The Australian Aviation industry's Impact on Qantas Airline - Example

Analysis of the Australian Aviation industry and its Impact on Qantas Airline Student: Professor: Institutional Affiliation: Table of Contents Analysis of the Australian Aviation industry and its Impact on Qantas Airline 1 Analysis of the Australian Aviation industry and its Impact on Qantas Airline 3 2.0Brief industry and market information 3 3.0PESTLE industry analysis 5 3.1 Political 5 3.2 Economical 6 3.3 Sociocultural 6 3.4Technology 7 3.5Environmental 7 3.6Legal 8 4.0Five Forces analysis 8 4.1Bargaining power of Suppliers 10 4.2Power of buyers 10 4.3Threat of new entrants 10 4.4Threat of Substitutes 11 4.5Industry Rivalry 11 5.0Key Success Factors analysis 12 5.1Maintenance of a significant domestic market share 12 5.2Capacity reduction 13 5.3Diversification into the budget travellers segment 13 5.4Investing in fuel efficient, low emission carriers 13 5.5Focus on product differentiation 13 Conclusion 14 References 15 Analysis of the Australian Aviation industry and its Impact on Qantas Airline 1.0 Introduction Qantas airline is the largest player in the Australian airline industry. The airline enjoys a 65% market share in the domestic market alone. Qantas employs 33,000 people in its operations (Freed 2015). Clearly, Qantas is an established airline that is one of the oldest in the world today. Despite the enormous economies of scale and resources available to Qantas, the company posted an astonishing $2.8 billion in losses for the financial year 2014. Qantas blames the loss on increased domestic competition from virgin, high operating costs and a strong Australian currency (Mason, 2014). Apart from Qantas, other players including Virgin and Malaysian airlines have posted poor growth prospects and low profitability from their market share (BBC Business 204). Clearly, the industry is experienced a set of macro and micro level challenges that make it unattractive in the long-run. A detailed understanding of the industry can be achieved through three different analytical approaches. A PESTLE analysis will provide a macro overview of the airline industry in Australia. Porters five forces model will provide a long-term indicator of Australia’s air travel industry. Key success factors analysis will point out various practices that may lead to success in the industry. 2.0 Brief industry and market information The Australian airline industry has in the recent past been recording mixed results in terms of profitability and growth. Major airlines such as Qantas, Virgin and emirates have been posting inconsistent growth and profitability results year after year. The performance of these major airlines is an indicative symptom of the challenges and competition factors facing players in the Australian aviation industry. In 2014, Qantas posted a record loss of $2.8 billion. Virgin Australia posted a statutory loss of $355.6 million after tax. The poor results posted by the two airlines have generally been blamed on excess capacity, aggressive price-based competition and a general economic uncertainty. The cost of fuel has been a major operating cost for airlines particularly due to excess unutilized capacity. The airline industry in Australia just like in most countries is not free from political interference. Qantas in particular is a national carrier that attracts a lot of attention from the Australian government and the general public. There is a specific act of parliament that guides operations and equity structure for the case of Qantas airline[Ste07]. Due to such political interference, market forces can not be allowed to freely determine the performance of the airline industry in Australia. Virgin Australia has on several occasions warned against government protection of any particular airline including Qantas in order to allow for efficiency and fair competition (Kelly 2014). The domestic market in the Australian aviation industry has attracted a great capacity competition for market share by major airlines. This situation has led to high standards of customer service at a very high cost for the players. Major airlines in Australia are currently considering expansion into international markets to diversify revenue streams. However, global economic challenges such as the 2008 financial crisis have also impacted negatively on the Australian aviation industry performance[Bel15]. 3.0 PESTLE industry analysis 3.1 Political Australia being a stable democracy means Qantas is not in any way threatened by political instability from its main domestic market. Qantas controls 65% of the domestic airline business. Political structures and factors in a country or region have a great effect on businesses, economy and industries. The airline industry in Australia attracts a lot of interest due to the number of jobs it provides and the critical support it offers to the tourism industry. In some cases such as Qantas, the government is an investor. The Australian government maintains a high level of control in the airline industry (Mason 2014). In 2014, the Australian government amended the Qantas act to reduce equity restrictions that lock out foreign investors from more than 25% ownership. In 2014, Qantas was considering a debt guarantee from the government as a means to raise more capital. This has obviously left the other players including virgin Australia to protest against government protectionism. According to Virgin Australia CEO, protecting some players may lead to an inefficient and non-competitive industry (Kelly 2014). 3.2 Economical The airline industry is closely attached to the performance of world economies, as world economies plunge and so does the demand for air transport as businesses experience low growth and thus little movement of people doing business (Hanlon, 2007; Belobaba, O, & Barnhart, 2015). Qantas Airline long haul routes to North America and Europe have been greatly affected by economic uncertainties stemming for austerity measures in the Eurozone and slow economic recovery. Qantas has had to invest heavily in capacity to compete in the domestic ands Asian market with Virgin and Malaysian airlines. Competition in the domestic market has reduced Qantas revenue sources significantly leading to a $2.8 billion loss in 2014 (Kelly 2014). Domestic tourists and business travellers in Australia have maintained a consistent demand for airline services (BBC Business 2014). Current low fuel prices in the global market have reduced the operating costs for airlines the world over[Bel15]. This favourable trend can lead to improved profitability for well managed airlines. While the macroeconomic environment presents a set of unique challenges, opportunities in low costs operations and capacity utilization can improve profitability for Australian airlines. 