Growth Path of Qantas Airline and Jetstar Airways - Case Study Example

Growth Path of Qantas Airline and Jetstar Airways Executive Summary Jetstar Airways is a low-cost subsidiary of Qantas in which Qantas has 49% stake. The Jetstar arm of the Qantas group is one of the most aggressive and fastest-expanding airlines in the low-cost sector. India has become a very attractive market for the aviation sector and this study has evaluated the entry mode that Jetstar should adopt in entering India. The evaluation has been conducted taking into account the legal, regulatory, the cultural and the business environment. Porter’s Diamond Model of nation’s competitive advantage was used to evaluate the risks, uncertainties and the benefits. The research was based on secondary data available through journals and reputed newspaper dailies available online. The study found that the regulatory framework in India is still very restricted as far as FDI in the aviation sector is concerned. They do not permit FDI in the domestic sectors due to security reasons. However, the air transportation sector in India has matured and the growth prospects are very high. India enjoys political stability and has massive plans for investment in the aviation sector. Modernization of most major airports has been planned and improvement in infrastructure is taking place. However, since FDI is not permitted in the domestic sector, Jetstar should enter into an alliance with AirAsia, which already has a presence in India. Through marketing and code sharing arrangement, Jetstar could make an entry and then work out the feasibility of operating on its own. However, alliances are being formed in the sector and the airlines concerned benefit from such alliances. 1. Introduction Qantas Airlines is the world’s leading long distance airline and one of the strongest brands in Australia. Qantas has a reputation for safety operation reliability, engineering and maintenance, and customer services. It has subsidiary businesses including other airlines. Qantas has seen a 4.3% fall in its yearly profits and has been exploring its subsidiaries to make up for the low profits (Mehmood, 2010). One of its focus areas is Jetstar Airways, the low-cost airline. Based in Australia, Jetstar Airways operates over 130 routes connecting various destinations in Australia, New Zealand, the North America, Asia and Indonesia. Jetstar Airways is one of the subsidiaries of Qantas in which Qantas has 49% stake. The Jetstar Group operates over 2,000 weekly flights to 50 destinations across the Asia-Pacific region (PeopleDaily, 2010). The Jetstar arm of the Qantas group is one of the most aggressive and fastest-expanding airlines in the low-cost sector (Bartholomeuz, 2010). Globally, low-cost airlines now take up 24% of the aviation market. While Jetstar flies to several Asian countries, it has no presence in India. Considering the attractiveness of the aviation market in India, this study proposes to evaluate the market entry of Jetstar, a subsidiary of Qantas, into India. Jetstar is keen to increase the profit margins and experience growth through market diversification. The entry choice would be recommended based on the external environment analysis. The external environment would include an evaluation of the government regulations, the cultural environment, the economic condition and the political stability of the country. Secondary data would be sued for the study as it is time and budget constraints do not permit collection of primary data. Theoretical framework would be applied in evaluating the entry mode. 2. External environment analysis 2.1 FDI In aviation sector - India FDI is a form of international inter-firm co-operation controlling host country enterprises. India does not permit FDI in the domestic sector but for Greenfield projects under the automatic route, 100% FDI is permitted (IBEF, 2010). FDI inflow into India has tripled in the last fiscal year ended March 2010 (I-Newswire, 2010). FDI went up to $16 billion which was exclusive of billions of dollars invested into the stock and bond markets by foreign investors. Airports Authority of India plans to spend over US$ 1.02 billion in 2010 in the modernization of non-metro airports. Eleven new Greenfield airports have been identified to reduce passenger load on existing airports (IBEF, 2010). FDI cap in India has been raised in ground-handling services, chartered airlines and cargo airlines from 49 to 74 percent (Murali, 2009). In maintenance, repair, pilot training and helicopter services, 100% FDI is allowed. Foreign airlines are not permitted to invest in the scheduled domestic airlines in India. Any investment over 49% in the automatic route has to be approved by the Foreign Investments Promotion Board (Economic Times, 2010). On grounds of security investments over 49 percent are barred as of now but the government is consideri9ng allowing foreign airlines to own equity in domestic carriers (Narayanan, 2010). The aviation sector needs an investment of USD 140 billion in the next 20 years and such insular approach to FDI will hurt the sector (ExpressIndia, 2010). 