Executive Summary
This report endeavours to study the market
positioning, strategy and the overall marketing plan of Virgin Australia
Holdings Limited. The findings of the report have been astounding and it has
been unearthed that some of the strategic issues facing the company are due to
its recent repositioning move which has left the air carrier somewhere in the
middle. The report contemplates whether such a positioning is sustainable in
the long term given Virgin’s resolve to provide quality services for a budget
in the face of economic crisis (when it’s hard to control costs).
Supported with sound reason, the researcher
finds it apt that Virgin stands a chance to strongly differentiate itself from
the competition by following and bettering on the ‘new world carrier’ strategy;
as this is a first in the market and enjoys best of both worlds, by delivering
a unique, fun culture to the customer at budget prices.
Introduction
This report aims to analyse the current
situation, strategic choices as well as issues facing Virgin Australia
Holdings. The researcher studies the macro environment as well as the
industry’s internal environment through various models and attempts at
suggesting a plausible course of action for future endeavours.
Product Overview
Virgin Australia launched as country’s
first low fare airline, on August 31, 2000; thus, ending a long sustained
duopoly of Qantas and Ansett in the Australian air transportation industry.
The airline company toed in line with its
parent Virgin, which is well known for its innovative and fun approach to
business; keeping its customer’s happy being the prime motto. However, over
time Virgin Australia has also secured a reputation of a value for money,
punctual and customer oriented air service.
The company has even diversified by securing
various partnerships (in the form of Joint ventures) and had launched Pacific
Blue and Polynesian Blue to cater to larger markets both domestic and overseas.
It now holds over 31% of the market share of the Australian airline industry
and thus, the second biggest player in the market.
Current Strategy
When the airline first launched, it
introduced itself as a low cost carrier for some highly demanding specific
routes such as that between Sydney and Brisbane. However, after Ansett closed
shop, Virgin found a lucrative opportunity to expand on a larger scale as full
service national airline. Also, Qantas by this time had launched a new low cost
airline, Jetstar; and even Tiger Airways entered the market by 2007 and it was
amply clear that Virgin could not survive solely on the basis of being a low
fare affair. Thus, the management at Virgin formulated a new focus in being a
‘new world carrier’ rather than being a ‘low cost carrier’. The approach
underlined under this motto is to retain the original low fare pricing but,
also providing services equivalent in value as that of any regular flight. This
was to retain all sorts of customers by offering value added services in
addition to the low fares.
However the global economic crisis and the
ever rising fuel prices over the years have reduced the profits accruing to the
airline (Profits dipped by 50% in 2008 when compared to those in 2007). This
cash crunch has left the airlines in a state of desperation to survive, result
being a rise in fare prices and other surcharges to meet the rising costs.
Thus, shift from a low cost strategy to a new world carrier strategy has only
left the airlines in a state of limbo, where the uncertain pricing approach and
ever rising costs, and lack of clarity about the situation has made the airline
vulnerable to various threats in its internal and external environment.
In this essay we strive to study issues
faced by the organisation in context of such situations as briefed above and
suggest solutions in the light of the strategic position of the company.
Product Situation
The product under study in this essay is
the air travel services offered by Virgin Australia. When it first launched in
the Australian market Virgin positioned itself as a low cost carrier (which was
a first in the Australian market) but, soon Jetstar launched in 2004 (and Tiger
airways in 2007) to claim their share of the cake in the segment. Hence Virgin
decided to reposition itself in the wake of declining market share and profits
due to market being on the verge of saturation due to competition. The new
positioning strategy now adopted was of a ‘new world carrier’ which is again a
first in the market – wherein the airline focuses on providing services (as any
other regular full service brand) at budget prices. However, such positioning
has lead Virgin to counter competition from all quarters (from budget as well
as full service players) making it difficult for the player to counter
competition, control costs and maintain services all at the same time.
Sales
Virgin reported total sales of 3.59 billion
USD for fiscal ending June 2012. This was an increase of 18.3% from that of
2011. Also sales have shown a continual increase for five consecutive years and
have increased by 71% in this period. However, when compared to growth and
sales of other airlines (especially Qantas), Virgin still needs to take the big
leap and catch up to establish market hold and sustained profitability.
