The Corporate Sustainability Model and General Environment Issues - Case Study Example

General Environment Analysis Political The Australian government has been taking some measures to assist Qantas. Deregulation of the Australian airline industry occurred in 1992 when the Australian government privatised both Qantas and Australian Airlines and opened up the domestic and international markets for competition (Tywoniak & Galvin, not dated). The government sold Australian Airlines to Qantas and then privatised the combined group, meaning that Qantas emerged as a very large and highly competitive group. The Australian government has continued to take measures to help Qantas survive difficult conditions, although as mentioned elsewhere in this paper, the assistance offered by the government is not much compared with what other governments such as the United States offer to their airlines during times of difficulty. As the Asia-Pacific region is emerging as the world’s fastest growing region for the air travel industry, many players are joining the competition. One of the emerging issues in the region is the growth of low-cost carrier travel which posed a major threat to traditional full service airlines such as Qantas. This trend has led to the emergence of new political and regulatory factors (Qantas Annual Report, 2011). According to the Qantas Annual Report (2011), in the new environment that has been created, it is imperative that Qantas takes the necessary steps to maximise productivity and competitiveness, renew its aircraft, and improve on technology. More importantly, the company has to meet customer needs, realise growth opportunities and enshrine business resilience (Qantas Annual Report, 2011). According to a 2004 Qantas Annual Report, Qantas is operating in a very demanding industry environment. After the turbulence that occurred over the past few years, the global aviation industry has still not regained normalcy. One of the key challenging areas is the price of oil, which is largely determined by political factors. For instance, crude oil prices have been at a record high while global traffic numbers have remained below those that were witnessed in the year 2000 (Qantas Annual Report, 2004). According to Boeing (2012), the future oil demand will be driven by growth in emerging markets, transportation needs, and the growth of oil as petrochemical feedstock. Yet the political uncertainty and persistent fear of contagion in oil producing states in the Gulf region has continued to cause oil prices to be relatively high since the year 2008 (Boeing, 2012). Despite this state of affairs, Qantas continues to be a dominant player in the aviation industry. Compared to other airlines that fly into and out of Australia, Qantas does not enjoy much support from the governments as some of the airlines do. According to the Qantas Annual Report of 2004, two thirds of the 40 international airlines that fly to and from Australia each week are government owned or supported, and Canadian and US carriers are subject to legislated bankruptcy protection. US airlines for instance received US$15 billion in grants and loans after the September 11 attacks and also enjoyed substantial government support in relation to many security measures for which Qantas is not supported (Qantas Annual Report, 2004). In Japan, airlines have received substantial funding from the government. In New Zealand, Air New Zealand received NZ$ 885 million from the government as a bail out, while in Italy the government intervened to rescue Alitalia (Qantas Annual Report, 2004). The same scenario is exhibited in the Middle East, where governments and ruling families are spending tens of billions of dollars on acquiring new aircraft and construction of new aviation infrastructure as they create new aviation and tourism industries to lower their reliance on the non-renewable gas an oil reserves (Qantas Annual Report, 2004). On the contrary, Australia is known to be one of the countries with the most open aviation policies in the world. In the same magnitude, Qantas remains impeded by the Qantas Sale Act, which is a limitation that restricts the company’s access to global equity capital. This law increases the cost of capital for the company (Qantas Annual Report, 2004). In spite of these challenges, Qantas has been able to reorganise itself into ten businesses that are supported by a corporate centre. The new structure is expected to enable the company to make better investment decisions and improve performance for customers, shareholders, and employees. This will increase autonomy, collaboration, accountability and the speed as well as quality of decision making – and thus increase returns on assets (Qantas Annual Report, 2004). The company has for instance developed business