3.3 Sociocultural Qantas has maintained a strong grip on major long haul routes such as United States. Qantas is still the airline of choice for a majority of travellers into and out of Australia to other global destinations (Freed 2015). Economic growth in the Asia-Pacific region will lead to increased disposable incomes and can thus provide a good clientele for Qantas given its brand strength. The premium market can provide an alternative for the company to differentiate its services and at the same time incur less cost by flying less and generating higher revenues. Qantas has a heavy social burden of providing jobs for Australians due to its positioning as the national carrier. Qantas received a lot of criticism from Australians when it announced 5000 job cuts in 2014 (Mason 2014). In 2015 is expected to post positive results and halt job cuts. While job provision is in itself a socioeconomic objective of a business, it should not threaten its long-term sustainability. 3.4 Technology Qantas airline has taken advantage of information technology and internet growth around the world and in Australia to improve customers experience as customers can book flights online, change flight plans to upgrade or get into other cheaper plans. One can also book hotel rooms in Australia and other selected regions through the airlines website. The airline also offers support for customers through the website[Qan131]. 3.5 Environmental Some of the environment issues facing the airline industry is the amount of pollution the air transports impacts on the environment. According to the European aviation safety agency (2010) global air traffic is growing at an average of 5% annually. This presents a challenge of reducing the environmental impact left by the air travel. The agency proposes technological and operational improvements to lower the level of impact on the environment by airline operators. Noise and carbon emission remain to be the greatest concern for environmentalists and the global community at large. Already, airlines including Qantas are required to pay a carbon tax intended to lower carbon emissions by the industry. Qantas paid $106 million in carbon tax in the 2014 financial year (Creedy, 2015). 3.6 Legal Operating at international level means Qantas Airline will have to comply with various regulatory issues such as safety, security and ownership structure. The Australian government has had to amend the Qantas act to allow foreign investors to hold more than 25% Equity. However, foreign ownership of the international airline is legally capped at 49% (Creedy, 2015). Generally, the legal environment in the Australian aviation industry is restrictive to flexible strategy change. 4.0 Five Forces analysis Five forces analysis of an industry is achieved using the porter’s model. This model analyses the external micro environment factors that interact to create certain conditions for the business. Porters five forces model can be used to determine the long-term attractiveness of an industry (Grant et al, 2014). 4.1 Bargaining power of Suppliers Fewer and concentrated suppliers have more power to exert influence in an industry as compared to small disintegrated players. Powerful suppliers determine the price of key raw materials. A business strategy can be significantly affected by its lack of control over its suppliers (Grant et al, 2014). In 2013 through to 2014 Qantas and other airlines had to grapple with high and inconsistent fuel costs that reduced their net profits (Freed, 2015). Qantas employs more than 30,000 people mainly in Australia[Qan131]. Labour in the Australian airline industry is expensive. Majority of the employees are in strong labour unions such as the Australian Licensed Aircraft Engineers Association, Australian and International Pilots Association and Transport Workers Union of Australia. Workers union offer employees as suppliers of labour a considerable bargaining power when it comes to pay, working conditions and other benefits[ste12]. 4.2 Power of buyers Buyer power is determined by the importance of a product/service to the buyer and the concentration of sellers in an industry. An industry with many sellers or few players with excess capacity accords a lot of power to the buyer due to the presence of alternatives (Grant et al, 2014). Qantas, Malaysian, Emirates and Virgin airlines have invested heavily in capacity expansion to cater for the domestic Market in Australia. This has led to lowering of prices by the airlines to compete for the relatively small market (Mason 2014). In essence, Australian travellers have more bargaining power to get lower prices for quality service. 4.3 Threat of new entrants Threat of new entrants is only anticipated if barriers to entry into an industry are acceptably low[Hil12]. The airline business requires quite a huge amount of capital to achieve economies of scale[Del05]. It is also a highly regulated industry in most countries including Australia. For the case of Australian airline industry, there is intense rivalry in the industry such that new entrants will find it difficult to break even within reasonable time. Most airlines such as Virgin Australia had to enter the industry as low cost carriers before gaining an economic market share [Bel15]. With such high barriers to entry, it is difficult for any new airline to enter the Australian air transport industry without incurring initial losses. 