VIRGIN BLUE UNDERSTANDING EXTERNAL ENVIRONMENT 1. Attractiveness of the Industry 1a. Identify the industry, product segments and value chain The industry is the Australian airline industry (global). Core activities cover providing travel services to leisure travellers in Australia and overseas, including flights, travel insurance, holiday packaged deals, and freight business. Products segments including ? Business travel? 57. 1% of industry revenue ? full-fare ? business & government travellers ? growth of video conference (-) impact on growth unit value of sale/pax double leisure travel fare ? Leisure travel? 29. 4% of industry revenue ? low-fare ? leisure travellers ? price is an important factor and strong driver for growth ? high cost incurred for flight changes ? Freight and other? 13. 5% of industry revenue ? freight transport, time sensitive & high value to weight item & charges on excess baggages, late fee,etc… 1b. What is the current life cycle of the industry? The Australian airline industry is at the mature stage of its life cycle.
This is demonstrated by the low average growth rate of the production, and the low airline operating margins around 2 percent over the last five years. Declining fares in the leisure travel segment due to strong competition have combined with increasing costs to lower profitability over this period. Yield management is critical to profitability due to high fixed costs involved in operating a flight, that is, the marginal cost of passenger on a flight is very low, so having a plane full, with as many full-fare passengers as possible, is important to maximise profitability.
Over recent years, there has been consolidation, brand transformation in the industry and more services been introduced to attract higher yield customers. This is evidence of a low growth environment, wherein the industry is at the mature stage of its life cycle, the organisation focus is on efficiency, cost control, and market segment. 1c. What have been the key issues affecting historical industry growth? What was their impact? Key issues influencing historical industry growth using TEMPLES model FactorIssuesNature of Impact ————————————————- +/ =/ -) Technology? The growth of video conference- Negative has had a slightly negative impact on growth in this segmenting recent ————————————————- years Economy? Threat of the uncertainties of the global financial- Negative crisis, changing interest rate and fierce competition ————————————————- from low-cost carriers in its domestic market Market? the low density of population and the size of Aus+ Positive Air travel in Australia is somewhat of necessary ? Declining fair in the leisure travel segment due to- Negative
Strong competition have combined with increasing costs to lower profitability over this period; fierce competition from low-cost carriers in its domestic ————————————————- markets Politics? Being restricted in the ability to expand overseas due – Negative to Singapore Airline’s right to veto the use of the Virgin ————————————————- Blue name internationally. SIA had the power to block ————————————————- Virgin Australis’s brand due to 49% stake in Virgin Atlantic ————————————————- hat SIA acquired in 1999 Law ————————————————- Environment? With a launch of the first real low-cost arline in+ Positive Australia, one class of ticket and minimal on-board, complementary service, there had been strong growth in the 2000s in market for travel for leisure, encourage ————————————————- Australians to take more holidays and air travels Society? low density of population and size of Australia+ Positive ————————————————- Air travel is somewhat necessary
Overall+ Positive 1d. What are the key issues that will affect future industry growth? What are their likely impact and the overall assessment of the industry’s future growth? Future growth for the overall industry is assessed as positive (although it will be at a lower rate than historically growth) Key issues influencing future industry growth FactorIssuesNature of impactAssessment of (+/ =/ -)impact on future Industry growth ————————————————- (Low/Med/High) Technology? The growth of video conferenceNegativeLow as had a slightly negative impact on growth in this segmenting recent ————————————————- years Economy? Threat of the uncertainties of the global Negative Low Financial crisis, changing interest rate and fierce competition from low-cost carriers in ————————————————- its domestic market Markets? Threat of new entrances present theNegativeLow Possibility the firms will enter industry And diminish the industry return by passing along value to buyers in form of lower price and raising cost of competition the alliance with SIA was one of thePositiveMedium several that Virgin had formed in building ————————————————- its international network Politic? the alliance with SIA was one of PositiveMedium several that Virgin had formed in building its international network, allow Virgin to offer global flight coverge, epscially South-east asia and China, attractive to International business and leisure ————————————————- travellers Legal ————————————————- Environment?
