Executive Summary
Market analysis is a vital concept for any business organisations to be able to assess the market needs and based on what is at hand, respond to the needs. Before making a market analysis, it is good to look at a company’s background in order to ascertain how current operations were motivated by past records. Three main tools have been used to analyse the airline industry using the case of Qantas.
These are Strength, Weakness, Opportunities, and Threats, (SWOT), Porter’s Five Forces, and Political, Economic, Socio-cultural, Technological, Legal, and Environmental (PESTLE) factors. At the end of the discussion, it can be noted that Qantas remains a major player in the airline industry at local and international levels amid the stiff competition from other carriers.
Introduction
Qantas Airways Ltd. is an Australian firm that operates in the airline industry at local and international capacities. The ideal to start the organisation was hatched by two individuals back in 1922. Fergus McMaster was convinced to look for interested investors after McGinness and Fysh sold the idea to him.
The history of Australian civil aviation is mainly about the history of Qantas that started from a humble beginning to what defines the future of Australian airspace. The corporation began with a two-passenger plane to the recent Airbus A380 series with carriage capacity of 450 passengers to far destinations.
The Queensland and Northern Territory Aerial Services Ltd, (QANTAS) hard to pass through hurdles to develop its market share with a pull of dedicated staff members backed by very loyal customers. The key pillars of Qantas development are the stakeholders who created it, the workforce, and the customers.
The vertical rise in the company’s growth has made Qantas one of the world’s best long distance international brands and one of the best service providers in Australia. The outstanding growth of Qantas defines the course of international aviation industry (Qantas, 2012a).
In order to critically analyse a firm’s business operations, there are tools that are employed to ascertain the strength and position of a firm. SWOT, PESTLE, and use of Porter’s Five Forces are recommended tools that can achieve this feat. The tools involve evaluation of a firm’s strength by looking at a number of factors that overly defines a successful business organisation.
By taking the case study of Qantas Airways Ltd, this paper vividly explores market parameters that make Qantas outstanding among other world airline brands. From review of the company’s business activities, one concludes whether the firm stands strong and whether sustainability of business activities will be achieved in both short and long terms.
Quantas Airways Background
Description of the Organization
Fergus McMaster was convinced to look for interested investors after McGinness and Fysh gave him a detailed plan for setting up an air service. Fysh and McGinness with the help of flight sergeant Arthur Baird took a trip to Mascot Aerodrome in Sydney to inquire for delivery of 2 Avro planes. An agreement was reached and the Western Queensland Auto Aero Service Ltd was registered.
A rebranding took place later to form the abbreviation, (Qantas, 2012b). The formal establishment of Qantas was in 1920 following registration with chairmanship of Fergus McMaster. There were then a series of air test and joy rides by the founders who experienced technical and physical difficulties while airborne.
The machines were remodelled to suit the needs at that time and the aircrafts could make 54,000km carrying a total of 871 passengers by the biplanes without damage (Qantas, 2012a).
As time passed by, more planes were required in airmail services between Cloncury and Charleville in 1922. Two years later, the first Australian Prime Minister flies Qantas on an official government duty.
The marched achievement seemed to bring new hope for the company and in 1926, Qantas started building its own machines at the Longreach base. The following chronology of events summarises the succeeding history of Qantas:
1927: The firm recruits the first trainee
1928: The launch of the Flying Doctors Service with Qantas offering the air travel services.
1929: Outback network arrives in Brisbane
1931: Trial airmail delivery is made from Brisbane to Darwin
1934: The firm changes its name to Qantas Empire Airways Ltd.
1935: The Qantas DH86 flies overseas, Darwin to Singapore. The flight is to deliver airmail to the UK in liaison with Imperial Airways that was later named BOAC.
1938: The airline to the United Kingdom receives Short C Class airplanes to make trips to Singapore. Imperial Airline obtains the responsibility of the route.
1939-1945: A fully set base takes operation of mechanical works at mascot base known today as Sydney Airport. Qantas gets involved in the WWII as its planes are used to transfer the foot soldiers from the threat of advancing Japanese fighters to New Guinea.
They airplanes also supply foodstuff to soldiers at the battle fields. Qantas also makes history for being the first to make more than 30-hours flight over Perch and Sri Lanka airs to make important links with Allied Forces. The kangaroo logo becomes symbol of Qantas in 1944.