4.4 Threat of Substitutes Substitutes lower the overall demand of a product in the industry thus reducing profitability and increasing competition[Del05]. Air transport has no close substitutes when it comes to its efficiency and service quality. However, low-cost carriers such as Tiger Airways provide a substitute for more expensive services offered by airlines including Qantas. Qantas is affiliated to Jetstar Airline, a low-cost carrier. With Jetstar, Qantas is able cater for premium and budget travellers (Mason 2014). This reduces the threat of low cost substitutes in an industry that offers almost similar products. 4.5 Industry Rivalry Rivalry between competitors is mainly determined by the concentration of firms in an industry. Fewer firms with large market shares tend to engage in aggressive price-based competition[Osw12]. Competition in such industries may even push prices to below production cost in order to maintain market share (Grant et al, 2014). This is precisely the case in the Australian domestic market in the airline industry. Qantas and Virgin have relentlessly engaged in price-based competition to acquire greater market shares. However, both firms have suffered from having excess capacity compared to the relatively low demand in the market. Qantas posted a net loss of $2.8 billion in 2014 while Virgin recorded a $355.6 million loss in the same period (Creedy, 2015). This shows that, industry rivalry in the Australian air travel business is very high. 5.0 Key Success Factors analysis External Forces/Needs Industry Responses Key Success Factors A strong Australian Dollar Growing demand for air travel in the domestic market Uncertainty in the global economy Growing concern over climate change and carbon footprint High fuel prices Increased capacity in the domestic market leading to price-based competition Scrapping of long haul unprofitable routes Investment in low emission energy efficient carriers Lowering operating costs by reducing workforce Alliances and diversification leading to introduction of low cost air travel services. Maintenance of a significant domestic market share Reduction of capacity to cater for realistic demand projections cost effectively Investment and diversification into low cost carriers segment to limit exposure to competition Investment in new fuel efficient carriers to lower the cost of fuel consumption Focus on product differentiation and brand publicity to reduce overreliance on price-based competition. 5.1 Maintenance of a significant domestic market share Qantas has aggressively defended its 64% market share through service improvement and low prices offering. The domestic market comprises the bulk of Qantas’s revenue. This market is less sensitive to global economic challenges and consumer indifference. Domestic travellers can easily identify with Qantas as a national carrier. Virgin has also been a very aggressive competitor to Qantas for the domestic market. Virgin differentiates its products through exceptional service quality levels. A share of the domestic market guarantees both companies a consistent revenue stream. 5.2 Capacity reduction Both Qantas and virgin had excess capacity in 2014 that led to their aggressive price-based rivalry. Competing on prices leads to an industry-wide loss (Creedy 2015). Businesses need cash flow to operate which explains why excess capacity leads to reduced prices to attract buyers. Reducing capacity leads to low operating costs and ultimately profitability. 5.3 Diversification into the budget travellers segment Budget travellers segment can be an ideal alternative to major airlines during periods of recession and low demand. Qantas has already invested in a budget subsidiary, Jetstar, Qantas needs to increase the capacity of pits low-cost carrier in order to compete effectively with new entrants and Tiger Airways, a subsidiary of Virgin Australia. Such low cost carriers can effectively serve the domestic business travellers that are sensitive to price adjustments. 5.4 Investing in fuel efficient, low emission carriers Airlines can reduce operating costs and carbon emissions by investing in newer fleets that have are more fuel efficient. The Boeing 787 Dreamliner is 20% more fuel efficient compared to previous models. Boeing is also testing low emissions technology on its aircrafts[Boe15]. Airlines should take advantage of such technology to lower carbon emissions and most importantly their operating costs. 5.5 Focus on product differentiation Price-based competition has proved to be an unsustainable model in the Australian air travel industry. Such a competition strategy erodes the expected return on investment and thus impacts negatively on long-term growth of an airline. Airlines should invest more in improving customer experiences and increasing brand salience to capture and retain existing customers. Qantas has successfully experimented of service value addition through its Frequent Flyer and Qantas Club. These programs ensure customers associate personally with brands and increase their loyalty. Conclusion From the industry analysis above, it is evident that Qantas operates in an industry with a set of very impactful challenges such as political interference, intense rivalry, economic uncertainty and customer indifference. Qantas has a social obligation to provide jobs to Australian and exercise environmental responsibility. These two obligation impact on Qantas’s profitability significantly. Qantas can rely on new technology to improve customer experience and reduce operating costs. Product differentiation can also be a prudent strategy to reduce cost and compete effectively with other players in the industry. Qantas should retain its grip on domestic market through its low cost subsidiary and aggressive product differentiation in order to be sustainable in the long run. The Australian air travel industry can be profitable for the existing players if product differentiation and technological advancement are favoured over price-based competition. References Ste07: , (Aulenbach, 2007), Bel15: , (Belobaba, O, & Barnhart, 2015), Qan131: , (Qantas, 2015), ste12: , (Holloway, 2012), Hil12: , (Hill & Jones , 2012), Del05: , (Delfmann, 2005), Bel15: , (Belobaba, O, & Barnhart, 2015), Osw12: , (Oswald & Flouris, 2012), Boe15: , (Boeing , 2015), Read More