MMM132 - Management
Trimester 2, 2009
Assignment 2 – Case Study Report
Corey Allen - 800398156
Luke Kinnear - 800301003
A Competitive Analysis of Virgin Blue
Airlines and the Australian Airline
Industry
800301003 & 800398156
Page 1
6/03/2016
1. Executive Summary
In this report we initially analyse the Australian airline industry as a whole
and the environment in which it operates. We see how the industry has
moved from a regulated two airline industry to being deregulated and
highly competitive. We review some of the political and economic forces
that have shaped the industry and how the airlines within it have
developed. We also highlight some key turning points in the industry such
as the Ansett collapse.
In particular, we study the way Virgin Blue operates within this competitive
industry. We examine how Virgin Blue has been able to develop a
presence in Australia since its inception in 2000. Initially targeting the
tourist market, Virgin Blue has been able to increase its impact on the
business sector which was once the domain of Qantas. We see that
Virgin Blue has been able to harness the power of the Global Virgin brand
and develop strategies in line with their culture to provide an attractive
alternative to its competitors.
We see that today’s industry is faced with the pressures of new entrants,
global economic crisis, global health issues and the continuing threat of
terrorism. Airlines such as Virgin Blue are under constant pressure to
adapt to their environment and have a clear strategic plan place to
guarantee survival and success in the future.
800301003 & 800398156
Page 2
6/03/2016
2. Table of contents
Page No.
1. Executive Summary
2
2. Table of Contents
3
3. Introduction
4
4. Environmental Analysis
4.1 Introduction
5
4.2 General Analysis
5
4.3 Task Analysis
7
4.4 Summary
9
5. Competitive Analysis
5.1 Organisation Background
10
5.2 Strengths
11
5.3 Weaknesses
12
5.4 Opportunities
12
5.5 Threats
13
5.6 Critical Summation
14
5.7 Recommendations
15
6. Strategic Analysis
16
7. Conclusions
17
8. References
18
800301003 & 800398156
Page 3
6/03/2016
3. Introduction
This report analyses the evolution of the Australian airline industry from its
former operations under the “two airline policy”, to deregulation in 1990
and the state of the industry today. We look at the effects of the
environmental forces that have shaped and continue to shape the industry.
We provide some background on the effects of policy changes and the
many upheavals the industry has experienced - such as the Ansett
collapse and the global financial crisis.
We examine in depth how Virgin Blue has rapidly grown within the
competitive deregulated market and the strategies the company
undertakes to maintain market share. We analyse the strengths,
weaknesses, opportunities and threats facing Virgin Blue and make
recommendations on ways to strengthen their position in the industry.
We begin this report with analysis of the general and task environment
within the Australian airline industry. We then provide an analysis of Virgin
Blue within the industry, including their competitive situation and current
strategic approach to the organisational environment.
The Australian airline industry has undergone many changes from
competitive, political and economic forces. Airlines need to be constantly
aware of the changing environment and be flexible enough to adapt when
necessary.
800301003 & 800398156
Page 4
6/03/2016
4. Environmental Analysis
4.1 Introduction
The organisational environment refers to the outside set of pressures and
forces that an organisation faces, which can have a wide-ranging effect on
how they run their operations. This is split into two categories, the general
environment and the task environment. The general environment includes
political, economic, and technological forces. The task environment is linked
more directly to the organisation through competitors and customers. These
environments are constantly changing and it is critical for organisations to
adapt accordingly (Wadell et al, 2008). Here, we analyse the organisational
environment of the Australian airline industry.
4.2 General Analysis
The Australian airline industry has changed significantly over the last 30 to 40
years. In late 1990 it moved from a government regulated industry and was
deregulated. The industry has experienced many turbulent periods throughout
its history often as a result of the environment it operates in.
As described by Kirby (1979), up until deregulation the Australian airline
industry operated under what was called the “two airline policy” since the
1950s. Under this system, the major air routes across the country were split
equally between two airlines. These routes were called Trunk Routes.
800301003 & 800398156
Page 5
6/03/2016
The two airlines were Airlines TAA (Trans-Australia Airlines) which was
government owned, and Ansett Airlines of Australia which was privately
owned. The regulation meant no price competition between the airlines or
improvements in quality of services such as in flight catering or décor. The
customer was only offered one price and could not opt out of any services.
This is in contrast the current deregulated market where discount fare
operators require passengers to pay extra for things such as in-flight catering
(Kirby 1979).
The airlines were also restricted in terms of flights offered because the flights
required were estimated and each Airline could operate 50 per cent of this
requirement. This kind of restriction inhibited any form of competition as
neither airline could aggressively compete through increased services.
In the late 1970s the industry began to change and the policy regulating the
industry was reviewed. The restrictions on fares and flights were reduced.
However even the lifting of some of these restrictions had little effect on the
industry. If discount fares were offered they could not be at the expense of
standard fares. (Quiggin 1997)
4.3 Task Analysis
The Australian airline industry became deregulated on 1 November 1990.
