Situational Analysis of the Australian Airline Industry - Case Study Example

SITUATIONAL ANALYSIS OF THE AUSTRALIAN AIRLINE INDUSTRY Name: Course: Tutor: Course: University: City and State: Date: Contents 1. Introduction 3 1.1 Industry Size and Growth 3 1.2 Major Competitors 3 1.3 Consumers 4 2.0 Macro-Environment Analysis: PESTLE Analysis 4 2.1Political 4 2.2 Economic 5 2.3 Socio-cultural 5 2.4 Technology 5 2.5 Environmental 6 2. 6 Legal 6 3.0 Market Segmentation 6 3.1 Price Conscious Short Haul Customers 6 3.2 Commercial Passengers 7 3.3 Leisure Travelers 7 4.0 Analysis of Qantas Air 8 5.0 Analysis of Virgin Airlines 9 6.0 Comparisons of Qantas and Virgin Airlines 11 6.1 Virgin Australia: Emphasis on Mix Opposed to Market Share 11 6.2 Qantas: Capacity Increase of Established Models 12 7.0 Conclusion 13 References 15 SITUATIONAL ANALYSIS OF THE AUSTRALIAN AIRLINE INDUSTRY 1. Introduction The aviation industry of Australia is being taken through changes. The need for changes has arisen from shift in market demand to low cost carriers. The new aircrafts have made most organizations to understand the need to capture different competitive market shares. The costs also need to be brought down for purposes of maintaining the market share. Australia has a long history of its airline industry. The most significant history occurred in 1990 with deregulation of the domestic airline industry. Deregulation has been the driving factor behind the entry and domination of foreign airlines such as Virgin airlines. 1.1 Industry Size and Growth Australia’s control of the industry enabled its stability during the global economic crisis. Serving over 20 billion people, Australia’s aviation industry has grown due to the focus on short distance flights for corporate clients, low cost carriers and premium cabins. The latest figures from July 2016 indicate that the potential growth in Australia has increased by 6.4% increase in seat occupation when compared to 4.7% in 2015 (Centre for Aviation 2016). Additionally, the international flights have increased from 3.3% in 2015 to 6.8% in 2016 (Centre for Aviation 2016). 1.2 Major Competitors Competition is high with operating airlines including Qantas, Eastern Australia, Maroomba Airlines, West Australian, Australian Express, Virgin Blue, Skytrans and Air Link. The recent decline in growth has helped the foreign airlines Qantas and Virgin. They are now the leading competitors in the Australian market. This is seen in the diagram below showing growth from 2012-2015. 1.3 Consumers Showing different statistics to the predictions from 2012 shows the strengthening in mean aircraft size and load factors. Passenger traffic holds the main economic market covering about 20% of the industry’s traffic. Surprisingly, the load carriers when compared to the passenger carriers are experiencing better growth (Centre for Aviation 2016). 2.0 Macro-Environment Analysis: PESTLE Analysis 2.1Political Australia’s political environment is friendly to both foreign and domestic competition. The government has been liberal in its policies to simplify the entry of new entrants in the airline market. As a result, the competition between the organizations is increasing and it is also becoming more serious. Intense competition encourages price wars. According to a research done by Vela and Garcia (2010, p.250) on Spanish airlines operating in Australia, companies that fail to hike prices in Australia end up bankrupt. 2.2 Economic The global and domestic airline industry is suffering from the recent social and economic struggles arising from the September 11 attacks using aircrafts. In addition, unstable and inflated fuel prices add to the pressure felt by airline organizations. Despite the good performance of the domestic market, the airline industry is suffering from the downturns from the western hemisphere (Vela & Garcia 2010, p. 250). 2.3 Socio-cultural Federal, corporate and academic emphasis on the principals of corporate social responsibility has led to the society becoming more aware of community projects undertaken by any immediate organization. As a result, giving back to the community has become a strategic advantage, which is equally costly to airlines. Australian industries need to develop CSR agreements that effectively cover community services, environmental concerns and business ethics. 