resilience and crisis management teams into strategic planning to enable it deal with unpredictable political issues such as political instability in the Middle East. This enables it to respond and recover quickly and effectively if any unexpected event occurs (Qantas Annual Report, 2011). Economic In the face of the recent goal financial crisis, Qantas realised a stronger than expected financial statement for the business year 2010-2011. The company’s underlying pre-tax profit was $552 million, which was a 46 percent increase from the preceding year, while the net profit doubled from $250 million. Overall, the company’s revenue rose by 8 percent to $14.9 billion. This shows that the company was able to perform well in spite of being hampered by economic obstacles such as the global economic conditions, high fuel prices, and unpredictable foreign exchange rates as well as the industrial relations environment (Creedy, 2011). On 16 February 2012, the Qantas Group released financial results that showed a $215 million decline in profit before tax for the half year ending 31 December 2011. The company notes that these were mixed results brought about by notable events such as continuing record results for Qantas Frequent Flyer and Jetstar, revenue growth of 6 percent, and cost improvements in yield unit, which were offset by the effect of a recent industrial action and high costs of fuel (Qantas Media Release, 2012). The decline in the company’s recent performance is as a result of the $194 million financial impact of the industrial action in the first half the fiscal period, as well as increased costs of fuel compared with the preceding corresponding period. The company estimates that fuel prices during this period were at $2.2 billion, having risen by $444 million or about 26 percent (Qantas Media Release, 2012). To deal with unpredictable economic risks, Qantas has a market risk policy to manage risks due to interest rate, foreign exchange rates and high fuel price among others. To contain interest rate risk, which is the risk that the fair worth of cash flows of a financial instrument will rise and fall because of changes in market interest rates, Qantas has exposure to movements in rates of interests occasioned by its portfolio of interest rate sensitive assets and liabilities in a number of currencies including the Australian dollar, the Great Britain pound, the Japanese yen, the New Zealand dollar, and the euro. These include corporate debt, cash and leases. The Qantas Group mitigates risk by reference to pricing intervals that are spread across different time spans with the proportion of fixed and floating rate managed independently. The relative mix of floating and fixed interest rate funding is managed by using interest swaps, options and forward rate agreements (Qantas Annual Report, 2011). Foreign exchange risk is defined as the risk that the fair worth of cash flows of a financial tool will fluctuate due to changes in foreign exchange rates. Such risks arise from operations, translations risks and capital expenditures. The company uses cross-currency swaps to convert long-term foreign currency borrowings to currencies in which the group has forecast adequate surplus net revenue to suffice principal and interest obligations under the swaps. In cases where the Qantas Group’s long-term borrowings are held in foreign currencies in which the company derives surplus revenue, offsetting forward foreign exchange contracts is used to match the timing of cash flows that arise under the borrowings with the anticipated revenue surpluses (Qantas Annual Report, 2011). To deal with the high cost of fuel, or the fuel price risk, Qantas applies options and swaps on jet kerosene, crude oil and gas oil to hedge exposure to movements in the price of aviation fuel (Qantas Annual Report, 2011). By applying the above strategies, Qantas has been able to deal with the adverse economic conditions such as the global financial crisis that caused low travel as people were keen on saving, and the recent industrial action that stalled the Group’s operations for some time. Social Qantas operates as a premium, full service domestic and international airline that offers services across a broad network of destinations. A review conducted by Gilbert and Wong (2002) with regards to the premium services that airlines should offer and what customers expect shows that the key service quality features expected by customers include reliability in maintaining flight schedules as well as reservation, ticketing, in-flight and ground services; customer reassurance by good safety records; expedient flight schedules as well as non-stop service; proper and well-timed handling of baggage; sociable and supportive employees; and a valuable frequent flyer programme. Qantas