1946: air transport in Australia-UK route recommence and this time the British Airways in a partnership programme. DC3 service is initiated to New Guinea as the flight network reaches new Indian and Pacific Islands destinations. In the same year, Australian regime launches new airline known as Trans-Australia Airlines, TAA in the domestic market with Lester Brain (formerly of Qantas) as the general manager
1947: Government of Australia buys all shares in Qantas, Constellation aircraft sets in, and the first flight is made to Japan
1949: TAA replaces Qantas in the Flying Doctors Service and the Queensland and Northern Territory routes
1953: Along the Kangaroo route to UK, a tourist economy class is introduced
1954: The Super Constellations flies to San Francisco, USA and Vancouver, Canada for the first time
1956: For the Olympic Games in Melbourne, Qantas carries the Olympic flame from Athens to Melbourne
1958: The Qantas’s Super Constellations make a round the world flight
1959: Qantas introduces Boeing 707 series as the first non-American airline. This gain reduces flight times by half for trans-Pacific flights
1960: TAA in charge of operations in the Papua New Guinea from Qantas
1964: TAA launches its first jet by purchasing Boeing 727 series; high performing machines that stimulate the Australian airline industry with their mechanical superiority, speed, and comfort. This results to massive growth of the industry.
1966: The retirement of Qantas Co-founder and Chairperson, Sir Hudson Fysh
1967: Qantas rebrands to Qantas Airways Ltd. TAA launches DC9 that proves to be mechanically sound for going 495 different revenue flights without delay on mechanical breakdown
1971: The introduction of the Jumbo jet; Boeing 747
1974: Qantas evacuates 673 survivors on one flight from the devastation of Cyclone Tracy from Darwin to set new world record
1979: Phasing out of the 707 series and venturing into an all-747 airline. In the same year, the firm rolls out the first Business Class travel experience to customers.
1985: The launch of Boeing 767s. James Strong goes to TAA in order to revitalise the TAA when the government was advancing to stronger deregulation and competition
1986: TAA becomes Australian Airline
1988: Australian airline is incorporated to a public company
1989: Australian Airline in trouble due to pilot’s strike followed by resignation. The government agrees to a deal to make a proposal that would bring together the Australian Airline and Qantas.
1989: Qantas Airways Ltd buys the Boeing 747-400 that the first nonstop flight of 18,001km in accompany jet. The first experience take place in the London-Sydney route.
1990: One John Schaap quits the firm as an executive member to join Australian Airways as its general manager. The departure took only ten months before deregulation of local airline industry in Australia.
1992: Government agrees to sell the stakes of Australian Airline to Qantas valued at $400 million.
1993: The government regime offloads 25% stake to make British Airways have ownership of Qantas Airline in a privatisation strategy. Australian Airline merges with Qantas to form Qantas Airways Ltd. with James Strong as the CEO
1994: A new cabin design launches to update service provision
1995: Qantas offloads the remaining 75% shares to the public in the ASX. Qantas becomes one of the world leading service providers in the aviation industry with an operation capability of airlifting 14 million passengers per annum using over 130 aircrafts
1997: Qantas marks the year of the golden jubilee along the Kangaroo network from Australia to the United Kingdom and Japan
2002: The launch of subsidiary airline to operate at international level. The name of the firm is Australian Airlines
2004: Introduction of a new and cheap carrier in the domestic flight known as Jetstar
2006:Australian Airlines stops its services
2008: The A380 series are added to Qantas fleet while second biggest order to be done by any airline corporation is in the pipeline. A380 aircraft is inaugurated to fly from Melbourne to Los Angeles, the technology is of high standards as the Required Navigation Performance finds usage in managing flight. This makes the firm to reduce its carbon emission by significant figures. Installation of Qantas General Electric CF6-80C2 engine to enhance the performance of the B747-400 aircrafts
2010: new check-in system
2012: The arrival of B787 aircraft considered as next generation fleet
2020: Centenary of Qantas, Qantas (2012a).
Location of Organization
- The initial location of the Qantas operations was in Longreach, Queensland to Brisbane
- In 1930, the company’s headquarter was moved from Longreach, Queensland to Brisbane
- In 1938, the company’s headquarters was moved from Brisbane to Sydney as operation base.
- In 1957, a new corporate headquarter was set up along Hunter Street, Sydney
Stakeholders of the Organization
From the chronology of events that have shaped Qantas Group, the company was a private entity when it was founded back in 1922. The growth track led to instant recognition and at some point the government of Australia took over the firm.
Afterwards the government privatised the firm. In a bid to make the firm have an international appeal, British Airways was took a 25% stake at Qantas after the government agreed terms with British Airways in 1993. In 1995, Qantas offloaded the remaining 75% shares to the public in the ASX (Qantas (2012a).
