Virgin Australia Airline: Company Analysis

Introduction

The Australian airline industry has undergone turbulent times over the past decade. The revolution within the industry revolves on the different macro-environmental changes that have occurred across the world. For example, the 2001 terrorist attack in the US led to a significant reduction in international tourism within the country. Moreover, the outbreak of Severe Acute Respiratory Syndrome (SARS) coupled with the war in Iraq also severely affected the industry (Virgin Australia 2012). Firms within the industry belong to three main categories, which include regional airlines, international airlines, and domestic trunk route airlines. Virgin Australia, which is based in Brisbane, is one of the key industry players. The firm was founded on 31st August 2000 and was initially known as Virgin Blue. Despite the turbulent nature of the Australian airline industry, Virgin Australia has undergone notable revolution.

Aim

The objective of this paper is to conduct an internal and external evaluation of Virgin Australia airline. Some of the issues taken into account include the airline’s current situation and the problems it has faced since its establishment. The paper also delves into the environmental factors that have affected the firm since its establishment. Taking into account the dynamic nature of the business environment, the paper also evaluates the organisational and structural changes that the firm has experienced coupled with an illustration of how the firm’s structure has changed over the years. Finally, the paper looks into the airline’s current performance, its productivity, and effectiveness.

Current situation

Since its establishment, Virgin Australia has undergone significant transformations as aforementioned. Upon its establishment, the airline had only two aircrafts, operated one route, and had a human resource base of 200 employees. Currently, the firm has managed to increase the size of its fleet to 80 aircrafts. Additionally, the airline is also committed towards undertaking extensive regional expansion. This move has allowed the airline to cover wider regions, which include the Asia-Pacific and North American regions (Meyer 2008). The airline entered into a 10-year strategic alliance covering a period of 10 years with Skywest Airlines to achieve this wide coverage. Virgin Australia purchases more stable aircrafts such as Boeing 777, Boeing 737, ATR Aircraft, Airbus A330, and Embraer 190 and 170 to ensure that its airlines are safe in line with the customers’ demands. Consequently, the airline has managed to enhance the level of satisfaction amongst its customers (Virgin Australia 2012).

The airline’s management team commitment to revolutionise the Australian air travel has culminated in the firm’s growth. Some of the ways through which the airline has changed the Australian airline industry include re-introduction of guest services to customers and reduction in airfares by adoption of the low-cost model (Meyer 2008).

Given the management’s commitment, Virgin Australia has grown from being a start-up enterprise to become part of the leading airlines in Australia. The airline’s value for money coupled with provision of service to its customers has also enhanced the transition. Currently, the airline ranks second on the chart of the largest airlines in Australia. The airline has also been successful in its transformation efforts from being a low-cost-carrier to a full-service airline. In 2012, Virgin Australia earned a net profit of AU$ 22.8 million, which is a notable increment from the previous loss of AU$67.8 million (Virgin Australia 2012).

The airline has also managed to attain a significant level of competitiveness within the airline industry. One factor that has stimulated the industry’s growth relates to attainment of cost advantage. During its market entry stage, Virgin Australia adopted a low-cost model, which is a proven cost effective strategy. Additionally, the firm has also undertaken rebranding (Pride 2011). Considering the fact that consumers are price conscious, adoption of a low-cost model positioned the airline effectively in the market. Additionally, a strong financial position has also enhanced the firm’s success in the industry.

Problems that the firm has experienced

In its operation, Virgin Australia is experiencing a number of challenges. One key challenge facing the firm relates to increased rivalry within the industry. Some of the airline’s core competitors include Qantas Airlines, which has attained an optimal market position. Additionally, Qantas Airline has managed to nurture a high level of customer loyalty. In an effort to promote its market dominance, Qantas Airlines is considering entering into short-term partnership agreement with Alliance Airlines (CAPA 2012).

The firm is also experiencing a challenge emanating from low cost competitors within the industry. The attractiveness of the Australian airline industry is motivating more entrants to consider venturing into the industry in an effort to exploit the prevailing market potential. The new entrants are considering adopting the low cost model to consolidate their share in the market. Considering the price conscious nature of the customers, this move presents a serious challenge for Virgin Australia due to the intense competition, which will result in a decline in the sector’s profitability (CAPA 2012).

Apart from cost, firms within the airline industry are competing based on technology. Airline companies are increasingly exploring how they can improve their competitiveness by incorporating customer services such as in-flight entertainment and adoption of new technology (Jiang 2007).

Increase in the rate of global warming also presents a challenge to Virgin Australia. For example, governments and environmental conscious agencies are increasingly pressurising airline companies to minimise their carbon emissions. Given the carbon schemes proposed by the Australian and European Union on 1st July 2012, Virgin Australia announced that it would increase its flight prices (Virgin Australia 2012). If the relevant authorities impose the proposed carbon tax, then there is a high probability of Virgin Australia experiencing a decline in its profitability.

