Virgin Blue Airline in Australia - Case Study Example

Assessment task 3 Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Case study: Virgin Blue airline in Australia Introduction At the global level, aviation has been perceived as one of the sectors which are experiencing massive growth in the wider world economy. This is evidenced by the fact that more than 27,000 new aircrafts are projected to be delivered in the next two decades whereas forecast has pointed to the possible doubling of the number of travelers to around 9 billion over the same period (The University of New South Wales, 2012). Amid this projected growth, the airline industry in Australia has experienced extensive dynamics in the recent past. These dynamics are epitomized whereby in the aviation infrastructure industry, recent decades have seen the shift of all the major airports in Australia from the Commonwealth to private corporations based on leases which are long-term in nature, the generic rearrangement of the air travel rates and the instigation of transformations to the cost recovery regulation at these airports (Kain & Webb, 2003). The entry of Virgin Blue, an airline based in Brisbane (a subsidiary of the Virgin Group of companies) which began its operations in 2000 instigated some major dynamics in terms of competition in the Australian airline industry. Virgin blue is credited for being one of the airlines which began to engage in direct competition with Qantas and Air New Zealand, two of the clearly established flagship airlines in Australia. To survive this cut throat competition, Virgin blue has been obliged to engage in good planning as well as adopting flexible strategies to attain its estimated market share of 30-40% of the overall Australian market (Kain & Webb, 2003). Nonetheless, this has not been without some major challenges which have threatened the viability of this company. Against this background, this paper will explore some of the challenges confronting Virgin blue as well as their causes. In addition, it will recommend some of the solutions central to surmounting these challenges. Lastly, it will expound on how these recommendations will be implemented, the necessary actions, responsible persons and the sequence in which these actions will be taken. Challenges confronting Virgin Blue Since its instigation, this airline has been confronted by immense challenges though the severity some has heightened in recent times. Nonetheless, this analysis will focus on three primary challenges explored in the subsequent section which are linked to the theories in strategy of national and global environment. Air travel costs competition and national competitiveness According to Forsyth (2002), the Australian aviation market has experienced an elevated entry of low cost carriers in the recent decades, just like many other countries around the globe. This prompted increased travel cost wars which entirely entailed launching low cost air travels as each company formulated competitive strategies aimed at gaining sustainable competitive advantage in the market. This is parallel to the inference by Porter (2001) who cited that competitive strategy is primarily concerned with how to generate competitive advantage in all the businesses under which a particular company competes. It is imperative to be cognizant of the fact that in the attempt attain national competitiveness (based on the Porter’s diamond theory), a company from a particular state is bound to reap success in a national environment where four attributes are favorable. These are intensity of rivalry, local demand conditions, factor conditions and the competitiveness of the supporting industry (Porter, 1990). Some of these factors have been favorable to Virgin blue, but some have not, which creates a major challenge. Factor conditions, for example, skilled labor and infrastructure have been favorable as well as the local demand conditions. However, the intensity of rivalry in regard to low costs has deepened has disfavored the company whereby despite the fact that Virgin Blue was the earliest beneficially of this low cost strategy resulting to increased market share, recent times have seen other airlines adopt a similar strategy. This is best exemplified by Singapore Airlines which has decided to venture into the business of providing low cost services to the consumers through the instigation of a new venture referred to as Tiger Airways. Against this backdrop, Virgin blue has conceived the infeasibility of winning the lowest cost base battle in the Australian market if at all it has to maintain both its reputation of high quality services as well as its profitability (Bennet, 2010). This proves a major challenge to the company is it makes extensive efforts to charge considerable fares which are favorable to the profitability objective of the firm and at the same time maintain its market share both in the domestic and international market. Taxation and pressure for local responsiveness Developments in the recent past have seen the overburdening of the airline industry in Australia by overwhelming activities. Most notably, this has been as a response to contemporary dynamics like climate change, both at the domestic and international levels. Thus, the aviation sector has been subjected to heightened taxation, which includes the tax on emissions for foreign carriers when they land or take off in Europe (Euro-tax), a move which has attracted immense criticism as well as the carbon tax in Australia (The University of New South Wales, 2012). This carbon tax is bound to affect both the long-haul and short-haul flights based on their high