Distribution
Virgin’s sales materialises through usual
sales channels as utilised by other airlines. What is to be noted here is, that
sales for the airline also take place through e-ticketing. This is very new for
the industry and is an advantage in the kitty of the company. Since, this is an
easy and efficient method to book tickets, consumers find it convenient
(leading to customer satisfaction) and online ticketing also saves costs for
the company by reducing load on facilities such as call centres, physical
booking windows and travel agent commissions (also leading to increased profits).
Overall Virgin’s distribution front is well
managed and has provided the management the confidence in integrating
technology in critical functions such as distribution.
Market Situation
Virgin Australia comprises of three
airlines, seeking to distinguish itself by offering full services at budget
fares. The airline also offers holiday packages and provides service to 29
Australian cities and 12 International destinations and consistently growing.
When Virgin launched in Australia in August
2000, it operated only on one route with two aircrafts in service; it now owns
a fleet of 68 aircrafts and services over 15 million passengers annually; and
has over 80% exposure to the leisure travel market.
Virgin Australia is currently the second
largest player in the industry with over 31% share of the market and its
current market capitalisation is over $961 million. Its major business comes
from domestic flights (over short distances) and from operating in the leisure
market. The major competitive advantage of the product came from being a low
fare airline; however, competition from Jetstar and Tiger Airways has required
the company to adapt to a new strategy to oust the competition. Hence, Virgin
is trying to woo customers by providing full services in budget fares. Also,
the group is striving to gain prominence in corporate and government travel
segments so as to widen its market base, increase profitability, reduce costs
and establish brand’s recognition and prominence in the market.
Competitive Situation
In this section we will study the major
competitors of Virgin Australia and their respective products and strategies,
to analyse their intentions regarding conduct of business. The companies studied
in this section are:
1.
Jet Star
Jetstar is a Melbourne based low cost
airline which was started as an offshoot of Qantas to cater to the domestic
leisure market and to defend Qantas position from being cannibalized by Virgin
Australia, which was a market leader in the segment. Some of the key features
of JetStar are listed below:
a)
Low Cost- JetStar is
essentially a low cost airline. Average air price of a Jet Star air ticket is
around $69 vis-à-vis $75 of a Virgin Australia ticket. However, the ticket price
of Jetstar covers only point to point travel (between A and B) everything else
on the flight is reportedly chargeable and often at unreasonably expensive
rates. Passengers may have to shell out extra for preferred seats, in flight
entertainment, even extra leg room, or to jump the queue (people carrying
infants aren’t any exception to this rule). Whereas, a typical Virgin seat
would contain some freebies or bare minimum essentials, such as leg room. Also,
Virgin focuses a lot on promotional give away thus, frequent flyers and other
customers stand to benefit from such offers.
b)
Customer Service- Jetstar has
concentrated on efficiencies and cost cutting more than putting any focus on
its customers. The employees seem to be untrained and ‘not very polite’ according
to some passengers. Some customers of Jetstar have reported that the staff of
Jetstar seem to be ‘counting minutes until knock off time’ showing least
interest in service or customer satisfaction. Whereas, Virgin staff has even
won various awards for customer satisfaction. All staff is smarty uniformed and
ever ready to help. The company closely follows the motto of Virgin
International, to keep it fun for the customers.
c)
Fleet- Jetstar owns a fleet of
old aircrafts. These are high maintenance vehicles which are often fuel
guzzlers. This only adds to the running costs of the airlines making it
impossible to sustain the low fare structure in the foreseeable future. Also,
the interiors of the flight are old and shabby. The seat covers are torn in
places and the overall ambience of the flight is poorly maintained. Some
passengers have even reported food and hair stuffed in gaps between seats.
The Virgin Australia flights are new and the update
technology promises a lot of efficiency and lower maintenance costs. Also, the
interiors are clean and inviting.
d)
Destinations- Jetstar although
a leisure air service, caters to lesser destinations than Virgin Australia.
Also the number of flights to certain destinations is less frequent compared to
Virgin’s services.
