Airline Industry within Australia - Case Study Example

Airline Industry within Australia Introduction Virgin Australia’s case study provides an insight into the overall working of airline industry within Australia. This case study summarized as to how the firm entered into Australian market, how it captured low cost, no-frills market and expanded into this segment of the business. The case study has also critically analyzed as to how Qantas Airline and other airliners were catering to the needs of business customers and what Virgin need to actually do in order to capture the business market. In order to analyze this case study and to provide strategic insights behind the overall working of the industry as well as the internal environment of the firm, different strategic models will be used. External Analysis In order to perform the industry analysis, following analysis will be performed however only relevant elements for the external analysis will be discussed: Political Factors Political factors may not affect the industry as such because political environment in Australia is considered as market friendly. It is however, important to note that on international routes, political conflicts between different countries can actually restrict the movement of airliners. Further to this, many airline firms may actually not be able to fly over certain countries due to factors related with the security. Additional security checks as well as compliance with strict screening of customers could be one of the factors which may be dominated by the political environment of the country. Economic Factors The overall economic factors discussed in the case study suggest that the demand for low fare travel was on the rise. Those customers who particularly look for low cost travel would prefer to travel through the services like Virgin blue. Economic factors also seem to dominate the way virgin blue has actually tailored its business model. The need to have relatively low cost travel was also considered as viable in a economy which was volatile in nature. It is however, important to note that the decision to focus on the business customers and offering premium services was also part of the way economics of the industry worked. Since revenue per customer was higher for business customers therefore Virgin made a shift to focus on that market also. Social Factors There is a clear tendency towards using airlines for the leisure purposes as it is indicated that there are increasing patterns for leisure vacations. On a whole, case study do suggests that there are clear shifts in the social patterns where people tend to take short leisure trips and also use the airlines for this purpose. Since the overall geographical area of Australia and New Zealand is also scattered too therefore there was a greater need for having cheap air travel than using the time consuming alternative methods of transport. It is critical to note that the social changes in the way consumers behave have also much to do with the economic factors also. Preference for the leisure travel has been mostly due to the fact that airliners were able to offer low cost travel. This change in pricing of the leisure therefore has resulted into the change in the way people perceived leisure and air travel. Technological Factors There have been clear shift towards the use of technology specially while allowing the use of other airlines facilities. Though essentially, Virgin maintained the same fleet of airplanes however technology would be more effective in terms of using fuel efficient fleet. Virtual checking in systems as well as efficient ticketing system could be some of the factors which can actually have an impact in terms of the use of technology. Industry Analysis The overall industry structure suggests that it is dominated by very few players in the market i.e. Qantas and Virgin. It is however, important to note that the industry is basically segmented based upon two segments of the customers i.e. leisure and business travelers and both the segments are being catered by different players in the market. It is also important to note that the airline industry is global in nature with QANTAS serving different international destinations also whereas Virgin also started to serve to various of international destinations however its focus was on the development of local market in Australia and New Zealand. The key products and services segments mentioned in the article indicate that there are two types of services i.e. one which are directed at those customers who look for cheaper air travel and therefore do not require premium services. The other segment of the market is catering to the needs of business customers looking for premium services. Porter’s Five Forces Analysis In order to better analyze the industry and its dynamics, following Porter’s five forces analysis is performed: Threat of New Competition Airline industry is capital intensive in nature and requires extensive capital expenditure in order to make a successful entry into the market. Higher level of capital expenditure involved however, also results into the creation of natural barriers to entry wherein new players may not be able to enter the market easily. Similarly, the exit cost is relatively higher too therefore existing players may not be able to leave the industry easily. Brand equity is also one of the key reasons as to why new entrants in the market may pose limited threat. Both Virgin as well as Qantas has been able to dominate two different segments of the market and have relatively loyal customer base. The higher level of brand equity therefore can restrict the threat of new competition in the industry. Industry margins are relatively lower too and are around 2% which may also be one of the reasons as to why new entrants in the market may not be able to make a successful entry. More profitable industries attract relatively larger level of new entrants however for an industry like airline which is not only mature but also going through a transformation; entry by the new competition may be deterred by the low margins as well as high cost of entry and strong customer loyalty to existing players. Threats of Substitutes As mentioned above that there are two different segments of the market i.e. low cost leisure travelers and business passengers. The switching cost for leisure traveler may be relatively low therefore their propensity to substitute may be higher relatively creating more threat for the firm of substitutes. Though substitutes exists in the form of road and other transport however, given the geographical spread of Australia, Air travel may be more rational choice for the consumers. Further, the perceived level of product differentiation can also result into low threats from the substitutes as consumers may value air travel more than any other form of travel thus restricting the threats from substitutes. Bargaining Power of Buyers It is important to understand that the switching costs for the buyers are relatively low as compared to the switching costs for the firm. As a result of this dynamics, buyers tend to have relatively higher bargaining power and it is also because of this reason that this industry operates at relatively low margins. Further, the information availability through the internet has provided buyers more power in terms of searching best deals for themselves. Relative price sensitivity of the leisure travelers is high whereas for business travelers, it is low. Since Virgin was entering into business customers markets, therefore it may be able to withstand bargaining power of buyers in this segment. In leisure travel, customers have relatively higher level of bargaining power and hence firm may experience