Introduction
Background information
During the period ranging from mid 1990s to 1999, the global aviation industry experienced a rapid growth arising from increase in demand for air travel. In addition, there was an increase in Gross Domestic Product (GDP) in most countries.As a result, the industry grew with a margin of 4% to 6% annually.
However, this trend was reversed at the beginning of the 21st century as a result of changes in the international business environment. The airline industry is characterized by a high degree of volatility. As a result, changes in the international business environment have a significant effect in the operation of all firms in this industry.
One of the firms that operate with in the airline industry is Qantas Airline Limited. The airline operates within the Australian airline industry. Since its establishment in 1920, the airline has managed to establish a portfolio of businesses which include Qantas Holiday, Qantas Frequent Flyer Program, Qantas Freight, Qantas Catering, Qantas, Engineering, and Qantas Defense services within the industry.
The firm serves diverse customer categories that include corporate customers, the government, leisure travelers, wholesalers and travel agents. Some of the contemporary issues facing the firm relate to the recent economic downturn, increase in fuel prices and threat of terrorism.
These issues have affected the performance of Qantas Airline in the Australian Stock Exchange. In an effort to understand how these issues have affected the firm, the researcher sought to conduct an in-depth analysis of the issues.
Analysis of the contemporary issues
Financial crisis
In its operation, Qantas Airline faces numerous financial risks which have a potential of creating a problem in the firm’s future cash flows. The financial risks emanate from changes in the global economic environment.
For example, the recent global economic recession that originated from failure of the US financial institution affected the operation of the firm in a number of ways. For example, there was a reduction in demand for air travel amongst customer in different categories.
During this period, consumers sought alternative means of transport both in the local and international market. Considering the fact that consumers are price sensitive, one of the sectors which pose intense competition to the firm is the low cost airline.
According to Gross and Schroder (2007, p.12), low cost carriers are offering less expensive mode of air travel. As a result, most consumers are considering the low cost carriers as the most cost effective mode of air travel.
Low cost carriers have a higher cost advantage compared to full service carriers which averages 51% as illustrated by Figure 1 below (Cento, 2009, p.21).
Figure 1: Comparison of Low Cost Carrier with Full Service Carriers.
The increased adoption of this business model within the airline industry is posing a threat in the survival of traditional airlines such as Qantas Airlines. The low cost carriers operate within the same route as Qantas thus leading into a significant reduction in the firm’s sales revenue hence its profit.
During its 2009 financial year, the airline’s profit amounted to &181 million. This is a lesser amount compared to its profit during the 2008 financial year which amounted to $ 1,408 million. This indicates a rapid reduction in its profitability.
Reduction in the sales revenue culminated into the firm experiencing a significant decline in the firm’s cash flow. According to Loudon (p.297), the global airline industry is characterized by high fixed, high capital investment and intense price competition.
Therefore a reduction in the firm’s cash flow may affect the firm’s working capital. As a result, the firm would not be able to meet its operation cost. In an effort to survive in such economic environment, the firm may decide to source debt finance from financial institutions.
However, some financial institutions are not willing to advance debt finance to airlines due to the volatile nature of the industry. In such a situation, financial institutions increase the cost of borrowing as a risk mitigation measure.
In addition to interest rate exposure, the airline firms also face currency exposure which arises from fluctuation in the exchange rate. This is due to the fact that its expenses and revenues are denominated in different currencies.
Increase in fuel price
The profitability of the airline industry is dependent on changes in fuel prices (Vedder, 2008, p. 18).
This is due to the fact that jet fuel forms a key component in the operating cost of airlines. Currently, Qantas Airline is facing a risk of fuel crisis as a result of changes in the geopolitical environment in the Middle East countries which are a producer of fossil fuel.
The unrest in the Middle East countries is leading into a shortage in fossil fuel hence affecting the price. According to Loudon (p.299), changes in fuel prices have a direct effect in the cash flow of airlines. In the short term, the airlines revenue may be marginally affected.
However, the long term effects may be adverse since the cost will be passed on to the customers. By the end of March, the management of Qantas announced an increase in its ticket prices in its domestic market.
For example, travelling within Australia increased with $ 10 while the cost of travelling to New Zealand was increased with a margin of 8%.
The management team cited the skyrocketing price of jet fuel as the major cause. During its 2nd quarter in 2011, the firm estimates its jet fuel cost to be US $ 2 billion.
In an effort to survive in this dynamic environment, the Qantas Airline had decided to reduce its size of management team and its domestic and international capacity.
Threat of terrorism
According to Seidenstat and Splane (2009, p.250), the global airline industry is also faced by a risk of increased terrorism. Most terrorism groups around the world are targeting airline companies to undertake their attacks as illustrated by the September 11, 2001 attack in the US.
Terrorism adversely affects airline sales revenue. This arises from the fact that the customers’ preference for air travel is significantly reduced.
