Excerpt
Table of contents
Executive Summary
1. Introduction and Overview
1.1 Structure outline
1.2 Limitations
1.3 Virgin Australia
2. The Macro Environment
2.1 The General Environment
2.1.1 Demographic changes
2.1.2 Socio-cultural forces
2.1.3 Political/legal trends
2.1.4 Economic trends
2.1.5 Technological trends
2.1.6 Global factors and other issues
2.2 The Competitive Environment – The Airline Industry
2.2.1 Analysing the Industry Structure Using Porter’s Five Forces
3. The Micro Environment
3.1 Competitor analysis
3.1.1 Qantas
3.1.2 Jetstar
3.1.3 Tiger Airways
3.2 Customer analysis
3.2.1 Regional segmentation
3.2.2 Income segmentation
3.3 Company analysis
3.3.1 Physical resources
3.3.2 Financial performance
3.3.3 Brand image
3.3.4 Innovation and creativity
4. SWOT Analysis
5. Conclusion
6. Reference List
Executive Summary
The purpose of this report is to analyse the current market environment of Australian airline industry in which Virgin Australia operates. Virgin Australia, which was commenced as a low-cost carrier gradually transformed into a four-star airline competing vigorously with Qantas and its subsidiary Jetstar.
The demographics of Australia is bringing positive vibe within the industry with the rise of Generation Y and retiring Baby boomers. Timetables took priority over service quality in today’s fast-paced global business environment. However, with the raise of environmental concern, people are looking for environment friendly transportation system. As the airlines are looking for ways to cut corners in a market that is experiencing increasing pressure from economy and competition, the Civil Aviation Safety Authority (CASA) is making sure that safety is not compromised. Although there is a forecast of rising unemployment in the middle of 2012 and there are concerns for economic downturn of some EU countries, economists are hoping for sharp improvement once this rough patch is over. Airline industry is most affected by the technological change and airline companies are taking this opportunity to turn modern technology into a competitive advantage by creating value for the customers. Finally, the threat of terrorism and raising fuel cost has increased the operating cost of the overall industry.
Throughout the last decade, the domestic airline industry in Australia is characterised by relatively flat growth, low profit margins and financial pressure and stiff competition. High entry barrier exists in the industry with soaring competition among the existing players. Even though the threat of substitutes is low, the overall situation is further worsened by high buyer and supplier bargaining power.
Qantas, Jetstar and Tiger Airways are the three major players of the industry with Virgin Australia being the second largest domestic airline. While Qantas focuses its strategy towards high-end business class and corporate customers, Jetstar and Virgin compete for the rest of the market segments. Except Tiger Airways all three companies have shown positive financial performance over their operating cycles.
Virgin Australia has strong brand value and image because of its innovative ideas and creative thinking. It operates a rapidly growing fleet primarily consists of Boeings and Airbuses. The low average fleet age helps the company to reduce maintenance cost of the aircrafts. Financial performance of the company was not so promising in the year 2011 because of rising fuel price, high value of Australian dollar and environmental disaster. However, the company has been successful over the past years and future outlook is promising.
Cheap flights to major destinations, top-notch service quality, innovativeness, good flying records, punctuality and strong brand image are some of the key success factors of Virgin Australia. However, the company has failed to attract corporate customers because of over reliance on leisure market. Moreover, because of fuel market volatility, high exchange rate of Australian dollar and environmental disaster, the company has not been financially thriving in the past years. With intensified competition in an unfavourable environment characterized by high fuel price, rising environmental concerns and high bargaining power of the suppliers, Virgin Australia will find it hard to keep their game faces on in the days to come. Nevertheless, Australian consumer behaviour is shifting in a way that is likely to benefit Australian airline industry as a whole and by creating strategic alliances and entering into hedge contracts; Virgin Australia can tap those consumers.
With the recovery of economy the company’s financial performance is expected to improve in the years to come and with the opportunities that present itself within the operating environment, there is a sign of light at the end of the tunnel.
1. Introduction and Overview
1.1 Structure outline
The purpose of this report is to investigate and analyse the current market environment in which Virgin Australia operates. With a view to achieving this objective, the report provides an overview of Australian domestic airline industry and its competitors with a keen focus on Virgin Australia’s operation.
The first chapter will provide an insight on the outline of the report, a brief description of Virgin Australia and also the constraints faced while preparing the report.
Chapter two focuses on the external environment surrounding Virgin Australia by analysing the main trends through scanning and monitoring. In addition, it inspects the industry environment using Porter’s five forces model.