has attempted to meet these conditions by having in place several customer benefits which include a global network, as much as four travel classes (which depends on the kind of aircraft in use and the route), in-flight food, wine and entertainment, a satisfying loyalty programme referred to as the Qantas Frequent Flyer, airport lounges and numerous other services. Qantas is also a founding member of oneworld alliance – a programme that enables strategies alliances with other major airlines of the world. Further, in 2010, Qantas acquired the West Australian charter airline Network Aviation, and this has enabled in to be in charge of the fly-in fly-out services offered to mining communities (Qantas Annual Report, 2011). While Qantas has fared well in most of the areas mentioned by Gilbert and Wong (2002) as shown above, its image has been partly dented by poor safety records in 2010 and the industrial action which left many Qantas passengers stranded in 2011. This is expected to impact the company’s social environment because according to Yilmaz (2008), quality customer service differentiates one airline from the other – and this helps to secure customer loyalty. Qantas should therefore conduct a survey in order to obtain accurate customer data, which will be essential for personalising services and maximising the benefits that come with marketing initiatives (Yilmaz, 2008). Qantas could also aspire to become a sustainability company as competition from airlines in Asia, the Middle East and Europe increases. According to Yilmaz (2008), leading sustainability companies are addressing global and industry challenges in a variety of areas. First is strategy, whereby, they integrate long-term economic, social and environmental aspects in their business approaches while maintaining global competitiveness as well as brand reputation. Second is financial, whereby companies strive to meet shareholders’ demands for noteworthy financial returns, long-standing economic growth, open communication and transparent financial accounting. Third is customer product and service, whereby companies foster loyalty by investing in customer relationship marketing as well as service and product innovation that focuses on systems and technologies that use financial, natural and social resources in an efficient, effective and economic way over the time. For instance, Qantas realised the need to revitalise the market in China by offering both premium and low cost travel units scheduled to start in 2012 (Fenner, 2011). Fourth is governance and stakeholder, whereby companies attempt to set the highest standards of corporate governance as well as stakeholder engagement, including public reporting and corporate codes of conduct. For instance, the Qantas Group has always provided reliable financial statements even in cases where it has recorded declines in profits – which can be linked by critics to a decline in performance. The fifth point discussed by Yilmaz (2008) is the human aspect, whereby companies have to manage human resources to uphold workforce competencies and employee satisfaction through organisational learning and knowledge management. Going by the recent industrial action that affected Qantas’ operations, it is unmistakable that the company has a lot to do in its social environment. Technology Information communication technology has always been a driver of the airline industry and Qantas has to adapt to the innovation trends in the industry in order to survive and remain competitive. According to Barnhart and Smith (2011), the current airline industry is very competitive and dynamic. In addition, maintaining consistent profitability requires that suitable tradeoffs be made between the frequently competing objectives with planning, operations and marketing. Airlines have led other industries in the application of operations research as well as information technology to deal with rising issues such as the need to win and retain more customers. This role is expected to increase as the industry becomes more competitive and the characteristics of flights change due to the incorporation of innovative technologies (Barnhart & Smith, 2011). Qantas’ Annual Report of 2004 states that the company will continue to invest in its engineering and maintenance operations. In the same year, the company completed the refurbishment of Hangar 4 at the Avalon airport, which is used for heavy maintenance. The company has also made substantial investment in new systems to lower information technology operational costs, decrease dependency on legacy technology and simplify business processes. Fuel hedging and fuel surcharge on fares are also some of the strategies used by the company to help offset the continued increase in prices of crude oil (Qantas Annual Report, 