Virgin Blue is a well known Industry Airline throughout the world. The following essay discusses an analysis of Virgin Blue's current position and to determine the performance of the industry as to whether or not it is performing above or below expectation. On the basis of this analysis, recommendations are proposed to assist the company with solutions to help prevent failure if such situation was to occur. The essay is structure as follows: In the first section we will provide a brief background of the company and how it became so successful. Then the analysis of Virgin Blue's macro-environment and current strategy and situation will be given to assist with providing the ideal recommendations for the company. The goal of this report is to provide Virgin Blue with relevant recommendations that can assist or improve their current situation so they can perform above expectation.
Virgin Blue Airlines commence operation in Australia in August 2000 that eventually leads them as one of the nation's major discount airline, emphasising on a special service culture. (Virgin Blue, 2009) Since its launch, Virgin Blue has developed from a start-up entrepreneurial business from Sir. Richard Branson's own Virgin Group Corporation. (Grant, 2005) to become one of Australia's 'leading major airline for service, on-time performance and value for money'. (Virgin Blue, 2009) Furthermore, Virgin Blue is also the leader in innovation, with Australia's first web check-in service and in the future they are expecting more continual improvement. (Centre for Asia Pacific Aviation, 2007)
In January 2004, the airline launched Pacific Blue, its New Zealand based leisure focussed internationally offering flights between Australia, New Zealand, the Cook Islands, Fiji, Tonga and Vanuatu. (Virgin Blue, 2009) In October 2005, Virgin Blue joined with the Government of Samoa to launch the 'Polynesian Blue', which is an innovative joint venture airline that provides necessary and affordable services between Samoa, New Zealand and Australia destination. (Virgin Blue, 2009)
Macro-Environment - PESTLE ANALYSIS
In analysing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence Virgin Blue's supply and demand levels and its costs.
A PESTLE ANALYSIS was developed as a way of cataloguing different possible issues that might affect an industry and such framework will guide us into analysing Virgin Blue's Operating environment. The analysis focuses on categorising environmental influences as political, economic, social, technological, legal and environmental forces. The analysis examines the impact of each of these factors on the business and the results can be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans.
- The political factor deals with the current and potential influences Virgin Blue will gain from political pressures. The government's involvement on a step- by- step process for development in the organisation is expected. The liaison of progress would be the government itself, assisting the market by providing effective partnership and agreements with the other countries that the airline will likely to service. Virgin Blue's agreements to legal and regulatory policies are considered. The company's management remains to the requirement specified by the authorities which in this case, the government. Also the influences the government has on the company's profits as the profits are depended upon annual government operating subsidies
- In the Economic aspect, a significant impact that not only has affected Virgin Blue but also most industries in the world would be the result of the global recession. This will lead to companies closing down and the loss of jobs may have a direct impact on its business strategy. Also, the unique instability in the local and international economy which will eventually affect the financial conditions of Virgin Blue.
- As an industry leader, Virgin Blue's social responsibility of providing outstanding services for consumers is always their main priority. The company made it a point to be consistent with its mission and aim in quality service offerings through providing their customers the best and cheapest service available. Also the safety measures they employ on board when travelling and on the ground when landing should be considered a social factor.
- Technology changes rapidly and it is very difficult for any organisation to keep up with the latest technology available to them. Technology in this industry is fast moving and very expensive and these factors should be considered in the technology force.
- Legal factors associated with Virgin Blue would be the authority that they will access when travelling to different countries because they will have different laws and regulations to Australia.
- To be an environmentally free industry will have a huge impact on the consumers because it will inform the consumers that the company is concerned about the environment. In Virgin Blue's case, the use of environmentally friendly fuels should be considered.
