Qantas - Diversifying Airline Products to Include Premium and Low-Cost Airlines - Case Study Example

Case Study Analysis: Qantas Group Name: Lecturer: Course: Date: Introduction Qantas Group is an Australian Airline with global operations. The company’s competitive advantage lies in its unique resources and capabilities, such as professional workforce, reputable brand, effective leadership, and reputation for safety. Despite this, the external environment provides vast challenges rather than opportunities for growth, such as high competition and low barriers of entry. In fact, the perpetual marginal profits indicate the need for an immediate action plan. This paper presents a case analysis of Qantas before concluding with reasons for supporting its current strategies, brief update on market reports on effectiveness of the alliances and recommendations. Internal environment The internal resource-based theory derives from the principle that an organisation’s competitive advantage lies in its internal resources, rather than the positioning of its external environment (Raduan et al. 2009). Hence, rather than evaluate the threats and opportunities associated with running Qantas, the competitive advantage lies in its unique resources and capabilities. Above-average returns are earned when a firm uses its valuable, rare, costly-to-imitate, and non-substitutable (VRIN) resources and capabilities to compete against its rivals in one or more industries. Qantas resources can be categorised into tangible and intangible resources (Cardeal & António 2012). In regards to the tangible resources, Qantas has a professional workforce. The company also maintains certified and skilled pilots, and a well-trained cabin and maintenance crew. Additionally, Qantas has the largest resource base in the domestic industry, which has enabled it benefit from economies of scale. Further, it has a reputable brand that has a rich history and traditions of excellences. It also maintains excellent slots at airports, which allow it to attract business passengers looking to get to the meetings fast. Similarly, it has proficient staff and a fleet of new planes. Qantas also has the largest fleet. In 2009, it had 224 passenger planes. On the other hand, Virgin Australia has no rich history, despite having a reputable brand in the low-cost segment, well-trained staff and new fleet. Tiger's brand is, however, becoming shabby after regulators shut down in 2011. Additionally, the geographic expanses of Australia present an opportunity for growth. For instance, since the continent is huge to travel by rail or road across Australia's scattered cities, Australians often resort to air travel. Consequently, it presents a potential market. In regards to intangible resources, Qantas has effective leadership and managerial capabilities, capacity to innovate, high reputation with suppliers and customer and reputation for safety. For instance, Qantas also has a long and excellent safety record. In the case study, it is indicated that Qantas has experienced few major accidents. This has made the airline attractive for the customers. External environment The five forces model consists of an analytical tool essential for enabling businesses to locate the most viable industry as measured by its profitability potential. According to the model, an industry’s profitability is a function of the interaction of five forces, mainly product substitute, buyers’ bargaining power, suppliers’ bargaining power and potential of new entrants (Porter 1980). Customers have a higher bargaining power in international and domestic airline industry. The changes in demography have affected the profitability of the industry. As indicated in the case, airlines will only tend to benefit once they have the right destinations organisation to lure the patterns in the global population. The increased globalisation, rise in levels of income and the growing population in Asia and Africa have meant more customers and more flights. It has also implied that Qantas changes focus on flights to the United States and United Kingdom, where competition is fierce. There is a high threat of entry due to the high competition in the international and domestic market. The industry’s low profitability is also a major barrier of entry. However, in Australia, companies have been entering into the market. The rise in the oil prices in 2008, in addition to the Wall Street meltdown led to a low return of -4.7 percent. This also created barriers of entry. Consequently, the high costs of fuel has affected Qantas profit margin. In the case study, high fuel prices lower the profits since it comprises a huge percentage of the operating expenditure. For instance, in 2012, the cost of fuel for Qantas was estimated at AUS4329 million, while it had total expenses of about AU15,459 million. Competitors such as Cathay Pacific have responded to such threats by upgrading its fleet with fuel-efficient airplanes such as 350 jets. Environmental factors have also created barriers of entry by limiting the profitability of the industry. Natural disasters, particularly in areas Qantas operates, have significantly derived a large portion of its customer base. For instance, the Earthquakes that happened in 2011 in places