a Attractiveness of domestic aviation industry in Australia [MPM703] Business Strategy and Analysis  Ashan De Silva Wijeyeratne  Kevin Procter TABLE OF CONTENTS Executive Summary3 Introduction4 Industry Analysis6 Methodology8 Results9 Industry Rivalry9 Competitor Analysis9 Environmental Analysis11 Macro Environmental Conditions11 TASK Environmental Analysis12 Comparative Market Positions of Regional Airlines18 Conclusion & Recommendations19 References21 Appendices22
Appendix A – Porter’s 5 Forces Model22 Appendix B – Comparative Market Positions of Regional Airlines23 Appendix C – Aviation Industry Time Line 24 EXECUTIVE SUMMARY The domestic aviation industry has grown by 5. 57% in 2007 in comparison with 2006 according to ABS (2008). This is a major indication of the attractiveness of this growing industry which is expected to perform better in the near future. By 2010 it is expected to grow up to 13. 67% in comparison to 2006. Some of the reasons for this growth could be classified s the reduction of airfares due to increased competition, deregulation of policies concerning air travel, advancement of technology, decentralisation, expanding aviation infrastructure, less travelling time compared to other modes of transpiration, increased spending on marketing promotions by airlines. Even though domestic aviation industry is in the growth stage of the life cycle, it is extremely difficult to get in to the market due to regulations, cost associated and competition. At present there are only 4 organisations competing in this industry, out of which Qantas has 60% of the market share.
The other airlines are competing for the rest of it. The environment of domestic aviation industry is very dynamic and technology plays a huge role in it. Organisations must be up-to-date at all times in order to gain a competitive advantage. Business strategy has to be aligned with the environmental conditions as an organisation with a general strategy wouldn’t be able survive in such a dynamic environment. It is recommended that any organisation entering the market should compete with the rest of the airlines rather than Qantas as it would be almost impossible for a new organisation to compete with such customer loyal airline.
Thus, new entrants must compete towards the rest of the market share especially by pricing strategies. More routes than other airlines would be a great advantage as with the discounted airlines, customers have a limited choice for routes. Therefore it could be concluded that in order to get a good market share in this industry, a company should differentiate its products, have an attractive pricing strategy and more routes. INTRODUCTION Travel has dated back since the dawn of time and has evolved now into a business with several modes of transportations taking you to different destinations over land and sea.
With the advancement of technology news means of transportation have risen up which has revolutionized transportation and evolving it into a business. This is clearly evident in the airline sector but since the airline industry is so vast with number of commercial airlines providing their services over international waters to narrow the study down its best to take a regional/domestic market of a particular country and look closely on that industry within that country. Transportation between countries was done was ships back in the day and is till existent today but as it is time consuming to reach its destination it isn’t the most preferable option but it was the only mode of transportations between countries. With birth of the first plane created by the Wright brothers, the aviation industry has been nothing but a success story and with the development of technology, Research and Development it does not look like slowing down The travel market within Australia is estimated to about 158 million trips yearly which could be classified to 17 million business trips and the rest of as leisure trips.
Even though vehicles dominate most of the travel market, air travel dominates the large distance market with over 4 million trips per annum (BTE, 2000). This report will identify the major areas of interest in the domestic aviation industry – the level of air service to the destination, the behaviour of the operators/airlines, the competitiveness within the industry, the structure of airfares and the impacts of other factors affecting current and new operators. When discussing the competitive forces within the domestic airline industry, it is important to look at the significance towards the country.
Australia has grown over the last decade and numerous numbers of routes opened up to several destinations providing goods and services to those regions which states how important that an efficient and competitive domestic aviation industry is to the economy and with the deregulations within certain states removing barriers to current and new entrants within the industry it would just increase competitiveness. INDUSTRY ANALYSIS The domestic air travel has grown leaps and bounds with numerous routes opening up all over the country and with the expansion of networks there is a different relationship to the number of customers.
The domestic market in Australia comprises of a number of airlines but even with stable operators in the industry with a fleet of 40- 50 of various sizes there is an the advancement of technology constituting changes in airlines, the deregulations within various states and territories and with that new routes opening up are a few indicators of the presence of competitive forces The domestic market used to be made up of two leading players that is Qantas Airways and Ansett Airways but since the liquidation of Ansett Australia in 2002, Qantas has a hold on the market with a 70% of Australia’ domestic arket. With demise of Ansett Australia it coincided with the arrival of Virgin Blue and the arrival couldn’t have come at a better time for Virgin Blue and they developed a strategy to counter the hold Qantas has within the market. They promoted themselves as a discount airline within the eyes of the public and that paid off well for them and opens up a new segment within the market.