Summing up, it can
be concluded that Jetstar is not much of a competition to Virgin Australia in
the low fare, leisure travel market. This is due to Jetstar’s inherent cost
inefficiencies and lack of focus on customer satisfaction. However, as Virgin
Australia is repositioning itself as a budget airline with full services, it
may find it difficult to maintain low pricing (given rising costs and economic
downturn) and can find itself vulnerable to Jetstar’s strategies, given the
latter’s undying focus on positioning itself only as a low cost carrier.
2.
Qantas Airways
Virgin Australia is repositioning itself as
a ‘new world carrier’ (from a low cost carrier) and is striving to be a budget
airline with full services. If maintaining prices with the budget constraints
was not all, the airline also faces stiff competition at the hands of Jetstar
parent company Qantas (in the full service segment). Given below is a brief of
key features of Qantas compared with that of Virgin:
a)
Full service flight- Qantas is
essentially a full service flight, which focuses on domestic corporate and
government travel market. It is the oldest and the largest national carrier of
Australia and holds over 65% share of the domestic air travel market and
carries approx 18% of passengers flying in and out of Australia. It has built
its business as a regular fare airline focussing on customer service and
satisfaction.
Virgin Australia has
recently endeavoured to reposition itself as a ‘new world carrier’. Under this
strategy it is striving to provide full services under a budget. This is a
behemoth task to achieve and Virgin is already facing some difficulties here in
maintaining prices along with services.
b)
Fleet- Qantas is now employing
Airbus A-330 on some of the busiest routes (like that between Melbourne and
Perth). The interiors of these planes have been tastefully done and cater to
the needs of the average business traveller. Facilities like wider seats and
individual workstations go a step ahead in delighting customers. Virgin on the
other hand is trying to catch up with Qantas. It has been able to deploy A-330s
on select routes; also the interiors done by Virgin have been cited of
international quality, by various industry experts. Facilities like fully
reclining seats which are well cushioned have ruled the roost here and Virgin
is emerging as a winner when it comes to innovating and truly delighting
customers.
c)
Customer satisfaction- As a
full service carrier, customer satisfaction has been the primary focus of
Qantas. Facilities like business lounges at various airports and card check ins
(which are time efficient) have given customer satisfaction a priority. The
airline seeks to build on this focus to retain patrons and attract new
customers. However, Qantas has close competition with Virgin when it comes to
delighting customers (as it is one of the founding philosophies of the latter).
Virgin has left no stone unturned in innovating to pleasantly surprise a
passenger. Establishing lounges and speedy grievance redressal mechanisms are
some of the steps in the direction. Virgin and Qantas seem to be at par in this
sphere and both of them need to continue the same to hold their ground.
Summing up,
Virgin is a relatively new entrant to the full service segment hence, it may
take some time before it gets a sizeable share of the market. Also, it should
be noted that a player as Qantas, which is well established in the Australian domestic
air travel market may not easily give up the fight to defend its share.
However, Virgin is making quick progress and closing in the gap between the two
airlines; for example in May 2012, Virgin carried 1.422 million domestic
passengers vis-à-vis 1.371 million by Qantas.
Macro Environment Analysis
The key elements of the wider (Macro)
environment of Virgin Australia have been studied in this section by means of a
PESTL analysis.
1.
Political, Legal and
Technological
a)
Industry deregulation in 1990 has enabled
the entry of various low cost airlines into the market. This has left little
competitive advantage to players such as Virgin Australia which is facing stiff
competition from all corners.
b)
The industry is protected by sovereign rights called ‘freedoms’,
providing the players in the industry with certain backing and help from the
government (especially in times of crisis when companies need bailing out of
financial whirlpools).
c)
Increasing number of customers
are utilising the internet (e-ticketing)
to secure bookings. This is fast changing the dynamics of distribution in the
aviation industry.
d)
Use of technology such as
internet and strengthened consumer groups has facilitated price transparency, leaving little scope for
airlines to manipulate fares.
2.