There were no longer restrictions on airfares or to competitors entering the
800301003 & 800398156
Page 6
6/03/2016
market. Quiggin (1997) indicates that almost immediately a new airline,
Compass Airlines, started operation in the domestic market offering heavily
discounted tickets with only one class. This resulted in the existing two
airlines, Ansett and Australian (formerly TAA) becoming more aggressivel in
their pricing offers. This ultimately led to the collapse of Compass less than
two years later. There was also a Compass Mk II, which also failed. In 1992
Qantas took over Australian Airlines and a year later they merged under
“Qantas – The Australian Airline” (qantas.com.au, 2009).
Arguably, one of the most turbulent periods for the Australian airline industry,
aside from the Pilots Strike of 1989, was the collapse of Ansett Airlines in
September 2001. The Australian government had lifted restrictions on foreign
investment, in particular domestic airlines being 100 per cent foreign owned.
This allowed British-owned Virgin Blue to enter the market in August 2000,
(Avline No. 5 2004). As Virgin Blue was the new player it was a shock to
many that Ansett was the one to fail. Another significant development to affect
the industry was the September 11 attacks in the United States in 2001. The
industry had been operating at record levels in July 2001, and fell 20.8 per
cent by October 2001. The airline industry restructured with Qantas and Virgin
Blue increasing capacity on the existing Ansett routes. (Avline No. 5 2004).
Today the Australian airline industry is dominated by four airlines who in
2007/2008 accounted for nearly 88 per cent of the total market. These four
are Qantas, Jetstar (Qantas owned), Virgin Blue and Tiger Airways (Avline No
12 2008). Regional airlines make up the remaining 12 per cent of the market.
800301003 & 800398156
Page 7
6/03/2016
The industry has become highly competitive especially among the discount
fare carriers, Jetstar, Virgin Blue and the newcomer Tiger. Hadley (2007)
reported that the industry was set for a price war with the arrival of Tiger
Airways, who were offering $10 plus tax fares. The airlines operate on CASK
(Cost per Available Seat Kilometre) calculation, and need to have this at a
certain level to be able to offer low fares and be profitable. These discount
operators offer no frills flying, and consumers purchase a ticket for a seat
only, and any extras such as in-flight catering are paid for as extras. This
lower cost of flying also introduced many customers to the airlines who may
not have been able to fly in the past or who would have used other forms of
transport. The rise in global oil prices has also directly affected airline prices,
profits and competition.
Wastnage (2008) reported in Travel Weekly that yet another airline was
looking to enter the Australian market. Indonesian-based Lion Air was set to
start flights to and from Indonesia. The question often raised is whether the
industry could make way for another player. Wastnage (2008) explains that
unlike Tiger and Virgin Blue who are 100 percent foreign owned, Lion Air had
formed a joint venture with Brisbane-based Sky Air World (51 percent owner).
This would effectively give them an ability to expand internationally, as under
Australian government policy Australian international airlines must be majority
Australian owned.
800301003 & 800398156
Page 8
6/03/2016
Despite deregulation, the industry is still required to comply with the Trade
Practices Act 1974,specifically in terms of its competition policy. The body that
oversees this is the Australian and Competition and Consumer Commission,
or ACCC. This body ensures there are no unfair competition practices in the
industry. For example, they monitor the advantages Qantas has compared to
its much smaller competitors (Kain & Webb 2003).
4.4 Summary
The Australian airline industry has moved from regulation of only two
operators to the modern market of four major competitors competing against
each other. Maintaining market share, continually maintaining low prices and
keeping operating costs low are continual challenges against such factors as
further squeezing of the market by new airlines, terrorism fears, and rises in
global oil prices.
800301003 & 800398156
Page 9
6/03/2016
5. Competitive Analysis
5.1 Organisation Background
Virgin Blue was launched in August 2001 with two aircraft and set out on one
route with the clear goal of providing a low cost, quality air travel alternative to
their largest competitor Qantas. Starting out with humble beginnings as a
purely passenger travel alternative for Australian routes, Virgin Blue has
grown within the Asia Pacific region to incorporate Pacific Blue which is a joint
venture with the Samoan government. This has provided “essential and
affordable air services between Samoa, New Zealand and Australia”
(virginblue.com.au, 2009).
With its evolving business strategy, Virgin Blue is moving towards a more
corporate friendly market while remaining relevant to the non-business
traveller. The virginblue.com.au website states that over 75 per cent of the top
200 ASX listed companies in Australia hold corporate accounts with them.
Virgin’s future business strategy embraces advances in environmental, audio
visual and aircraft technology to deliver a product to its consumer that meets
the demands of the savvy traveller, whether it is for business or pleasure.
These include new aircraft to the fleet and carbon offsetting for the entire staff
of Virgin Blue. Virgin has also introduced a frequent flyers program (Velocity)
and business lounges at airports to accommodate their growing business
clientele.
In 2006, CEO Brett Godfrey stated “Virgin was moving from a low-cost
business model to a ‘new-world carrier’. New-world carriers provide many of
800301003 & 800398156
Page 10
6/03/2016
the services legacy carriers such as Qantas provide, but retain a low-cost
approach”. (smh.com.au, 2005)
5.2
Strengths
The review of Virgin Blue’s corporate strategy has revealed the
following strengths;