Industry-Environment - Porter's 5 Forces
The airline industry is very competitive and Michael Porter's five-force model can be used to analyse the power and weakness of the competition and the profitability of this industry. Porter's five forces model is a business unit strategy tool which is used to make an analysis of the value of an industry. The analysis is made by the identification of 5 fundamental competitive forces. Theses are 1.Entry of Competitors, 2.Threat of Substitutes, 3.Bargaining Power of Suppliers, 4.Bargaining Power of Buyers and 5.Rivalry among the existing players. (Porter, 1979)
- One of the forces identified by this model is the threat of new entrants which refers to the possibility of new competitors entering the industry and undermining the profits of the established businesses. (Porter, 1979) The degree of threat for Virgin Blue in the future is determined by the existing barriers to entry. The airline industry would be one of the most expensive industries, due to the cost of buying and leasing aircrafts, safety and security measures, customer service and manpower (Berry, 1992). Other barriers to entry which will affect new comers into the airline industry include Government restrictions and the cost of entry to the industry. However, the entry barriers for new airlines is lower today since the Australian domestic airline market was deregulated in 1990 (Dipendra, 2001), which since its founding, Virgin Blue has seen more airlines start up and existing airlines expanding their market due. The deregulation has allowed Jetstar and Tiger Airways to enter the market and reduce the market share for Virgin Blue and with the added competition, together with pricing freedom, means that there is a major constraint on profitability for the airline industry. (Dipendra, 2001)
- The bargaining power of buyers is another force that can affect the competitive position of a company. This refers to the amount of pressure customers can place on a business, thus, affecting its prices, volume and profit. (Porter, 1979) Individuals wishing to travel to and from a specific destination are presented with various choices when selecting an airline but price is usually the most important factor, especially for students and families. Hence, the bargaining power of customers in the airline industry is very high since they are price sensitive and search for the best deals available. Virgin Blue attracts travellers that are price sensitive by offering them low fares and those that are convenience oriented by providing them with frequent flights. (Virgin Blue, 2009)
- In addition to buyers, bargaining power of suppliers can also exercise considerable pressure on a company by increasing prices or lowering the quality of products that they offer. However, other suppliers who work with the airline such as the providers of on board snacks do not have the same bargaining power as they are a larger industry which allows for Virgin Blue to have a choice over who they are purchasing from and this will give them the benefit of increasing sales so they can make higher profit margin.
- The availability and threat of substitutes is another factor that can affect competition within the airline industry. This refers to the likelihood that customers may switch to another product or service that performs similar functions. (Porter, 1979) Substitutes for air travel include travelling by train, bus or car to the desired destination. The degree of this threat depends on various factors such as money, convenience, time and personal preference of travellers. The competition from substitutes is affected by the ease of with which buyers can change over to a substitute. Virgin Blue has actually joined forces with its substitutes, such as car rentals and hotel and tour packages as they believe that these complement the Airline Industry by helping its growth and popularity. (Virgin Blue, 2009)
- The final force in Porter's model is competitive rivalry that describes the intensity of competition between established firms in an industry. (Porter, 1979) Industries that are very competitive generally earn low profits and returns since the cost of competition is high. The airline industry is usually considered cut-throat competition due to its low cost nature. The airlines are continually competing against each other in terms of prices, technology, in-flight entertainment, customer services and many more areas, and the result of this competition between companies is an overall slow market growth rate.
- Berry, S. (1992). Estimation of a Model of Entry in the Airline Industry. Journal of Econometrica, 60(4), 889-917.
- Centre for Asia Pacific Aviation. (2007). Aviation Publication. Retrieved September 15, 2009, from http://peanuts.aero/low_cost_airline_news/airlineProfile/view/153/Virgin+Blue
- Creedy, S. (2009, July 13). Virgin flags additional cost-cutting. The Australian, Wall Street Journal, retrieved from http://www.theaustralian.news.com.au/business/story/0,,25769289-23349,00.html
- Ferguson, A. (2009, January 01). It's not over: crisis will cast its shadow this year. The Australian, Wall Street Journal, retrieved from http://www.theaustralian.news.com.au/business/story/0,,24860466-30538,00.html
- Hopkins, P. (2008, May 24). Airlines hit turbulence as fuel and fare rises. The Age, retrieved from http://www.theage.com.au/business/airlines-hit-turbulence-as-fuel-and-fares-rise-20080523-2hp0.html
- Jiang, H. (2007). Competitive Strategy for Low Cost Airlines, Proceedings of the 13th Asia Pacific Management Conference, Melbourne, Australia, p.431-436.
- Meyer, J. (2008, June 13). Virgin cuts routes, raises fares. The Age, retrieved from http://www.theage.com.au/business/virgin-cuts-routes-raises-fares-20080613-2q1k.html
- Porter, M. (1979). How Competitive forces shape strategy. Harvard Business Review, March/April 1979.
- Sinha, D. (2001). 'Deregulation and Liberalisation of the Airline Industry: Asia, Europe, North America and Oceania', Macquarie University, Sydney Australia, July 2001.