2.4 Technology Technological innovation is perhaps the most influential force in the airline industry. Technology is believed to be and used as the primary response to increasing costs in fuel and global environmental concerns. The market demands require the airlines to implement online reservation systems for digital bookings and satellite technologies for international landing systems. Airlines equally need to constantly upgrade their fleets in order to increase carrying capacity and minimize energy consumption. Implications of technological demands can be difficult for organizations with financial challenges as it requires frequent requisition of funds. 2.5 Environmental The global airline industry is facing a constant challenge from green house and carbon gas emissions. Airlines are expected to adhere to a given carbon emission amount per aircraft in attempt to mitigate and control global climate change. Reduction and maintenance of carbon footprints adds to the operational pressures felt by airlines. 2. 6 Legal As presented in earlier sections, the Australian political and legal system is liberal thus allows entrance of novel organizations. Established firms are presented with the threat of new entrants by liberal policies. However, the threat from new entrants is still low. Two primary reasons argue against entry of new airline companies. For one, market penetration requires intense capital investment for infrastructure and brand development (Farabi 2012, p.6). Secondly, dominance of established firms such as Qantas, Virgin and Jetstar leaves little market shares for sustainable profit generation (Farabi 2012, p.6). 3.0 Market Segmentation 3.1 Price Conscious Short Haul Customers Airliners have to consider several important characteristics of persons in this market segment. For one, age is more important than gender given clientele numbers for both males and females is nearly equal (Truxal 2013, p. 41). The group covers persons from 19-55 years of age (Truxal 2013, p. 41). Because of income limitations, clientele in this group are very aware of promotion strategies and seek discounts and quality with minimal costs. In most cases, customers in this group will journey in groups and will make frequent short trips (Truxal 2013, p. 41). The degree of frequency is one of the reasons for price consciousness across this market segment. 3.2 Commercial Passengers Important to note is that researchers show that while business travelers maintain flight capacity in the industry due to commercial engagements, more and more business clients are starting to make leisure trips. The commercial passengers are the main target of Qantas and they normally cover their own expenses. They are less priced sensitive compared to the leisure segment. Gender is an influential factor as more male make frequent trips compared to women in this segment. More than 85% of commercial passengers are beyond the age of 25 and occupy middle and upper social classes (Truxal 2013, p. 42). Therefore, gender and social status are equally important influential marketing factors. Employer companies influence airliner choice as focus is put on reliability, scheduling and punctuality. In addition, commercial passengers give less emphasis on extra in-flight services. 3.3 Leisure Travelers The division of leisure clientele in Australia entails two categories namely economic class and business class travelers. The two classes are different from the normal business class as they are more price conscious because of disposable income constraints (Truxal 2013, p. 43). At the present, the leisure segment is the best target for Virgin Airlines. Research shows that the price elasticity of airline organizations increases market demand for services from leisure travelers. Most leisure-segment clientele are middle and short haul travelers, who constitute the majority of passengers in the Australian industry. 4.0 Analysis of Qantas Air Market analysis reports show that Qantas is the leading airliner in Australia. The company is best known for its provision of quality air travel at minimal costs. However, recent reports highlight that Qantas is recording close to $87 per second suggesting lapses in its strategic position and market attractiveness. According to Farabi (2012, p.6), economists and the public at large associate the lapse with the managerial inefficiencies of Allan Joyce, the CEO of the airliner. When it comes to ground strategies, Qantas uses a difficult market division tactic in accordance to different market needs, expectations and requirements. Behavioral differentiation is applied in target market selections. Over recent years, Qantas has been slowly refocusing its target audience from business to leisure travelers. For this tactic, the airliner has an established customer loyalty program. For both business and leisure travelers, online booking covers allocation of seats, in-flight services, guidance menus, public company safety records, meals and third party accommodation services. The