such as Christ Church, New Zealand, affect travel, leading to reduced number of flights and lower profit margin. The Icelandic volcanic eruptions that happened in 2010 and the tsunami that happened in Japan in 2011 also affected flights. There is a high competitive rivalry in the airline industry. The international market experiences fierce competition, leading to low profit margins. In particular, the industry is crowded, with Skytrax listing 620 airlines in operation as of 2009. On the other hand, IATA listed 230 members during the same period. Additionally, most of these Airlines are well-branded and are long-haul flights. In Asia-Pacific for instance, Qantas faces fierce competition from Virgin Australia, Singapore Airlines, Malaysia Airlines, Cathay Pacific, Thai and Emirates, which are also equally fairly balanced with excellent fleets, reputable brands, and loyal customers. In terms of quality, Cathay Pacific, Malaysia and Singapore Airlines have been regionally credited for travel quality. The fierce price competition has also complicated the airline industry in Asia-Pacific. In the case study, brand loyalty has appeared to vanish once the differences in price become more conspicuous. Competition from the national airlines has been ever more formidable. From the facts presented by the case study, it appears that this is since national airlines such as Singapore and Emirates are associated with national pride and by bringing people to their national countries, contribute to economic growth. The major competitors in the domestic market include Virgin Australia, which has a formidable brand market in the Australian airline low-cost marketplace. Tiger is also a fierce competitor in the low-cost market segment, with new planes and profitable planes giving it an edge over Qantas. The suppliers have a higher bargaining power. This is since the only two major airplane suppliers include Airbus and Boeing. Conversely, Qantas has a low supplier base. Due to the growing concerns over environmental population, more passengers are becoming eco-conscious. This has implied that airplane manufacturers such as Airbus and Boeing concentrate on supplying fuel-efficient planes to reduce cost and environmental pollution. There are threats of substitute products which have led to low profit margins in the industry. This has made the international airline industry to be virtually a marginal industry. It is lowly profitable and offers slim opportunities for growth. As indicated in the case study, the global airline industry has been marginally profitable by 0.3 percent returns over the past 4 decades. In addition to this, the industry faces extreme challenges. Similarly, the domestic airline industry is equally competitive and continues to witness low profit margins. Indeed, it is indicated in the case that the industry revenue is estimated by IBIS World to grow at a rate of 0.5 percent through 2017 and 2017. In Australia, fierce competition has reduced prices of flights due to substitute airlines that charge in the low-cost segment. The entry of new airlines such as Tiger and Virgin Australia, both using the low price differentiation strategy, has forced Qantas to reduce prices of flights, leading to low profits (Ahlstrom & Bruton 2009). Strategies Strategy refers to the creation and capturing and sustenance of value. Based on the I/O model, the structure of the industry is viewed to be less profitable and more vulnerable to attack (Porter 1996). However, Qantas has heterogeneous resources and capabilities it can leverage to position itself strategically in the market. Based on the I/O model of above average returns, Qantas uses cost leadership strategy to produce standardised products and services at costs below that of the competitor’s differentiation strategy, which produces differentiated goods or services for which customers are willing to pay a price premium. To compete against Virgin Blue, Qantas resorted to price and quality differentiation, where it initiated low-cost airline called Jetstar, which worked with the low-cost value chain, and internet booking system. However, the travellers had to pay for drinks while on board. Qantas also had standard fleet of airplanes to minimise maintenance issues and hired low-paid pilots and cabin staff. Qantas also used co-operate level strategies. For instance, since the company uses diversification strategy to sustain itself in the marginal industry. Other than concentrate on airline business, Qantas Group also operates a number of other businesses. For instance, the company runs airport businesses such as handling of baggage, passengers’ lounges and check-in. The company also operates catering businesses, called Q catering. The strategy enabled Qantas to access new markets, to sustain its airline business amid the declining market, spread risks of losses and to be able to use resources it already has. Qantas uses multi-brand strategy (Qantas and Jeststar), enabling its service to cover virtually most of the continents. As a result, the company has managed to acquire the highest market share of about 80 percent for the business market. The company also runs a flyer program to enhance customer loyalty. For instance, the Qantas Flyer program consists of a business