Australian Airline Industry: Overview

Executive Summary

Despite earlier deregulation of the Australian industry, the latter remained regulated because it was under obligations of the regional regulation namely bilateral air service agreements (ASAs). The market had competition between more than one operator, namely Qantas and Ansett, before Virgin Blue joined. Qantas had established network before Virgin Blue had and therefore had a competitive advantage when the latter entered the market. The Australian Airline Industry realized a growth in 2001-2002 where the passenger movement grew at an annual rate of 12.1%. Market players in the regional and trunk carrier categories used to collaborate together before and until the Ansett group collapsed. The methods of collaboration used by the operators were equity and operational links like baggage handling and ticketing. This trend shifted at around 2003, where many carriers begun to operate as stand-alone entities from the trunk route airline companies and global alliance system. Virgin Blue is currently a very potential competitor to Qantas, having been voted as the best airline on overall basis. Initially, the airline had no such network as that of Qantas, but has now improved to the extent of forming collaborations that could or have seen improvement in the reduction of travel fare. Virgin Blue has tested techniques which could help out in its quest for business survival, which includes low-cost fares and reward programs. There lie challenges on the Virgin Blue’s avenue, including facing resistance to collaborating with other networks which has arisen from other players. Opportunities of growth include the development of internet services which could boost airline operations, among others.

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Introduction

Australian Airline is a deregulated market. Although entry into the Australian airline network could have proved difficult in the initial past years, those coming into the industry could have had cost advantages as compared to incumbents. There has been a characteristic of market power in the Australian Airline industry market in the history.

Competition that has existed between the older airlines like Qantas, Ansett and the newer airlines has come and gone since the deregulation of the industry in 1989. competition around the year 2003 was somewhat restrained between Qantas and Virgin Blue because the former was the only provider of nationwide ‘full-service’ scheduled services and had a better bargain because of connection with other international networks through membership with One World Alliance, in addition to its regional and international networking.

The sources of finance for domestic Airline market players include business sectors, inbound tourism, and domestic tourism. Domestic tourism contributed the highest-40% of the revenue, with the business sector contributing 35% and the inbound tourism 25% (IBISWorld Australia, 2003; 8 qtd. in Kain, Richard, & Economics, Commerce and Industrial Relations Group, 2003).

Most domestic airline industries do not operate freely in the regions they have access to because of abiding agreements and regional regulations, and these may underpin these industries. Likewise in 2003, the Australian domestic airline industry remained regulated at the Commonwealth level although it was largely deregulated. The exposure of the Australian Airline industry to the regulations in the bilateral air service agreements (ASAs) made regulation still not a thing of the past even though the domestic industry was deregulated. The impact of the internationally recognized regulation may still be felt because it is across the boarder and dictates such issues as the amount of airline seat capacity to be deployed over individual country to country (Kain, Richard, & Economics, Commerce and Industrial Relations Group, 2003).

The 2001-2002 period saw rapid growth in Australian airline services particularly the regional services. Market players in the regional and trunk carrier categories used to collaborate together before and until the Ansett group collapsed. The methods of collaboration used by the operators were equity and operational links like baggage handling and ticketing. This trend shifted at around 2003, where many carriers begun to operate as stand-alone entities from the trunk route airline companies and global alliance system. This trend raised concern for the government to establish a coherent national strategic framework for the airline industry, and the House of Representatives Transport and Regional Services Committee inquiry was set up in response.

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Commonwealth later allowed more than one Australian-owned operator for scheduled services to run operations to and from Australia. Virgin Blue also developed interest to operate in some international markets in Australia’s immediate region although Qantas had been in the venture before. Low-cost international carriers like the Ryanair were later visible in the Australian market. These, generally referred to as ‘value-based airlines’ posed a challenge by offering low fare travels, but Australian Airlines and Freedom Air as Australasian carriers were later established to cater for the growing market.

Australian Airlines went through turbulent times following the September 11 attacks especially on the aspects involving security. International tourism faced a decline following these attacks. Major structural changes have resulted to minimization of major routes on the so called ‘domestic trunk routes’ from four to two after the 1990s changes. Virgin Blue and Impulse airlines entered the market in around 2001 in a time when Ansett and Qantas Airways were the dominant airlines. However, Impulse Airlines and the Ansett group collapsed in 2001.

Competition in the Australian market declined in many parts of regional airline industry following the collapse of Ansett. Competition against Qantas as the giant emerged from Virgin Blue, Regional Express and such as Alliance Airlines.

