Virgin Australia Airlines Strategic Marketing - Example

Strategic Marketing Plan -Virgin Australia Airlines Student’s Name: Course: Tutor’s Name: Date: EXECUTIVE SUMMARY Virgin Australia Airlines (Virgin AA) is a low-cost carrier operating in the Australian market. Since its inception in 2000, the airline has gained a considerable market share estimated at 28 percent by 2009. In the recent past however, the airline has registered reduced growth and profitability, which has necessitated a change of its marketing strategy. A combination of factors may have contributed to the airline’s dwindling fortunes. First, competition is rife in the Australian aviation industry with well-established airlines like Qantas dominating the lucrative upper-end market segment, and making inroads in the low-cost segment through its affiliate company Jet Star. In addition to Qantas and Jet Star, Virgin AA is also facing competition from a relatively new market entrant, Tiger Airlines. In addition, the operating environment does not favour Virgin AA especially considering that the Australian government has an open skies policy and a multiple designations policy, which has made it relatively easy for new competitors to access the market. Additionally, financial uncertainties have reduced the number of leisure travellers and this has lowered the number of airline service consumers. Other factors such as escalating oil prices, high risk of insurance due to terrorism, and lack of service differentiation in the airline market have made the operational environment for Virgin AA all the more challenging. In order to survive and remain profitable in such an environment, Virgin AA needs a strategic marketing plan for the next five years between 2012 and 2016. The objectives of the strategic marketing plan have been identified as increasing the airline’s market share by 30 percent, increasing its profitability by 200 percent, and making Virgin AA the airline of choice for Australian travellers regardless of their income levels. To attain these objectives, the marketing plan has proposed that the airline should segment its target market into two: business travellers, and individual/leisure travellers. The airline travel services is then to be priced, promoted and packaged in a manner that will appeal to the distinct needs of the two market segments. TABLE OF CONTENTS TABLE OF CONTENTS iii 2.1 Current situation of the company 1 2.2 Macro environment 2 2.2.1. Market 2 2.2.2. Customers 2 2.2.3. Competitors 3 2.2.4. Employees 3 2.3 Macro Environment (PEST analysis) 3 2.3.1. Political-legal factors 3 2.3.2. Economical 4 2.3.3. Social/culture 4 2.3.4. Technological 4 2.4 SWOT analysis 5 2.4.1 Strengths 5 2.4.2 Weaknesses 5 2.4.3 Opportunities 6 2.4.4 Threats 6 1.0 PROBLEM IDENTIFICATION: THE CHALLENGE Virgin Australia Airlines (formerly Virgin Blue airlines) is a low-cost carrier operating in Australia. Established in 2000, the airline has been successful in its marketing campaigns and has been able to acquire a significant market share in Australia. Lately however, the airline’s profitability and business base has been on the decline. Specifically, the airline’s growth has been steadily declining over the past five years (Virgin Australia, 2011a). The eroding profitability and growth therefore calls for a change of strategy in how the company markets its brand and services. It is worth noting that Virgin AA’s main competitor is Qantas, which is a flagship airline. The next competitor in line is Jet Star, which is an airline-within-an-airline, given that its parent company is Qantas. Such a situation therefore means that virgin AA needs a foolproof marketing strategy if it is to survive the cut-throat competition posed by its rivals in its immediate operating environment. One could also argue that having existed in the Australasian market for a decade, Virgin AA has already attained maturity in reference to the product lifecycle. Hence, the airline is experiencing challenges as it strives to hold on to its existing market. As such, it needs to develop a lean business strategy that will enable it re-invent itself if it is to remain competitive. 2.0 SITUATION ANALYSIS 2.1 Current situation of the company Virgin Australia Airlines is the second largest airline in Australia, and over the years, it has successfully marketed itself as a low-cost carrier. Virgin AA first started operating in Australia in 2000 under the Virgin Blue brand name. When it entered the market, it met three main competitors, namely Ansett Airlines, Impulse Airlines and Qantas. Ansett and Qantas had dominance in the domestic routes that Virgin was intent on pursuing. In 2001, Impulse was taken over by Qantas, and on September 2001, the Ansett group collapsed. This meant that Virgin AA was facing less competition. However, the taking over of Impulse by Qantas and the collapse of Ansett was also an indication that the operating environment for airlines in Australia was laden with challenges. 