MMM132 - Management
Trimester 2, 2009
Assignment 2 – Luke Kinnear 800301003 & Corey Allen 800398156
Australian Airline Industry
1. Executive Summary
2. Table of contents
3. Introduction
4. Environmental Analysis
The Organisational Environment is 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 usually split into two categories, the General
Environment and the Task Environment. The General Environment includes
such things as Political, Economic, and technological forces and the task
environment is more direct to the organisation such as Competitors and
Customers. This environment is 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.
The Australian Airline Industry has changed significantly over the last 30 to 40
years. It has moved from being a government regulated industry to being
deregulated in late 1990. The industry has experienced many turbulent
periods throughout its history often as a result of the environment it operates
in.
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As described by Kirby (1979), up until deregulation the Australian Airline
Industry was regulated and operated under what was called “The Two Airline
Policy” which had been developed from the 1950’s. This system involved the
major air routes across the country being split equally between two airlines.
These routes were called Trunk Routes.
There were two Airlines TAA (Trans-Australia Airlines) which was government
owned and Ansett Airlines of Australia which was privately owned. The affect
of regulation of this type was that there was no price competition between the
airlines. This also meant that the Airlines could not change the quality of their
other services such as in flight catering or décor. The customer had to pay
one price and could not choose to opt out of any of these services. This is
contrast to today’s 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. In other words the
flights required were estimated and each Airline could operate 50 percent of
this requirement. This kind of restriction inhibits any form of competition as
neither airline could aggressively compete through increased services.
In the late 1970’s 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 this restrictions had little effect on the
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industry. If discount fares were offered they could not be at the expense of
standard fares. (Quiggin 1997)
The Australian Airline industry became deregulated on 1 November 1990.
There were no longer restrictions on airfares and to competitors entering the
market. Quiggin (1997) further highlights that almost immediately a new
Airline started operation in the domestic market, Compass Airlines. They
offered heavily discounted tickets with only one class. This resulted in the
existing two airlines, Ansett and Australian (Formerly TAA) pricing more
aggressively and which 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/travel/airlines/history (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 led to Virgin Blue entering the market in August 2000, (Avline No. 5
2004). As Virgin Blue was the new player it was a shock to many that Ansett
had failed. It was also around the time of the September 11 attacks in the
United States. Where previously the industry had been operating at record
levels in July 2001 this had fallen by 20.8 percent by October 2001. This led
to the restructuring of the airline industry whereby Qantas and Virgin Blue
increased capacity on the existing Ansett routes. (Avline No. 5 2004).
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Today the Australian Airline Industry is dominated by four Airlines who in
2007/2008 accounted for nearly 88 per cent of the total market, the rest by
regional airlines. These four are Qantas, Jetstar (Qantas owned), Virgin Blue
and Tiger Airways.(Avline No 12 2008)
The industry has become highly competitive especially among the discount
fare carriers, Jetstar, Virgin Blue and now 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 under a CASK (Cost per
Available Seat Kilometre) 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.
The consumers are buying a ticket for a seat 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.
Wastnage (2008) reported in the Travel Weekly that another Airline was
looking to enter the Australian Market. The 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) goes on to
explain that unlike Tiger and Virgin Blue who are 100 percent foreign owned
Lion Air had formed a Joint Venture with Sky Air World (51 percent owner),
based in Brisbane to form Lion Air Australia. This means they would therefore
operate as majority Australian owned. This effectively gives them the ability to
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expand internationally, as under Australian government policy Australian
International Airlines must be Australian owned.
While the industry today is deregulated it is still required to comply with the
Trade Practices Act 1974 and specifically in terms of its competition policy.
The body that oversees this is the Australian & Competition and Consumer
Commission or the ACCC. It serves to ensure there are is no unfair
competition practices in the industry which could be taken advantage of given
the size of Qantas compared to it’s other competitors (Kain & Webb 2003).
The Australian Airline Industry has moved from one of restriction and
regulation where there were only two operators. The environment today sees
four major competitors facing off against each other. Maintaining market share
is important as there is also the threat of potential competitors entering the
market as we have seen with the recent indications by Lion Air. The operators
are faced with continually maintaining low prices and keeping operating costs
low. This has become even more difficult in recent times due to the rise in
global oil prices which directly affects the airline industry.
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. Whilst starting with humble beginnings as a
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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 whilst keeping itself relevant to the non-business
traveller. The virginblue.com.au website states that over 75% 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
the services legacy carriers such as Qantas provide, but retain a low-cost
approach”. (smh.com.au, 2005)
5.2
Strengths

Strong culture

Low cost strategy in a cost focused environment

Edgy marketing strategy
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
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

31% of the domestic market, which makes it the second biggest airline
in Australia
5.3
Weaknesses

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
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
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

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

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
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
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
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
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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
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

Target business clients more heavily, as personal air travel is more
prone to the economic downturn
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
Find ways to transfer international Virgin flight business to the domestic
travel market

Explore codesharing relationships with other major international airlines

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

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

Use smaller aircraft such as the Embraer fleet to reduce ticket pricing
for business routes such as Sydney to Melbourne and Sydney to
Canberra
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
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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 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
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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
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.
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REFERENCES
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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
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Management, McGraw-Hill Irwin, Sydney
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