Although they may not provide a quality service or serve as many routes as compared to Qantas but they compensate that will a reduce air fare. Qantas which still has a strong presence within the industry combated that move from Virgin Blue by launching a partnered airline Jetstar to compete with Virgin Blue over this new segment.
There was a lack of strong competitive pressure in the past in the domestic aviation structure and it could not have been more evident in the individual route level because no one airline operates in all states and territories due to the nature of the industry the air routes are split between operators (Qantas & Ansett) along geographical lines but now with the expansion of fleets and the introduction of new participants it has been far more competitive.
In the past the highly concentrated and strongly oligopolistic nature of the market did not consequently mean that customers would suffer low quality services and pay a higher price which is generally accustomed when the service provider (s) have such power but with the change in market that has changed with airlines such as Virgin Blue and Jetstar providing a less quality service at a less price as compared to Qantas. METHODOLOGY In order to gather information about the domestic aviation industry, a lot of data needed to be collected.
Due to the time and budgetary constraints; the entire report is based upon secondary sources. Some of the main secondary sources that are used in this report are online databases, official internet websites of airlines and other organisation, text books written in the near future about business strategy and other numerous written sources that aided in research. In order to gather statistics to help research about the industry as a whole, Australian Bureau of Statistics (ABS) website was accessed.
The latest information has been gathered to the best of writer’s knowledge, in order to grant the reader an accurate picture about the industry and to keep the report up-to-date, in order to make a well-informed decision about entering the market upon understanding the attractiveness of the domestic aviation industry. RESULTS Some of the results of the research carried out using the above stated sources follow. These are classified under different subtopics to benefit the reader to understand the report. INDUSTRY RIVALRY
Industry Rivalry is an aspect that would influence the overall profitability and the captivation of market share Airlines which offer products and services which a homogenous in nature are likely to experiences rivalry within the industry to a larger extent. With several operators in the market it is important to differentiate from other operators to capture its audiences’ trust and loyalty. COMPETITOR ANALYSIS An analysis on competitors allows an organization to assess whether or not it can compete successfully within a given market with given profit opportunities.
Details on some of the Regional Airlines competing in Australia QANTAS AIRLINES According to QANTAS (2008) it is the national airline of Australia and is one of the 5 best airlines in the world as voted by Skytrax. “QANTAS” an acronym for Queensland and Northern Territory Aerial Services and also nicknamed the “the Flying Kangaroo is third oldest airline in the world dating back to 1920. The main competitor in the domestic market used to be Ansett Australia until they collapsed in 2001 which sent their market share shoring to 90% in 2001. VIRGIN BLUE
Is an Australian low-cost airline founded by British businessman Richard Branson and was launched in 2000 and came at a fortunate time with the failure of Ansett in September 2001. With the failure of Ansett it allowed Virgin Blue to grow rapidly to become the country’s second domestic carrier. With the successful expansion of Virgin Blue it cut down Qantas domestic market share back to 60 % (Virgin Blue. 2008). JETSTAR Jetstar (2008) states that it is another low-cost airline based in Melbourne is a subsidiary of Qantas was launched in response to the threat posed by Virgin Blue. Although owned by Qantas with a 42. % stake hold the management running Jetstar is independent. A historical moment in Australian aviation was the fact that Jetstar became the first Australian airline to allow customers to choose their seat upon booking. Jetstar also operates in Asia thus marking Qantas’s entry to the Asian low-cost market. TIGER AIRLINES Tiger airways which started running in 2003 is based in Singapore but it was only in 2007 that they management decided to take advantage on the lucrative prospects in the Australian regional market and opened up a subsidiary company Tiger Airways Australia in November later that year.
Tiger Airways like Jetstar and Virgin Blue prides itself on providing cheap air-fares to every state and territory in the country. They are “followers” in the market following strategies that have worked out well for other aviation players around the world. They are replicating the strategy that has worked so well for Europe’s Ryanair where they analyse every single aspect of the flight to remove non-essential costs for instance instead of printing tickets of paper why not book them online, the ticket wont include excess services such as excess luggage, food and entertainment and if wanted will be paid separately .