2.2 Macro environment 2.2.1. Market When Virgin airlines started operations in Australia, it had two aircrafts plying a single route. Fast forward to 2011, the airline directly operates in 29 Australian cities, with its main hubs located in Melbourne, Sydney and Brisbane. By October 2011, the company’s fleet had 87 aircrafts and 47 pending orders for new aircrafts (Virgin Australia, 2011a). Currently, the airline has a fleet of Boeing airplanes, Embraer jets and Airbus jets. When the airline first started, it operated as a low-cost carrier. However, it has since changed its business models, and now targets the business travel market, where it has successfully combined the ‘no frills’ mantra adopted by low-cost airlines with service offers comparable to what is offered by full-service carriers. According to Bamber et al (2007), the airline’s new business model has packaged it as a worthy competitor in the business travel market, which was previously dominated by Qantas. In 2011, Bamber et al (2007) note that the airline took its business strategy a step further through a change of name from Virgin Blue Airlines to Virgin Australia Airlines, the introduction of on-board catering services and the introduction of new crew uniforms to match its new image. Additionally, the airline introduced the business class travel status. 2.2.2. Customers Being a low-cost airline, Virgin AA targets consumers who do cannot afford to spend huge amounts of cash on airline travel. The airline also seeks to appeal to consumers who in spite of desiring to spend limited amounts of money on airfare, are also intent on getting superior onboard services. In an apparent move to appeal to customers who want to combine comfort and value for their money, the airline introduced the premium economy class in 2008. 2.2.3. Competitors The main competition in Australia for Virgin AA comes from Qantas airlines, which has not only managed to capture a sizeable market segment, but has also endeared itself to the Australian company as a bona fide local carrier (Bamber et al., 2007). To fight off competition from Virgin AA, Qantas, which was traditionally a high-end carrier, launched its Jet Star subsidiary to compete with the former on pricing (Bamber et al., 2007). Tiger Airways is also another competitor launched in 2007 with its target being the low-cost market. Airline % market share Virgin AA 28 Qantas/ Jet Star 58 Tiger Airways, and others 14 Source: PPS Publications (2011). 2.2.4. Employees Information posted on the company website indicates that Virgin AA values its employees and communicates the same through internal meetings, training and development, quarterly road shows involving the employees, annual employee-engagement surveys, and direct communication. Since a majority of its employees have union membership, the company regularly engages with union leaders in order to address matters such as health and safety. Additionally, the company engages with union leaders in order to negotiate enterprise bargaining agreements and other employee awards (Virgin Australia, 2011b). 2.3 Macro Environment (PEST analysis) 2.3.1. Political-legal factors According to Hodgkinson (2006), the Australian policy environment is liberal and this means that new entrants can easily penetrate the aviation industry. This implies that Virgin AA needs to prepare itself for potential new market entrants who would pose more competition in the future. Hodgkinson (2006) further notes that Australia has a ‘multiple designations’ international aviation policy. Such a policy gives designated carriers the right to compete with incumbent carriers for similar capacity (Stamford, n.d.). Additionally, the policy exposes domestic carriers from competition from international carriers (Stamford, N.d.). 2.3.2. Economical Ever since the terrorist attack in the United States 10 years ago (i.e. September 11, 2001), war-risk insurance has become a major economic factor in the aviation industry. According to The Australian Government (n.d), war-risk insurance shields airlines from losses that could occur due to terrorism, strikes, sabotage, riots and acts of war. 2.3.3. Social/culture Competition for skilled labour is relatively tight in Australia and this call for companies such as Virgin AA to invest more in human resource development practices that not only motivate employees but also help in their retention (Commonwealth of Australia, 2006, p. xii). The heightened awareness regarding consumer rights is also something that Virgin AA will have to deal with through employee training and sensitization in order to avoid related litigation in future. In 2003 for example, the Virgin Blue flight attendants wrongfully refused a quadriplegia sufferer travel on allegations that he was probably a terrorist or drunk. The man later filed a lawsuit, which the airline settled (Airline Industry Information, 2003). Recently in January 2011, the airline breached the anti-spamming laws and was consequently fined $100,000 (The West Australian, 2011). 2.3.4. Technological Airline customers are today seeking more information and knowledge regarding different flight service providers, something that has been made possible by the growth registered in information industries (Jiang, 2003). Consequently, airlines (Virgin AA) included will need to invest more in the creation of reliable, accurate and timely sources of information regarding the company’s operations. Newer airplane designs have also made it possible for airlines to acquire larger airplanes that will ideally enable such companies to achieve economies of scale (Besanko et al., 2009, p. 48). For example, a 300-seat airplane is more economical than a 150-seat airplane since the former carries a higher number of passengers at comparably lower costs than the latter especially in relation to fuel costs, and the number and sizes of the cabin and flight crew. This perhaps explains why Virgin AA intends to phase off the Embraer E-170 by the end of 2012. 