Analysis of environmental factors affecting the company

Hierling (2007) asserts that numerous environmental forces affect businesses in the course of their operation. Some of these forces are associated with political, technological, social, economic, and legal sources. These environmental factors can have remarkable effects on a firm’s strategy. In its operation, Virgin Australia has not been buffered from these factors.

Political factors

The Australian government turned down a request to allow open competition that was applied by Air New Zealand and Qantas airline. The argument by the government is that it intends to maintain domestic market competition. This aspect shows that there is a certain level of control of the industry by the government (Goh 2004).

Since the 2001 terrorist attack in the US, the Australian aviation industry has experienced numerous challenges emanating from the global market forces. For example, firms within the global insurance industry are increasingly considering developing unique policies to cover risks associated with acts of sabotage, riots, strikes, terrorism, and war. The 2001 terrorist attack led to withdrawal of the third-party war-risk insurance policy.

In an effort to promote the country’s economic growth, the Australian government considered it wise to provide airline companies and airports with third party indemnity cover against acts of terrorism. Despite the promotion of aviation insurance, the high cost of the policy is leading to surcharges in airfares. Therefore, the financial performance of firms within the industry is being affected negatively.

In an effort to promote their countries’ economic growth, the Australian and New Zealand governments have formulated a policy aimed at promoting international investment within the airline industry, and thus foreigners can now own 100% of domestic airlines (CAPA 2012). Due to this policy, there is a high probability of Virgin Australia benefiting through an increment in its financial capital base. This probability arises from the fact that it will be possible for the firm to source for external funds by issuing shares to foreigners. The ultimate effect is that Virgin Australia will address the financial constraints that it might face in the future. This move will culminate in an improvement in the airline’s operational effectiveness and efficiency.

Over the years, Virgin Australia has been committed at positioning itself as the leading airline in Australia. One way through which the airline intends to achieve this goal is by ensuring a high level of customer satisfaction. The airline has integrated a policy, which requires the firm to undertake continuous improvement of its fleet in a bid to achieve this goal. In line with this policy, the airline added 23 new Boeing 737 MAX 8s aircrafts. The new acquisition has played a significant role in the airline’s effort to challenge Qantas Airline within the domestic market segment. Qantas airlines have for years continued to be the market leader in the Australian airline industry (CAPA 2012).

Economic factors

In their operation, firms are affected positively or negatively by economic changes occurring within the domestic and global markets (Fojt 2006). The global economic recession, which occurred between 2008 and 2009, adversely affected the firm’s financial stability. During the recession, the airline’s management team projected a significant reduction in its net profit. The firm’s net loss during the 2008/2009 financial year was estimated at $165 million down from a net profit of $98 million during the 2007/2008 financial year (Ferguson 2009). Due to the turbulence created by the global economic recession, the firm’s share price declined significantly from its previous level of $1.15. In an effort to adjust to the economic changes occurring, Virgin Australia reduced its operational capacity with a margin of 8% (Ferguson 2009). Additionally, given the high rate of globalisation, Virgin Australia is not immune to economic changes. Therefore, in the event of another global economic recession, there is a high probability of Virgin Australia being adversely affected by the same.

The rise in fuel costs has also affected Virgin Australia. In 2008, Virgin Australia experienced a 21 per cent increase in fuel cost. Consequently, the firm had to cut down on the number of its domestic routes, in addition to raising airfares with a margin of $5 in more than 50 per cent of its routes. Virgin Australia had to increase its airfares to deal with the rise in fuel prices (Hopkins 2008). According to Hopkins (2008), fuel cost constitutes approximately 30 per cent of the total airline cost. Therefore, an increment in fuel price would significantly pressurise a firm’s profitability. Virgin Australia’s profit reduced from $215.8 million in 2007 to $ 97.7 million in 2008 (Hopkins 2008).

Technological forces

The global airline industry is experiencing significant transformation due to technological innovation. One aspect that has stimulated this transformation relates to the high rate of innovation with regard to the Internet. Most airline companies are considering improving their reservation process by making it possible for customers to book online in a bid to align with the technological changes (Grover 2008).

Virgin Australia has made it possible for customers to purchase air tickets through the Internet, thus the airline has managed to cut air travel agency fees and managed to pass the benefits to customers through low costs. The airline sells approximately 60 per cent of its tickets through the Internet. Increase in the volume of air travel is also forcing airline companies to improve their check-in processes at the counter. Airline companies are computerising their check-in process to align with the market changes (Grover 2008).

Social-cultural factors

The Australian aviation industry will probably experience growth in the future due to social-cultural transformations. Currently, Australian’s are increasingly considering aircraft transportation as an alternative means of travel. According to Scollay and Kaufmann (2011), the airline industry has become a crucial component of the Australians’ life. The industry’s growth potential is enhanced by the fact that other industries such as mining and tourism are considering incorporating air travel in their operations.

After the 2001 terrorist attack in US, airline customers have increasingly become conscious of safety. In response to acts of terrorism, customers have significantly reduced the volume of international travel. Over the past few years, Virgin Australia has benefited from an increment in the volume of domestic travel and thus the firm’s profitability has increased significantly.

