 20,850 (26,418) 132
Balance sheet Ryanair Debonair Virgin Express
(March 31, 1997) (March 31, 1997) (Dec 31, 1996)
$000 $000 $000
Cash at bank and in hand 32,806 1714 13,304
Other current assets 18,762 11,084 50,963
Total current assets 51,568 12,798 64,267
Fixed assets (net) 68,792 3602 1865
Total assets 120,360 16,400 66,132
Current liabilities 52,648 12,993 60,456
Long-term debt 46,203 17,119 60,421
Other liabilities 17,278 n/a 2221
Shareholders equity 4231 (13,712) (56,954)
Minority interests (12)
Total liabilities and 120,360 16,400 66,132
shareholders’ equity
Exchange rates used to convert financial data to US$, as of March 27, are as follows:IR£/US$ 1.37; £/US$ 1.68; $/BEF 36.
Virgin Express’ negative shareholder equity is mainly due to a $52m goodwill write-off.
3.1 million in fiscal year 1997 (year ending March
1997).
Under the leadership of its 36 year-old CEO Michael
O’Leary, Ryanair aspired to establish itself as the
leading European low-cost airline by adding routes
to Continental Europe, increasing the frequency of
flights along existing routes, and considering possible
acquisitions. In March 1998, the Irish carrier ordered
up to 45 new Boeing 737-800 aircraft worth $2bn.
Ryanair placed 25 firm orders worth $1.1bn for the
new 189-seat aircraft and took options worth $900m
on a further 20 737-800s. The company intended to
take delivery of five aircraft per year beginning in
March 1999. O’Leary believed that the new aircraft
European Management Journal Vol 17 No 1 February 1999 29
would allow Ryanair to increase capacity 25 per cent
per year and beat any low-cost competition from Eur-
ope’s major airlines. It would also allow the gradual
replacement of the old 737-200, which were
approaching the end of their useful lives.
Virgin Express
Virgin Express began service as a charter airline in
February 1992, operating under the name Eurobelg-
ian Airlines S.A (EBA). In November 1994,
responding to the deregulation of the market for air
transport within the European Union, EBA initiated
scheduled services between Brussels and Barcelona,
EASYJET’S $500 MILLION GAMBLE
Figure 4 Shareholder Returns of Listed European Low-cost Airlines
European Management Journal Vol 17 No 1 February 199930
EASYJET’S $500 MILLION GAMBLE
Vienna and Rome. In April 1996, EBA was acquired
by Virgin Express Holdings, which re-branded the
carrier as Virgin Express, hired a new management
team and emphasized scheduled service at the
expense of charter flights.
The new management team — led by CEO Jonathan
Ornstein who joined Virgin Express after two years
as a top executive in Continental Express — actively
pursued growth. As a result, Virgin Express grew
from 338 scheduled flights per month in April 1996
to 1628 flights in August 1997. Virgin Express’ early
success was based on four core strengths: low
operating costs, the Virgin brand name, a highly
experienced management team and a steady revenue
stream from its charter flights and its agreements
with Sabena. Under these agreements, Sabena pur-
chased a certain number of seats on each Virgin
Express flight (generally more than 50 per cent of the
available seats) on routes between Brussels and Lon-
don’s Heathrow and Gatwick airports, Rome and
Barcelona. Based in Brussels National Airport, Virgin
Express was flying, in early 1998, to 150 charter desti-
nations and operated daily scheduled services
between seven major European cities: London
(Gatwick), Rome, Barcelona, Milan, Madrid, Copen-
hagen and Nice. It had a young fleet of 12 Boeing
737-300s and four Boeing 737-400s and enjoyed an
impressive passenger volume growth rate: during the
last quarter of 1997 Virgin Express reported 510,905
passengers, nearly double the number of passengers
who flew Virgin Express in the last quarter of 1996
(272,939).1
Like his counterparts at easyJet and Ryanair, Jona-
than Ornstein sees the airline as a European version
of Southwest Airlines and admits that he imitated its
operational model: ‘We will emulate Southwest
where we can and when we can — why reinvent
the wheel?’
Sleeping Giants Awake
easyJet first encountered retaliation from a flag-car-
rier during its initial foray into Continental Europe
in April 1996. When easyJet decided to fly to Amster-
dam from its London hub, the route was already
served by several airlines which together offered 50
flights daily, and officials at the Amsterdam airport
bluntly suggested in their ‘welcome’ fax that easyJet
select an alternative destination. Despite the
obstacles, easyJet entered the route. The incumbent
Dutch flag-carrier KLM — which had a 40 per cent
market share in the route — immediately responded
by matching easyJet’s fares with a permanent price
promotion called ‘EasyChoice.’
KLM’s aggressive response nearly grounded easyJet.
The flights on the London – Amsterdam route were
often almost empty, generating serious losses at the
critical start-up stage. Stelios publicly stated that
European Management Journal Vol 17 No 1 February 1999 31
easyJet could not survive another six months on the
route unless KLM changed its tactics. easyJet
responded with a high-profile legal battle, and
charged KLM with anti-competitive practices before
the European Commission. Stelios seized the legal
battle as a public relations opportunity: he flew to
KLM headquarters, along with a television crew to
personally hand KLM’s CEO 1000 letters from easyJet
customers complaining about the Dutch airline’s
actions. The story received extensive press coverage
for many months in both the UK and Netherlands,
boosting the fledgling airline’s brand awareness.
easyJet persisted and gradually established itself as
a key player in the London – Amsterdam route, and
in 1998 was contemplating a new hub in Amsterdam.
