Air New Zealand - Strategic Analysis and Recommendations

by: Marc Dominick

Table of Contents

1 Current strategic direction 1

1.1 Mission and goals  1
1.2 New Philosophy  2
1.3 Cost reduction  2
1.4 Portfolio of businesses and airlines  3

1.4.1 Engineering and Cargo 3
1.4.2 Airlines  4

1.5 Strategic Alliance with Quantas  5

2 SWOT analysis 6

2.1 External – societal environment  6
2.2 External - industry analysis 7

2.2.1 Competitors and intensity of rivalry  7
2.2.2 Critical industry success factors  9

2.3 Internal – organisational analysis  9

2.3.1 Sales network and distribution channels  9
2.3.2 Products, service, marketing and aircraft  10
2.3.3 Staff, culture and management  10
2.3.4 Finance  11

2.4 SWOT diagram 12
2.5 Core competence and competitive advantage 12

3 Strategy formulation 13

3.1 Strategic Factor Analysis Summary (SFAS Matrix)  13

3.1.1 The ten key strategic factors  13
3.1.2 The top three strategic factors being faced by Air NZ 14

3.2 Modification of Air NZ’s current strategy  16
3.3 New strategic goals and objectives for Air NZ 16
3.4 Alternative strategies and effect on corporate strategy  17

3.4.1 Alternative strategies  17
3.4.2 Effect on corporate and current competitive strategy of Air NZ 18

3.5 Implications for the various lines  18

4 Implementation Issues  19

4.1 Strategy evaluation and control 19
4.2 Ethical issues  19

5 References 20

1 Current strategic direction

Since the appointment of RALPH NORRIS as Managing Director and CEO of Air NZ in February 2002 Air NZ has been working on its new strategic direction. Structural changes in the ma rketplace made a new direction indispensable and Air NZ is now turning away from inflexible service offerings to align its route and service standards to customer needs. In fact, Air NZ is developing from a full service airline into the direction of a “value-based-plus” airline (Airline to put profit on menu, 2002) which involves lower fares and more customers. Reduced revenues (per customer) should be offset by lower operating costs mainly achieved by simplification of product bundles and services. (UBS Warburg Conference, 2003, p.11; Airline to put profit on menu, 2002) The following subchapters give an overview of the key aspects of Air NZ strategic direction.

1.1 Mission and goals

The company’s mission, although not explicitly stated as such, is to “position itself as a long-term sustainable business providing value to its customers, employees and shareholders”. (Annual Report 2002, p. 13) At the UBS Warburg Transport and Leisure Conference in Sydney on April 9 2003, RALPH NORRIS gave a strategic update in which he presented Air NZ’s strategic key goals:

1. Maximise the overall Group return on capital employed
2. Bring diversity and balance to the Group’s earning streams
3. Take full advantage of the Group’s competencies in markets where we have influence (UBS Warburg Conference, 2003, p.23)

Concrete objectives concerning the goals have not been publicised. Apart from the first goal, goal no. two and three are very broad and give room for different interpretations.

1.2 New Philosophy

“It is no longer sufficient to be good at flying planes. The Air New Zealand of the future will excel at flying people.” said Ralph Norris and concludes: “From an airline perspective, the core of this turn-around is a new and fundamentally different philosophy.” (UBS Warburg Conference, 2003, p.8) In this new way of thinking customers become the centre of attention. Their needs are what counts. But Air NZ wouldn’t offer anything that is possible rather than what is justifiable from a bus iness point of view. Those service components which don’t bring added value compared to their costs externally (for the customers) and internally (Air NZ) will be dismissed. (Annual Report 2002, p.5)

1.3 Cost reduction

The ‘new philosophy’ is strongly linked to cost reduction, which is one of today’s Air NZ main issues. Its strategic goal “Maximise the overall Group return on capital employed” implies cost reduction and becoming a “long-term sustainable bus iness providing value to its customers, employees and shareholders” must entail constant work on cost reduction measures. But cost reduction by all means is not always clever and sometimes also not possible. According to SIOBHAN VINISH (Director of public relations and communications, WestJet Airlines, Canada) conventional full service airlines like Air Canada have difficulties to go into the low-cost market. Main reason is that a low cost strategy needs commitment from all employees in form of a lending-a-handattitude. (Mark & Crossan, 2002) It is questionable if Air NZ’s employees are willing to make such a contribution. In any case, the executives and managers of Air NZ should be a living example.

Figure 1 , taken from: UBS Warburg [figure only in downloadfile]

Figure 2 , own figure, source: UBS [figure only in downloadfile]

1.4 Portfolio of businesses and airlines

Air NZ businesses are inter-related with the airlines as its centre. According to RALPH NORRIS Air NZ is currently facing a “strategic dilemma” which lies in the inseparability of the profitable businesses (Express Class, Engineering, freedom air) from the rather loss-making ones (Air New Zealand International, Tasman) because the loss-making ones enable the success of the profitable businesses to a large part. (UBS Warburg Conference, 2003, p.5)

1.4.1 Engineering and Cargo

ANZES, Air NZ 2500 people strong engineering business is highly profitable (EBIT $47m). But still over a half of ANZES revenues come from the internal customer Air NZ itself and not from the outside market. (UBS Warburg Conference, 2003a, p.17; Annual Report 2002, p.12) In the future, ANZES will follow a different growth strategy compared to the int egrated airline but both will still complement each other. (UBS Warburg Confe rence, 2003, p.21) Cargo as well as Ground handling are both profitable, too, and its revenue comes not only from Air New Zealand but also from external clients. (UBS Warburg Conference, 2003, p.22)

1.4.2 Airlines

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