2.4 SWOT analysis 2.4.1 Strengths Virgin AA has received ‘best low-cost airline’ award in the Australia-Pacific region given by Skytrax, hence indicating that it is among the best domestic commercial airlines in Australia (Virgin Australia, 2011a). The airline has withstood the financial upheavals that rocked most economies in the developed economies in the 2008-2009 financial crises, and even managed to remain profitable (Virgin Australia, 2011a). The airline has a strong brand name (Bamber et al., 2007). 2.4.2 Weaknesses Virgin AA does not have much room to differentiate its services. According to Bamber et al (2007), airlines can either market themselves as low-cost carriers or full-service normal carriers There seems to be an unbalanced structure in the aviation industry in Australia, especially if one considers the multiple designations and open skies policies. Hence, the fierce competition between Qantas and Virgin AA is likely to continue even though Qantas seems to have a head start necessitated by the policy. 2.4.3 Opportunities Virgin AA could tap on the multiple designations policy in order to start offering international air services. 2.4.4 Threats The ever-rising cost of jet fuel (which is promoted by escalating crude oil prices) could make air transport expensive, thus making consumers opt for alternative means of travel. This could end up reducing profitability in the aviation industry. Aviation insurance is also becoming a major threat as fewer insurance companies are willing to insure airlines due to increasingly risky operating environment combined with the high damages they would be required to pay in case an accident occurs. Ansett’s demise, coupled with Australian government’s open skies policy has opened up the country to the possibility of new market entrants thus meaning that Virgin AA could face increased competition in the future. 3.0 OBJECTIVES To increase market share by 30 percent in the five years between 2012 and 2016 To increase profitability by 200 percent in the five year period To package Virgin AA as the airline of choice for all Australians regardless of their economic divide 4.0 MARKET SEGMENTATION By 2010, Virgin AA, then named Virgin Blue had an approximately 28 percent market share in the domestic airline industry. Its main competitor, Qantas, had dominance in the market with approximately 191 aircraft compared to Virgin AA’s 84 jets (Sandilands, 2010). Currently, Virgin AA has segmented its target market in the following criteria Business travellers Business travellers are defined as people whose travel is necessitated by their jobs or careers (Doganis, 2009, p. 196). They are different from leisure travellers since they are more conscious about comfort and convenience. Although not as price sensitive as their leisure counterparts, the business travellers seek good bargains, especially if it is coupled with minimal or no delays, good service, and comfort (Doganis, 2009). Individual travellers Often, these are leisure or convenience travellers who are either travelling for holidays, or visiting friends or family. They are sensitive to price elasticity, and therefore will most likely travel via the airline that offers them the best airfare prices. Doagnis (2009, p. 196) notes that individual travellers’ willingness to spend money on airfare depends on prevailing financial situations. For example, when the economy is performing well and such people have higher disposable incomes, they are most likely to spend more on air travel. If airfare proves too expensive when income levels are low, individual travellers are more likely than business travellers to switch to alternative travel methods such as rail or road. This is especially true because their travel needs are not as urgent as those of the business travellers. These two market segments appeal to the airline’s strategy to position itself as a low-cost corporate carrier. 5.0 ALTERNATIVE MARKETING STRATEGIES To arrive at the three identified objectives, three different strategies were considered. They include: (i) initiating a price war with competitors by lowering prices the routes where Virgin AA flies to; (ii) improving the onboard services in order to attract more customers without necessarily raising the airfare; and (iii) maintaining the current pricing strategy where premium business class travellers are charged a higher fee than the economy class travellers who travel on a no-frills arrangement. In the end, the last option was chosen as the right strategy since it provided the airline with an ideal way of addressing the two market segments (i.e. the business traveller, and the individual leisure traveller). 6.0 SELECTED MARKETING STRATEGY The current pricing strategy where premium business class travellers are charged a higher fee than the economy class travellers who travel on a no-frills arrangement was selected as the right approach to package and promote Virgin AA’s services. The strategy was chosen because a simple analysis on all the proposed strategies indicated that the third option stood the highest chance of maximising returns from the two distinct market segments. A price war as suggested in the first alternative would probably help Virgin AA attain a significant market share, but it would probably compromise the airline’s profitability in the short-term especially considering the high cost of fuel and labour. Improving onboard services would also compromise the airline’s profitability especially considering that this strategy does not consider the need for increments in airfare to match the type of onboard services offered to travellers. Such a strategy would probably deny the airline a chance to break even its expenses on onboard services and its profitability. 