Globalisation and Business Enterprise - Air New Zealand Limited - Essay Example

Issue - Economic Recession: The economic recession was actually a result of US sub-prime mortgage crisis followed by debacle of property sector. Not only the major financial institutions (that have savers’ money) including commercial banks, private investment groups, pension funds, saving schemes and mutual funds of USA (actors), but also investment organizations and elites from other developed and developing nations had made stupendous investments in US booming property sector before 2007 – 2008. Indeed, the soaring international oil and food prices aggravated the situation as that increased inflation and simultaneously a decrease in real incomes. This in turn reduced aggregate demand of goods and services (especially luxuries or those with elastic demand) including housing units whereas demand of necessities remained same. In short, the prices of property units plummeted that adversely affected financial position of aforementioned actors. In short, they suffered huge losses and decline in wealth and signed bankruptcies and declared themselves as defaulters. This not only shattered consumer confidence across US but also in many advance economies and thus resulted in negative economic growth. The developing countries that are dependent on developed West for trade also faced the pinch of economic meltdown and contraction in advance economies. (Shah, 2009) Air New Zealand Limited: Air New Zealand is top quality air travel services provider at affordable prices that also offers related services such air ticketing, customer handling and commercial cargo handling in Australia, New Zealand, North America, Asia Pacific and European nations. The company faces competition with major airlines such as Qantas, Virgin Blue etc. Indeed, it is a state-owned company as government enjoys more than 70% stake in Air New Zealand. (Web: Airnewzealand.co.nz) The airline mainly attracts customers from New Zealand and Australia since it offers innovative and differentiable services that in turn creates clear and unique image in the mind of customers. Quite unequivocally, the airline believes in flexibility and adaptability (McChesney, p.14, 2009) to macro environment changes in order to gain a competitive edge over its rivals. Indeed, the top management has adopted and implemented the principles of new workplace including team-building, continuous learning and experimentation, benchmarking etc. to become the most reliable air travel services provider. Air New Zealand has a fleet of 99 aircrafts, majority of which are purchased from Boeing for passenger services. The company received “airline of the world: award in 2010 besides other accolades. (Web: Airnewzealand.co.nz) and (Company’s Annual Report, 2009) The table below will throw light over company’s fleet as updated on April 30, 2010. Operating Fleet Aircraft In Operation On Order Average Age (years) Average Utilization (hrs/day) Jet Aircraft B747-400 7 - 15.3 12:35 B777-300ER - 5 - - B777-200ER 8 - 4.0 15:42 B787 - 8 - - B767-300ER 5 - 14.6 12:17 Airbus A320 12 14 5.8 11:37 B737-300 15 - 12.3 7:56 Turbo-props ATR72-500 11 - 9.3 7:42 Q300 23 - 3.3 7:21 Beech1900D 18 8.3 6:42 Totals 99 27 8.0 9:10 Source: http://www.airnewzealand.co.nz/fleet/ Positive consequences The global economic meltdown not only adversely impacted the financial institutions and manufacturing related businesses but also it negatively affected the growth of airlines. It is worthwhile to mention that air travel businesses have higher fixed costs (or in simple words the overheads) that is covered through greater passenger volume and capacity utilization. This is also known as Load Factor in core business terms. The demand for air travel is relatively price elastic for normal travellers and visitors who can increase / reduce their spending on travel any time after analyzing the security conditions, weather and economic conditions such as inflation, availability of hotels etc. in the host nations. In contrast, the demand for air travel from businesses, investor groups, and sole proprietors is relatively inelastic as they need to travel abroad for collection of payments, for new orders, for business negotiations and fulfillment of legal matters. Hence, the revenue generated per seat is higher from businesses is higher compared to fares charged from individuals, tourists, families etc. However, the worst economic recession resulted in considerable fall in demand from both passengers and businesses because a large number of potential customers became cash starved while businesses also observed a slump in their aggregate demand of products. (Snyder, 2009) In the wake of above, recession somewhat benefited Air New Zealand in a way that it has become more focused towards enhancing its productivity and efficiency through minimizing any internal inefficiencies and weaknesses. Without any doubt, the company has become more flexible to external environment thereby reducing its fares and service charges to entice visitors and passengers that have relatively stable purchasing power (upper-middle and middle-middle groups) and that are not greatly affected from economic turmoil and unemployment. However, it must also not be forgotten that the reduction in fares strategy mainly aimed to attract travellers (lower middle) that have an inclination towards air travel but facing pricing issues due to poor economic conditions. (McChesney, p.14, 2009) In addition, the company improved its management and administrative practices so that it could maximize its output and reduce its overheads that are now difficult to assimilate after fall in demand for air services. The airline has also focused on innovation of existing procedures adopted within airline to reduce time frame for travel services