2004). Qantas has also invested in state-of-the-art aircraft such as the Airbus A380, which is the largest and most technologically advanced aircraft ever built. According to Qantas, the aircraft is quieter, more efficient and more powerful compared with today’s other big jets. The airplane also delivers up to 10 percent improvement in fuel efficiency and carbon emissions per revenue tonne kilometre than other jets that are currently in use (Qantas, 2012). The company has also invested in other large aircraft such as the Boeing 747s, the Boeing 737s and the Airbus A330s. Investment in such aircraft aims not only to lower operational costs, but also to attain the desire by the global aviation authority led by the International Air Transport Association to lower emissions. Qantas hopes that by investing in newer and technologically advanced aircraft, it can contribute significantly to lowering global emissions. But other key reasons for such investment include reduction of auxiliary power unit, improvement of flight planning and scheduling, and optimising loading. Qantas also intends to collaborate with air service navigation providers to improve airspace efficiencies which affect the industry’s overall fuel efficiency (Qantas Annual Report, 2011). The fact that Qantas is continually investing in modern aircraft puts it in very competitive position to face other major airlines of the world, especially those currently emerging from the Middle East and Asia. According to Jani (2011), an airline’s technical or technological performances are mainly determined by the features of the aircraft it uses – which are materialised through aircraft design. Such features include aircraft speed, carrying capacity and productivity (Jani, 2011). Additionally, the airline operational performance encompasses demand, capacity and quality of services, which Qantas is striving to improve as discussed earlier. References Boeing (2012). ‘Aviation policy and geopolitics 2012’, Retrieved 13 April 2012, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CFkQFjAH&url=http%3A%2F%2Fwww.boeing.com%2Fcommercial%2Fpdf%2Fgeopolitical_trends.pdf&ei=ieiHT-vUJ_S20QXMkNzDCQ&usg=AFQjCNGJDdeX5eoNjxZQzaoqmPwpZUhs_w&sig2=Lr0IQC7tHEhjUkpesSvCjg Creedy, S. (2011). ‘Qantas in 'strong' position despite challenging and volatile conditions, says CEO Alan Joyce’. The Australian , August 24, 2011. Retrieved 13 April 2012, from http://www.theaustralian.com.au/business/aviation/qantas-in-strong-position-despite-challenging-and-volatile-conditions-says-ceo-alan-joyce/story-e6frg95x-1226121160947 Qantas Media Release (2012). ‘Qantas announces profit result, response to economic conditions’. Retrieved 13 April 2012, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&ved=0CGMQFjAI&url=http%3A%2F%2Fwww.afr.com%2Frw%2F2009-2014%2FAFR%2F2012%2F02%2F15%2FPhotos%2Fdb489738-5830-11e1-bac6-c3e836982fa9_QAN_01268976.pdf&ei=KfeHT9LaMMil0QWnhMzFCQ&usg=AFQjCNHlLeMhzL8HGN8iiJhaSNkPzqSY-A&sig2=mb_KU6OdJMFGNP_EzrK2qQ Gilbert, D. & Wong, R. K.C. (2003). “Passenger expectations and airline services: a Hong Kong based study.” Tourism Management. 24 (2003): 519–532. Yilmaz, A. K. (2008). ‘The Corporate Sustainability Model for Airline Business’. European Journal of Scientific Research, 22(3): 304-317. Retrieved 13 April 2012, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CGMQFjAH&url=http%3A%2F%2Fwww.eurojournals.com%2Fejsr_22_3_01.pdf&ei=8QqIT46cF-GS0QXi443SCQ&usg=AFQjCNFzFf2kVNXoZfjFF2_jyP7WtJTa3g&sig2=bVO_oAZleGUNPviCL0HqlQ Fenner, R. (2011). ‘Qantas Airways to target China travelers with 5 separate airlines’. Manila Bulletin Publishing Corporation. September 16, 2011, Retrieved 13 April 2012, from http://www.mb.com.ph/node/334528/qanta Barnhart, C. & Smith, B. (2011). Quantitative Problem Solving Methods in the Airline Industry: A Modelling Methodology Handbook. New York: Springer. Jani, M. (2011). Greening Airports: Advanced Technology and Operations. New York: Springer. Tywoniak, S. & Galvin, P. (not dated). ‘Qantas: The high flyer of the airline industry?’ Cases in strategic management. Qantas Annual Report (2011). Retrieved 13 April 2012, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDcQFjAB&url=http%3A%2F%2Fwww.qantas.com.au%2Finfodetail%2Fabout%2Finvestors%2F2011AnnualReport.pdf&ei=Q8mHT-nGEIOw0QWxubXlCQ&usg=AFQjCNGevm6ADTMUaO_zVyIS-arpihUtzg&sig2=fRxwpxmCNKgBk9UAeSw4oA Qantas Annual Report (2004). Retrieved 13 April 2012, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CEUQFjAC&url=http%3A%2F%2Fwww.qantas.com.au%2Finfodetail%2Fabout%2Finvestors%2F2004AnnualReport.pdf&ei=UtyHT9HtDMfW0QXqq6TKCQ&usg=AFQjCNHj33JQy9mLNd_KqvFI9ms99D_pdA&sig2=OYe4akRbgKsJI3JQfm4QWw Qantas (2012). ‘Qantas A380’. Retrieved 13 April 2012, from http://www.qantas.com.au/travel/airlines/a380/global/en Read More