Economic and Global
a)
Virgin Australia and the
aviation industry in general is extremely
sensitive to economic variables such as GDP growth, households’ disposable
income and the general business sentiment; as such variables directly affect
the consumer’s purchasing power and the underlying costs of the company thus
affecting purchase decisions and other business functions.
b)
Of late the oil prices in the international
commodity market have been volatile. Forever increasing, the price rise has
affected airlines adversely, as fuel is one of the major costs in the aviation
industry.
c)
Although Australian GDP has
grown but current global economic downturn has left trade and industry in a
never ending limbo between growth and
crisis. The upward moving interest rates have adversely affected consumer
spending thus, affecting sales in the airline sector.
d)
Crisis and competition in
domestic markets is pushing companies to find greener pastures overseas.
Airlines such as Virgin Australia have launched international services to benefit from expanding into a larger
market.
3.
Socio Cultural and Demographic
a)
As population is getting
clustered and centred on few urban centres, the number of domestic routes has reduced to a few, with high traffic plying on
such routes.
b)
As trade is on the rise, the
demands of the business traveller is for more frequent and on time flying schedules. This is a lucrative insight
for Virgin Australia which is planning to foray into the government and
corporate travel segments.
c)
Increased awareness about environmental impact and the need for
conservation (promoted by various interest groups, government and consumers),
has motivated the players in the aviation industry to implement steps in the
direction of reducing carbon footprint (for example, differentiated take off
and landing fees are a step in this direction).
The use of the PESTL model is limited in
providing only a checklist under the headlines included in this model.
Analysing change needs a close insight into the issues pointed out in this
model. However, it has come to light that the major issues pertaining to
Australian aviation industry and that to Virgin Australia in particular are
those under the head of Global and Economic forces, and Environmental and Socio
Cultural impact.
The current global economic downturn has
adversely affected the Australian aviation industry. With rising costs
(especially fuel costs which are a major cost component in the aviation
industry) has pushed airlines to explore foreign markets for business.
Decreasing purchasing power of the consumer and inefficient operations of the
airlines has lead many players in the segment into a downward spiral of
decreasing profits and market share. However, the air carriers are trying to
woo customers by adopting various cost cutting measures to reduce fare prices
and adopting environment friendly approaches to spread a positive word about
their brand.
Therefore the analysis of various macro
environment elements has lead to the understanding of issues facing Virgin
Australia and has also helped in attempting to suggest various strategic
responses to resolve the problems of the air borne carrier.
SWOT Analysis
The internal and external environment of
Virgin Australia can be analysed meaningfully by the way of a SWOT analysis.
Strengths
1.
Customer Service- Virgin is
well known globally for having a ‘fun’ approach to business and keeping
customers happy. Virgin Australia toes in line and boasts of a great customer
service record, substantiated by various awards it has won for the same.
2.
Fleet of aircrafts- Virgin
Australia’s fleet is over 68 aircrafts. These are new machines therefore,
relatively easy to maintain and incur less costs.
3.
Distribution- The ticket
bookings for the flight are mostly made online, reducing the need for physical
transactions.
4.
Flying record- Virgin Australia
enjoys a clean flying record, reporting few to none accidents and compliance to
rules and regulations. This has encouraged customer’s confidence in the ability
of the pilots and machines of Virgin in ensuring safety and rescue.
5.
Punctuality- Virgin has been
reported as being on-time than most airlines. On a customer survey, people
cited that virgin was punctual 90.5% times as compared to Jetstar which scored
88%.
6.
Innovation- Deriving its core
philosophies from Virgin International, Virgin Australia focuses on continual
innovation. Initiatives such as that of countering climate change have been a
first in the industry.
7.
Strong backing- Virgin
Australia is backed by a brand as reputed and strong as Virgin (international).
This has not only provided the Australian company a head start in the market
but, also considerable potency to take risks, playing on the resources of its
international counterpart.
Weakness
1.
Foreign brand- Virgin Australia
is not owned by an Australian company hence, it may lose favour from
government, customers or other influential groups in the wake of nationalism.
2.
Over dependent on one segment-
Virgin Australia depends only on the domestic leisure travel market. No
initiatives to diversify in to other segments have left the brand vulnerable to
competition.