products that Qantas offers are classified into two main classes, which are freight containers and passenger travel. The airliner offers four flight classes including first class, global business class, global economy and premium economy in decreasing order of luxury. The subsidiary organization Jetstar is responsible for offering low cost flight plans. Qantas offers one of the most frequent flying plans globally with better tracking systems, safe containers and route connectivity. In terms of pricing, the airliner employs a ‘cost-plus margin’ model where high market demands correlates with high pricing. Competitive pricing is employed for low cost airlines while refunds are disseminated to maintain customer loyalty. One important unique practice is that Qantas does not issue price discounts in new destinations. In terms of promotion, Qantas employs direct marketing through mass media to cover product promotion and branding. Qantas is known for customizing marketing message for individual clients in order to capture a personal level impact. During low seasons, Qantas offers sales promotions and direct selling to business customers. The main emphasis of Qantas is on virtual and physical positioning. The company has separate counters in the airport to for its direct sales. Additionally, it has independent retail outlets in each of the major cities in Australia for the direct sales. However, are also acquires through other means such as airline agents and online ticket booking services. Some customers also call in to book their ticket reservations. 5.0 Analysis of Virgin Airlines Virgin Australia is part of the Virgin Group founded by Sir Richard Branson in 1970. Virgin airlines is one of the most respected organizations globally with over 50,000 employees and 30 country destinations. The company entered the Australian stock exchange in 2004. By 2011, the company had over 80 aircrafts with advanced avionics in operation. Virgin air serves 29 Australian cities and focuses on expanding the domestic route to cover New Zealand. On the ground, Virgin Airlines employs an all-around marketing strategy to enhance its strategic position. In the first half of 2013, Virgin acquired Skywest to increase its market share of the domestic market. In the course of the following 12 months, the company increased its majority share in Tigerair Australia to 40% in partnership with Singapore Airlines. The tactical importance of the share increment is that it eats away the hold of Qantas’ Jetstar on the leisure segment of the airline market (Centre for Aviation 2016). The strategy of Virgin Australia is mainly focused on corporate business travel. Additionally, they also insist on maintaining a balanced sheet. In end 2013, Virgin air made a debt issue entailing enhanced equity offerings pushing its position from $580 million to $825.7 million. The offering was very important because it enhanced the corporate decision making ability of Virgin air in Singapore air, Etihad air and Tigerair in light of the protection from the creep provisions under the Corporations Act (Centre for Aviation 2016). Partnerships with other airlines are also marketing strategy the Virgin employs as it enables the firm to attack Qantas’ monopoly areas such as regional services (Centre for Aviation 2016). Virgin Australia provides numerous onboard and out-board services. Its human resource capital sets the standard as the best customer care. The airliner offers economy, premium economy and upper class travel classes, each with its unique array of meal, drink and entertainment offerings (Farabi 2012, p.6). In terms of price, Virgin differentiates itself by establishing a unique selling point. In Virgin Australia, one cannot rebook a seat once the flight takes off. The excellent customer service creates the unique selling point in terms of the glamour, sexual appeal and attention Virgin employees draw (Farabi 2012, p.6). Virgin Australia seeks to offer the best prices per serving route in order to maintain attractiveness of its price offerings. The company offers both low and high seasonal pricing which differ per destination. In recent times, Virgin air focuses on virtual locationing through its online reservation system. Products are distributed online through third party contractors such as travel agents. The company applies all aspects of mass marketing including posters, television advertisements, direct mail, YouTube and travel agents to promote their services. In 2012, Virgin Australia together with the broader Virgin Group received the Daily Award for Best Corporate PR team (Farabi 2012, p.7). 