Air Transat Internal and External Analysis (Aviation Industry) - Research Paper Example

Air Transat Internal and External Analysis (Aviation Industry) Different tools will be used in the analysis of the internal and external analysis of Air Transat to aid in reaching a conclusion on the strategic issue facing the company. The paper will make use of a number of strategic tools in the analysis of the external environment of Air Transat including PESTLE, Porter’s Five Forces, Dormant Economic Feature Analysis, Driving Forces Analysis, and Framework for Competitor Analysis, key success factors, and strategic group map. 1. PESTLE Analysis Political: government policies in the aviation industry are confusing in terms of the relation between employees and the industry employers (Henry, 2011). Government roles in unionization and time spent at work are some of the political factors affecting the aviation industry and Air Transat. Economic: economic changes including high maintenance costs of aircrafts affect the aviation industry and its players. Social: social changes including preferences for eco-friendly companies and emphasis on Air Transat in augmenting brand loyalty has allowed the business to overcome social change and remain competitive in the Airline industry. Technological: The technology that Air Transat employs has made the company receive a competitive advantage. It is reported to be the first airline to offer RAVETM Wireless; this enables the customers to stream movies, television shows, music and other media files to their tablets and smartphone. Legal: The legal framework that surrounds the Air Transat is mainly from the aviation authority in the respective countries and affects the ability of the company in meeting the needs for regulation and compliance. Environmental: the need for conservation of the environment has never been greater and with consumer emphasis on the need for a reduced carbon foot print, airline companies including Air Transat have to reduce their emissions and protect the environment in its operations. Implications From the PESTLE analysis it is evident that political, economic, social, technological, legal, and environmental issues affect the performance and operation of companies in the aviation industry. The PESTLE factors affect the ability of Ait Transat in meeting consumer needs, profitability, and adhering to regulations in different global locations. 2. Dominant Economic Features analysis The airline industry has a number of dominant economic features that determine the success of a company. These include: Service life cycle: the airline industry has reached the maturity stage of service lifecycle meaning no growth or decline. The industry consists of many small and large airline companies with the service being provided to local, regional, and global levels according to the size of the company. Number of buyers: buyers consist of groups, individuals and families in the airline industry with bulk buyers having more bargaining power compared to individuals. Buyers who have loyalty cards access the most bargaining power owing to discounts. Differentiation: differentiating on price, service, and quality ensures companies success in the market. Since there are many buyers in the market, low price, quality, and customer reviews are the main focus in the airline industry. Suppliers: two main suppliers, Airbus and Boeing supply the whole airline industry with aircrafts consisting of thousands of aircraft companies. Technological advancement aids in product improvement and development. Experience: having experience in the airline industry is the main advantage for success resulting in the inability of instant success for new entrants. Experience allows for airline companies to develop economies of scale allowing for cheaper cost and pricing strategies. Experience also allows companies to have a better understanding of costs and profitability strategies. Implications Air Transat operates in the international and global level being the third largest airline company in Canada and has to operate in a mature life cycle of service requiring quality service provision and great emphasis on customer service. Players in the airline industry range from many small to very large players operating in national, regional, international, and global levels with the aim being to expand globally and ensure efficiency of operations. Focus has shifted towards low prices for the consumers resulting in the increased aim for airline companies to offer the lowest cost. Having only two aircraft suppliers, Boeing and Airbus in the airline industry has resulted in the payment of high prices by airline companies. Experience offers advantage to airline companies in terms of cost, reputation, profitability, and knowledge of the market. 