Airlines in Australia - Essay Example

Airlines Name Institution Airlines Executive Summary Australian tourism of Australia has faced turbulent times as a result of fluctuating economic issues in the Australian international airline industry. The industry has experienced a decline in the international tourism following terrorist attack in the US in September 2001, financial global crisis of 2008 and recently, the war in Asian countries such as Yemen, Iraq, Afghanistan, Syria and Israel. Experts have also quoted major airline accidents as one of the major causes of a decline in the growth of the Australian tourism sector. However, in the recent time the country has experienced some potential growth in the airline industry which is a good sign of growth in the tourism sector. Therefore, this report will analyze Australian international Airline Industry particularly how it influences tourism sector. This assessment task involves an in-depth situation analysis of an airline industry segment of the tourism industry so as to ascertain the major threats and opportunities for the segment at large. In addition, the analysis will focus on the industry participants such suppliers or principals, and the markets for their products such consumers or clients. Lastly, it will project the future of the airline industry in relation to the tourism sector. Table of Contents Airlines 2 Executive Summary 2 Table of Contents 3 1.0 Introduction 4 2.0 The overview of Australian Airline industry 5 3.0 5C Analysis 6 3.1 Company and competitors 6 3.2 Customers 8 3.3 Collaborators 11 3.4 Climate (Pestle analysis) 14 4.0 Trends and Conclusion 15 5.0 References 17 6.0 Appendices 20 1.0 Introduction In a period of early 2000, the airline industry faced a tough time with the decline of demand in air travel and tourism activities (Massachusetts Institute of Technology, n.d). The turbulent times were resulted by the rising terrorism, fluctuating fuel cost and global financial crisis of 2008. Even such issues still remain a threat a challenge to the airline industry and tourism sector. In order to save the face of tourism sector, both the Australian government and airline industry have used different strategies to market their tourism activities to the world to showcase as unique and rich. The situation is attributed to the importance of tourism to the economy. In fact, tourism through the airline industry contributes two thirds of the Australian’s GDP. Tourism Research Australia (2011) stated that the effort has seen the airline sector gaining potential to grow from 2010. In 2010, the outbound travel from Australia and the incoming foreigners increased by 13.4 % from 9% (Australian Government Austrade, 2014). Based on the preamble, this report will assess the Australian international Airline Industry particularly how it impacts tourism sector. This assessment task will involve a detailed situation analysis of the airline industry segment of the tourism industry in order to ascertain the opportunities and major threats for the segment at large. The situation analysis will be conducted using 5C Analysis which includes company, competitors, customers, collaborators and climate. 2.0 The overview of Australian Airline industry According to Kain & Webb (2003), Australia's airline sector is categorized into three classes consisting of the domestic route, regional and international airlines routes. These airline categories perform regular travels ferrying passengers based on their destinations. Their seat capacity starts from 38 seats with a weight of over 4 200 kg (Kain & Webb, 2003). The domestic airline sector includes the mainline scheduled airlines operating locally. This route is dominated mostly by city-city routes. Domestic routes carry small number of passengers from 100 to 250 and operated majorly by the low-cost airline which are mainly Jetstar (Qantas subsidiary) and Tiger Air Australia (Virgin Australian’ subsidiary). IBISWorld report of 2014 claimed that Australian international airline industry major market segments encompass business travels in foreign countries, general outbound consumers, holidaying tourists and freight forwarders. However, the airline industry majorly depends on the tourist for profits. The Australian international airline industry is typified by six key market players consisting of Qantas Airways, Virgin Australia, Emirates airlines, Singapore Airlines, Malaysia Airlines, Qatar Airways and Air New Zealand (IBISWorld, 2014). Qantas become the first airline company to be set up by the government in the country, and the one which stated to target international markets. The airline company is a segment of the tourism sector, which highly depends on the factors that influence tourism industry. Zervas and Proserpio (2014) argued that in 2001, after the September 2001 New York terrorism attack, many people were afraid to tour different parts of the world as a result of fear for their lives. In that incident four passenger airlines were hijacked by terrorists and crashed in the Pentagon, World trade center and California. Also, the instability of the economy has been an impediment to the growth of Australia Tourism and Airline market (Quin & Kookana, 2013). Airline market highly depends on high disposable income due to its nature of being a luxury product or service. Despite the industry being fragile, it has shown some resilience and is back growing. Australian Productivity Commission (2015) stated that the sum total spending on tourism contributed to nearly 3% of the country’s GDP equivalent