6.0 Comparisons of Qantas and Virgin Airlines Virgin Australia and Qantas employ different marketing practices. However, the logic behind the marketing tactics is the same because it focuses on increasing domestic growth. Both Qantas and Virgin Australia seek to capture low profile operations in high profit markets based on traffic. As a result, both airliners are venturing into neglected regions such as New Zealand. Below is a more in-depth comparison. 6.1 Virgin Australia: Emphasis on Mix Opposed to Market Share The airliner continues to use the traditional tactic of high capital investments to increase number of flights with the hope that the market will cushion the capacity (Centre for Aviation 2016). The company has increased its number of flights in all trunk routes between Brisbane, Sydney and Melbourne. The increment is seen in the figure below. Retrieved from Centre for Aviation (2016) Second, the airliner changes its revenue mix for existing capacity. Virgin Australia’s investment in low cost airplanes means a transition to the leisure segment of the industry. Investments in lounges and products have seen Virgin Airlines acquire 10% market share of federal and commercial traffic (Centre for Aviation 2016). Virgin Australia has also increased its business carrier share by 10% due to a three-year strategy ending Qantas decade monopoly of the segment (Centre for Aviation 2016). In essence, Virgin Australia employs a mixed marketing and growth strategy. 6.2 Qantas: Capacity Increase of Established Models The maturity of Virgin when compared to Qantas is shown by their ability to employ mixed strategies. In addition, the organization in the recent past has failed to capture government and corporate opportunities like its rival. As a result of the failures, the company‘s marketing strategy entails addition of services with elevated secondary fees. However, Qantas only targets a specific market share namely 65% as research show maximum revenue generations occur past the tagged market share margin (Centre for Aviation 2016). The research finding is covered by the S-curve below. Retrieved from Centre of Aviation (2016) Therefore, the marketing strategy of Qantas aims at maintaining the organization’s superior market share as opposed to increasing its capacity. To maintain market share, Qantas has to respond to the penetration strategies of Virgin Australia. Despite the similarity in penetration strategies, Qantas offers air tickets that are more expensive compared to Virgin Australia. For instance, the air ticket for a to and fro flight from Melbourne to Sydney for scheduled 14 February is $89 for Virgin Australia and $118 for Qantas. 7.0 Conclusion The aviation industry of Australia has reached a point, which it is changing towards legacy low expenditure aircrafts and service delivery models. In the transition, it is important to note the decline in performance of the airlines, Qantas, in light with the creeping advances of Virgin Australia and Jetstar. The performance contrast is based on the constrain faced by Qantas due to the Sales Act. The organization cannot merge or acquire other companies while implementing its expansion strategy. However, from the analysis in the report, it is identified that the degree of democracy in Australia favors continued growth and penetration by new entrants. In order to gain a better strategic and competitive position, it is vital that an organization have an effective differentiation strategy. There is also need for airliners to have marketing strategies that combine more than one market segments. The Australian airline industry mandates that airliners in their economic models look past pricing and into service reward models for sustained growth. References Centre for Aviation 2012, Qantas and Virgin Australia Pursue Different, but Equally Logical, Strategies to Grow Domestically, CAPA: Aviation Analysis, viewed 10 December 2016, http://centreforaviation.com/analysis/qantas-and-virgin-australia-pursue-different-but-equally-logical-strategies-to-grow-domestically-72898 Centre for Aviation 2015, Australia Domestic Airline Market Outlook: Qantas Group Reins in Capacity as Virgin Continues Growth, CAPA: Aviation Analysis, viewed 10 December 2016, < http://centreforaviation.com/analysis/australia-domestic-airline-market-outlook-qantas-group-reins-in-capacity-as-virgin-continues-growth-218946> Farabi, Yasir, 2012, Analysis of Marketing Environment for Virgin Australia, Grin Verlag, Munich. Truxal, Steven 2013, Competition and Regulation in the Airline Industry: Puppets in Chaos, London: Routledge. Vela, M, R, & Garcia, M, E, 2010, A Segmentation Analysis and Segments Profile of Budget Air Travelers, Cuadernos de Turismo, vol. 26, pp. 235-253. Read More