Organisational and structural change within the airline

Given the turbulent nature of the airline industry, Virgin Australia will restructure its corporate structure by splitting its operations into two different units (CAPA 2012). The restructuring aims at promoting a high level of transparency and accountability within its various business units. The high rate at which airline companies are repositioning themselves within the industry has also motivated the firm’s decision to restructure its management structure. Some of the strategies being employed relate to the formation of partnerships and alliances (CAPA 2012).

On 23rd February 2012, the management team of Virgin Australia made a proposal to restructure the firm’s operations. The decision was motivated by the need to comply with the requirement of the Air Navigation Act (ANA), which states that foreigners can only own 49% of the Australian airlines (Virgin Australia 2012). The decision will result in a change in the airline’s shareholding structure with the majority of the shareholders being foreigners. This move will give foreign institutional investors an opportunity to own a significant proportion of the airline thus improving the firm’s liquidity (Virgin Australia 2012).

The new shareholding structure will lead to the establishment of an unlisted entity known as Virgin Australia International Holding Pty Limited (VAIH). VAIH will be responsible of the airline’s international business. Additionally, an autonomous board of directors will head VAIH. Shares of the new entity will not be easily transferred and will only be transferred under limited circumstances (Virgin Australia 2012). The airline will also sign a long-term loan and service contract with Virgin Australia Holding. On the other hand, Virgin Australia Holding will carry the responsibility of providing VAIH with different services such as maintenance, training its crew, and provision of various back office services.

The management will undertake the proposed structural changes by splitting the airline’s international and domestic operations into two distinct business units as aforementioned. After the splitting, each of the business unit will be required to develop its own profit and loss statements. Therefore, the airline will formulate effective business strategies to deal with the changes occurring in the airline industry based on their profitability (CAPA 2012). Additionally, the move to split business operations has also enhanced the firm’s competitive advantage relative to its competitors such as Qantas Airlines. This element arises from the fact that it will be difficult for Qantas airlines to compete on the same model in the future owing to the political restrictions imposed on Qantas Airlines by the Qantas Sale Act (CAPA 2012). The split has also improved the firm’s competitiveness by joining two market degrees.

Conclusion

The analysis on Virgin Australia illustrates that the firm has been remarkably effective in its operation since its establishment. Within a period of 10 years, Virgin Australia has managed to position itself second in the Australian airline industry despite the intense competition in the industry. Additionally, Virgin Australia has also managed to cope with the industry dynamics emanating from the macro-environment of the market. Some of these dynamics relate to economic, social-cultural, political, legal, and technological forces. The airline has also been successful in transforming itself from being a low-cost carrier to a full-service airline. Virgin Australia has also managed to cope with the turbulent nature of the airline industry. The airline’s management team commitment in ensuring that it contributes to the revolution of the Australian airline industry means that Virgin Australia has a bright future. For instance, the firm undertook a sweeping restructuring in its operation and thus the airline will achieve a high level of operational effectiveness and efficiency in the coming days.

Recommendations

Development of a higher competitive advantage is particularly crucial in the firm’s effort to increase its market share. In order to achieve this goal, the management of Virgin Australia should consider the following.

  • Virgin Australia should consider adopting alternative sources of energy to deal with the rise in fuel prices. In its consideration, the airline’s management team should take into account renewable sources of energy such as nuclear energy and bio-fuels. Incorporation of these sources of energy will buffer the firm against raising its flight prices. Consequently, a large number of consumers will prefer flying using the airline.
  • The firm’s management team should consider conducting continuous market research. The market research should focus on its customers and competitors. Consumer market research will play a critical role in the firm’s effort to understand its customers’ needs and wants. One the other hand, competitor market research will aid in understanding the competitors operational strategies, hence help in integrating effective strategies to counter competition.
  • The airline’s management team should review the effectiveness of the proposed structural change continuously. This move will aid in identifying areas that need adjustment to attain the intended objective.

Reference List

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Ferguson, A 2009, ‘Its not over : Crisis will cast its shadow this year, The Australian’, Wall Street Journal, vol. 1 no. 2, pp. 1-4.

Fojt, M, 2006, The airline industry, Emerald Group Publishers, Bradford.

Goh, J 2004, Single aviation market in Australia and New Zealand, Routledge, New York.

Grover, V 2008, Process think: Winning perspective for business change in the information age, Idea Group Incorporation, London.

Hierling, M 2007, The Australian airline industry and the case of OzJet: a strategic analysis report, GRIN Verlag, Melbourne.

Hopkins, P 2008, Airlines hit turbulence as fuel and fares rises. Web.

Jiang, H 2007, Competitive strategy for low cost airlines, Proceedings of the 13th Asia Pacific Management Conference, Melbourne.

Meyer, J 2008, Virgin Australia cuts routes, raises fare. Web.

Pride, W 2012, Marketing principles, Cengage Learning, Melbourne.

Scollay, R & Kaufmann, U 2011, Australia-New Zealand closer economic relations trade agreement (Anzcerta) and regional integration, Institute of Southeast Asian Studies, Singapore.

Virgin Australia, Company Overview, 2012. Web.