to % 11 billion in 2014. The report also shows that one third of that contribution is accounted by the international tourism. The share of international tourism registered 60% of service exports in 2014 (Australian Productivity Commission, 2015) 3.0 5C Analysis Australian international Airline industry’s capability to continue improving and becoming stronger compared to other airline industries of the world can be attributed to its competence and quality status which comes from the internal environment. This involves the market players’ competence, competitive level, and customers bargaining power, collaborators and positive climatic environment for doing business. To completely understand this Australian international airline market, this situation analysis will use the 5C analysis to assess external and internal environment to know its capabilities, business environment and customers. 3.1 Company and competitors According to Australian Government (2014), Australia airline industry is defined by both domestic and international airline companies which operate aircrafts on the scheduled domestic and international destinations across the world. At the present, Australian international airline sector is considered a low risk business with high competition due to rising of both the long haul and low-cost airlines. The Airlines sector in this segment holds a concentration that can best be regarded as medium level (IBISWorld, 2014). Since international contributes a large segment of the GDP this report will wholly focus on this segment. The Australian international airline sector consists of two locally owned companies of other foreign owned company. The locally owned companies include Qantas and Virgin Australia Airlines. Foreign-owned companies comprise of Emirates airlines, Singapore Airlines, British Airways, Malaysia Airlines, Qatar Airways Etihad Airlines, American Airlines, Southwest Airlines and Air New Zealand among others. According to IBIS world (2014), Qantas remains the largest company by revenue have a market share of 29.6 percent. The second largest market player in this industry is Virgin Australia with a market share of 7.8%, followed closely by Singapore Airlines with 7.4 percent. Emirates has a market share of 6.6 %, Air New Zealand 4.0% while Malaysia Airlines has 2.8% (see appendix 1) (IBISWorld 2014). Among these airline companies, Qantas and Virgin Australia operate both domestic and international routes while the remaining ones only operate international routes. The expansion, however, has been predicted to boost the Australian tourism industry as a result of the growth of the economy particularly in the Middle East. Zervas and Proserpio (2014) posited that most of the Middle Eastern companies now have a high disposable income which they can use to visit Australia is rich based on tourism needs. Competition in the airline sector is based on price and product branding. These market players have different prices offered to customers anchored on the different types of cabins. In the most cases, companies have three international cabins for their tourist namely economy class, business class and first class. Tourism Research Australia (2011) claimed that economy class remains the cheapest while first remain the most expensive with tourist having to part with large some of dollars to get the services offered in such cabin. Even though, all major international airline companies have business, they tend to differ in prices so as to attract customers in various ways. For instance, Park (2007, p.239) claimed that Qantas use psychological pricing to convince customers that they offer a discount to them. The fierce competition in the Australian market has led to the high cost of operation which firms use in branding and marketing strategy so as to develop loyal customers. The change in the market has also transformed the face competition in different ways. Ansett Australia becomes one of the victims of September 2001 New York bombing when its profits reduced tremendously. In 2002, the airline company was put under administration after experiencing some huge financial collapse (Kain & Webb, 2003). What followed was that companies reduced their seat capacity since the air travel demands from tourists significantly decreased. Operating large airlines with many seats would have caused more losses to the industry players as a result of high costs of operation. Today, the Australian international airline market is moderately regulated (IBISWorld, 2014). Meaning market entry is not barred if the company meets the requirements. The situation means many players are likely to enter the market, hence reducing the fare prices. As a result, with low fares, many foreign tourists are likely to come to Australia thus improving the economy through foreign exchange. 