2.2 Drivers and consequences of globalization Opening of the economy and the aviation sector has made India an attractive destination for expansion. Moreover, the markets have globalized, due to convergence of buyer lifestyles and preferences. India has emerged as the top ten aviation markets in the world as a result of the government’s loosening of control (Chaudhuri, 2010). The government’s loosening of control has helped the sector, the consumer, the economy and the tourism. India is now being recognized as the aviation power. It has liberalized its aviation agreement with many countries which has increased the presence of international airlines in India. With the US, India now has an open skies agreement. This provides opportunities to Jetstar although several international carriers operate to and from India. This has made the Indian consumer more demanding and low-cost carriers have gained importance. India is also technologically advanced which reduces the cost of doing international business. The geographic distance is no more a barrier as communication has eased. India is recognized for its economic development and growing prosperity. The low-cost carrier (LCC) sector has influenced the global airline and the travel sector. LLC has become the driving force in reshaping the competitive landscape in the global airline industry. This has provided potential for cost savings to the airlines. Through the utilization of innovative technologies, the LCCs have been empowered to respond to competition and to respond to change quickly. The distribution costs have reduced tremendously as direct sales have become possible due to proliferation of the internet (IGT, 2005). Consumers in India have total control and competency to plan and purchase their tickets online. Paperless tickets in India have picked up. E-ticketing has automated the booking process thereby providing convenience and ease of booking while reducing the costs for the LCCs. The distribution costs, the travel agency commission and the booking fees can be done away with (Murali, 2009). 2.3 Risks in international business – legal and political environment International travel is not yet liberalized. Bilateral agreements are essential between two nations wherein civil aviation is permitted between the two territories. Bilateral agreements restrict competition on such aspects like number of possible flights, the number and identity of carriers and the airports that can be served (Shah, 2007). The government is investing in airport infrastructure through public-private partnership (ExpressTravelWorld, 2005). Indian airports attract high landing charges and airport taxes, which has compelled foreign airlines to pull out of India. Squeeze on margins and drop in premium inbound travel has forced airlines such as Virgin Atlantic, Sri Lankan Airlines, Austrian Airlines, Delta, KLM, Syrian Airlines, Aeroflot, All Nippon Airways, Singapore Airlines, Lufthansa and Finnair to withdraw over 100 flights in 2009 (Chowdhury, 2009). While airport charges are falling globally, they have been rising in India. Travel agents too are boycotting sale of tickets due to lack of commissions and the fuel price in India is much higher than the global price. International carriers’ margins have dropped to single digit and even negative in some cases. Airlines that have withdrawn are entering into code share agreement with other airlines. The metro airports have overcapacity. Internationalization is a business risk and my not bring success always. The airline industry is susceptible to disasters and if this happens in another country, it could result in negative publicity. A Qantas airline was involved in a disaster in Thailand but this gave rise to serious doubts in other counties as well (Articlebase, 2010). The company had to remold its image through massive efforts. Initial entry into a new market requires capital investments. The profits generated from a new market have to be initially used to offset the capital investments. Political economy constraints create a stumbling block for reforms in areas such as labor laws and privatization of public enterprises. Trade Unions play an important role in India and every political party has its own labor union wing. Trade unions represent the organize labor and this constitutes just 8% of the total labor force, but they are very vocal with their demands (Das, 2006). Trade unions have political power and they influence politics and government policies. The political parties and the trade unions have no stake in the industry and hence their interventions in labor reforms are only because of the vested interests which clashes with the interests of the consumers. India has an open sky policy for international tourist charters, for international cargo, and scheduled services for peak period, without insisting on a reciprocal arrangement (Kesharwani, 2005). Apart from this, no open sky policy in the world is unconditional. All countries have a bilateral agreement. India has recently liberalized the grant of traffic rights including foreign airlines. Air India, the international carrier of India, permits foreign carriers to use its rights and operate certain services subject to commercial agreement. It collects commercial fees or rents from the foreign airlines in exchange of its traffic rights. Open skies policy was announced with ASEAN with the intention to allow foreign carriers such as Singapore Airlines, Thai Airways and Malaysian Airlines to tap into the Indian market without restrictions. Airlines of the ASEAN region are permitted to operate daily flights to the four metros and to 18 other destinations. This gave a boost to the tourism sector. However, India does not have a long-term policy for civil aviation. Any new government that comes to power introduces its own policies and amendments. 