3.
Declining profits- Virgin
Australia’s profitability is declining year by year as a result of rising
costs, increased fare prices and stiff competition.
Opportunities
1.
Partnerships- Virgin can secure
alliances to expand its network thereby enabling customers to use its services
to fly frequently to more destinations. This will not only reduce costs but
also bring in additional profits and brand recognition and loyalty from the
customers. A 10 year strategic alliance with Sky West is a step in this
direction.
2.
New Segments- Virgin Australia
is trying to diversify in the government and corporate travel market thus,
undermining the share of Qantas and establishing market leadership.
3.
International markets- By catering
to international destinations through V Australia, the brands international
recognition and long term profits from multiple channels are being secured.
4.
Virgin Australia has signed the
Open Skies Aviation agreement, which has benefitted the brand in more ways than
one.
Threats
1.
Competition- Virgin Australia
faces stiff competition from Jetstar, Qantas and Tiger airways. This has not
only eroded the company’s market share but has also resulted in declining
profits. What is toll taking is the fact that Virgin has to fight competition
at both ends of the spectrum; that is from low cost carriers as well as full
service airlines alike.
2.
Economic Downturn- Virgin
Australia is not spared from the global economic crisis. Rising prices of
labor, fuel and other costs specific to an airline has adversely affected the
financial health of the company. Adding to this strict government regulations
have made it even more difficult to operate smoothly.
Strategic Issues
Summing up the analysis one can derive that
most of the strategic issues faced by Virgin Australia are interrelated and
vested in its inability to figure out a lasting sustainable competitive
advantage. This lack of direction in the company’s policy is further reflected
in the recent fall in share prices of Virgin Australia.
Mentioned below are two key strategic
issues faced by Virgin Australia:
1.
Market Positioning
When it first launched in 2000, Virgin
endeavoured to position itself as a low cost carrier; aiming to attract
customers by reduced/budget fares for domestic destinations. This positioning
was largely attempted to capture the leisure traveller population, and it
worked well until Qantas launched Jetstar to cater to the same segment in 2004;
and Tiger Airways also positioned itself similarly by launching in 2007. At
this juncture, Virgin felt the need to position away from the competition and
sought to pursue a new strategy to cater as a full service airline within
budget. However, such a strategy could be a dicey one and Virgin may end up
being ‘stuck in the middle’ failing to make a mark on either end of the
spectrum enabling its competitors to take advantage of the situation and eat
into its market share. Also, positioning in such a segment ordains the company
to fight competition from either end thus standing a chance to be overwhelmed
by the competitor’s strategy.
2.
Challenging economic conditions
It is evident that the world is not
performing at its economic best. The rising costs owing to spiralling economic
mechanisms and dependency in international trade which has lead to the spread
of economic disasters to wider areas far flung from their epicentre. The rise
in fuel prices internationally (which are largely controlled by oil cartels in
the middle-east and some developed nations) has adversely affected the aviation
industry as a whole. Fuel which made 14%-15% of the total cost component
earlier constitutes to about 35% of Virgin’s cost currently. This has made it
difficult for airlines to keep their prices within check.
A carrier such as Virgin which aims at
providing services and quality within a budget is finding it extremely
difficult to contain costs and resist from passing on the increase to the end
consumer. Also, as households’ disposable income has fallen, ticket sales have
dipped. Obviously in times of such crunch a consumer will prefer an airline
which transports at the lowest costs (even minus the services) hence, Virgin’s
positioning in such a climate is becoming vulnerable both at the hands of the
competition as well as the economic climate in the country.
Recommendations
Given the strategic issues faced by Virgin
Australia, in this section we attempt to provide strategic alternatives that
Virgin may choose to incorporate in order to mitigate the adverse circumstances
it faces at the hand of competitors and economic climate.
1.
Cost Price Leadership- Under
this strategy it is suggested that Virgin should again size down to the low
fare/budget travel segment. Owing to the company’s long standing expertise in
the segment it would be wise if the company repositions back to the old
setting. This move will involve centralisation or outsourcing of service
facilities as call centres, reducing the ‘value added services’ it currently
offers as part of the ‘new world carrier’ strategy, downward revising of
employees salary, improving technology to incur efficiencies and focus on
control measure to contain costs.