Chapter three concentrates on the internal environment of the company providing assessing its competitors, target market and the company’s performance itself.
Finally, the paper identifies the strengths and weaknesses of Virgin Australia and potential opportunities and threats stimulated from external environment.
1.2 Limitations
The periphery of such undertaking is enormous and it is quite complex to capture an instant snap shot across a number of airlines simultaneously. In order to react to the changing market environment each of the airline are consistently modifying their strategies. Therefore, the paper has attempted to limit the depth of investigation across the various measurement criteria because of time and resource constraints. Not all the dates align with each other because of the lack of access to resources. Nonetheless, these can be satisfactorily used for high level comparison.
1.3 Virgin Australia
Virgin Australia, formerly known as Virgin Blue, is Australia's second largest airline co-founded in the year 2000 by renowned British business magnet Sir Richard Branson and former Virgin Blue CEO Brett Godfrey.
Initially started as a low-cost carrier, the company improved its services to become a “new-world carrier” as described by themselves (Virgin Blue media release, 2011, para. 2). In 2011 the company further stretched the strategy introducing new uniforms, new catering service on board, new wide-body aircraft and business class; together with a new livery and a renaming to Virgin Australia. Currently the airline is considered a four-star airline by research consultancy firm Skytrax.
2. The Macro Environment
2.1 The General Environment
The general environment in which a firm operates dramatically affects its strategy and thus the firm itself. This paper takes a closer look at the crucial forces that can positively or negatively affect Virgin Australia and its competitors in the Australian airline industry.
2.1.1 Demographic Changes
Demographic changes are very important to the airline industry because it conducts business through a relatively luxurious but moderately priced service. Presently there is not only a growing but also an aging population in Australia. Among 20 million people living in Australia, Generation Y represents about 4.5 million. This is the demographic group that is reported to be influencing the spending pattern of this country (Wyld, 2005, p. 1). With the increase of retiring baby-boomers and those living in debt, Australian consumers are likely to increase consumption.
In this environment, Virgin Australia aims at gaining business people as customers by offering its service in the major cities within Australia (Rochfort, 2006, para. 3). Its customers primarily consists of young professionals; the so-called Generation Y, as well as business people aged 35 to 54, which represent a large part of the Australian population (Hierling, 2006, p. 5).
2.1.2 Socio-Cultural Forces
There is an ongoing trend for greater environmental concerns around the globe to which Australia is not an exception. People nowadays try lean forward to environmental friendly transportation and look for less carbon emitting substitutes.
According to Department of Transport and Regional Services (2007, p. 1), there is also an increasing trend in providing services to leisure destinations to fulfil the needs for fun and consuming lifestyle of the Australians.
Furthermore, in today’s fast-paced global business environment, timetables took precedence over service and for a discerning business traveller, scheduling is critical (Freed, 2005, para. 9).
2.1.3 Political/Legal Trends
Although Australian airline industry is heavily regulated and has gone through considerable changes over the last decade, there is a trend of deregulation (Hierling, 2006, p. 6). The Airline Deregulation Act 1991 (ADA) has also played a role in the evolution of the domestic airline industry by allowing freedom to airline companies to set their own prices and strategize their own routes. However, the government did not adopt the full “open skies” policy, but instead accepted a proposal by Qantas and Ansett, that foreign airlines should not be allowed to compete with domestic airlines for passengers and cargo inside Australia (Wainwright, 1999, p. 3).
A study conducted by Rose, Bjornstad and Packard (2008, p. 4) indicates that The Transportation Security Administration (TSA) has stepped up security regulations following the events of 9/11 and terrorist attacks all over the world. The new standards of TSA requires a longer check in process, more in-depth baggage checks, and restricted access of airport terminals to only those that have a boarding pass. These strict regulations affect the ability to turn consumers, fill airplanes to capacity, and affect customer perception.
2.1.4 Economic Trends
According to an article published in the Herald Sun, the value of Australian dollar will continue to rise for the rest of the year and the stock market is likely to surge almost 10 per cent. The report also mentions that a short-term rise in unemployment over the coming months may force the Reserve Bank to lower interest rates to 4 per cent. However, most market watchers say forward indicators point to a pick-up in jobs growth later in the year as confidence flows back into the economy (McMahon, 2012, para. 1). The airlines industry is affected by the interest rate set by the Reserve Bank because a fall in interest rate directly affects consumer behavior.
Although the market is being held back at the moment by concerns about China, US, Greece and Spain, according to Oliver (2012, p. 1), market is relatively cheap and things should improve markedly once it get through the volatile rough patch in the middle of the year.
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