The improvement of certain conditions has favored the increase of competition between the older networks such as Qantas, and the newer ones. The factors that had led to the collapse of new entrants to the trunk routes were latter less of a barrier as projected around 2003. For example, freeing of some Ansett terminals allowed more availability or access of airport terminal facilities to the new or would-be new entrants to the market. This would lead to more favorable entrance or survival of entrants in the Australian airline market to compete with the more dominant Qantas giant. Other favorable conditions that are mentioned by Kain, Richard, & Economics, Commerce and Industrial Relations Group (2003) included relatively low cost of obtaining aircraft as a result of depression of the state of the aircraft market. Australian federal cabotage restrictions which restrict carriage of domestic passengers and freight only to Australian-based airline carriers on domestic sectors have existed before. These were however eased after the aftermath of the collapse of Ansett group.

Virgin Blue Airline

Virgin Blue Airline has grown from August 2000 with only two aircraft to the present status as one of the major players in the Australian Airline industry. It is owned by the Virgin Blue Group of Airlines which also constitutes V Australia, Polynesian Blue and Pacific Blue. It was launched as a low fare airline in Australia; it has grown as a world innovator and leader. According to the 2008 company report, the company operated more than 2800 flights a week to more than 25 Australian cities and centers. Virgin Blue recorded an increase in the number of international passengers by 67.4% during the year ending June 2009 over the previous year, while the number of domestic passengers fell by 4.4% for the same period of time. The company’s traffic in Revenue Passanger Kilometer (RPKs) for domestic travels also rose by 4.8%, while the RPK for the international passengers increased by 106.6% (Virgin Blue, 2009).

Virgin Blue was the major competitor of Qantas after the collapse of Ansett group. It offered services mainly on the busiest portions of the networks. Costs were controlled earlier on by operating only one aircraft type, a Boeing 737 jet fleet. This year, poll result indicate customer preference for Virgin Blue over Qantas on the question what airline the participants would recommend to others. Virgin Blue scored 57% of the participants while Qantas scored 39%. In addition, Virgin Blue was voted as the best overall in Australian industry.

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In the beginning of 2003, Virgin Blue controlled 24% of the domestic aviation market and planned to increase this market share to 30% over the remainder of the same year.

Strengths

Firstly, Virgin Blue spread its customer base to all categories of passengers thus reaching even the ‘service frequencies’ passengers for example, businessmen. Consequently, the company’s networks of operation increased as well as its service frequencies translating to increased profitability.

The company’s total revenues increased by 8.4%, and yield increased by 0.2%. Firstly, Virgin Airline operates flights at a low rate compared with other companies in the Australian airline industry. The company, according to their annual report for 2008, received recognition as the Best Low-Cost Airline for Australia/Pacific and another as the second-placed in the World’s Best Low-Cost Airline. Virgin Airline attracts passengers through a number of strategies. These include offering a competent and friendly service, frequent flyer program, aggressive promotional sales and comprehensive online strategy. In addition to receiving the aforementioned awards in the 2008 Skytrax Awards, the company received recognition in the Best Cabin Staff in Australia and New Zealand. It was the third time the company received recognition in the Best Low-Cost Airline. Offering services at low prices or cheaper cost helps the company to remain competitive in the network. Reward programs have been used by many companies across the product and service divide to make sure that the consumers continue to use certain product or service for a long period of time without shifting to a competitor. This is because they are looking forward to attaining the reward after attaining the set mark or requirement after product or service usage. Virgin Airline operates a reward program referred to as Velocity, which is an award winning loyalty program. Members across the entire Virgin Blue network can purchase any available seats by use of Points, and this can be done in everyday flights all around the year. Although there are other flyer programs in Australian Airline industries, the program offered by the Virgin Airline company rewards with lesser points.

The recognition program allows status level recognition for the members. Additional benefits accrue to the members with Gold and Silver recognition. Customers could access more benefits such as earning more Points per dollar while flying with not only Virgin Blue but also other players in the market such as Polynesian Blue and Pacific Blue. In addition, other benefits accruing to customers included allowance for increased baggage and entry to the lounge. By spending fares on V Australia and the aforementioned airlines, customers could earn status credits for every dollar so spent. The aforementioned status credits help to determine the status level for members and enable their loyalty to be recognized.