3.2 Customers The Australian International Airlines sector's has experienced many challenges in the recent past. The global financial economic downturn 2008 reduced the growth of revenue in Australia (Australian Productivity Commission, 2015). Nonetheless, Tourism Research Australia (2014) contended that the profits are projected to increase in the next five years from 2015 through to 2020 because of stable growth in the number of passengers and the increase of the international low-cost airlines with cheap prices. The situation is largely attributed to the increase in the number of tourists from Australia’s nearby continent, Asia that has been boosted by international volumes of passengers. Industry profits are projected to increase at a yearly rate of 4.5 per cent in the next five years from 2015 through to 2020 reaching $17.2 billion Australian (Productivity Commission, 2015). Seetaram (2012, p.1536) argued that the rising of Australia as one of the best tourism target markets has benefited global airlines, and offered new entrants an opportunity to take advantage of the rising tourism markets. Customer in airline sector can be categorized based on tourism activity and social status, such business tourist, incentive tourist and backpacking tourist (Oh, 2005, p.42). Business tourist as the name suggests particularly encompasses business related trips across the globe. Business customers attend meetings, special events, and exhibitions in other countries such as Australia to participate or showcase their products (see Appendix 2). An example of such tourists are salesperson travelling to a particular city, let’s say China to Melbourne to attend an exhibition to promote his products or services. Just like the name they normally use business class of an airline which are normally spacious and have seats which can be turned into beds. Though, companies brand their cabins differently to suit the needs of their customers and create competitive advantages. Another customer segment is the education tourists. This segment tours other countries attend an institution of learning to study or undertake an exchange program (Kim, Chenb & Jang, 2006, p.927). Similarly, they may be attending workshops to acquire new skills. Customers in this category use different cabins from economy, business class to high class depending on the level of social status. A student who is yet to secure a job would use the economy class to save some money. Oh (2005, p.40) asserted that, another category of customers which contributes to Australian tourism sector growth is incentive tourists. In this segment, employees are rewarded with a paid up holiday on the basis of their good performance. The companies understand that an incentive provided by the company to travel for holiday motivates staffs to put more efforts towards their work so as to improve the individual and company performance. However, Weaver and Lawton (2007) stated that there is a segment of customers who travel for leisure to explore the unique scenery in other countries. When deciding to travel to a certain nation, tourists usually put into consideration the destination features they fancy to visit. Song, Dwyer and ZhengCao (2012, p.1659) posited that generally, individuals travelling to Australia fancy destinations which have natural beauty, wildlife and beaches. In a period between 2013 and 14, nearly 75% of the international tourists to Australia took part in nature-based or outdoor activities like camping at beach, national park or bushwalking. Some of the known tourist attraction sites in Australia include Great Barrier Reef, Fraser Island, Blue Mountains National Park, Cable Beach, Whitsunday Islands, Gold Coast, Sydney Opera etc (Weaver & Lawton, 2007). Such customer normally saves money for sometimes with a target to visit new countries. Customers in this segment are price conscious, but want high quality services. It is for this reason that most of the international airline market players have the economy class to accommodate them. Companies lower costs to attract more customers. According to Padachi, Seetanah and Rojid (2011, p.11), switching cost has become a norm in the industry yet customers are rarely loyal. Price conscious customers often compare fares between industry players in order to make a purchase decision. Companies such as Qantas, Virgin, Emirates and Singapore airlines today offers loyalty programs to reduce a situation of losing more customers to rival companies (Murph, 2010, p.6). However, it should be noted that, generally, most Australian airline company customers are middle class customers with high disposable income which can be used to buy tickets which is highly considered as a luxury service. China is regarded as the fastest rising international tourism source in the globe, with spending rising nearly ten times from 2000. Australian Productivity Commission (2015, p.6) claimed that China has become the second-leading international tourist source to Australia just after New Zealand (see appendix 3). The trend is projected to continue with China still expected to be a critical source of tourism to the Australian market. 3.3 Collaborators Australian international air services have many industry players which influence the operation of companies and airlines. Some of these bodies include, International Air Transport Association, Civil Aviation Safety Authority and Airservices Australia. Prices are controlled by International Air Transport Association companies set their prices which are with the range of the regulatory body. According to the Australian (2014), Airservices Australia was established by the Australian government to provide environmentally-friendly and safe management of airline traffic. Just like Airservices Australia, Civil Aviation Safety Authority serves as the overall body or agency charged with the responsibility of ensuring the safety of planes and the traffic. Carbon tax is one of the policies enforced by the Civil Aviation Safety Authority to reduce carbon emission into the atmosphere (The Australian, 2014). Since many airlines still emits greenhouse gases, high carbon tax might discourage them from operating in Australia. In some way, it may discourage tourist too from coming to Australia. This is few planes coming