Current Strategic Plan of Virgin Atlantic - Term Paper Example

 Companies in the airline industry are changing the way business is performed The tough times that started after 9/11 created a new reality and global perspective in which unity is the key for the survival of all the players involved in the air transportation game from the airports, manufacturers, travel agencies and airlines. One of the most success small airlines in the United Kingdom is Virgin Atlantic. This company has grown tremendously in last 25 years to become a leading airline in the European market. This report analysis Virgin Airline by providing five different segments on the topic: company profile, SWOT analysis, current strategic plan – Virgin Atlantic, industry analysis and conclusion / recommendations. Company Profile Virgin Atlantic is a UK based airline company with 25 different destinations around the world. The company was founded by Richard Bronson in the 1980’s; at the time Mr. Bronson was the owner of the popular record label Virgin records. The company grew tremendously under the guidance of Mr. Bronson, a decade after starting operation the company was sold to Thorn EMI (Virginatlantic, 2007). The firm has taken a trajectory towards becoming a world class air transportation operation. A large share of the business equity of the company was sold in 1999. Before the start of the 21st century 49% of the company was sold off to one of the largest players in the Asian and European market, Singapore Airlines. The company strategic focus changed once Singapore Airlines gained a lot of influence in the decision making with it’s nearly 50% influence in the business. Virgin Atlantic operational performance The latest information available from the company that illustrates the operating performance and financial performance of the company is the annual report for the fiscal year 2004-2005. During this business cycle the company the company had total revenues of 7813 million pounds with a net operating profit of 215 million pounds (Airliners, 2007). Both these performance numbers are an improvement over the previous business cycle. The company’s debt to equity ratio for fiscal year 2005 was 0.42, its operating margin was 6.9%, and the return on assets of the company (ROA) was 9.35% (Annual Report: Virgin Airlines, 2005). Appendix A illustrates the business ratios in 2005 for the Airline Industry compiled by Dun & Bradstreet database. The company’s performance in comparison with the airline industry was outstanding. The industry average return on assets metric is 4.8%. The company had a ROA nearly double the industry median in 2005. The net margin of the industry is 3.8%, Virgin Atlantic is net margin is 81% higher than the industry. The company flew over 35,000 passengers in 2005 with a passenger load factor of 74.8% (Airliner, 2007). SWOT Analysis Virgin Atlantic has a highly profitable operation with above average financial performance. The sound finances of the company allow the firm to have excess cash flow which eliminates cash flow deficiencies and allows the managers to utilize their valuable time to increase shareholder wealth. The company has a merger arrangement with Singapore Airlines. The deal increased the company’s capital and enabled the firm to gain many advantages with the integration and cooperation among two companies in the same industry. The company gained efficiencies in many operating areas due to this alliance. The company gained access to an alternate information technology system and new database of customers which be used to gain sales leads. The human capital of the company appreciated in value by the asset gaining exposure to different work arrangements and corporate atmosphere in joined work efforts with Singapore Airlines. The marketing efforts of the company includes project to support its main line of business and Singapore’s businesses. The customer service of the company is outstanding. The company has a great online information platform which includes a customer center to take care of most of the common needs of its passengers. The customer center includes links for booking, airport matters, refunds, special needs customers, code-share fights and other concerns. The company has a lot of process which can be performed electronically for the customer’s convenience. The company just like any other enterprise has its weaknesses. The firm’s overall flight destination has a total of only 25 places. The company is a small airline still and it has to increase its total amount of aircrafts in order to be able to increase its air traffic and expand into other markets such as the South American and Australian markets. It takes time to build up capital assets in this capital intensive industry which depends on machinery and equipment for expansion. A new plane can cost hundreds of millions of dollars per unit. Other airlines have been around for 50 to 100 years thus they have had time to stock up on assets. The company has the opportunity to purchase new aircrafts including the industry changer the A380 combo-jet aircraft. The plane is the largest commercial aircraft in the world which was introduced into service in 2007 by Virgin Atlantic’s partner Singapore Airlines. The plane is a luxury craft with a capacity for 550 passengers with advanced flight technology which allows it to run in less more and more efficiently that other smaller planes. It is also a very luxurious craft that will attract a lot of new customers. The company has orders with the manufacturer of the A380, Airbus, for planes to be delivered in the year 2013 (Virgin-atlantic, 2007). Virgin Airlines faces different threats associated with risks of the air transportation industry. Rising gas prices are the biggest threat in the near future for companies in the transportation industry that puts in danger the survival of many players in this industry. Gas prices are out of control and currently reach all time highs. The prognostic for the future is further inflation in the price of petroleum based products. Airlines work on the international level, thus foreign currency fluctuations are a threat for international firms. One of the biggest consumers for the service provided by airlines is the American community. The downfall of the dollar and the never ending war are two factors that may cause a major recession in the United States which hurts all companies in the airline industry. Airports the place where airlines such as Virgin Airlines operates have become after 9/11 terrorist targets that have the threat of complete destruction which would cause great human and