A Strategic Analysis of Qantas and the Australian Airline Industry Essay
A Strategic Analysis of Qantas and the Australian Airline Industry
The following paper provides an analysis and evaluation of the current market position of Qantas and the Australian Airline Industry. By assessing the company both internally and externally, this report will assess Qantas’ strengths and weaknesses. In addition to this, the report will focus on the specific elements that enable Qantas to obtain a competitive advantage over its competitors.
Our team has established that Qantas is facing direct competition from new market entrants as well as threats from it’s own development – Jetstar. As a result, Qantas has lost some of the market share over recent years. However, while the treat of new entrants has affected Qantas, new opportunities have become available and have encouraged the airline to think outside the square.
The Global Financial Crisis presented many industries with a challenge and Qantas was not excluded from this. In addition to this, the September 11 attacks in 2001 largely affected the industry as customers became reluctant to travel.
Consequently, it is clear that Qantas has been faced with a variety of challenges that have resultantly prompted them to think of alternative ways to obtain a sustainable competitive advantage. Partnering with Tourism Australia, developing Qantas as a brand, and painting the boeings to advertise an Australian lifestyle have all been successful at achieving a competitive advantage. It is recommended that Qantas continues to compete with new market entrants by focusing on developing the brand further and generating greater loyalty.
Qantas & the Airline industry
Qantas Airways Limited is an Australian public company that obtains its revenue predominately from the operation of airlines. The company operates mainly in Australia, New Zealand and Asia and is also established in the UK and the USA. Globally, Qantas employs over 35,700 individuals. At June 30, 2010, international airlines in Australia were reported to be worth $14, 924, 000, 000, with Qantas estimated to hold 25.60% of the market share. From the same study, the domestic airline industry in Australia was reported to be worth $12,801,000,000 with Qantas accounting for 73.50% of the market share. (IbisWorld, 2010)
Over recent years, the drastic increase in fuel prices coupled with the global economic crisis has resulted in the increased cost of airfares. Low income, high unemployment levels and unavoidable disasters like the recent ash cloud have seen the demand for air travel in Australia reduce significantly. Specifically, the Qantas Group’s industry revenue declined an estimated 1.8% per annum over the five years through 2009-10. (IbisWorld, 2011). However, it has been forcasted that the industry with grow by 9% over 2011-2012, reaching a revenue of $13,400,000,000. The potential growth has been attributed to several factors, for example, increases in business related travel and the growing popularity of cheaper airlines. (IbisWorld, 2011) See Fig. 1
Qantas’ flying business operates under two main brands, Qantas and Jetstar. Jetstar was first launched in 2004 and is Qantas’ cheaper airline.
Qantas revenue from international flying is reported to be far weaker than it’s domestic business. While international flying accounted for 22.5% of revenue over 2009-2010 for Qantas, this figure was considerably higher 2004-2005. New market entrants and strong competitors were said to be responsible for this decline. In particular, the development of Jetstar and the ability to fly internationally at low-cost saw Qantas’ international flight business drop from 46.3% of industry total in 2004-2005 to 23.0% in 2010-2011. (IbisWorld, 2010)
Conversly, Qantas’ domestic flights generate approximately 70.4% of total sales and are increasing slowly. However, while the domestic flight popularity is increasing, the growth rate is slow in comparison to the industry. This is due to the fact that Qantas has lost some of the market share over recent years with the entrance of new competitors, for example, Virgin Airlines and Tiger Airways. In addition to this, the entrance of Jetstar into the market and the recent financial crisis saw more passengers targeting the low-cost airline over Qantas.
The following investigation will include an analysis of Qantas’ external environment by utilizing a Porter analysis of the industry’s competitive forces. In addition to this, the report will include an analysis of the internal environment at Qantas by conducting a value chain analysis and identifying the resources and capabilities that provide Qantas with a competitive advantage over its rivals. * Please note: All dollar values listed throughout the report are in Australian dollars.
When determining the external forces that affect the domestic airline industry there are four areas that need to be discussed; political, environmental, social and technological. In discussing these areas we will be able to determine what strengths and weaknesses arise for Qantas as a result. During 1990 the Australian government decided to deregulate the domestic airline industry (Bureau of Transport and Communications Economics, 1995). This has opened up the opportunities for new airlines to do business in Australia. For Qantas this could be seen as a threat as there are going to be new players in the market as it has opened doors for low-cost carriers to enter. However, it may also be an opportunity for Qantas to differentiate themselves from the rest of the domestic airlines and be the only one offering a premium service. The most recent and economically crippling factor that has influenced the airline industry is the Global Financial Crisis (GFC)(Nuguid, 2011). According to the House Standing Committee on Infrastructure, Transport, Regional Development and Local Government (2009) the tourism industry in Australia was hit the hardest which declined at a worse rate than the rest of the economy.