2.4 Cultural environment- challenges cross-cultural environment - high and low context cultures India has a high power distance which suggests inequality in division of authority and power while Australia has low power distance. Australia ranks among the highest in individualism index (90) whereas India scores 40 (Hofstede, n.d.). Individuality is reinforced in Australian’s daily lives and must be considered at all times. Privacy is the cultural norm in Australia. Culture has a significant effect on problem solving, perception and cognition (Gilbert & Tsao, 2000). This can lead to differences in levels of satisfaction on the same product between global consumers. Even though Indian cultural values differ to a large extent from other countries (Gollakota & Gupta, 2006), India is undergoing transition and contemporary globalization. The changing lifestyle, the availability of western goods, the sky-rocketing real estate prices in the metros and the development in infrastructure and transportation challenge the traditional Indian cultural and religious practices (Pick & Dayaram, 2006). Defined structures are being dismantled and disembedding of culture is taking place. The Indian society is attempting to graft the western-style structures and the society is gradually showing signs of consumerism, materialism and individualism. The Australian perception of Asian markets is one of a poverty stricken region that needs Australian help (Bealsey, 2010). Based on the tourism campaigns, the perception of the Asians is one of being very traditional in their approach and conservative. The natural disasters and the risks of terrorism have also created such images of the Asians in the eyes of the Australian. However, India is a globally connected country with high speed internet, far better than Australia. In reality, culture is converging due to the forces of globalization. Australia is cultural diverse now and they recognize that its future lies in Asia. Having qualities such as people skills, empathy, awareness and tolerance for ambiguity, can take care of the challenges that cross-cultural environment can pose. 2.5 Regional co-operation ASEAN region handles one of the busiest air traffic in the world. The Asia-Pacific region as a whole has been the fastest growing air transport market. This is because of the economic development, tourism promotion and the fragmented geography of the region (Zainal-Abidin, Nawawi & Kamaruddin, 2005). The best performing airports in ASEAN are located in Singapore, Thailand and Malaysia. ASEAN airlines state that it will be difficult for private carriers to fulfill the diverse functions of the airlines operating in the developing economies. They have to meet the national objectives and promote tourism and trade sectors. Although bilateral air service agreements still exist, India has permitted the ASEAN countries to operate daily to the four metros. Foreign ownership is permitted in other countries but India has restrictions in allowing foreign airlines to invest in domestic routes. Thus, the only alternative for Jetstar (a unit of Qantas) is to enter into an alliance with AirAsia. Alliances help to get over the capacity constraints and the bilateral route. Alliances are limited to marketing arrangements and technical cooperation. This includes activities such as code sharing, shared use of the computer reservation system, coordinate schedules, management contracts, and joint ventures in catering, ground handling and aircraft maintenance. 2.6 Comparative advantage – Porter’s diamond model Choice of entry mode is related to control and control is essential to achieve the ultimate goal of the organization. Porter’s Diamond of Determinants of national competitive advantage explains how a country can become internationally competitive within any given industry. The four determinants are the factor conditions, demand conditions, related and supporting industries and the firm strategy, structure and rivalry. Factor conditions: this includes labor, natural resources, capital, technology, entrepreneurship, and know-how. Factors need to be upgraded from time to time and India has envisaged massive investments for the modernization of airports and other facilities. Factors can be basic factors or advanced factors. Basic factors have to be extended or reinforced through more advanced factors. The basic factors include the natural resources, demographics, climate and location. India has all these factors to its advantage. The advanced factors include the technology and the communications infrastructure. India has a large pool of educated labor, has advanced in technology and has the necessary resources. The infrastructure in India has improved a lot and it can support new airlines entering the country. Demand condition: the strengths and sophistication of customer demand. This demonstrates the bargaining power of the buyers. The Indian consumers have become demanding and look for precision. Air transportation is now sought for even by the middle class. Consumer demand for cost-effective air travel has give rise to innovative ways to fulfill the demands of the consumers. India has been able o attract foreign airlines but many have withdrawn for reasons other than low capacity. Firm strategy, structure, and