monetary losses. The cost of labor is rising due to inflation in related fringe benefits such as medical plan coverage on top of the typical labor cost rise. The aging workforce is another threat which may hinder the ability of airlines to recruit key professionals such as pilots which are essential to operate the organization. There is greater global competition from new companies being created in many emerging economies. A threat for Virgin Airlines in the near future is alternative air travel vehicles such as the Moller Skycar. The Moller Skycar is a prototype of four passenger car that travels in the air at hundreds of miles per hour to take passenger long distances at a short interval of time. The Skycar can reach speeds of 360 miles per gallon (Bolander, 2007). Current Strategic Plan – Virgin Atlantic The current strategy of Virgin Atlantic involves organic business model to achieve business growth over a long period of time. The company’s partnership with Singapore Airline allowed the firm to switch its fleet to two basic plane models: Boeing 747 and the Airbus A340 with orders for A380 are in process to arrive on 2013. The company uses a strong corporate responsibility strategy that has helped the company achieve customer recognition world wide and build brand value. The company has environmentally friendly practices as part of its strategic corporate responsibility plans. Some of the objectives of the company are: The company plans to improve fuel efficiency by 30% by the year 2020 Obtain 50% wastage recycling by 2012 A commitment of buying 100% electricity needs from the UK site and 20% overall reduction by the year 2012 (Virgin-atlantic, 2007). Industry Analysis The Airline industry drastically changed after the dramatic effect of 9/11 hurt the industry worldwide including the European continent. The industry in Europe is expanding due to the integration of the member nations of the European Union. In a period from 1999 to 2005 the growth for high fare flights in Europe was 4.9%, while low fares economic flight grew at a rate between 16% to 18% (Datta & Shakraverty). Lower cost trips are in high demand due to the increase in intra-Europe flights among the European people. The industry has a big impact in the economy of Europe and overall sales are associated with the economic condition at the time, since most flights are leisure events which take place when Europeans have extra disposable income to spend. The industry faces many challenges including rise of gas prices. New planes such as the Airbus 380 are setting new standards in the industry for flight efficiency and overall passenger capacity. The airline industry in Europe and worldwide has seen a large amount of mergers between company in order to create operation synergies to achieve greater levels of productivity and operational savings associated with the integration of two firms. Virgin Atlantic is an example of a company that followed another merging trend in the industry which is cooperating agreements among companies. Virgin Atlantic signed a deal with ANA to share flight routes (Japancorp, 2007). The customer takes an outbound flight with one Airline and at the end of the trip takes an inbound flight with the partner airline with a same roundtrip ticket purchased at either corporate facility. In order to survive many airlines in Europe are restructuring their operations to streamline their operation and achieve cost savings. The company’s in this industry have a similar dilemma in that many operating expenses despite being variable cost are items which are very difficult to change the cost associated with them. Some examples of the types of expenses are difficult to reduce are fuel consumption, rental space at airports, aircraft ownership, maintenance of fleet and ground handling charges (Datta, et al). The optimal business functions to target are the supply chain and marketing activities. Another major trend in industry are free air agreements among nations. The European airline industry is bargaining with the Canadian government to achieve a free air agreement among the two continents (Legal News in Brief, 2007). The other major deal on the works among the two biggest players in the industry is the Open Air Agreement among the two powerful nations: USA and Europe. Greater expansion of European airlines into the US market is under way (Churchill, 2007). Recommendation / Conclusion Tough times at times help bring people together to join forces and achieve greater things. The tough times the airline industry has faced has made companies such as Virgin Atlantic stronger by getting help from different partners such as Singapore Airlines and RNA. The European air transportation market is integrating itself more into the global economy. Virgin Atlantic currently is facing some tension with its main partner Singapore Airlines a situation that must be cleared up. Singapore Airlines wants to sell its equity in Virgin Airlines. The company has several option which include buying the stocks back, helping Singapore find a buyer for their equity interest or reaching an agreement with Singapore to continue the partnership. The company has a bright future if it continues to follow the latest industry trends such as partnership and expansion into free air zones. References Airliners.net (2007). Civil Aviation. Retrieved December 22, 2007 from http://www.airliners.net/ Annual Report 2005: Virgin Airlines. Retrieved December 22, 2007 from http://www.airliners.net/ Bonander, R. (2007). Moller M400 SkyCar. FutureCars. Retrieved December 24, 2007 from http://www.futurecars.com/reviews/moller-skycar.html Churchill, D. (2007). Flying the Flags. Business Travel World. Retrieved December 24, 2007 from EBSCOhost database. Datta, D., Chakravarty, S. European Airline Industry: Strategies for a new millennium. SkyTech Solutions. Retrieved December 25, 2007 from http://www.skytechsolutions.com/pdf/researchPapers/European%20Airline%20Industry%20-%20Strategies%20for%20the%20New%20Millennium.pdf Japancorp.net (2007). Virgin Atlantic announces alliance with ANA. JNC Network. Retrieved December 25, 2007 from http://www.japancorp.net/Article.Asp?Art_ID=14323 Dun’s & Bradstreet (2007). Transportation Air Business Industry Ratios. Retrieved December 23, 2007 from Dun’s & Bradstreet database. In the News Brief. Airfinance Journal (355). Retrieved December 24, 2007 from EBSCOhost database. Virgin-atlantic.com (2007). All About Us. Retrieved December 23, 2007 from http://www.virgin-atlantic.com/en/us/index.jsp Appendix: Airline Industry Business Ratios 2005 (Dun’s & Bradstreet, 2007). Read More