emission and emissions in the course of take-off and landing respectively (Tol, 2007). This is founded on the theoretical foundation of pressures for local responsiveness due to the demands by the host government. This is whereby increase in taxation will prompt the companies to increase their prices aimed at covering the costs of operation deficit which in turn affects the demand of the products. Therefore, the increase intaxation both domestically and internationally is bound to affect the competitiveness of Virgin blue. This is based on the inference by British Airways (2009) which cited that the plans by different governments to impose significant increases on environmental tax will pose adverse effects in terms of prompting the airline companies to hike the air travel fares which will in turn impact on the demand for the air travel tickets. This is mostly detrimental when these taxes, for instance, the Euro-tax targets companies outside the EU which will give a competitive advantage to domestic airlines and disadvantage the international ones. Thus, the increase of taxes, mostly those inclined towards addressing environmental conservation will reduce the competitive advantage of Virgin blue, mostly at the international realm which is an enormous challenge. Safety and security Kain and Webb (2003) noted that the airline industry in Australia has been confronted by the challenge of decline in international tourism, mostly in the epoch after the aftermath of the terrorist attack in the US in September, 2001, the acute loss of traffic in the course of war in Iraq, the outbreak of severe acute respiratory syndrome (SARS) outbreaks in some parts of Canada and Asia. All these security and health concerns have in the recent past posed detrimental impacts on Virgin Blue. This is based on the theory that more stringent regulations by the government and other agencies in exerts pressure on the companies to enhance the quality of their products engage in technological upgrading and as well as provision of features which are responsive to the consumer demands and preferences (Porter, 1990). This is best epitomized by the delay of the launch of A330-200 aircraft by the airline after continued concerns as expressed by the Civil Aviation Safety Authority. This aircraft was targeting the business class which was aimed at placing the airline in a favorable niche to compete with Qantas which would have resulted in improved returns. This is not to forget that the initial launch of Virgin blue in 2000 had to be delayed for 28 days as the carriers for this airline had to pass a proving test (Horton, 2011). Therefore, the increased security and safety concerns over this airline pose detrimental impacts on the public reputation of the company which can impact on the traffic of travelers willing to use this airline, and eventually its competitive advantage in the market. Thus, the theory of pressure for local responsiveness expound on the differences in consumer preferences and taste based on security and safety concerns, which is a major challenge for Virgin blue. Surmounting the challenges There are several solutions which can be implemented to overcome the above challenges. However, these solutions are endowed with advantage and disadvantages, both of which will be explored in the subsequent section. In the first challenge related to cost, Virgin blue ought to develop a robust pricing strategy which will yield substantial profits to the company as well as ensure that the interests of the consumers in terms of charges are catered for. This is based on the theory that the succumbing to pressure for extensive cost reduction might send a negative signal of possible low quality of the services which can adversely affect its reception in the market (Ehmke, Fulton & Lusk, 2010). The advantage of this solution is that the company will be able to generate considerable revenues which are fundamental for its viability. However, it has a disadvantage in the sense that it will result to the loss of some consumers segments, for instance, the low-income and some middle-income passengers who often seek for the lowest cost airline. Secondly, the airline can seek to diversify its fright routes to others destinations which have opportunity that can generate economic value (profit) that has not been previously exploited by the firm or is currently being under-exploited by others. This is founded on the theory that for a company to attain continued growth, profitability and meet the claims of the stakeholders, it ought to engage in several activities, central to them being development of new markets through diversification and internationalization (Porter, 1990). This can mean reduced frights to the EU where the taxes are high to countries in the Caribbean or in Africa which have high tourism potential. The advantage of this solution is that it will culminate to reduced tax costs for the company which can be diverted to other activities like recruiting and training competent human resource which is central in the company attaining competitive advantage in the market. The disadvantage of this solution is that it will reduce the traffic of the passengers travelling to the EU as they will prefer other more airlines whose frights are predominantly on the European Union routes. Lastly, the company ought to spend more resources in training its personnel on security and safety issues confronting the firm. The advantage of this solution is that the passengers will feel more secure using this airline but on the other hand, it will add overhead costs to the company. Recommendations on the solutions and their justification In