Along with alliance with SIA, there have beenPositiveMedium forged alliances with other international airlines such as Etihad, Air NZ, and US giant Delta Air Line to give business travellers an attractive overseas ————————————————- and flequent flyer network Society? the airline developed and preserved its PositiveMedium culture by spending a lot of resources on recruiting the right people to serve its leisure customers and providing a culture and conditions that retain good ————————————————- people Overall ImpactPositiveMedium
In conclusion, the future industry growth is assessed as Low to Medium 1e. What have been the key issues affecting historical profitability? What was their impact? Industry revenue was estimated to be $14. 5 billion in 2012, with its main business being the transportation of passengers and freight on scheduled routes within Australia. Approximately 86% of the industry revenue is generated from airline ticket sales. The business travel segment is accounted for 57. 1% of industry revenue in 2012, while leisure travel segment is 29. 4% and freight and other are 13. 5%.
Airline operating margins are relatively low, averaging around 2% over the last five years. Declining fares in the leisure travel segment due to strong competition have combined with increasing costs to lower profitability over the period. Using Porter’s five forces model, we can review the factors affecting historical profitability, it can be concluded that industry’s rivalry has increased. This is the result of many factors including: ? Threat of new entrance is low due the barrier of entry high. Capital requirements required to enter the airline industry. High fixed cost in operating the fly. The power of suppliers has been high due to limited number of service options available in business travellers segments such as proving access to hundreds of destination and business lounges around the world, offering high quality catering and other on-board service like newspapers & magazine in premium class cabins, car hire and hotel reservation services. ? The increasing power of buyers’ buyers due to the price sensitivity of consumers (low price) and the search for best deal available, as well as air travel in Australia is somewhat of a necessity, given the size of Autralian and the low density of population. The increasing impact of substitutes such as alternative services like video conference maintaining low-cost services ? Industry rivalry is high: Jetstar, QAL’s low cost airline, was introduced in 2004 in response to Virgin Blue’s success in the industry and the loss of market share away from Qantas’s full-fare service to the low-fare carrier; Jetstar is a low-cost carrier targeting low-fare leisure travellers; The airline industry growth is average and as it is easy for buyers to switch between the airline companies, depending on price. Thus rivalry is increased.
Furthermore, the high fixed cost create opportunity for the airline companies to have price wars to compete each other, the great market share of Qantas will kill Virgin Australia at last. Porter’s competitive model Airline industry Potential New entrants Airline club loungesForeign carriers Priority ticketingRegional carriers Priority check-in High quality catering Newspaper ; magazine Hire car ; hotel reservationIndustry Rivalry Bargaining power of buyers Bargaining power of suppliers Qantas Jetstar Alternative services Business travellers Subsitute products ; services Video conferenceLeisure travellers
Freight ; other, tour packages 1f. What are the key issues that will affect future industry profitability? What is their likely impact and the overall assessment of the industry’s future profitability? Attracting higher yielding corporate and government customers has been a key driver of improving the industry profitability. Yield management is critical to profitability due to high fixed costs involved in operating a flight – that is, the marginal cost of a passenger on a flight is very low, so having a plane full, with as many full-fare passengers as possible, is important to maximise profitability.
Also, in order to improve profitability, the major competitors in the industry (Jetstar, Qantas, Virgin) have become vertically integrated. Strategic airline alliance been introduced. Qantas and Malaysia airline negotiated an agreement for access markets in Asia and code-sharing. SIA and Virgin formed an alliance, allowed SIA customers access to Virgin Australia’ s domestic airline airport’s lounges. This partnership, along with Virgins’ other alliance, would allow Virgin to offer global flight coverage, attractive to international business and leisure travellers.