All these extra costs are cut down without sacrificing on customer safety and security. Tiger Airways long term goal is not only to be the leading low-fare airline in Australia but the leading low-fare airline in Asia-Pacific (Tiger Airline, 2008). ENVIRONMENTAL ANALYSIS The activities of an organization are greatly influenced by the environment within which it operates. An organization may have resources and capabilities, however if they do not adapt appropriately to the environment they are in, it would be difficult to survive (Fletcher, 2001, pp. ) MACRO ENVIRONMENTAL CONDITIONS Organizations in this industry do not operate alone nor do they operate in a world where forces factor in the industry they operate in. However good an organization’s resources and capabilities are, if it does not adapt to its environment, the organization is unlikely to succeed (Fletcher, 2001,p. 3) Internal Environment External Environment The common thread is consideration of factors outside the organization itself. The most popular definition of environment identifies it as everything outside an organization’s boundaries.
Environmental analysis is a look into the forces that affect the day to day changes that the organization has to adapt with. These changes can negatively or positively affect the organization. The environment consists of external as well as internal environment. Due to the nature of the organizations in the airline industry, they are very sensitive to its environment because even a minor change in the environment can result in greater influence on the organization either positively and negatively The External or Macro Environmental Analysis will be analysed by looking at P. E. S. T analysis and Michael Porter’s Five Forces Model.
That is by analysing the effect of the Political, Economic, Socio-cultural and Technological environments in the industry that provides opportunities and threats for them to run their operations. POLITICAL- LEGAL ENVIRONMENT Refers to the legal and Government systems within which an organization functions. Trends in Legislation, court decisions, politics and government regulation are important legal-political environment aspects. Organizations operate within the general legal framework of every country on which they do business. They are governed by many laws specifically addressing their functioning.
Political processes also influence the legal system. Political issues may result in government regulation of various areas. The industry is a very volatile one and it of the determinants is the political influences in which it takes place. The Government which include state and territory bodies play a huge role like stated before there has been an increase deregulation in the industry and now the role of the government is more fixated on the Safety Regulations in the Aviation sector through the CASA (BTE, 2000) and measures have stepped up after the 9/11 attacks in America and several other attempts worldwide. Refer Appendix C – Aviation Industry Time Line) The Department of Transport and Regional Services another regulatory body deals with the consumer interest of not only the operations of these airlines but also the operations in airports (BTE, 2000). ECONOMIC The economic element involves systems of wealth production, distribution and consumption. Organizations in Western Countries function largely in capitalist economies though they may do business with and/or operate and individual the means of production either directly or through corporations. In a socialist economy, the state owns the means of production and economic activity.
It’s because of these differences organizations operating in a variety of countries face a range of economic ground rules (Poor, 1993). When looking at the economic environment of an organization, focus needs to be given to the GDP trends, unemployment levels, inflation rates, energy availability, consumption and interest rates (Fletcher, 2001,p. 4) Australia’s annual GDP has risen over the last few years with the GDP real of 4% and is in par with the dominant western European economies and with a steady rate of growth Australia is one of the safest markets around.
With a strong currency that has pushed the trade deficit up in the recent years and a budget that has been in surplus since 2002 it is safe to assume it is heading on to the right direction into achieving the goal of * High disposable income resulting in higher purchasing power * High GDP growth rate * Low Inflation rate SOCIO-CULTURAL This element involves attitudes, values, norms, beliefs, behaviours and associated demographic trends typical of a region, life style changes, and growth rate of population, age distribution of population, life expectancies and birth rates (Fletcher, 2001, p. ). The socio cultural environment is extremely important to any company because social concerns can have an immediate effect on the activities of the organization (Viljoen & Dann, 2003) Passengers are divided into two groups that are based on the purpose of travel whether it is business or leisure. These segments have their own behavioural characteristics and prefer a varied quality of service. Airlines like Jetstar, Virgin Blue and Tiger Airlines try and induce customers by sacrificing quality for reducing their fares in order to gain passengers.
Qantas on the other hand is the national carrier for Australia and it is that slogan that Qantas takes advantage of. Australians are drawn to what is Australian and of their passengers is based on loyalty. TECHNOLOGY Australia is a powerhouse of knowledge and innovation, and is internationally renowned for its excellence in scientific research and development (R&D). The Industrial Revolution paved the way for new technological advancements throughout the years. Australia ranks high in the usage of modern communication technology such as the internet, wireless networks, broadband and Bluetooth technology.
The regional airline industry adopts most of its communications with the use of these to be more efficient. Technology advancement plays a huge role in inducing the customers to fly under their wing, Televisions and Satellite radio were not even thought in the past but now it’s a necessity that every chair has that facility. New fleets are made which could hold more capacity and engines that cut down travel time and these are all what technology has done to the aviation industry and it’s these technological advancements that these operators have to take advantage of to gain a sustainable competitive advantage.