and increase the number of flights per week. The company has attempted to “replace larger aircraft by smaller aircraft, fitting fuel saving wingtips33” (McChesney, p.14, 2009) to reduce its total costs including direct and indirect operating costs. Obviously, this will start benefiting the airline once global economy completely recovers from worst economic situation after Great Depression of 1930s. Negative consequences Considering the above mentioned facts, it is worthwhile to mention that the economic managers and policy makers at Air New Zealand initiated a restructuring program that included ‘capacity reduction’ of passenger aircrafts (McChesney, p.14, 2009) and closure of airline’s booking offices, service outlets and commercial agencies. Undoubtedly, the reason behind that was to bring in-line Air New Zealand’s operations with its existing global demand that reduced significantly in 2008 – 2009 thereby resulting in huge financial and monetary losses. The airline’s total revenue reduced to around $3,200 million in 2009 compared to $4,222 million generated in 2008 whereas its fuel expenditures increased from $1024 million (24%) of total revenue in 2008 to $1,593 million (37%) in 2009 that shows year-on-year increase of 13%. The loss after tax reported to be $114 million in 2009 against profit after tax of $184 million that is an evidence of negative growth. However, the group posted some profit of around $20 millions in 2009 even though the Air New Zealand Company reported a heavy loss (Annual Report, 2009) and (McChesney, p.14, 2009). In addition, this not only weakened the financial position and performance of the airline but also adversely impacted its competitiveness against its rivals. The company had to reduce its capacity that would obviously affect the long run strategies and defined objectives by strategic planners. Similarly, the diminishing trend in sales also compelled the policy makers to downsize any additional employees that now became redundant to the organization after global crises. This also intensified the unemployment issues within New Zealand while at the same time, impacted employee-employer relationships and trust. It must be pointed out that the airline downsized more than ‘200 employees’ within New Zealand and allowed its ‘pilots to finalize short term contracts with other airlines’. Moreover, the ‘working hours were reduced’ because of steep fall in passenger and cargo demand from visitors across the world. (Socialist Review, 2009) Some consumers even shifted to Train and By-road travel because of affordability issues thereby affected airline’s goodwill and reputation in the marketplace. Some existing customers also switched to low cost barriers because they offer no-frills convenient and reliable services at below industry fares. Drawing together Evaluating the positive and negative consequences as discussed in this paper, it must be emphasized that global financial crisis and turmoil forced the selected airline to redefine its goals and business strategies and to adopt ‘market penetration strategy’ for customer retention. In addition, the management and administration could be improved to maximize internal productivity and reduce burden on financial assets in an extremely challenging, unexpected, unpredictable and unstructured business environment. On the flip side, the losses were incurred due to economic uncertainty, which is beyond control for any enterprise. Conclusion Critically analyzing the above mentioned strategic position of Air New Zealand, it must be highlighted that recession is out-of-control economic factor since it intensifies the unemployment followed by reduction in purchasing power, aggregate consumption and savings by potential customers. The airline business is a highly competitive industry where each operator aims to compete to first ensure its business survival and then observe growth. The economic meltdown enabled the Air New Zealand to improve its internal environment so that it could retain its existing customers, suppliers and business partners. Also, the airline focused on reengineering and reorganizing its operations to restore its competitiveness against Virgin Blue and Qantas that are its major competitors. References: Shah, Anup (2009). Global Financial Crisis. Global Issues.org Available at http://www.globalissues.org/article/768/global-financial-crisis Braddock, John (2009). New Zealand “Jobs Summit” places burden of recession on working people. World Socialist Website Available at http://www.wsws.org/articles/2009/mar2009/newz-m03.shtml Socialist Review (2009). Recession and the war on workers. International Socialist Organisation New Zealand Available at http://www.iso.org.nz/socialist-review/452-recession-and-the-war-on-workers.html McChesney, Ian (2009). Vulnerability assessment of the impacts of peak oil on the Canterbury Region Ecan.gov.nz Available at http://www.ecan.govt.nz/publications/General/Peak%20Oil%20Vulnerability%20for%20Canterbury%20Region.pdf Snyder, Brett (2009). Air New Zealand CEO Rob Fyfe Discusses the Airlines Clothes-Free Ad Campaign Available at http://industry.bnet.com/travel/10002011/air-new-zealand-ceo-rob-fyfe-discusses-the-airlines-clothes-free-ad-campaign/ No author. Corporate Governance. Air New Zealand Available at http://www.airnewzealand.co.nz/corporate-governance/ Centre for Aviation analysis (2009). Air New Zealand’s long-haul yields still struggling Available at http://www.centreforaviation.com/news/2009/12/22/air-new-zealands-long-haul-yields-still-struggling/page1 No author (2009). Company Annual Review 2009 Air New Zealand Limited Available at https://www.trioonline.co.nz/airnz/airnz/index.html Company Report (2009) Annual Financial Report 2009. Air New Zealand Limited Available at https://www.trioonline.co.nz/AIRNZFin09/index.html Read More