The key factors influencing the future profitability of the industry can be summarised as follows: ? Positive factors include ? Forming alliance has allowed Virgin to offer global flight coverage, attract more international business and leisure travellers ? introducing a premium – valued service ? develop new lounge – product enhancement ? introduce new uniform and new menu – product enhancement ? Negative factors include ? Strong competition in the industry between major companies as growth slow and more emphasis is placed on maintaining or increasing market share with price becoming a key factor. Potential entrance of other new low-cost carriers. The future profitability of the industry will continue to be medium. 1g. Who are the industry’s key competitors? What are their strengths and weaknesses? In 2012, the industry is dominated by two airlines, Qantas Airways Ltd and Virgin ————————————————- CompetitorValueStrengthWeaknessRelative ————————————————- Propositionproposition Qantas Airways Ltd? Fully integrated? Highest market? Less focus on? Strong ? Accounting for 65%shareleisure travellers share of industry? Dominates business evenue in 2012segment ? More services offered such as full service, ————————————————- low cost, regional Virgin ? Fully integrated? Second highest? No coverage? Strong ? Accounting for 17. 2 %? Strong presencein regional share of industryin leisure market revenue in 2012? Offer services in full service and low ————————————————- cost service Others? Accounting for 17. 8%? private charter ? group of small? Weak share of industrypassenger flights orcompanies revenue in 2012freight operation UNDERSTANDING EXTERNAL ENVIRONMENT 2.
Summarise the strategic position of Virgin Blue 2a. Who are Virgin Blue’s key stakeholders, what are their objectives and are their objectives aligned with Virgin Blue’s strategic goals? As stated in the section on “Game change program- a new strategic direction for Virgin in Australia”, Virgin regard itself as number one position in the leisure segment and maintaining its low-cost focus. Its state strategic goals are as follows: ? Growing its share of the Australian business travel segment from 10% to 20% ? Establishing a ‘virtual’ global network through strategic airline alliances ?
Ensuring capacity was closely aligned to profitability ? Maintaining a strong presence in the leisure market ? Enhancing its brand in Australia and overseas markets There are numerous stakeholders (individuals/groups that have interest in the business or corporate strategy of the organisation) in relation to Virgin Blue. An analysis of the objectives of each of these stakeholders and the alignment of these objectives with Virgin’s strategic goals as follow ————————————————- Who are theWhat do they seek to receive fromIs Virgin Blue delivering against their stakeholders? he organisation? expectation? John Borghetti? Launching “Game Change” program? Yes, the transformation of Virgin (CEO)with the vision to be the airline of has been well on the way and choice for Australian business and attract numbers of business & leisure travellersleisure travelles ? Reinvent the company as a full-service? No, still not yet take over Qantas brand by altering its low-cost, no-frillsbusiness market model to take market share from Qantas ————————————————- in the higher-margin, business market Board including: Roger Linderman? new management team, formed to?
Yes, its chase growth in business (General manager)take on Qantas, particularly in thesegment, but not yet take over Jane McKeoncompetition for business travellerQantas (running government’s relation team) Hope Antzoutlatos (head of domestic ; International network Operations) Will Owens (Heads of yield Management) Hans Hulsbosch? develop the airline’s economy ;? Yes, have been attractive to (Creative director)business class cabins to attract numbers of business travellers ————————————————- Business traveller segment Employees? Secure employment prospect? Yes, as its chase growth in the family based, teamwork,business segment, it has to ensure ————————————————- respect and funlow turnover and maintain culture Singapore Airline? SIA and Virgon form an airline? yes, the agreement between SIA alliance, allow the use of Virgin Ausand Virgin has allowed SIA customer Band overseas. Virgin able to build to use Virgin’s domestic network its international network, and alsowith just one ticket & allow two allows SIA customer access to Virginairline gold member to access to Australia’s domestic networkVirgin’s domestic airline’s airport ————————————————- ounge 2b. What business strategy is Virgin Blue supposed to have been pursuing and has this in fact been the case? The five questions (5Qs) approach is used to understand Virgin Blue’s stated business strategy Business strategy usingExamples of how Virgin has been pursuing this stated ————————————————- 5Qs approachbusiness strategy ? Does Virgin Blue want to growthVirgin blue wants to grow. We can see from their new vision profitability? “to be the airline choice for Australian business and leisure Travellers”. And its targeting to grow the share in business travel segment from 10% – 20%.