Technological is widely welcome but more so in the airline industry which provides similar products and services. With the update of technology comes an invite of vast information about destinations, competitors and latest machinery. E-booking has taken air travel into a different level and providing passengers a much easier and more convenient way to book airline tickets. Televisions on the headrest in the aircraft were seen as a luxury at the start with several airlines making sure they somehow advertise about that feature in their campaign.
Now technology has taken one step further with the launch of a double Decker plane (A380) which instead of seats is consists of rooms for passengers. THE TASK ENVIRONMENT ANALYSIS This includes the elements in the environment that directly affects the organization and is in turn affected by the organization itself (Fletcher, 2001). Michael Porter’s 5 Forces model can be used to identify the key factors that affect the profitability of the industry. They are: i. The bargaining power of the suppliers ii. Bargaining power of the buyers iii. Threat of substitutes iv. Threat of new entrants . Rivalry among competitors (Refer Appendix A – Porter’s 5 Forces Model) BARGAINING POWER OF SUPPLIERS In order for airlines to supply in an efficient and cost effective manner is dependent on a number of factors. In order for the suppliers (operators) to achieve a profit they need to produce their services at minimal cost. The characteristics or the segment in which they are targeting are taken into consideration when making a supply decision. The supply of the services has various factors that influence the cost such factors are labour, fuel, type of aircraft etc.
There is a direct relationship between the air fare cost and the operation costs (BTE, 2000). The domestic market in Australia the operators (suppliers) are powerful and have control over the various factors and as a result need to ensure quality in their service to gain a competitive advantage. BARGAINING POWER OF CUSTOMER “Buyers are a strong competitive force when they are able to bargaining power over price, quality, and terms of sale or service” (Strickland, 2003) The demand for services provided by these operators is driven by: * The Quality of service offered The air fare compared with costs of alternative modes of travel * Characteristics of the traveler and routes The characteristics of the traveller and routes are divided into the purpose of travel whether it is business or leisure. Business travellers tend to fly in a more flexible full economy fare ticket while leisure passengers look out for discount tickets. Another factor is the demand of the service on either a daily, weekly or annual basis but the most important factor is the trends both regional and economical that takes place. The Supply and demand of the services provided are independent.
The demand has to match up with the supply of the services over which the suppliers (airline operators) have control over. Airlines do research so they can control these factors and thus determine what services to provide and how much to charge for these services. THREAT OF SUBSTITUTES The presence of substitutes in the market is a threat to any organization providing the similar product or service and this threat exists in the domestic market. There is a choice for customers to choose from discount airlines in the form of Jetstar, Virgin Blue, Tiger or travelling in quality with Qantas.
In order for these operators to gain an advantage over their competitors they need to maintain or improve customer service, devise a way to create loyalty and diversify their product line or service if possible. Even with the existence of substitutes Qantas differentiates its service by providing more routes and a better service and thus the threat of substitutes is not considered to be as a main threat to Qantas. Apart from immediate substitute, customers have other options such as travelling by road, rail or by sea because Australia is an island itself which has broad transportation infrastructure networks.
THREAT FROM NEW ENTRANTS (POTENTIAL COMPETITORS) OR BARRIERS “New entrants to a market bring new product capacity, the desire to establish a secure place in the market and sometimes substantial resources with which to compete” (Strickland, 2003) There are several barriers to entry but these barriers are not so strict to force an impossibility to enter the market. With aviation market in general being so volatile for a new entrant to survive it’s a necessity to enter with some aviation industry experience.
With the main players in the market protecting their market share a new operator would have to concentrate on research and advertising as well as coming up with attractive packages to compete with the others and all this added with the start up cost. Such a plan is risky and hence is a big obstacle new entrants had to face will enforce the oligopoly industry structure and give a clear advantage to the main players (BTE, 2000). COMPARATIVE MARKET POSITIONS OF REGIONAL AIRLINES This shows the operators serving in the domestic market and the close rivals within the market.
With the two variables on the axis been chosen that is the Price and Quality on one side and the Geographic destinations covered by the operators. Qantas fares are priced high and the customers get a lot for what the pay for and plus with a market share of 60% its separates itself from the others. Often firms in strategic groups that are far apart on the map hardly compete at all and that is the case in this market with Qantas and Virgin Blue, although these two operators might provide the same services they cater to different customers and provided services with different features.
Although the main player in the market is Qantas the intense competitive battle is among Virgin Blue, Tiger and Jetstar providing similar service with similar features and catering to the same segment. (Refer Appendix B – Comparative Market Positions of Regional Airlines) CONCLUSION AND RECOMMENDATIONS As seen on this report, it could be said that domestic aviation industry of Australia has got a very attractive market as people now prefer domestic trips over overseas trips due to many reasons. Before Ansett went in to liquidation, Qantas and Ansett had an oligopoly.