further low margins. Bargaining Power of Suppliers Suppliers in this industry work at two different levels i.e. the one who provide the air planes and those who provide other services. The switching cost of the manufacturers of airplanes is relatively higher than the airline services however, given the specialized and capital extensive nature of the industry; suppliers may have relatively larger bargaining power. For the suppliers of other services, however, their bargaining power is relatively low considering the overall brand name and business volume of the airline services working in the industry. It is also important to note that the supplier concentration is relatively higher as compared to airline industry. There are very few players in the market who manufacture airplanes therefore the relatively degree of concentration of the suppliers also give them higher bargaining power. Relative Intensity of the Competition As discussed in the case study that there are only two major players in the market which control the substantial market share. This very nature of the industry structure therefore makes it relatively obvious that the overall competition in the industry is relatively higher. Since Virgin was controlling the market which offered low returns therefore it decided to move into that segment of the market where the competition is already higher and is dominated by QANTAS. The relative degree of innovation by both the firms as well as powerful competitive strategy of adapted by Qantas as well as Virgin has resulted into higher level of intensity of the competition in the industry. It is important to understand that role of government is limited in terms of overall regulation of the industry. However, increased security requirements as well as compliance with anti-terrorism measures may increase the overall costs for the firm. Buyers Buyers are mostly the firms offering their employees travel options for the business purposes. It is therefore really important that more focus should be on the development of effective B2B marketing solutions in order to focus on the business market. This is also more important because the business travelers often travel for business purposes on the behalf of their employers therefore the buyers’ buyers will have relatively more bargaining power in terms of getting right deals and packages for their employees. Suppliers’ suppliers may not have relatively larger bargaining power because suppliers of airplanes tend to be large in size and mostly dominate the market in terms of manufacturing the complete airplanes and deliver them to their customers. Internal Analysis Considering the information provided in the case study, following internal analysis is performed: Core Competencies of the firm One of the core competencies of the firm was its ability to actually use low cost differentiation. Using its low cost structure and ability to run simple and cost effective airline services has actually allowed the firm to dominate one segment of the market. Firm has been consistently able to dominate this market through its cost effective operations and the excellent customer services. It is also important to understand that firm has been able to rely on its people as one of its core competencies to offer excellent customer services. The challenges firm now faces in terms of transitioning to new market segment is also related with the success of firm’s ability to bring in that change within the organization. This core competency of the firm has also resulted into its competitive advantage in the industry as other players have not been able to replicate this strategy. QANTAS Airlines has focused on higher revenue per passenger therefore it has been operating facilities which are relatively cost to operate. Virgin on the other hand however, been able to keep its costs low and has been operating at a level which is giving it edge in one segment of the market. it however, will require to improve upon its current core competencies in order to compete in new segment of the market i.e. to capture the market for business travelers. SWOT Analysis Strengths 1. Long and rich history of success in various markets. 2. Experience and resources available to tap into the new market. 3. Ability to operate at low costs. Weaknesses 1. Focus on just one segment of the business. 2. Lack of penetration in international market. 3. No presence in business passengers market. Opportunities 1. Business market. 2. International expansion in relevant areas. 3. Opportunity to attract business customers as leisure customers. Threats 1. Intense competition from QANTAS. 2. Better and improved alternative transportation methods. 3. Economic situation which may force the margins further down. Major Problem The above analysis and the facts provided in the case study suggest that the firm may be facing following major problem: 1. Though the firm has been able to achieve the transition towards the new market dynamics however, its core competencies lie in serving the low cost leisure customers. Making a transition towards a market which does not fall into the traditional core competencies of the firm may be difficult for the employees to cope with and the change may not be relatively as easier as the firm may think it could be. Minor Problems Following minor problems are discussed in the case study: Strategic alliance with Singapore airline may not work as firm may need to formulate strategic alliances with other firms in Asian market also. Employees may not be ready for this change and transition towards a new market therefore firm may face skill shortages in terms of people who could cater to the business passengers. Change in focus from low cost leisure travelers to business travelers may reduce the overall market share of the firm as QANTAS has also introduced a new low cost airline services too. The above discussion therefore indicates that in order to successfully make a transition, firm needs to take certain strategic initiatives. These initiatives need to be focused and based upon carefully designed strategies to make an entry into the market. Strategic Solutions Firm can take following strategic initiatives: Diversification Since Virgin will be entering into a new market therefore it can adapt diversification as one of the strategy. Traditionally it has focused on catering to the needs of the leisure customers however; it has now diversified itself into the premium services therefore diversification is the relevant strategic initiative to be taken. It is however, critical to understand that to successful diversify; firm has to also create ownership for its new changes. It seems that the employees may not be ready for this transition into the premium services. Firm therefore has to clearly identify various of its risks since it will be entering into a new market before it can actually commit itself to the fully development of this new market. Employee Empowerment Management must take into consideration that it can create ownership for the new changes taking place in the company. Employees must be given the sense that they are part of the new changes and that their level of skills as well as role will be enhanced once they are able to make a transition towards much larger market. Virgin needs to carefully consider the fact that its employees actively participate into the overall change process and must adapt to the change. Higher management must need to meet and communicate with the employees and take their feedback in improving the overall delivery of the new services. By doing so, Virgin will be able to better capitalize on the changes it made and improve the services to actually directly compete with the QANTAS in this market. Read More