British Airways’ Response: Go
In November 1997, British Airways (BA) announced
its intention to launch a new airline with a hub at
London’s Stansted airport which would offer
reduced in-flight service and much lower fares than
its regular BA flights. The project — nicknamed
Operation Blue Sky — had commenced six months
earlier when Barbara Cassani, Blue Sky’s would-be
chief executive, conducted a feasibility study of the
new airline’s potential. Cassani’s study projected that
Blue Sky could turn profitable in its third year of
operations in 2001. The new airline, named Go in
early 1998, planned flights to Italy, Spain, Scandina-
via, France and Germany from Stansted Airport. Go
adopted most elements of easyJet’s successful recipe:
it planned to fly only Boeing 737-300s with 148 seats,
bypass travel agents and sell tickets directly to cus-
tomers, offer no frills on board and even use the same
reservations software as easyJet. In its first year of
operations, Go would create 150 jobs and grow from
two leased Boeing 737-300 aircraft to eight. Fares on
routes not covered by other low-cost carriers would
be at least 30 per cent below standard fares on reg-
ular BA flights. On routes that were already served
by easyJet, Debonair, Ryanair or Virgin Express, Go
planned to match the low-cost carriers’ price.
BA’s announcement provoked an immediate reaction
from the management of easyJet and Debonair, who
expressed their concern that BA had formed the new
airline to force the low-cost carriers out of the market
through predatory pricing. Stelios responded
aggressively in an attempt to turn public opinion
against BA’s move. easyJet placed a page-long adver-
tisement in major UK newspapers expressing his
thoughts about Go: ‘Does the world’s favorite airline
really need a low cost carrier?’ (Figure 5). A few
weeks later easyJet launched an advertising cam-
paign with the slogan ‘BA is a copycat, fly the real
thing!’ Ryanair, on the other hand, welcomed BA’s
decision, presumably because Go’s decision to locate
at Stansted airport — Ryanair’s existing hub —
would enhance the airport’s position in its fight with
Luton for the title of London’s dominant low-cost air-
port.
EASYJET’S $500 MILLION GAMBLE
Figure 5 easyJet’s Advertisement in Response to Go
‘Lufthansa Light’
In 1997, the German flag-carrier Lufthansa faced
huge operating losses on its domestic flights, and felt
threatened by the entry of low-cost airlines, parti-
cularly Debonair which offered flights between Ger-
man cities. Lufthansa’s management board con-
sidered and rejected the options of dropping its loss
making domestic routes or contracting them out to
low-cost carriers. Instead the management board fav-
ored the option of launching its own low-cost airline,
known informally as ‘Lufthansa Light.’
‘Lufthansa Light’ was envisioned as an autonomous
carrier offering direct flights between smaller Ger-
man cities — thereby bypassing Lufthansa’s hubs in
Munich and Frankfurt. The new carrier would oper-
ate under its own brand, with its own management
and personnel, although Lufthansa would retain 100
per cent ownership. A feasibility study of the new
airline recommended an initial fleet of 6–14 aircraft.
The study also recommended a subsequent fleet
European Management Journal Vol 17 No 1 February 199932
expansion of 16 additional aircraft to serve routes
from non-hub cities in Germany to other European
destinations, e.g. Paris – Leipzig. If pursued, this plan
would result in a maximum fleet of 30 aircraft, in
addition to the 150 aircraft that the parent company
was already flying on European routes. To keep costs
low, the aircraft would have extra seating, cabin ser-
vices would be cut, and lower salaried personnel
would be hired. Additionally, maintenance and
repair would be contracted out. Managers estimated
that these cost savings would allow Lufthansa Light
to price at 20 per cent below current Lufthansa fares.
Although Lufthansa’s management board approved
the proposal in early 1998, the company’s Executive
Board delayed implementation because it felt that the
proposal did ‘not yet offer adequate attainable busi-
ness improvements, and further investigations are
required to settle outstanding issues such as auto-
mation and charges.’2
Growing Pains
‘All I need to do now,’ Stelios wrote in the December
1997 edition of easyJet’s in-flight magazine, ‘is find
six million people a year to fly on my new planes.’
some industry analysts believed that easyJet’s strong
brand recognition and momentum would allow it to
capture share in the growing market for low-cost
flight in Europe. Others wondered whether easyJet
could maintain its low costs and quick turn-around
times as the carrier expanded to new hubs in Europe,
such as Athens and Amsterdam, and also speculated
how rapidly the low-cost airlines would exhaust the
pool of lucrative potential routes. Other commen-
tators questioned whether easyJet could succeed in
the face of competition from low cost airlines and
incumbent flag-carriers. easyJet managers were
undaunted, however: ‘As long as we keep the for-
mula right,’ Ray Webster argued, ‘we feel as a com-
pany that we don’t have to worry about the compe-
tition.’
Acknowledgement
Donald N. Sull wrote this version of the easyJet case based
on a teaching case study by Panagiotis Lekkas and Dimitris
Vareltzidis, which was intended to be used as a basis for class
discussion rather than to illustrate either effective or ineffec-
tive handling of a management situation.
Notes
1. Virgin Express website.
2. Flight International (1988).
Reference
Flight International (1988) 25 February – 3 March, p. 15.