After Ansett cancelled all their flights in 2001 (Refer Appendix C – Aviation Industry Time Line) the market immediately opened up and Virgin Blue took advantage of this. However, Qantas is still dominating the market as they have got the experience and preference from Australian population as it is a local organisation. On the other hand, Jetstar, Virgin Blue and Tiger Airways are fighting for the rest of the market with different business strategies than Qantas. The growth of Tiger Airways since starting operations in 2007 is proof of how well the industry is performing.
Another factor contributing to the performance of the industry is the support of the government. It is very hard to get in to the aviation industry due to the costs and regulations associated. Since customers have a choice with secondary substitutes such as travelling by road, sea and rail within the country, it is very important to take all these factors in to consideration when formulating the core strategy of the organisation. The real competition is not to gain the majority of market share at first as even a slight market share would benefit an organisation immensely due to the increasing market size.
When Tiger introduced such low prices, the way in which Jetstar reacted show how much the organisations want to get the market share other than what’s Qantas has acquired (Wikipedia, 2008). Thus, the competition is to get the second largest market share. It is recommended to apply the same strategy as Jetstar, Virgin Blue and Tiger with low prices. With the information gather, the core strategy to enter the market would have to be a low cost airline, with superior services than the other three low cost airlines with more routes within the country.
If the marketing mix is put in to practice, it could be said that the product has to be a quality service in terms of flight attendants, maintenance, pilots and flight agents and the price has to be similar to the other three air lines, if possible lower than that while promotions would have to take place a lot more than the rest because the air line would have to be introduced to the Australian population. However, it is essential to keep in mind that low prices should not be associated with low-quality services as in aviation industry, customers would want to have superior quality at a lower cost. Please refer Appendix B – Comparative Market Positions of Regional Airlines: note the X in order to see the positioning recommended by the writer in order to ENTER the market in years 2008-2010). REFERENCES ABS (Australia Bureau of Statistics) (2008), Year Book, viewed on 20 Apr 2008, <http://www. abs. gov. au/AUSSTATS/[email protected] nsf/bb8db737e2af84b8ca2571780015701e/08B332BC08267D3CCA2573D20010BD96? opendocument> BTE (2000). Regional Aviation Competitiveness. Bereau of Transport Economics, viewed on 19 Apr 2008,< www. bitre. gov. au/publications/35/files/wp41. pdf> Fletcher, J, (2001).
Strategic Management Guide III, MAN3503, Australia: Edith Cowan University Hewerdine, L (2008) Case study 1, Alaska is more than just snow and grizzlies, Graduate School of Business; University of Adelaide Jetstar (2008), viewed on 17 Apr 2008, <http://www. jetstar. com/au/about-us. html> Poor, S. &. (1993). Standard & Poor’s Stock and Bond Guide. McGraw-Hill. QANTAS (2008), viewed on 18 Apr 2008, ;http://www. qantas. com. au/info/about/index; Strickland, T. (2003). Strategic Management: Concepts and Cases (13th ed. ). McGraw-Hill. Tiger Airways (2008) viewed on 19 Apr 2008, ;http://tigerairways. om. au/about_us/; Viljoen, J. ; Dann, S. (2003) Strategic Management, (4th ed. ). Australia: Pearson Education. Virgin Blue (2008), viewed on 18 Apr 20085, ;http://virginblue. com. au/AboutUs/index. htm; Wikipedia (2008), viewed on 29 Apr, ;http://en. wikipedia. org/wiki/Tiger_Airways_Australia; APPENDICES Appendix A – Porter’s 5 Forces Model Industry Rivalry New Entrants Substitutes Buyers Suppliers Entry Barrier Entry Barrier Bargaining Bargaining Power Power Appendix B – Comparative Market Positions of Regional Airlines High Price ; Quantity Low Few RoutesMany Routes
Geographic Coverage Appendix C – Aviation Industry Time Line 2001Terrorist attacks in the USA (9/11); tourists arriving in Australia decreased by 8%; loss of AUD 2000 million; increase in domestic travel; Ansett cancelled all their flights, people who’s booked their flights lost money and 60,000 lost jobs 2002Bali bombings; affected Australia as Bali was Australia’s playground 2003Operation freedom was launched in Iraq; holiday without planes had a better appeal; world learnt a new word SARS source : Hewerdine, L (2008) Case study 1, Alaska is more than just snow and grizzlies