3. Porter’s 5F analysis Porter’s five forces analysis provides a framework for understanding the state on power of buyers and suppliers, rivalry, substitution, ease of entry in the industry (Hill & Jones, 2009). Intensity rivalry within the industry: High The aviation industry has high rivalry with the main players in Canada alongside Air Transat being Air Canada and West Jet. Threat of substitute product: Moderate Substitution is affected by the quality, price and customer service in the airline industry with the substitutes being cars, ship, and train. Threat from terrorism has also affected the number of customers using airlines preferring other means of transport. Threat of new entrant: Moderate Owing to many players in the airline industry already, the existence of many regulations, and the need for knowledge and technical knowhow to compete effectively, there is moderate threat of new entry. Bargaining power of suppliers: Moderate The company’s operations are done intermediaries, as part of a multi-channel strategy it has adopted. The intermediaries act as the main suppliers to the company, and when their bargaining power is high the profit margin of the company are brought down. The company is always looking for new intermediaries to reduce the bargaining power. The bargaining power of the buyer: High Consumers are very sensitive to provision of high quality customer service including measures for handling of language,. Ensuring low flights are cancelled, and that flights arrive and leave on time to meet consumer needs. Safety concerns are the other areas that have to be considered in ensuring best customer service Implications High bargaining power of the buyer mainly affects the Air Transat owing to the availability of low cost transport means and the Canada Airlines introduction of lower cost carrier, Rouge has affected the situation further (CAPA, January 17, 2014). High competition affects the performance of Air Transat but it has responded to these through reducing costs and augmenting customer value. The threat of new entrant is minimal to Air Transat owing to its established status in the market. 4. Driving Forces Analysis Economic downturn: the worldwide recession in 2008/2009 period affected the airline industry resulting in the reduction of passengers owing to reduced ability to purchase tickets. The recession also increased operation costs with fuel costs consisting of between 40 and 50 percent of a company’s operational costs in the airline industry. Terrorism: Terrorism after the 9/11 attacks resulted in augmented fuel costs, increased government regulation of the airline industry to ensure consumer safety and fear of flying by consumers. Seasonal ticket sales: tickets sole by airline companies are high in summer and low in winter. Air Transat and other companies are affected negatively by low sales of ticket during winter reducing revenue and profitability. Implications The 9/11 terrorism bombing clearly had a huge impact on the airline industry in terms of reduced tickets sales numbers and increased cost of operation. Economic recession also affected the airline industry and having a comprehensive risk management plan at Air Transat is the main way of dealing with the negative impacts of external factors that affect profitability, cost, and ticket sales/revenue. 5. Strategic Group Map analysis Price/ Reputation/ Performance Market share Compared to the main competition in the market Air Transat has a lower market share and a reduced profitability owing to high experience and market presence by Air Canada and West Jet. 6. Framework for Competitor Analysis The main competitors to Air Transat are Air Canada and West Jet. Air Canada has a more recognized brand in Canada and international markets and has a dominant position in Canada. Air Canada mainly deals with goods and passenger transportation and has recently released its low cost carrier Rogue in response to the competition as a way of consolidating its market share. Air Canada also offers holiday packages, executive upgrades, beverages, and meals to the consumers to compete effectively in the market. The other competitor to Air Transat is West Jet airlines based in Calgary that has been effective in using non-union employees. Non-union employees had benefits from profit sharing agreements. The other ways in which West Jet competes is through control of costs, and having casual work environment that favoured customer relation. To overcome the challenges offered by the competition, Air Transat has put in place measures including derive synergies from its vertical integration model, which distinguishes it from most of its rivals. The corporation is also growing its market share in France where it is ranked as one of the largest tour operators. In order to increase its buying power for its traditional destination, the company is aiming new markets that has demands for these routes, reducing costs and, fitting airlines with latest technology gadgets, facilities, and amenities are the other ways in which the business responds to the competition. Provision of quality service and offering of low prices packages are the main aims of the three airline sin a measure to outdo each other for the market. 7. Key Success Factors Analysis Geographical reach: extension of the geographical reach to the global level is the main key success factor for airline companies including Air Transat. Geographical reach has been achieved by companies through the purchase of efficient and fast jets. Technological advancement: advanced technology has allowed airline companies to access consumers owing to increased comfort and safety of new planes and success is pegged on the ability of an airline company to have the latest technology (Riwo-Abudho et al., 2013). Technology enables airlines to have flights for long distance and be more efficient allowing for economies of scale. Quality customer service: having quality customer experience is a requirement for companies to develop a loyal client base and avoid substitution to other transport means. Quality service is also a differentiation factor by companies in their competition against each other and is a strong determinant of a company’s success in the airline industry. Implications For a company to succeed in the airline industry it has to have global geographical reach, advanced technology, and provision of quality service to the consumers. 