- Virgin Blue. (2009). Retrieved September 29, 2009, from http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/TheVirginBluehistory/index.htm
- Virgin Blue. (2008). Virgin Blue Annual Report 2007-2008. Retrieved September 30th, 2009, from http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/AnnualReports/index.htm
- Zinko, R, Ferris, G.R, Blass, F.R & Lair, M.D. (2007), Toward a Theory of reputation in Organizations, Personnel and Human Resources Management, 26, 163-204.
Global Financial Crisis
Another impact of the immense loss that Virgin Blue encountered in 2008 would be the case of the Global Financial Crisis.
Virgin Blue is predicting a net loss after tax of approximately $165 million for 2008-09, as opposed to a net profit of $98 million in 2007-08. (Virgin Blue, 2008)The company's shares have plummeted from $1.15 over the previous 12 months as the airline industry continues to face turbulence created as a result of the global financial crisis. These issues have required Virgin Blue to eliminate eight (8) per cent of their organisations capacity. (Ferguson, 2009)Therefore, these results could eventually see the job losses of up to four hundred (400) of the organisations staff. (Creedy, 2009)
Rising Fuel Costs
According to Jiang, one of the most striking features of the airline industry in the beginning was the 'availability for consumers of a new concept of flying'. (Jiang, 2007) The increasing fuel costs are having a major impact in the Airline Industry. According to Meyers (2008) Virgin Blue will cut some domestic routes and raise fares by an average $5 across more than half its routes, in the face of a 21% rise in its fuel costs in 2008. Hopkins (2008) also argues that Virgin Blue must be careful as fare rises will have an affect on customer demand. Virgin Blue has increased their fares in the past few years as the prices of oil/fuel skyrockets. (Hopkins, 2008)
Fuel prices make up to 30% of airline costs, which will put profit makers under pressure. (Hopkins, 2008) Virgin Blue revealed the net profit for the 2008 financial year which is $97.7 million, (Virgin Blue, 2008) down from $215.8 million in 2006-07 (Refer to Appendix 1) Virgin Blue's ability to raise fares to offset the fuel price rises is quite limited as there is a diversity of competitors and their strategy is to be the lowest fare airline. This has made it difficult for Virgin Blue to obtain profit or performed well during 2008 due to the high rise of fuel costs.
Virgin Blue's Strategy - Richard Branson's Reputation
Reputation has been shown to be an "important factor in assessing the worth of an organization" (Zinko, Ferris, Blass, Laird, 2007) or the value of a product, and Zinko et al also states that reputation can also be positioned as playing "important roles in managerial behavior and leadership". (Zinko, et al 2007) Richard Branson's reputation has a major impact on the success of Virgin Blue. Zinki, Ferris, Blass and Laird argue that personal reputation will have a consequence on the organisation. Stating that "Reputations are likely an important consideration when making decisions to hire, retain, or promote individuals organizations." (Zinko, et al 2007) Supported by this theory, Virgin Blue needs to take into consideration Richard Branson's reputation within the company. Making the decision to either relieve or let go of Richard Branson will be a critical decision to make due to Richard Branson's unique position within the company and also the high expectations that he has set out for the company will be difficult to sustain. (Grant, 2005)
Conclusion and Recommendations
There are constant strategic issues that an organization must deal with and the way that a company overcomes these issues often determines whether they remain successful or not. The following are recommendations appointed to Virgin Blue to be able to perform better within the airline industry. In regards to the Global Financial Crisis issue, the airline should take into consideration offering its staff job-sharing alternatives or the opportunity of taking up positions in Virgin Blue's international start-up V Australia prior to the commencement of dismissals (Creed, 2009). These will prevent job losses and will also help the company to maintain their employees who have experience and skills that they need within the industry.
Virgin Blue should take into account more emphasis on the Virgin Blue brand itself. The brand image should be the main focus for all future marketing strategies, with less attention being placed on Richard Branson. Implementing this to the organisation's strategy will help prevent the company's success from Richard Branson's reputation and therefore will create an everlasting image for the brand alone. This will reduce any jeopardy that will emerge if Richard is expected to retire/leave the company due to the major dependence that the brand has on him.
Overall, if Virgin Blue identifies the critical issues that have played a major impact on their below performance this current financial year and also considers the recommendation that has been addressed, then their performances will improve and be above expectation.