Solution
Despite the changes in the international business environment, it is vital for firms to develop a high competitive advantage. This will enable them to survive in the long term as going concern entities.
According to Hoskisson, Hitt and Ireland (2008, p.108), there are various ways through which a firm can develop competitive advantage. However, the firm has to ensure that its products or services are unique from those of its competitors and that they cannot be easily imitated.
Adoption of the Low Cost Carrier Model
Considering the changes in the global airline industry, it is important for Qantas to develop strategies to safeguard against incurring decline in its cash flow. For example as a result of the global economic crisis, the airlines management team should consider integrating the low cost carrier business model.
This will enable the firm to operate cost effectively. The resultant effect is that the airline will be able to adjust its pricing strategy so as to deal with the prevailing price wars.
Adjusting the price will contribute towards the firm increasing its sales revenues and hence its profitability since a large number of customers will be attracted to the airline (Wu, 2009, p. 23). Increase in profitability will enable the firm meet its high fixed costs and other operating costs.
Alternative source of Jet fuel
Considering the effect of rise in jet fuel prices on the firm’s operation, it is paramount Qantas Airlines to undertake a comprehensive cost-benefit analysis with regard to utilizing alternative fuel. A research conducted by NASA in US revealed that utilizing alternative is cost effective (National Research Council, 2006, p. 104).
The firm’s management team should consider utilizing alternative jet fuel rather than over depending on petroleum based fuel. Some of the alternative fuels which should be considered include gasified fuels derived from coal and natural gas fuel.
According to a research conducted by NASA on the effectiveness of these fuels, it was revealed that these fuels have the necessary energy required to fly a commercial flight. One of the alternative jet fuels which the firm should incorporate is biofuel.
The firm can venture into production of biofuel using different agricultural crops such as soya and jatropha. Other alternative fuels which the firm should consider utilizing include methanol, ethanol, and hydrogen (Bassam, 2010, p. 16).
By utilizing these alternative fuels, the firm will be able to caution itself against increase in the petroleum based jet fuel which is highly volatile to changes in the political environment. By integrating alternative fuel, the firm will be able to operate in a social responsible manner.
This arises from the fact that firm will be able minimize emission of carbon dioxide which is a major cause of climate change (Hackey & Neufville, 1999, p.243).
Safety measures
Airline companies have a responsibility to ensure that their customers are safe. Considering the rise in the rate of insecurity within the industry, Qantas, airline should consider enhancing the security of the passengers.
One of the ways through which the firm can enhance its security is by integrating a technology that screens all the passengers to ensure that there are no threats in the course of the flight.
In addition, the airline should ensure that people within its facilities are not threatened by terrorism. For example, firm should employ sufficient and professional security personnel.
Conclusion
The analysis illustrates indicates that the Qantas Airline is faced with a number of challenges emanating from the macroeconomic business environment. The major contemporary issues that the firm is facing includes changes in the global economic crisis, rise in the price of jet fuel and threat of terrorism.
These business changes in the macroeconomic business environment within the airline industry are beyond control of firms in this industry. However, management teams of firms within the Australian airline industry such as Qantas can develop strategies aimed at countering changes in the international business environment.
Recommendations
In order to survive in the volatile airline industry, it is vital for Qantas Airline to consider the following recommendations.
- The management team should consider integrating the low cost carrier model. This will enable Qantas to appeal to a large number of potential customers since it will be able to price its flight more fairly.
- The airline should also consider utilizing alternative fuels such as hydrogen and biofuel. This will improve the firms’ commitment towards environmental conservation by limiting the amount of emissions.
Reference List
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Cento, A., 2009. The airline industry: challenges in the 21st century. Heidelberg, Germany: Physica-Verlag.
Gross, S. & Schroder, A., 2007. Handbook of low cost airlines: strategies, business processes and market environment. Berlin: Enrich Schmidt Verlag.
Hackey, J. & Neufville, R., 1999. Lifecycle model of alternative fuel vehicles: emissions, energy and cost trade-offs. Transportation Research Part A: Policy and Practice. Vol. 35, issue 3, pp. 243-266. Massachusetts: Massachusetts Institute of Technology.
Hoskisson, R., Hitt, M. & Ireland, D., 2008. Competing fro advantage. Mason, OH: Thompson.
National Research Council. 2006. Decadal survey of aeronautics: foundation for the future. Washington, D.C: National Academies Press.
Loudon, G., 2004. Financial risk exposure in the airline industry: evidence from Australia and New Zealand. Australian Journal of Management. Vol. 29, issue2. Sydney:The Australian Graduate School of Management.
Seidenstat, P. & Splane, F., 2009. Protecting airline passengers in the age of terrorism. Santa, Barbara: Praeger Security International.
Vedder, H., 2008. Strategic alliances in the aviation industry an analysis of past and current developments. Munchen: Grin-Verl.
Wu, C., 2009. Airline operation and delay management; insights from airline economics, networks and strategic schedule. Farnham: Ashgate.