The reward program can help members acquire what they want, ranging from scooters, flowers, beer and international flights, in exchange to Points. The program therefore allows diversity. Small businesses also using Virgin Blue for travel can also benefit through the Virgin Blue Accelerate Program rewards whenever they spend over $20000 per year on eligible domestic travels (Virgin Blue, 2009).

The Airline had a good on-time performance (OTP). The average number of flights departing on time for the 12 months period to 30 June 2008 represented 80.4% of the flights and the company performed better than its major competitors in this field.

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The company offers an opportunity to the customers to save on time through the website check-in facilities. Members can also avoid queues by these online check-in facilities, selection of seats, and printing of boarding pass. Online check-in systems have also enabled the company to save on carbon emissions. Customers on the Virgin Blue network were also allowed to offset their flights, and this could help the company to save carbon emissions. The offset cost is added to the cost of the flight during the time the customer is paying for the transaction. However the customers can alternatively request for this offsetting of the flight through the post-purchase offsetting page. The offset arrangement allows customers to contribute to the Approved Greenhouse Friendly Abatement Projects in Australia.

Business partnership is one of important strategies being used today by companies to gain competitive edge over others, cut on operating costs, and pull resources together. Airline companies can share agreements with others on particular partnerships. In particular, Virgin Airline shares agreement with international companies like THAI, United, Airline PNG, Air Mauritius, Hawaiian Airlines and Etihad Airways. Customers using Virgin Blue are able to have an access to global network of flights and destinations. Customers are able to enjoy more convenience of using one ticket in traveling on several airlines, can enjoy thorough-checked baggage and seamless transfers. Another example of partnership which may enable Virgin Blue to reach and serve customers in parts across the whole world is with Emirates.

Virgin Blue at large has a policy that encourages auditing and management of the risk involved in the traveling industry. This concern may seek to encourage confidence of travelers with the airline, enhance the value of service offered, and help the company to achieve its objectives as a whole. The policy traces basis on the existing “principle 7 of the ASX Corporate Governance Council’s Principle of Good Governance and Best Practices Recommendations” and the “Australian/New Zealand standard AS/NZ 4360:1999 Risk Management Standard”. This policy is a big step towards the identification of the existing threats and opportunities by the company, and masking sure that the company incorporates risk management to all of its activities.

Virgin Blue Holdings has a set of guiding principles to the business conduct, which outlines how business should be conducted with integrity. The employees and the directors are required to observe the guides to the conduct of integrity, which is believed to be a competitive advantage for the company.

Communication within and without is an essential practice for an organization because it may affect company’s publicity as well as its reputation. The company has a policy that guides disclosure of market information and communication of the company information. The policy is in line with the Australian practice. The policy ensures that there is no disclosure of information where there is confidential information, where a reasonable person would not expect the information to be disclosed and where there are some specified exceptions to the information. The group recognizes the importance of confidential information which is crucial to the effective operation of the group. Although Qantas countered the strategy for low-fares by Virgin Blue, the latter sought to develop its business travel market in order to expand beyond its leisure travel niche (Kain, Richard, & Economics, Commerce and Industrial Relations Group, 2003).

The collapse of Ansett group contributed to the strengthening of Virgin Blue because the latter took most of the domestic terminal space occupied by the former. It entered agreement with Sydney Airports Corporation Limited to move into the Sydney KSA domestic terminal formerly occupied by Ansett group. Through this arrangement, Virgin Blue was able to solve problems of congestion at its original Sydney KSA facilities.

Weaknesses and Threats

Virgin Blue has had a history of unfair competition from Qantas as the latter had connection with regipoanl and international networks before Virgin Blue. Qantas joined the One World Alliance before Virgin Blue who had no other such regional and international networks at the beginning period. Qantas expanded its share of budget travel market to respond to Virgin Blue’s low-fare travel strategy. Virgin Blue expanded its vision by code-sharing with United Airlines, a member of Star Alliance in October 2002.

The weaknesses of a company can be manifested during the times of challenges because the latter expose the vulnerability of the company to dealing with these situations. Escalating fuel prices made the company suffer in the operating costs. The operating costs increased by 18.5% although this was again reflecting the increase in production. In fact, one of the challenges the company may have to live with would be any instability of the fuel cost. The contract rate paid to the jet fuel oil also increased by 17%. Other challenges presented like in any other environment are competition from other companies.