As a direct result of this the airline industry specifically has also seen a significant downturn. This presents a potential weakness or threat for Qantas who may come to feel that their premium price for quality service is not enough to get the customers to fly with them. Probably the most recent and most prominent social change that has affected the airline industry was the September 11 terrorist attacks in America(Ito & Lee, 2005). Although this was not in Australia it still had a large impact on people’s preferences when it came to domestic and international travel. This along with an aging population is slowing down the airline industry as the concern for safety of passengers has risen. This could be a potential opportunity for Qantas to offer, in addition to great quality, a higher safety rating for their flights and help them achieve an advantage against the opposition. There are always new technologies available to improve service and quality; an example of such is the introduction of the regional jet(Brueckner & Pai, 2007).
This new technology provided better service quality and higher flight frequency to the airline industry. All new technologies represent an opportunity for Qantas to increase the quality of their services. This particular technology also provides Qantas with the opportunity to increase their flight frequency. The government regulations of the airline industry in Australia are very lax in comparison to other countries leading to fewer barriers to entry, particularly at the low-cost end of the market. This makes it far easier for potential entrants to enter into the market. So far since the deregulation in 1990 two new major domestic airlines have entered and done so successfully; Virgin Blue and Tiger Airways (Bureau of Transport and Communications Economics, 1995 and Bureau of Intrastructure, Transport and Regional Economics, 2010). Although there have also been a number of entrants that have failed to sustain their place in the airline industry this is not considered as Porter looks only at the threat of new entrants, not whether entry actually occurs (Porter, 2008).
Pilots have a huge influence over what goes on in the industry as evidenced by the 1989 pilot strike(Schulte & Zhu, 2005). Even though the pilots were unsuccessful in this instance this shows that pilots are much more likely to be able to achieve change in the industry if they choose. Currently there are only two major suppliers of airplanes, Boeing and Airbus. Being the only two major suppliers in the industry gives them a lot of power to determine prices and quality. Passengers have a lot less power in the airline industry as they generally don’t get a whole lot of choice or say in what happens. Firstly, there are high switching costs associated with changing to another airline. Secondly, there is not much difference from one airline to another especially if the airline is competing on quality or service(Investopedia News and Articles, 2010). For the domestic airline industry there really isn’t any major substitutes.
The automobile industry and possibly the locomotive industry have the most influence here but if you are travelling from Sydney to Perth there really is no alternative to the airplane. The main determinants that make air travel non-substitutable include; time taken to travel, the cost of travel, personal preference and convenience(Investopedia News and Articles, 2010). There a four major domestic airliners that have the majority of the market share in Australia; Qantas, Virgin Blue, Tiger Airways and Jetstar (Dixon, 2006). With Qantas announcing recently that they are going to focus more closely on international services rather than domestic this could change the market share mix for the remaining three competitors. In considering the various forces that determine industry competition we can also draw a conclusion as to the profitability of the industry. Due to the aforementioned forces we can say that the profitability of the airline industry is quite low, which is also evidenced by Porter (2008). With respect to Qantas we can say that the threats of new entrants in the market is not quite as high for them as they are offering a premium service, not low-cost and so the barriers to entry for premium services are much higher.
Value Chain Analysis
“Value is the amount that buyers are willing to pay what for a firm provides them and the quantity it can sell.” (Osegowitsch, 2011: 82) Conducting a value chain analysis, a concept popularized by Michael Porter, offers insight and understanding of a business’ activities that give it sustainable, competitive advantage. Qantas’ offerings to the market, according to its mission statement as of its Annual Report 2010, is safe, airline travel at reasonable prices to both international destinations and domestic ones, through its complementary brand Jetstar. The Qantas Group asserts that it strives for a sustainable future through a two-brand strategy (that of Qantas and Jetstar) supported by its portfolio of business investments. This internal analysis will seek to examine The Qantas Group’s strategy through assessing its primary activities and its support activities.
They use Altéa Inventory, which is an inventory management product. This system for example, has helped Qantas monitor rates and fares with immediacy. “Altéa Inventory provides instant data on demand and bookings to adjust pricing policy as potential passenger loads rise or fall. Altéa enables Qantas decide where to make seats available at certain price levels” (Amadeus Case Study) According to CIO John Willett; Design clarity means that major schedule changes are relatively easy to accommodate, allowing more efficient use of time of Qantas technical staff. The flexibility that came with Altéa allows Qantas to concentrate on revenue and how to improve it throughout the year. (Amadeus Case Study) With regard to onsite inventory, Qantas has extensive inventory availability “to support maintenance and overhaul programs for a wide range of customer engineering requirements.”