to Australia could hike fares hence discouraging tourists. Trade agreements and foreign policies are one of the factors that influences a countries’ airline sector operations. In negotiating trade agreements and positive foreign relations, arrangements which entail treaty-level instruments like memoranda of understanding are considered. Memorandum of understanding in this perspective outlines the routes which the airlines can operate, and capacity in terms of seats (Australian Productivity Commission, 2015, p.110). Australian Productivity Commission (2015, p.100) went ahead to claim that today, Australia has air services agreements with 94 countries as way collaboration to seek mutual benefits. Over the years, the Government of Australia has pursued international aviation liberalization as a matter of national interest in the increasing tourism sector and its GDP. A major attribute of the international airline policy of Australia has been to ensure that policy existing under the bilateral agreement stays ahead of the demands. The air policies of between Australia and other countries consist of open skies agreements which entail unrestricted seat capacity with some countries, including the US, the UK, Japan, Singapore, New Zealand and Switzerland (Australian Productivity Commission, 2015, p.111). The agreement with these countries has facilitated a significant increase in the number of tourists coming to Australia. Part of the agreement also limits number of international airlines operating in key airports such as Sydney, Brisbane, Perth and Melbourne Tourism Research Australia, 2011). The situation has enabled distribution of growth as most, if not all airports and businesses within have been able to benefit from foreign exchange from tourists. Other collaborators in tourism and airline industry are the travel and ticket agents and car renting companies. Ching-biu Tse (2003, p.455) contended that there has been an increase of travel and tickets agents as a result of changes in the business environment. In recent years, business has changed and people are now operating 24-hours economy thus have tight scheduled. To ease tough life of the modern day business people, many travels have come into place which can help them arrange traveling process from air ticketing, hotel bookings and traveling arrangement in the host nations (Ching-biu Tse, 2003, p.456). Such companies collaborate with airline companies so as to be able to get tickets for their clients. Other collaborators who have influenced Australian international airline market are the suppliers. Massachusetts Institute of Technology (n.d) opined that there are two suppliers who majorly influence airline business and they consist of aircraft manufacturers and fuel dealers. The airline craft manufactures has a high bargaining power over the airline companies such as Qantas, virgin, Emirates and Singapore because they are only two major companies. The reputable aircraft manufacturers are Boeing and Airbus and have control over the market prices (Massachusetts Institute of Technology, n.d). These companies may hike price based on the prices but due to competition based on branding and new fleets, airline companies will be forced to buy new high quality aircrafts to sustain competition. In addition, bargaining power of buyers in international airline industry is important because it determine the revenues they make (Kotler & Armstrong, 2010). Unfortunately, suppliers in the fuel industry have a high control and barging power over the buyers. To be able take advantage of the influence, industry sometimes apply strategies like hedging to reduce the effects of fluctuations of prices. As the high prices of new aircraft, buying in bulk is highly recommended in an effort to reduce bargaining power of the two suppliers (Kotler & Armstrong, 2010). 3.4 Climate (Pestle analysis) Climate entails the environmental forces which influences business operation in an industry. Climate includes PESTLE factors such as politics, economics, social technology and legal issues. Australian international airline sector is influenced by various political and socio-economic which are either good or bad for tourism the country tourism sector. IBISWorld (2014) stated that the Australian international Airlines industry has numerous levels of policy and regulations. However, the country has allowed free trade, including airline service between themselves, including China, the US, the UK, Singapore, Malaysia, United Arab Emirates among others. Qantas and Virgin Australia have had government incentives making them to look like monopoly. These two had performed before the 2008 economic crisis, but are today struggling to sustain competition from Singapore Airlines and Emirates airlines more so in international markets (Seetaram, 2012, p.1539). Australian Government understands the importance of its airlines to promoting the tourism sector therefore controls their ownership, provides political patronage and protects them from market competition. IBISWorld (2014) reported that the Government of Australia had imposed 49% of local-ownership on Qantas Airline to make sure it remains a national carrier and enjoys the bilateral agreements and incentives. IBISWorld (2014) went ahead to state that as a national carrier, Qantas on different times has received political patronage such as subsidies and tax reduction in a bid to give a competitive edge. The same has been done to Virgin Australia, despite having foreign origin. Weaver and Lawton (2007) claimed that the government