unit that has some 5 million members. The program is a necessary tool for competitive parity rather than competitive advantage. Qantas also uses strategic alliances to maintain market leadership, leverage their existing resources and capabilities while at the same time working with partner firms to create additional programs that can build new competitive advantages (Isoraite 2009). Due to the fierce price competition, Qantas has considered delay of aircraft delivery and entering into strategic alliances. Further, the One Word Alliance with Canadian Airlines, British Airlines, American Airlines and Cathay Airlines presents Qantas with cost-sharing advantages where it can share frequent flier points, lounges, and joint booking of flights. In 2008, the company merged with Jetset to form a vertically-integrated travel business called the Jetset Travel World. Qantas owns 58 percent of the business. In the case study, Qantas uses outsourcing to save money and to share risks, which makes the company more flexible and adaptable to market changes. Additionally, the company has often downsized its staff. For instance, it outsourced 7000 jobs in 2005. This has, however, led to labour disputes within the company due to frequent standoff between the management and maintenance unions (News.com 2014). Settling the disputes has meant additional expenses, which has strained the company's profitability. For instance, while Qantas has won the cases, the cost has been great -- estimated at AUS194 million revenue loss, aside from loss in brand reputation, and employee motivation. Conclusion Because of the highly competitive industry, Qantas has diversified its airline products to include premium and low-cost airlines respectively. The diversification and differential strategies have allowed the company to appeal to a wider customer segment, such as the business class and economy class. It has also enabled the company to maintain a loyal customer base, despite competition from Virgin and Tiger, which focus on low-cost. The cost differential strategy has enabled the company to maintain the largest market share in Australia. While the price of flights is based on the market, Qantas matches demand with supply before deciding the fares (Ahlstrom & Bruton, 2009). Qantas also employs cost differentiation. The company’s strategies include using low-cost carriers aimed at capturing a large customer-base and maintaining increase customer loyalty (InvestSmart, 2014). The strategic alliances have been effective, as they have enabled the company to maintain market leadership, leverage its existing resources and capabilities while at the same time manage to work with partner firms to create additional programs that can build new competitive advantages (Eurominitor 2013). However, they have not been effective in reducing costs, making them ineffective in increasing profits (Judge & Dooley 2006). Hence, their real purpose in cost reduction has been missed. Currently, Qantas has a feeble financial standing. As at February 27, 2014, Qantas reported an Underlying PBT loss of $252 million plus a Statutory Loss After Tax of $235 million, for the six months ended December, 31 2013 (Qantas, 2014). This shows that the strategic alliances have not been necessarily beneficial. Indeed, the huge losses are blamed on the giant of global airline capacity given the increase in competitor capacity by 46 percent since 2009 (Hurst 2014). It is recommended that the company should focus on expanding in emerging markets in Africa, Brazil, and China through codeshare partnerships with other airlines. The emergence of middle income economies in the emerging, rise in globalisation and the huge population signal high profitability. References Ahlstrom, D & Bruton, G 2009, “International Management: Strategy and Culture in the Emerging World,” Cengage Learning, New York Cardeal, C & António, A 2012, "Valuable, rare, inimitable resources and organization (VRIO) resources or valuable, rare, inimitable resources (VRI) capabilities: What leads to competitive advantage?," African Journal of Business Management Vol. 6(37), pp. 10159-10170 Eurominitor 2013, “Qantas Airways Ltd in Travel and Tourism. Euromonitor International, viewed 12 Oct 2014, Hurst, D, 5 March 2014, “Qantas inquiry to investigate airline’s financial problems,” The Guardian, viewed 11 Oct 2014, InvestSmart 2014, Qantas Airways Limited (QAN), viewed 12 Oct 2014, Isoraite, M 2009, "Importance Of Strategic Alliances In Company’s Activity," Intellectual Economics, Vol. 1 No.5, p. 39–46 Judge, W & Dooley, R 2006, "Strategic Alliance Outcomes: a Transaction-Cost Economics Perspective," British Journal of Management, Vol. 17, p.23–37 News.com 2014, “Qantas starts with senior management as airline moves to cut 5000 jobs,” News.com, viewed 11 Oct 2014, Porter, M 1980, Competitive Strategy, Free Press, New York Porter, M 1996, “What is strategy?” Harvard Business Review, November-December, 61-78. Qantas 2014, Qantas Group Financial Results, viewed 10 Oct 2014, Raduan, C., Jagak, U. & Haslinda, A. & Alimini, I. (2009). Management, Strategic Management Theories and the Linkage with Organizational Competitive Advantage from the Resource-Based View. European Journal of Social Sciences 11(3), 402-416 Read More