Qantas is divided into 3 groups; Commercial, Customer and Marketing, and Operations. Its Operations group comprises engineering, airports, catering, flight operations, operations planning and control and Qantas Aviation Services. These
To keep their operations running efficiently, Qantas has its own engineering division, called ‘Qantas Engineering’
Often used in airline, hotel and advertising industries. Involves the concept of Qantas offering a ‘perishable’ good – being their airplane seat that if isn’t sold prior to flight, will ‘perish’. “For airlines, yield managers use widely accepted statistical tools to forecast seat demand, taking into account historical data and seasonal variables. For example, there is heavy demand on domestic routes during weekday peak periods and to leisure destinations during holiday periods, but there may be troughs in demand at other times. Each flight has its own individual forecast. Yield managers look at factors as diverse as economic swings which affect longer-term demand, seasonal schedule changes and changes in aircraft capacity to achieve an optimal mix of fares. In today’s environment, and without yield management, airlines would find it more difficult to make a profit and customers would be denied the broad range of fares and services offered.” (Qantas Fact Files)
Marketing and sales
Qantas have their own ‘customer and marketing’ division. They have heavy involvement in marketing and view it as critically important. The “Still Call Australia Home” was re-launched given slump in profits in 2009. The original campaign cost $6m but in 2009 when it was re-launched, they “deliberately just filmed in Australia and we have used the international footage we have from previous campaigns to manage the costs associated with it” (The Australian, 2011) according to CEO Alan Joyce. * Qantas appointed new head of Marketing in 2009 (http://www.bandt.com.au/news/qantas-makes-marketing-move)
Qantas’ secondary activities
Normally, Qantas seeks proposals from various suppliers – so as to maintain a level of competition amongst suppliers in an attempt at receiving the best offer. However occasionally, they do only seek the services of a single supplier. As is consistent with their procurement process, Qantas ask for formal bids or tenders and once they have been received, commence negotiations with prospective suppliers. At times, this can replace the tendering process, but normally it is done alongside it, as a further step in their competitive benchmarking process. (Qantas Procurement Report: p. 1)Ultimately, their aim is to source the best service from suppliers, at the most competitive price, in a manner that is understood and fair according to all participants.
Human Resource Management
The Qantas Group employs approximately 37,000 people, 90% of which are based in Australia. (Qantas Website) The magnitude of Qantas’ operations and its abundance of employees have forced Qantas to develop competitive Human Resources (HR) strategies and maintain competitive advantage. HR is divided into four sections in The Qantas Group: 1. Corporate
This includes responsibilities such as remuneration, employee benefits, industrial relations and other key tasks that essentially make this group in charge of forming strategies that will be carried through the other levels of HR 2. Business Segments
HR teams within particular business segments of The Qantas Group, who deliver and implement the strategies as formulated at the Corporate level 3. Shared Services
The central support unit that offers to assist employees, respond to inquiries and essentially offer support in all the typical HR responsibilities such as recruitment and remuneration 4. Learning and Development
This branch relates to the development of training programs to teach, train and further improve Qantas employees.
This layout of HR responsibilities is proven to be an effective structure for many large companies and has served Qantas effectively.
The Qantas Group’s IT division is predominantly based at a head office in Mascot, Sydney. The IT division consults and works within the areas such as: * Project and Program Management * Business Systems Analysis
* Testing and Quality Assurance
* Services and Relationship Management
* Architecture (Qantas Website – Information Technology)
Qantas’ infrastructure is immense and naturally demanding of high volume and efficiency given the company’s line of business. With a fleet of 254 aircraft, the maintenance of “superior infrastructure” (Qantas 2010 Annual Report, p. 9) , as coined by The Qantas Group, is imperative. The company manages the aircraft, in addition to 14 international lounges as well as several multi-tiered domestic lounges. The renewal of the fleet as well as other infrastructure is made possible through an “investment-grade credit rating”, making Qantas a desirable borrower for lenders. Furthermore, the company consistently experiences strong cash-flows and as such, is able to monitor and ensure high liquidity. The Qantas Group’s infrastructure is supported by a system of effective borrowing and investing, as well as maintained liquidity so its non-current assets and existing infrastructure is secure and kept up-to-date.
Qantas’ Resources and Capabilities
When analyzed simply, The Qantas Group boasts many capabilities/resources that potentially offer it competitive advantage, including; * Resources: * Airport locations/hangers
* Engineering facilities
* Trained personnel
* In-flight food (Neil Perry’s involvement) * Qantas lounges/restaurants * Storage facilities for inventory, ranging from machinery to uniforms * Training facilities for flight attendants and pilots * Capabilities: * New IT systems to promote more efficient operations – such as the evolution of e-tickets * New development in cost effective service (e.g. with food, cutting costs on ingredients or perhaps where the food is prepared) * New developments for the ‘frequent flyer’ scheme to adapt to competitors’ similar concepts – such as the Chairman’s Lounge * Fleet development: “The airline has been constantly growing since its inception as a result of increasing fleets. Qantas has been purchasing Boeing aircraft makes like the 747-400.‘
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