Strong culture

Low cost strategy in a cost focused environment

Edgy marketing strategy

Viewed as a fun brand which targets young travellers successfully

Good economy to scale- Virgin is a large company with diverse
interests (money lending, car insurance, international airlines, music)

Corporate strategy- “true and sustainable competition and value-formoney, while not compromising safety or product quality.”
(virginblue.com.au, 2009)

High levels of employee engagement

High brand recognition- Virgin Blue had a 94% brand recognition rate
before launch in 2000 (hrleader.net.au, 2003)

Ability to codeshare with Virgin Atlantic, V Australia and Pacific Blue
airlines

Live 2 Air network, which allows customers to access FOXTEL and
AUSTAR content on personal screens- a revolutionary first in air travel
entertainment

Carbon offsetting available for customers

All Virgin employee travel is carbon offset
800301003 & 800398156
Page 11
6/03/2016

31% of the domestic market, which makes it the second biggest airline
in Australia
5.3
Weaknesses
There are weaknesses in the Virgin Blue strategy although they do not have
major implications;

Viewed as an ‘expensive low cost airline’ by the industry

Fly to out-of-the-way airports such as Avalon in Melbourne which does
not affect Qantas

Hiring policy- eight flight attendants have won an age discrimination
case against airline Virgin Blue. The women, aged between 36 and 56,
claimed Virgin Blue discriminated against them in job interviews that
required applicants to dance and sing. (smh.com.au,2005).

Views that the airline compromises safety and comfort for price.

Low brand loyalty- most customers find cheapest flights on Webjet etc
5.4
Opportunities
Various large opportunities exist in the airline market for Virgin Blue to take
advantage of;

Low cost business target market

Viral marketing/ social media (Twitter/ Facebook) to reduce marketing
costs

Expanded routes

Reduction of costs through own website bookings

Expanded marketing overseas for interstate travel
800301003 & 800398156
Page 12
6/03/2016

More fuel efficient aircraft to reduce costs

Smaller aircraft (Embraer) so they can compete on routes such as
Sydney- Canberra and “enhance their ability to serve the corporate
market by more accurately matching seat capacity and frequency to
passenger demand” (smh.com.au, 2006).

“European budget carriers experienced traffic growth of 2.1 percent
despite their revenue worries.” (smh.com.au, 2009). Virgin has a
distinct ability to achieve growth during the Global Financial Crisis.
5.5
Threats
Many significant threats exist in the airline industry and the external
environment which have major implications to Virgin Blue’s business;

Competitors offering the same type of product with the same cost
advantages such as Tiger and Jetstar.

Video conferencing taking over from business trips

Rising fuel costs and lack of ability to pass on costs

Online competition, lack of control over online market

Online fraud/ viruses from booking websites

Global financial downturn- reduction in profitability. Qantas just posted
an 88% drop in profit on the last financial year, and expects to cut costs
by $1.5b over the next 5 years (abc.net.au, 2009).