regard to the solutions of developing a robust pricing strategy which will yield substantial profits, it is imperative for the company to engage in intensive market segmentation whereby specific services from the company are targeted to specific target groups. This is based on the theory that different market segments in terms of age, occupation and status among others have different service needs. The rationale behind this approach is that the differences in pricing for the different segments will supplement each other, for instance, the relatively higher charges for first class services to the comfort seeking, high-income consumers can be used to supplement the lower cost charged for the low-income and middle-class classes. This is founded on the Porter’s diamond theory whereby Virgin blue has a favorable local demand condition which is key to national competitive advantage. Secondly, the solution on diversification of fright routes to other barely exploited destinations in Africa can be enhanced through careful choosing of the entry strategy into the new market. This can be through a concrete balance of the costs, benefits as well as the risks which are associated with doing business in diverse countries. The justification of this approach is based on the theory that diversification to other unexploited places reduce the pressure of local responsiveness as well as intensity of rivalry in these new localities. Lastly, the training of the personnel on safety and security issues confronting the airline ought to be taken in phases to ensure that there is limited interruption of the daily activities in the company. The rationale behind this approach is that it willmake sure that the delivery of services to the consumers is at the company continues as usual and the company will be able to meet its financial targets despite the ongoing training on personnel. Safety training ought to also be undertaken on new recruits in the firm. However, this latter undertaking has minimal significance since the factors conditions like skilled labor in the local population favor the company which according to Porter’s theory is a source of national competitive advantage. Implementation of the recommendations The first recommendation will be implemented through a holistic approach whereby all the departments involved in pricing will come together, identify the possible market segments and determine the price for each segment based on the services required. This will entail collaboration between the management structure and all the departments in the firm. In terms of timing, this ought to be done as soon as possible in order to limit the financial burden being incurred by the company as a result of comprehensively low prices, and after the consumers are informed about the changes in pricing, the identified prices ought to take effect immediately. In regard to the second recommendation, there will be need to identify prospective alternative destinations. Thus, the market research and marketing departments ought to meet and identify the most favorable substitute destinations. After they have been identified and these briefs passed on to the management for approval, the company ought to work out the logistics in these destinations, for instance, security, human resource, terminus and other logistics. After all these have been streamlined, the company ought to popularize these destinations in the media outlets and slowly start frights to these destinations and gradually pull out from the destinations with high taxes. In regard to the last recommendation of training the employees on safety and security, the human resource is primarily responsible for this undertaking. Firstly, all the resources ought to be assembled in terms of training facilities and facilitators among others. This should be followed by liaising with other departments to communicate the instigation of the training, arranging about the training schedules, and once all these have been done, the trainings in different phases ought to take place. Conclusion From the above discourse, it is apparent that the airline industry in Australia has been confronted by different dynamics in recent past. In particular, Virgin blue has been confronted by the challenges of air travel costs competition, increased taxation as well as security and safety which are linked to various theories in strategy of national and global environment. Different solutions have been recommended as well as their rationale behind their applicability at Virgin blue. References Bennet, M. (2010). RBS, Macquarie analysts fix on short-term challenges at Virgin Blue. Retrieved October 10, 2012 from http://www.theaustralian.com.au/archive/business-old/rbs-macquarie-analysts-fix-on-short-term-challenges-at-virgin-blue/story-fn4xq4v1-1225874897531. British Airways (2009). The markets we operate in. Retrieved October 10, 2012 from http://www.britishairways.com/cms/global/microsites/ba_reports0910/pdfs/Our_business.pdf Ehmke, C., Fulton, J & Lusk, J., (2010). Marketing’s Four P’s:First Steps for New Entrepreneurs. Retrieved October 10, 2012 fromhttp://www.ces.purdue.edu/extmedia/ec/ec-730.pdf. Forsyth, P. (2002). Low Cost Carriers in Australia: Experiencesand Impacts. Discussion Papers ISSN 1441-5429. Melbourne: Monash University. Horton, W. (2011). Safety concerns may delay Virgin Blue A330 services. Retrieved October 10, 2012 from http://www.flightglobal.com/blogs/wings-down-under/2011/04/safety-concerns-may-delay-virgin-blue-a330-services.html. Kain, K. & Webb, R. (2003). Turbulent Times: Australian Airline Industry Issues 2003. 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