Airline industry around the world has had to raise concern over issues of security following September 11 attacks. After the September 11 incidents of attack on the United States, war-risk insurance which covers losses as a result of acts of war for example, became a concern in the Australian industry. Third party war-risk insurance aviation cover which existed before was removed after the attacks of September 11, and the Australian government responded by seeking to provide third-party war, terrorist and hijacking indemnity to airlines and related facilities. The company must prove to the current competition from dominant Qantas. According to a poll result, some travelers still prefer force of habit and membership of the Qantas frequent flyer programme.

Opportunities

Expansion of services for any company in business is important because it ensures a wider coverage of the existing market. The company report of 2008 gives the information that the company would focus on the majoring in the more profitable and those routes with limited competition in the future. Virgin Airline Opportunities for growth in the Australian Airline industry include the growing usage of the internet for the purposes of advertising, booking and check-in among other services, and the company can exploit this opportunity to advance growth in future.

Further collaboration between Virgin Blue and other international operators of airline services presents not only an opportunity for further coverage of the company, but also reduction of fares. Delta Air Lines and Virgin Blue have for example established a revenue-sharing agreement. Further reduction of fares has faced resistance from Air New Zealand and Tiger Airways. The Virgin Blue’s move to collaborate with U.S carrier Delta Air Lines this year was termed by Air New Zealand as collusion on fares and capacity. The Australian Competition and Consumer Commission had rejected plans for corporation between Air Canada and Air New Zealand on the Sydney-Vancouver route, and therefore Virgin Blue must embrace itself for these challenges if it intends to form more collaboration with companies in order to expand or reduce travel fares. This collaboration would benefit the two operators through product planning, allowing customers on both networks to have access to the two airlines, extending frequent flyer programme benefits, and code-sharing. According to July 2009 reports, Virgin Blue had plans to extend operations in Asia because they were studying destinations like Kuala Lumpur, Penang and Phuket (Travelmole, 2009). The Australian industry airline is currently characteristic of competition amongst airlines collaborating with other outsiders – international or regional operators. The company was voted as the best overall in economic class category.

Recommendations

The company should employ well thought out strategies so as to fight competition posed by other companies. It would be very important that the company spreads its tentacles even wider so as to expand its customer base, a good move in countering competition. An expansion program (with cost minimization in mind) will definitely help fight competition. The firm should also invite more partners to collaborate with, a thing that will present an opportunity for further coverage as well as reduce its fares. The company should focus on strengthening its security services so as to gain the customers confidence. War-risk insurance covers should not be left behind as they will assist in compensating customers should an accident happen.

Conclusion

The Australian Air industry has undergone some transformation in the past that has favored the newer airline entrants more. It seems that individual efforts still would play a major role to the business success of airlines in Australia as it seems with the case of Virgin Blue which was more favorable to even Qantas in the overall category in the aforementioned research. Collaborations between airlines have played a key role in the success of airlines in Australia with domestic players bonding with international or regional players to have a wider outreach or cut on travel costs. Virgin Blue emerged as a low-cost travel airline and was launched after Qantas, which already had begun to role out its networking with other players.

Virgin Blue has exploited techniques for market survival such as low-cost fares and reward programs. The latter encourage consumers be glued to one network through continued use of services. Virgin Blue has opportunities which it could exploit in order to advance, as well as challenges it must counter to make sure it remains competitive. Challenges include resistance to its approach of collaborating with other airlines, which has reportedly received some resistance from other players. Opportunities include the expansion and growth of internet technology which could favor the travel industry.

References

IBISWorld Australia. (2003) Scheduled Domestic Air Transport in Australia (electronic document). p. 8

Kain J., and Richard W., and Economics, Commerce and Industrial Relations Group. (2003) Turbulent Times: Australian Airline Industry Issues 2003. Web.

‘Skywest: Regulation means certainty’. Traveltrade, 2003, p. 6

Thomas, I. (2002), After Ansett—Emerging Public Policy Issues in the Australian Airline Industry. Department of the Parliamentary Library, Vital Issues Seminar series, 2002

Travelmole. (2009) Airline: Virgin, Delta deal faces more turbulence. Web.

Travelmole. (2009) Virgin Blue to extend operations in Asia. Web.

Travelmole. (2009) Virgin, Delta seek Pacific joint venture. Web.

Travelmole. (2009) Virgin Blue voted Australia’s best overall airline. Web.

Virgin Blue. (2009) Release. Virgin Blue Holdings Limited-Preliminary Operating statistics, 2009. Web.

‘Virgin and Rex become fellow travelers’, Australian Financial Review, 2003, p. 1

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