rivalry – the presence of strong competitors at home serves as a national competitive advantage. Competition in the aviation sector is intense in India although there are very few foreign airlines operating from India. Mostly the ASEAN region carriers have been performing well. Some carriers have withdrawn due to low profit margins. The threat of new entrants is low because of the restrictions on FDI. Related industries can lead to a nation’s competitive advantage because information can be shared leading to cost savings and creating new opportunities. Related and supporting industries – availability of cluster of suppliers that may themselves be internationally competitive. This refers to the threat of substitutes. Domestic carriers of India do not operate to and from Australia. Several related industries exist in India such as the travel agencies, tour operators, the catering and in-flight services. Role of the government: this is the most critical factor in creating national competitive advantage. The government has permitted public-private partnership in the modernization of airports that would improve the services, the facilities, and the infrastructure to attract foreign airlines. It has already permitted open skies for the US and has bilateral agreements with many countries. The ASEAN countries are allowed to operate daily to the four major cities. However, it has not yet permitted FDI beyond 49% in the automated route and does not allow foreign investment domestic routes for security reasons. 2.7 Emerging market economies India has the most distinguishing characteristics. The standard of living has improved with higher disposal income in the hands of the people. The middle class is fast emerging as a niche group and culture changes can be seem. India is evolving towards the wealthy nation status which is evident from the amount of FDI it has been able to attract. In the aviation sector, restrictions have been imposed to protect the domestic carriers. Emerging markets such as India matter because of the growing population, the rising GDP and the FDI inflow. The per capita GDP in 2007 was $4031 (IMF, 2007). 2.8 Entry mode Selecting the right mode of entry is important the first time because there may be no second chances. Rajan and Pangarkar (2000) contend that wrong choices can cost the company its brand name, loss of important resources such as time and money, and loss of market potential. Foreign market entry is a multilevel phenomenon where several factors have to be taken into account. These include the size and characteristics of the parent firm, the sector, the nature of transaction, the degree of competition, and the characteristics of the host country. Based on the level of control and commitment required, the entry mode could be through exports, licensing, joint ventures and through wholly owned subsidiaries (WOS). All these modes involve resource commitments. This paper focuses on FDI outflow to India through wholly owned subsidiaries. In the airline sector, however, the mode of entry would differ. When firms want maximum control and are prepared for maximum risk and commitment of resources, they opt for WOS. The choice of foreign entry should be based on trade off between risks and returns. Factors like firm-level country-level and industry-level influence the entry mode choice. 3. Recommendation and conclusion A country’s institutional environment affects the firm boundary choices because this reflects how the firm can participate in the environment. In this case, there are host country risks and uncertainties involved. There are five types of risks - product, government policy, macroeconomic, materials, and competition – that influence the decision (Brouthers & Hennart, 2007). The product demand is very high and in growing year on year. Air transportation is India has matured in the past few years. The government policy too has loosened and FDI to the extent of 49% is permitted in the automatic roué while it is much higher in other related fields. Jetstar can enjoy comparative advantage by entering into the Indian market. The business and the air transportation environment in India are conducive to growth and would provide the airline with unique benefits in global competition. The demand for air services in India is going up as the middle class is emerging with higher disposable income. The disposable income has gone up by 5 times in the last two decades (Shah, 2007). Jetstar will not be able to enjoy the first mover advantage because AirAsia is already operating flights to and from India. There are two ways that Jetstar can enter India. They can either consider entering India by opening a wholly owned subsidiary (WOS). They cannot operate direct flights because of the fixed number of seats (6500) that have been allocated to Qantas. As of 2005 bilateral agreement between Australia and India exists for 6500 seats (DGCA, 2005). Prospects for LCCs are high because of the budget travel and cost cutting measures adopted globally by the corporate sector. However, Jetstar can provide services to the entire value chain including ground-handling, in-flight catering, leisure airlines and travel agency. In these areas, FDI is permitted to a large extent (Murali, 2009). However, to star extending these services on their own could lead to cultural clashes and issues of bureaucracy. They would need to employ local staff for liaison with