8. Conclusions of Relevant findings From the analysis of the external environment of the airline industry, evidence shows that the industry harbours profitable players despite the need to have certain characteristics to be successful. Quality service provision, experience, technological advancement, and global reach are the main factors for success in the airline industry. Company’s Internal Analysis 1 Financial analysis This part of the internal analysis provides an analysis of the financial statements of Air Transit allowing for understanding of the financial performance of the company in terms of profits, revenue generation, gross margins, dividend payments, and ratios. The financial performance of Air Transat shows a decrease in revenue by 58,641 from 847, 222 on October 31, 2014 to 788,581 as on January 31 2015. The company also had a net operating income loss of 35,753 on January 31, 2015 an increase in the loss by the airline company from 23, 892 on October 31, 2014. Net income loss attributed to the shareholders was 64,314 at the end of 2015 Q1 compared to a 25,649 net income loss attributed to shareholders at the 2014Q4. A massive decrease in net profit margin from 0.69% in 2014 Q4 to -8% in Q1 (Jan 2015) is a depiction of the losses at Ait Transat and shows the inability of the company to compete effectively and meet the needs of the consumers or overcome challenges from the external environment. A decrease in operating margin from 1.02% to -6.02% is also evidenced by the financial statements of Air Transat depicting the high costs experienced by the company in providing services to the consumers as a fraction of earnings. Return on equity and assets decreased from 1.96% and 4.95% respectively to -16.44% and -54.45% depicting the fall to negative generation of returns from assets and liabilities from Q4 (2014) to Q1 (2015). The effect of the release of the 2014 financial statements was a fall in the share prices by $1.91 to rest at $9.10 (The Canadian Press, March 13, 2014). Owing to the losses made by the company, there company could not be in a position pay any dividends to the shareholders showing a failure to meet one of its objectives of profitability and investment gain to the investors. The other factor evident from the analysis of the financial statements of Air Transit is a reduction in the revenue from Americas revenue from $722,207,000 in Q4 (2014) to $678,881,000 showing a decline of $43, 326,000. Europe revenues also declined by 58,641,000 from 125,015,000 in Q4 (2014) to 109,700. A decline in revenues in America and Europe translate to low total revenues for the company showing that the company is not meeting its objectives. 2 Quantitative and qualitative analysis a. Identify Company’s Vision, Mission, Objectives (financial and strategic) The vision of Air Transat is to become a leader in the holiday travel industry by offering an exceptional, reliable and heath-warming experience to travellers (Air Transat, 2015). They intend to achieve this through the expansion to other countries in order to enhance high growth potential. The mission is to maximize the value of their shareholder on their investment by maximizing on the benefits of vertical integration, increasing their market share as well as expansion into new markets (Air Transat, 2015). Air Transat’s objectives include undertaking vertical integration in the industry so as to derive synergies from the model, expanding to new market where their operations are not yet tapped, gaining more market share as well as becoming the market leader in the air travel industry. Air Transat also aims at the provision of low cost air transport to the consumer in an aim to fight for market share from Airt Canada and West Jet. b. Identify company’s competitive approach Competitive Approach Discussion Innovation Innovation to improve the brand recognition of Air Transat travel services. Brand differentiation through the application of information management system. Quality High quality services due to innovation and customer service Prompt response in case of any issues with the company’s services. Easy and simplified services during booking due to technological application. Customer Responses Great customer response Application of information management system helps in simplification of customer service tasks. Efficiency Low market share than the other air company’s in Canada. Improving the quality of service Attracting a significant market share. c. Identify and analyze key performance indicators The key performance indicators for Air Transat include being the main carrier for tourists in Canada and having the number three spot in Canada as an airline service provider. However, the business has witnessed losses in recent years that has affected dividend payments and reduced revenues from America and Europe. Provision of quality service and having new gadgets and quality amenities in its aircrafts are the other key performance indicators for the business. d. SWOT