Staffing cuts due to the Global Financial Crisis.

Swine flu- implications on travel industry and airfares “Passenger traffic
fell 9.3 percent last month following a year-on-year decline of 3.1
800301003 & 800398156
Page 13
6/03/2016
percent in April, a month traditionally buoyed by holiday travel over the
Easter period.”

Terrorism- implications from September 11

The region experiencing the most economic trouble remains the AsiaPacific market, where international passenger traffic fell 14.3 percent in
May due to the weak economic climate "and the impact of influenza
A(H1N1) on the region with the most vivid memories of the SARS
crisis," (smh.com.au, 2009)
5.6

Rising insurance costs due to terrorism

The ability of Jetstar to draw on Qantas’ customer base
Critical Summation
Virgin Blue continues to hold true to its maxim that it will provide a low cost
quality service whilst not compromising safety or comfort. Their foray into
providing a business service has been augmented over the last few years by
introducing corporate packaging, a frequent flyer program, premium economy
class and business lounges at airport terminals. Staff enjoy working with the
airline and create a fun atmosphere within the organisation, but the company
has been criticised in the media for its hiring policy and procedures, and has
been punished accordingly. The marketing around Virgin continues to be
audacious and overt, with figurehead Richard Branson constantly in the media
spotlight.
The Global Financial Crisis and the outbreak of swine flu have had major
implications on business worldwide over the last year, and Virgin has not
been immune. Profits are forecast to continue to drop in the next financial half
800301003 & 800398156
Page 14
6/03/2016
year. Rising fuel and insurance costs are threats to business, and the threat of
terrorism still hangs over the airline industry since September 11, 2001.
The airline has some very real opportunities to expand and maximise
business including embracing fuel efficient technologies and purchasing
smaller aircraft to maintain economy to scale on less popular routes. Growth
in budget airlines continues to occur despite the Global Financial Crisis
overseas, so it follows that the trend will transfer to the Australian market,
which still continues to rally against the downturn.
5.7
Recommendations
The following points should be undertaken by Virgin Blue to ensure
continuation of business growth, listed in order of priority;

Target business clients more heavily, as personal air travel is more
susceptible to the economic downturn

Use smaller aircraft such as the Embraer fleet to reduce ticket pricing
for business routes such as Sydney to Melbourne and Sydney to
Canberra

Find cleaner and more fuel efficient ways of going about business such
as a sustainability programme which other major companies such as
Coca-Cola Amatil have embraced

Continue to implement the low cost strategy of Ryan Air and the like,
as this business is still in growth

Find ways to transfer international Virgin flight business to the domestic
travel market
800301003 & 800398156
Page 15
6/03/2016

Explore code-sharing relationships with other major international
airlines

Promote bookings through the virginblue.com.au website to encourage
direct business

Promote a fairer recruitment strategy including recruitment of women
between the ages of 30 to 35