government for obtaining the licenses and permits. These require local knowledge and hence opening a WOS is not feasible. The other alternative is to enter into an alliance with AIrAsia that already has presence in India. Because of the restrictions due to the bilateral agreements, Jetstar should enter into an alliance with AirAsia. Jetair and AirAsia have already entered into an alliance for the Singapore region and this is the first of its kind in the LCC category (Bartholomeuz, 2010). There are several LCCs in Asia but this alliance has the potential to give these groups a significant edge. AirAsia already has a presence in India. An alliance can help reduce competition on overlapping non-stop routes. Jetstar could enter India by handling the passenger and ground handling arrangements for AirAsia. They could also enter into a code sharing agreement so that both the airlines can market the routes of each other. Once the brand name of Jetstar is established, it could operate its own flights at a later date if necessary. Alliances help to keep administrative, marketing and advertising costs in control. References Articlebase. (2010). Growth Path Of Qantas Airline. Retrieved October 3, 2010 from http://www.articlesbase.com/writing-articles/growth-path-of-qantas-airline-1896630.html Bartholomeuz, S. (2010). Jetstar aims to bluer – and cheaper – skies: Bartholomeusz. Retrieved October 3, 2010 from http://www.smartcompany.com.au/transport-and-logistics/20100107-jetstar-aims-to-bluer-and-cheaper-skies-bartholomeusz.html Beasley, T. (2010). Australia’s future in Asia – understanding cross-cultural complexity. Retrieved October 3, 2010 from http://bintercultural.wordpress.com/2010/04/19/australias-future-in-asia-understanding-cross-cultural-complexity/ Brouthers, K.D. & Hennart, J. (2007). Boundaries of the Firm: Insights From International Entry Mode Research, Journal of Management, 33, 395 Chaudhuri, S. (2010). Aviation Minister Praful Patel on a 'Calibrated Approach' to Open Skies. Knowledge@Wharton. Retrieved October 3, 2010 from http://knowledge.wharton.upenn.edu/india/articlepdf/4511.pdf?CFID=27548957&CFTOKEN=13116291&jsessionid=a830861e4333d73185aff1a134631936c543 Chowdhury, A. (2009). Foreign airlines pull out of India. Retrieved October 3, 2010 from http://www.business-standard.com/india/news/foreign-airlines-pull-outindia/355388/ Das, T. (2006). The impact of research on policymaking: the case of labor market and external sector reforms in India. Retrieved October 3, 2010 from http://depot.gdnet.org/cms/grp/general/Das_BB.pdf Economic Times. (2010). RBI questions FDI changes in aviation sector. Retrieved October 3, 2010 from http://economictimes.indiatimes.com/news/economy/policy/RBI-questions-FDI-changes-in-aviation-sector/articleshow/6423813.cms DGCA. (2005). Bilateral Air Services Agreement. Retrieved October 3, 2010 from http://dgca.nic.in/bilateral/Bilateral.pdf ExpressIndia. (2010). 'India's insular FDI policy hurts aviation'. Retrieved October 3, 2010 from http://www.expressindia.com/latest-news/Indias-insular-FDI-policy-hurts-aviation/686605/ Gilbert, D. & Tsao, J. (2000). Exploring Chinese cultural influences and hospitality marketing relationships, International Journal of Contemporary Hospitality Management, 12 (1), 45-53 Gollakota, K. & Gupta, V. (2006). History, ownership forms and corporate governance in India. Journal of Management History, 12 (2), 185-198 IBEF. (2010). Aviation. Retrieved October 3, 2010 from http://www.ibef.org/industry/aviation.aspx IGT. (2005). LCCs - Technology Unleashed, Retrieved October 3, 2010 from http://www.igt.in/whitepapers/Peanuts!64_05Apr05.pdf I-Newswire. (2010). Foreign Direct Investment tripled in the last financial year – FDI India. Retrieved October 3, 2010 from http://www.i-newswire.com/foreign-direct-investment-tripled/45122 Kesharwani, T. (2005). RATIONALIZATION OF ALLOCATION OF LANDING RIGHTS FOR CIVIL AVIATION. Retrieved October 3, 2010 from http://www.adb.org/Documents/Reports/Consultant/TAR-IND-4066/Transport/kesharwani.pdf Mehmood, F. (2010). Qantas airlines optimistic despite of fall in profits. Retrieved October 3, 2010 from http://topnews.ae/content/23621-qantas-airlines-optimistic-despite-fall-profits Murali, D. (2009). Airlines need to be obsessive about saving costs. Retrieved October 3, 2010 from http://beta.thehindu.com/business/article62281.ece Narayanan, K.S. (2010). 'GoM to examine FDI in aviation sector'. Retrieved October 3, 2010 from http://expressbuzz.com/finance/gom-to-examine-fdi-in-aviation-sector/186514.html People Daily. (2010). Jetstar charts expansion plan. Retrieved October 3, 2010 from http://english.peopledaily.com.cn/90001/90778/7141854.html Pick, D. & Dayaram, K. (2006). Globalisation, reflexive modernisation, and development: the case of India. Society and Business Review, 1 (2),171-183 Rajan, K.S. & Pangarkar, N. (2000). Mode of entry choice: an empirical study of Singapoream Multinationals, Asia Pacific Journal of Management, 17, 49-66 Shah, N. (2007). Competition Issues in the Civil Aviation Sector. Retrieved October 3, 2010 from http://cci.gov.in/images/media/ResearchReports/F1_NancyShah_20080411102237.pdf Zainal-Abidin, M., Nawawi, W., & Kamaruddin, S. (2005). Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership Rules and Investment Issues. Retrieved October 3, 2010 from http://www.aseansec.org/aadcp/repsf/docs/04-008-FinalOwnership.pdf Read More