Analysis Strengths Establishment of high quality and extensive infrastructure. Capacity for expansive operations Deployment of optimized airline capacity Dominant loyalty flyer International recognition Large experience workforce Weaknesses Poor communication among the company employees. Higher wage costs due to the union labour laws Dependence on contract leasing of aircrafts Opportunities Increased rate of growth both internationally, global, and domestic market Reduced government control of foreign competition in Canada Increasing demand for airline services Growth of the economy Only threatened by two major competitors locally, Air Canada and West Jet Threats Increased price pressure in the industry Movement towards more efficient planes in the industry Increased cost of operations mainly fuel and maintenance High external business risks including the economic recession and terrorism e. Value Chain Analysis Primary Activities Operations: Air Transat ensures the effective running of all the aircrafts and flights in 60 routes mainly in Europe and America. Maintenance of aircrafts and providing services to the consumers are the main measures of keeping afloat by the company. The main operation bases for the company are Montreal-Pierre Elliott, Vancouver Airport, and Toronto Pearson. Sales and marketing: the provision of high quality service to the consumers and ensuring access to the highest technology are the main sales and marketing strategies used by the company apart from paid advertisement and online marketing Service provision: flying consumers from different tourist destinations in America and Europe are the main specialization for Air Transat. Infrastructure Improvement: integrating information technology in the current infrastructure at the business allows the business to compete effectively with West Jet and Air Canada. Secondary Activities Human resource management: ensures employees are well trained to provide quality service and efficiently run operations at the company. Human resource management at the company also ensure wage payment on time and negotiation of contracts with labour unions. Logistics: ensuring the presence of well-maintained aircrafts to ply different rates is the other support activity at Air Transat through leasing and the recent acquisition of a new fleet to reduce costs of leasing. Implications The value chain components at Air Transat aid in meeting the consumer needs with operations increasing the availability of aircrafts to different destinations. Customer loyalty and confidence is achieved from having quality service while human resource training allows for well-trained courteous personnel. f. Representative Weighted Competitive Strength Assessment In comparison to Air Canada and West Link, Air Transat is not in a good competitive position in terms of profitability, performance, and market share. Lack of brand recognition and access to non-unionized employees are the main reasons for the inability of Air transit to effectively compete in the market. g. Strategic Issue The strategic issue recognized from the analysis of the internal and external environment is how to mitigate the Air Transat reliance on leasing of aircrafts h. Strategic Issue facts and reasons for managerial attention Air Transat has been leasing aircrafts from other airline companies affecting the ability of the company to make decisions ion costs without the influence of the leasing companies. The lease contracts affect the independence of the company in running operations. From 2003 to 2009, Air Transat leased aircrafts from West Jet, which is one of its competitors resulting in a fall out on the contract and later Canjet from 2009 to April 2014. Evidence of the effects of leasing is the high operation costs. From the financial statements in the appendix, the obligations on operating leases increased to 684,551,000 in the first quarter of 2015 from 657,639,000 in the fourth quarter of 2014 showing the high operational costs that result in high costs for the company. The need to decrease these operational obligations has never been greater considering that the company is making huge losses. References Hill, C. W. L., & Jones, G. R. (2009). Strategic management theory: An integrated approach. Boston, MA: Houghton Mifflin. Henry, A. (2008). Understanding strategic management. Oxford: Oxford University Press. Riwo-Abudho, Marcella, Njanja, Lily W., & Ochieng, Isaac. (2013). Key Success Factors in Airlines: Overcoming the Challenges. The International Institute for Science, Technology and Education (IISTE. CAPA (January 17, 2014). Canada's airlines Part 4: Air Transat regains financial footing as long-haul competition intensifies. Retrieved from http://centreforaviation.com/analysis/air-transat-regains-financial-footing-as-long-haul-competition-intensifies-canada-airlines-part-4-148089 The Canadian Press. (March 13, 2014). Canadian Dollar drags Transat to loss despite more winter travel. CBC News. Retrieved on March 17, 2015 from http://www.cbc.ca/news/business/canadian-dollar-drags-transat-to-loss-despite-more-winter-travel-1.2571608 Air Transat. (2015). Retrieved on March 17, 2015 from http://www.airlinecouncil.ca/en/air-transat.html Appendix Retrieved from http://www.transat.com/en/investors/financial.highlights.aspx http://www.google.ca/finance?cid=665884 http://www.transat.com/en/investors/investors.aspx Read More