Use social networking to reach their young target market with viral
marketing

Promote the groundbreaking Live2Air network to the public
6. Strategic Analysis
Forming a strategy involves “managers analysing an organisation’s current
situation and then developing strategies to accomplish its mission and
achieve its goals” (Waddell et al, 2008). Virgin Blue’s mission is to provide
“true and sustainable competition and value-for-money, while not
compromising safety or product quality.” (virginblue.com.au, 2009) To achieve
this, Virgin has implemented many strategies to keep costs low for their
customers which do not require cutting costs on maintenance and comfort.
Virgin’s ‘user pays’ philosophy is backed up by provision of on board menus
and innovations such as Live2Air, which are available for those who wish to
pay extra for them. This goes back to Virgin’s original maxim “all you’re buying
is the flying” (virginblue.com.au, 2000).
Virgin’s target market when the aircraft launched was purely tourist market
which they reached by providing a cheaper alternative to the duopoly that had
existed until deregulation of the Australian airline industry. Virgin has now
800301003 & 800398156
Page 16
6/03/2016
expanded their target market to embrace the lucrative business sector with
business lounges at terminals, larger seating options and corporate
packaging.
Virgin Blue’s low cost business strategy holds the company in good stead in
2009 and helps maintain an edge over their major competitors. This is a
strategy by which “managers try to gain a competitive advantage by focusing
the energy of all the organisation’s departments or functions on driving the
organisation’s costs down below the costs of its rivals” (Waddell et al, 2008).
In the wake of a global financial downturn, individuals and companies are
looking for ways to reduce costs, and air travel is considered to be a large
cost to most. Rising business costs, security levels and health concerns
remain large threats to the airline industry, but Virgin Blue needs to maintain
their share of the market to weather these threats. The major competitive
threat to Virgin Blue in the current climate is the introduction of other low cost
airlines such as Tiger Airways and increased competition from established
airlines such as Qantas and Jetstar, which could erode Virgin’s 31% share.
In order to differentiate itself from the competition, Virgin Blue needs to
encourage related diversification amongst its business units by, for example,
code-sharing with Virgin Atlantic, V Australia and Pacific Blue and by
providing incentives for customers to purchase tickets for Virgin Blue flights
using Virgin credit cards.
Conclusions
Virgin’s global strategy encompasses various business types including music,
money lending, air travel and now a push toward space travel (Virgin
800301003 & 800398156
Page 17
6/03/2016
Galactic). The company continues to diversify in order to remain the brand of
choice for its customers. The culture of pushing boundaries whilst providing
value and quality for their customers makes Virgin pertinent to its target
markets. To survive in the current global financial market and remain
competitive in the Australian airline industry, Virgin needs to remain true to its
policy of quality and comfort whilst retaining the low cost focus and become a
new world carrier, as outlined by Brett Godfrey in 2006.
800301003 & 800398156
Page 18
6/03/2016
REFERENCES
Kain, J. Webb, R. 2003 Turbulent Times: Australian Airline Industry Issues
2003, Reseach Paper No. 10 2002-03 Department of Parliamentary Library
http://www.aph.gov.au/library/Pubs/RP/2002-03/03RP10.pdf. retrieved 25
August 2009
Kirby, M. G. 1979, ‘An Economic Assessment of Australia’s Two Airline
Policy’, Australian Journal Of Management (Oct 1979), Vol 4 Issue 2, pp. 105
– 118, retrieved 25 August 2009, Business Source Premier.
Quiggin, J. 1997, ‘Evaluating Airline Deregulation in Australia’, The Australian
Economic Review (Mar 1997), Vol. 30, no. 1, pp. 45-46, retrieved 25 August
2009, Business Source Premier
http://www.qantas.com.au/travel/airlines/history-expanding/global/en,
retrieved 26 August 2009
Hoss, P. Stone, S. Thompson, S. 2004, Avline issue 5, Australian
Government, Bureau of Transport and Regional Economics,
http://www.bitre.gov.au/publications/42/Files/avline5.pdf, retrieved August 26
2009
http://www.bitre.gov.au/publications/79/Files/Avline12.pdf, Avline Issue 12
2008, Bureau of Infrastructure,Transport and Regional Economics, retrieved
August 26 2009
Hadley, M. 2007, ‘Rumble in the Jungle’, Travel Weekly, 23/07/08, p.4
Wastnage, J. 2008, ‘Lion in Wait’ Travel Weekly, 25/01/08, p.6
http://abc.net.au/search/click.cgi?url=http://www.abc.net.au/7.30/content/2009
/s2661071.htm&rank=2&collection=abcall retrieved 22nd August, 2009
http://www.hrleader.net.au/articles/0B/0C01A00B.asp?Type=60&Category=87
5 retrieved 22nd August, 2009
http://www.smh.com.au/news/business/virgin-tells-qantas-its-a-newworld/2005/11/30/1133311105361.html retrieved 22nd August, 2009
http://www.smh.com.au/news/business/virgin-blue-edgingupmarket/2006/05/10/1146940617280.html retrieved 22nd August, 2009
http://www.theage.com.au/news/business/small-is-beautiful-in-virginstrategy/2006/11/02/1162339986377.html retrieved 22nd August, 2009
http://www.virginblue.com.au/AboutUs/Media/NewsandPressReleases/index.h
tm retrieved 22nd August, 2009
800301003 & 800398156
Page 19
6/03/2016
http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/TheVirg
inBluehistory/index.htm retrieved 22nd August, 2009
Wadell, D, Devine, J, Jones, G.R. & George, J.M. 2007, Contemporary
Management, McGraw-Hill Irwin, Sydney
800301003 & 800398156
Page 20
6/03/2016