The airline alliance strategy to establish it built its international alliance network in Asia as it is a critical market for Virgin ? What products/services will Virginleisure travel segment maintaing its low-cost; Virgin Blue Blue provide? began offering a premium economy fare, reinvent itself as a full service brand by altering its low-cost, no-frills model to take market share from Qantas in the higher margin, business market; developed its passenger lounges, introduced a loyalty reward scheme, ‘Velocity Rewards’, and offered the first Web check-in service in Australia. In what market will Virgin BlueGeographic market – Australia domestic airline, global flight operate? coverage after Virgin formed alloances with Singapre Airlines Customer market – business traveller, leisure traveller, freight and other include travel insurance, and formed a new venture with ZUJI, an online travel company. ? What generic strategy will VirginGeneric strategy – low cost leadership (no-frills models) adopt? -;Differentiation: take market share from Qantas in the igher margin, business market (full-service model). ? what is the position in the insutryVirgin Blue had grown through expanding its leisure travel does Virgin Blue plan to hold? segment, and growing low-fare passenger numbers to hold the number one position in the leisure segment and maintaining its low cost focus; By 2010, Virgin had about 10 per cent of business travellers and an approximate 30 per cent of all domestic air travellers; Growing its share of the Australian business travel segment from 10 per cent to 20 per cent.
SWOT ANALYSIS Identify the capabilities of the organisation in the context of the competitive environment, using SWOT analysis ? Strength: Virgin Blue had grown through expanding its leisure travel segment, and growing low-fare passenger numbers to hold the number one position in the leisure segment and maintaining its low cost focus. _ Virgin had formed alliances with Singapore Airlines in building its international network _ Borghetti was a former QAL executive who was appointed CEO and MD of Virgin in 2010.
He quickly established a new management team capable of taking on Qantas, particularly in the competition for business travellers, by recruiting some highly experienced ex-Qantas staff including: Roger Lindeman as General Manager Service Experience; Jane McKeon, to run Virgin’s government relations team; Hope Antzoulatos as head of domestic and international network operations; and Will Owens as head of yield management. ? Weakness: Qantas has 65% of industry revenue in 2012 but Virgin only has 17. % and no regional offered compete with Qantas; Qantas dominates the business segment. _ Unprofitable routes in New Zealand and to destinations including Fiji, Phuket and South Africa, high costs in maintaining its four brands, and confusion in the market between the brands. ? Opportunities: Acquire 20% of market share in market sector _ brand transformation reduce the cost of advertising and less confuse customer _ expand alliance with SIA to enter Asia market, broaden its offering by adding more services to enter the business segment and attract higher yield customers ?
Threats: fierce competition from low-cost carries in its domestic market; Jetstar would have in capturing part of the leisure market _ Declining fares in the leisure travel segment due to strong competition have combined with increasing costs to lower profitability over this period. EVALUATION OF STRATEGIC OPTION ? Competitive advantage Benefits:yes, to sustain growth and profitability Valued by customers_ maybe not as people perceived Qantas as leading provider for business segment _ have to be careful not losing loyalty customers External consistency Industry’s life cycle:Fits well – moves to more competituve environment TEMPLESto respond to the external environment particular social cultural factors and economy factors – > fit well to maintain profit Profit well with the changes in external environment where more competitive from low cost Jetstar and profit due to pressure on price, to sustain growth & profitability by capturing more market sharee in business segment ? Internal consistency Revenue & costrevenue increased by capturing more in business segment
Cost reduced by consolidating into one brand Not implementmore difficult to complete in the industry because of competition Reputation riskculture issues Loyal customer * Consistent in term of growth and sustainability But not consistent with the current culture and balance >< low cost leisure and business segment ? Internal consistency Capabilities:experience management team from Qantas Capitalcan be quite costly to reposition itself and do it property Strong culture in family oriented can be quite difficult for business market