7.0 RECOMMENDATIONS 7.1 Pricing Virgin AA will have two different prices on all its routes. Airfare for the leisure travellers’ market segments will be adjusted to match competitors’ airfare, while the business travellers will be adjusted $10 above that. In order to compete well with Qantas in the business travel market segment, the airfare for the business travellers’ market segment will be adjusted to be at least $10 lower than what Qantas will be charging. 7.2 Product The airline will offer basic services for the leisure travellers booked on the economy class travel category, while business travellers booked into the premium business class travel category will be provided with additional services such as additional leg-room, onboard entertainment, food and beverages, and additional luggage capacity. 7.3 Promotion Promotion will be done through mass media campaigns such as TV commercials, bill-board advertisements, radio advertisements and through emails. 7.4 Place/ distribution The airline will continue concentrating of five major Australian cities namely Adelaide, Brisbane, Canberra and Sydney. However, in order to expand its target market, the airline will increase its flights into the larger Australasian region. 8.0 CONCLUSION Air travel in Australia and elsewhere in the world continues being impacted negatively by a combination of factors which include the uncertain financial markets, threats of terrorism, escalating oil prices, and consumers’ cautious attitude towards spending. Leisure travel has especially suffered under the identified conditions and few people are taking it up. Hence, airlines are forced to compete for the reduced market share that is predominantly made up of business travellers. Virgin AA has branded itself as a low-cost carrier, with its target being the business travellers who wish to balance comfort and spending, and the budget conscious leisure travellers. With the current reduction in leisure travellers, the airline may have to change its marketing strategy in order to address the needs of the business travellers who wish to travel aboard comfort, convenient and affordable airlines. At only $10 above the no-frills charge, Virgin AA will provide such travellers with an attractive deal, which will probably attract customers by the numbers. The $10 addition will however be enforced if the total amount charged on consumers will be $10 lower than what Qantas will be charging customers flying to the same destinations. If not, the airline can lower the margin a little lower to even $7 above the no-frills airfare. This strategy is meant to provide Virgin AA with a cost reduction competitive strategy, which will no doubt endear it to the consumers. 9.0 REFERENCES Airline Industry Information 2003, ‘Disabled man settles lawsuit with Virgin Blue’, AllBusiness, viewed November 13, 2011, < http://www.allbusiness.com/operations/shipping-air-freight/602589-1.html>. Australia Government not dated, ‘Pre-election economic and fiscal outlook, The Treasury, viewed November 13, 2011, . Bamber, G. J, Lansbury, R D, Rainthorpe, K., & Yazbeck, C 2007, ‘Low –cost airlines’ product and labour market strategic choices: Australian perspectives’, viewed November 14, 2011, . Besanko, D, Dranove, D, Shanley M, & Schaefer S 2009, Economics of Strategy, 5th Edition, John Wiley and Sons, London. Commonwealth of Australia 2006, ‘Audit of science, engineering & technology skills’, Australian Government-Department of Education, Science and Training, viewed November 14, 2011, < http://www.dest.gov.au/NR/rdonlyres/AFD7055F-ED87-47CB-82DD-3BED108CBB7C/13065/SETSAsummaryreport.pdf> Doganis, R 2009, Flying off course: airline economics and marketing, Taylor and Francis, London. Hodgkinson, D 2006, ‘Restrictions across the Pacific: Australia’s international air services policy and the problems of liberalisation’, the Hodgkinson Group- Aviation Advisors, viewed November 14, 2011, . Jiang, H 2003, ‘Application of e-CRM to the airline Industry’, viewed November 14, 2011, PPS Publications 2010, ‘Virgin Blue’s growth coming from international routes; 18.4 million passengers carried in last 12 months’, Anna Aero Airline Analysis, viewed November 15, 2011, < http://www.anna.aero/2010/06/08/virgin-blues-growth-coming-from-international-routes/> Stamford, C not dated, ‘Contribution to the APEC “Liberalisation Library” on multiple airline designation’, Commonwealth Department of Transport and Regional Services, Pp. 1-6. The West Australian 2011, ‘Virgin Blue fined $110K over emails’, viewed November 13, 2011, < http://au.news.yahoo.com/thewest/a/-/newshome/8634304> Virgin Australia 2011a, ‘About us’, viewed November 14, 2011, < http://www.virginaustralia.com/> Virgin Australia 2011b, ‘Stakeholder engagement,’ viewed November 14, 2011, http://www.virginaustralia.com/AboutUs/CorporateResponsibility/Sustainability/StakeholderEngagement/index.htm. Read More