If Virgin could regain
such efficiencies it earlier had, it can easily take over competitors such as
Jetstar.
However, the cost price
leadership strategy is not without disadvantages. Positioning in a segment on
the basis of price can lead to price wars among competitors, especially when it
has become easier to enter the air travel business (after deregulation) and new
entrants find the low fare segment easier to establish base. Also, operating in
the budget segment always requires a strict control on costs which is becoming increasing
difficult in adverse economic conditions; this can have an adverse effect on
profitability of low cost carriers.
2.
Focus Strategy- under focus
strategy, Virgin will be required to continually improve its services In order
to compete in the full service airline market. This can be advantageous to
Virgin and require minimum effort as Virgin already has a focus on customer
satisfaction and continual innovation to delight the passengers. Also, this
market has very less competition, Qantas being the only major competitor in
this segment. It is to be noted that Virgin is already closing the gap with
Qantas and is steadily gaining market acceptance by consistent focus on
customer satisfaction and is gaining entry into newer market segments such as
corporate and business travellers.
However, following such a
strategy is not without problems. Maintaining budget prices and providing
quality services at the same time is a behemoth task to handle, especially in
the face of rising costs. Increased ticket fares in times when net disposable
incomes have decreased and consumers are less willing to shell out money, can
spell a death knell for all frill air carriers. If Virgin is to tread this
path, it must do so with utmost caution taking into account all possible
factors which can turn off consumers in the given economic setting.
3.
Differentiation strategy- This
strategy requires Virgin to position on the basis of special qualities of the
brand and its unique image. The Virgin brand portrays an image of a fun and
innovative brand focusing on customer delight and this is well known among its
target market. However, it may be noted that an average customer may not be
willing to pay an additional cost for this uniqueness of the brand. But, it is
also to be noted that the unique culture at Virgin has fostered an environment
which is conducive to employee motivation, training and retention, ensuring employees
deliver their best to the customer (this has also resulted in certain
efficiencies in terms of reduced hiring costs and staff performing at their
optimal best). Such a unique culture if catered at control prices will surely
enthral customers and help in securing their loyalty. Virgin can even think on
the lines of integrating such a strategy with its current ‘new world carrier’
positioning.
Deducing from the above suggested courses,
the researcher would suggest Virgin to embrace the differentiation strategy.
Operating in the cost price leadership market is fraught with competition and
the focus strategy may land the company in a financially unreasonable position.
However, the differentiation strategy manages the best of both worlds –
catering a unique nurturing, innovative and fun environment which is positioned
at total customer delight while meeting the budget expectations of the end
consumer will surely capture the attention of the target market and the loyalty
of the user.
Conclusion
The report has been material in studying
the macro and micro environment of Virgin Australia. This has enabled the
researcher to critically analyse the strategic issues facing the brand, which
are impeding its growth and sustainability. The problem discovered through such
an analysis is that of positioning and gearing up for economic upheavals in the
world economy. Certain plausible alternatives have been provided to help
mitigate such strategic issues and it is suggested that Virgin continues to
build upon its current strategy to build a differentiated position in the
market.
The researcher hopes, by following the
recommendations posted in this paper, Virgin is able to secure a sustainable
competitive edge in the market it operates in.
References
4.
AJNRR Consulting, Virgin Blue Holdings, A Strategic Analysis
Prepared by: Andy Ley, Joachim Brastein, Nathan Westgarth, Rishi Dave, Ron Stanley
Prepared by: Andy Ley, Joachim Brastein, Nathan Westgarth, Rishi Dave, Ron Stanley
5.
Blogs.crikey.com.au/planetalking/2012/08/28/virgin-australia-says-its-game-on-with-qantasjetstar/
6.
www.ausbt.co.au/qantas-vs-virgin-australia-how-satisfied-are -you
9.
www.flyertalk.com
10.
finance.ninemsn.com.au/pfmanagingmoney/spending/8124440/virgin-blue-versus-jetstar-which-is-better-value