has also continued to provide security in airports and tourist hotels and attraction sites to improve the image of Australia. In return, the two airlines have marketed Australia as a unique tourist destination suitable for foreigners. Marketing and growth of economy in Australia and Asia since 2010 has improved the demand for air travel (Quin & Kookana, 2013). Advancement of technology has played a big part in improving operations in the international airline industry. Technology has been used to improve customers’ service. Today, customers do not need to go to the airport to book plane. Ticket reservation or booking can be done on the company website or just by making a phone call to the company. Murph (2010, p.5) argued that technology also presents an opportunity for airline companies to market their products to tourist across the globe. Today, Australian airline companies use social media like Facebook, Twitter and Instagram to market their products and service to customers all over the world. Travel agents also use technology such as website and search engine to depict Australian Airline fares, Hotel prices and tourist attraction sites (Australian Productivity Commission, 2015). Some of the common travel agent companies with presence in Australia and across the globe include Travelclick.net, Travelocity.com, Booking.com, Tripadvisor.com, Expedia.com, Hotels.com, and Lastminute.com among others 4.0 Trends and Conclusion The report has established various issues which are likely to shape and influence tourism and airline Australian. Technology stands out as the major factor which will influence the tourist decision to travel with a particular airline company. Today, customers need efficient website with updated information on the service of the company. Companies with simple websites are likely to gain competitive advantage. Provision of internet is likely to shape decision for a customer to buy service with an airline company. Prices are another important factor which companies cannot ignore. With many airline companies coming into the market, much option is provided to tourist coming and leaving Australia, hence companies must differentiate their prices while increasing quality and comfort to gain competitive advantage. Therefore, this report concludes that Australian international airline companies must encourage innovation if they want to remain relevant in the competitive global market. 5.0 References Australian Government. (2014). Australian Air transport. Retrieved 27th May 2015, The Australian (2014). Airlines face carbon tax price scrutiny. Retrieved 27th May 2015, Australian Productivity Commission. (2015). Paper Australia’s International Tourism Industry. Retrieved 27th May 2015, Australian Government Austrade. (2014). Tourism update: updated results to ‘state of the industry 2013’ tourism 2 research Australia. Retrieved 27th May 2015, < http://www.tra.gov.au/documents/State-of-the industry/Tourism_Update_March_Qtr_2014_FINAL.pdf> Ching-biu Tse, A. (2003). Disintermediation of travel agencies in the hotel industry. Hospitality Management, 22, 453-460. IBISWorld. (2014). IBISWorld Industry Report I4902: Domestic Airlines in Australia. Retrieved 27th May 2015, Kim, H.J., Chenb, M., & Jang, S. (2006). Tourism expansion and economic development: The case of Taiwan. Tourism Management 27, 925–933. Kotler, P., & Armstrong, G. (2010). Principles of Marketing, 13th (Global) ed. Boston: Pearson Education, Inc. Kain, J., & Webb, R. (2003). Australian Airline Industry. Parliament of Australia. Retrieved 27th May 2015, http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp0203/03RP10 Massachusetts Institute of Technology (MIT). (n.d). Airline Industry Overview. Retrieved 27th May 2015, < http://web.mit.edu/airlines/analysis/analysis_airline_industry.html> Murph, D. (2010). Technology and innovation in airline distribution. Airline Business, 7(3), 5-8 Oh, C. (2005). The contribution of tourism development to economic growth in the Korean Economy. Tourism Management, 26 (1), 39-44. Padachi, K., Seetanah, B., & Rojid, S. (2011).Tourism and Economic Growth: African Evidence from Panel VAR framework. University of Technology, Mauritius, 1-22 Park, J.W. (2007). Passenger perceptions of service quality: Korean and Australian case studies. Journal of Air Transport Management, 13, 238-242. Quin, T., & Kookana, J. (2013). Tourism businesses in Australia, June 2010 to June 2012. Retrieved 27th May 2015, Seetaram, N. (2012). Immigration and international inbound tourism: empirical evidence from Australia. Tourism Management, 33(6), 1535–1543. Song, H., Dwyer, L., & ZhengCao, G.L. (2012). Tourism economics research: a review and assessment. Annals of Tourism Research, 39(3), 1653–1682. Tourism Research Australia. (2014). State of the industry 2014 tourism Research Australia. Retrieved 27th May 2015, Tourism Research Australia. (2011). What is driving Australians' travel choices? Retrieved 27th May 2015, http://www.tra.gov.au/documents/What_is_driving_Australians_travel_choices_FINAL_-_2_June.pdf Weaver, D., & Lawton, L. (2007). Tourism Management, Third Edition (Wiley Australia Tourism). John Wiley & Sons Zervas, G. and Proserpio, D. (2014). The Rise in the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry. Boston University. 6.0 Appendices Appendix 1: major players Source: (IBISWorld 2014) Appendix 2: Tourist Types and Trends Source: (Australian Productivity Commission, 2015). Appendix 3: Sources of Australian Tourists Source: (Australian Productivity Commission, 2015). Read More