Today Qantas is a public owned company and it is listed in the ASX as QAN. This gives opportunity to anyone who would wish to own the firm a chance by simply buying the stock. Any individual who owns the QAN is a Qantas owner; hence, stakeholder
. The management team spearheaded by the Nominations Committee is free to nominate a new member to the Board of Directors and every stakeholder has the right to approve such nominations during the company’s AGM. Just like other listed companies, only a stakeholder with 51% ownership of the firm can have a direct say on how the firm should run with regard to management and who should be in the Board.
Organizational Structure
The Qantas’ Board is dominated by independent Non-executive Directors who work hand in hand with Executive Directors to carry out Qantas capital intensive programmes. The Board has responsibility of upholding accountability and freedom in a bid to maximise the profit for goodwill of all stakeholders.
The Board of Directors
Source: Qantas (2012b)
The Executive Arm of Qantas
Other than the Board of Directors, Qantas also has the Executive Team that comprises of the following personalities:
- Alan Joyce; The firm’s CEO
- Gareth Evans; CFO
- Lesley Grant; CEO of Qantas Loyalty
- Simon Hickey; CEO of Qantas International
- Jayne Hrdlicka; the CEO of Jetstar Group
- Brett Johnson; the firm’s General Counsel
- Jon Scriven; Group Executive People
- Lyell Strambi; CEO of Qantas Domestic
Board Committees
- Audit Committee
- Nominations Committee
- Remuneration Committee
- Safety, Health, Environment and Security Committee
Board Committee Charters
The Board Charter was adopted by the Board in September 1, 2003. The Committees have the duty of giving comprehensive analysis of all issues affecting the company to the Board for approval. In addition, the Board approved charters for its Committees as:
- Audit Committee Charter
- Nominations Committee Charter
- Remuneration Committee Charter
- Safety, Health, Environment and Security Charter, Qantas (2012b).
Service Analysis
The main Qantas’ service line is passenger transportation and air freight services. These are the services that have seen the company grow in the last decades. The fleet size has increased, the planes have been modernised, and expectations are still high is the fleet renewal plans.
This means that customers will continue to experience superior services at least in the near future. Other than the main services, Qantas owns a number of subsidiary firms as it takes service experiences a notch higher.
QantasLink
This subsidiary, firm has more than 2000 flights per week in 56 destinations spread in metropolis, regions, and across borders (Papua New Guinea).
Q Catering
This is the firm’s group that offers catering services to the travellers and is fully owned by Qantas. It has two main branches: the Q Catering spread across Qantas’ 6 ports in Australia and Snap Fresh that is a modern facility in Queensland specialised in meal production. The meals are supplied to non-aviation destinations.
Qantas Freight
This is Qantas’ subsidiary that manages all the freight issues in the international level for Jetstar, Jestar Asia, and Qantas. In addition, it handles freight in domestic market that is marketed by Australian air Express. Qantas Freight Enterprise runs specialised logistics businesses across the borders done by: Express Freighters Australia (EFA), Jets Transport Express, and Qantas Courier employing 800 workers.
Express Ground Handling
This is Qantas’ subsidiary is fully owned by Qantas Airways and works in liaison with Qantas Airports and Qantas Catering Group. It provides ground handling facilities regional airlines and Jetstar.
Qantas Holidays
This is Qantas’ subsidiary forming union with the Jetset Travelworld Group to offer travel wholesale services. The services cover all the Qantas destinations outreach not only by Qantas itself but also in alliance with other airlines. There have been mergers of Qantas Holidays with other firms to offer a range of travel agency at retail prices.
Qantas Jetstar
This is a low cost airline working in Singapore and Australia since 2004. Whereas the Jetstar Australia is wholly owned by Qantas, “Jetstar Asia is a Singapore-based partnership between Qantas (49%) and Singapore company Westbrook Investments (51%) with the hub based in Singapore” (Qantas 2012c).
Qantas Defence Services
Qantas Defence Services offers flight services to the defence force of Australia in at both local and international levels. This began in the WWII and since then, the government of Australia is in liaison with Qantas to offer air flights. There are warplanes in the Qantas Defence Service docket to suit these needs.
Technology
The Dreamliner’s arrival
Qantas has, since its inception tried to remain one of the best performing airlines not only in Australia but also in the international airline industry. This has been made possible given the firm’s drive to purchase high performing machines in the airline industry. Backed by sound financial background, Qantas embraces any technology that can add value to the passenger transportation and freight services.
Technology must improve if the world is to attain global climatic challenges resulting from the emission of carbon into the atmosphere. In the airline industry, one way of using technology to cut on carbon emission is the adoption of efficient cars.
Qantas has made the Boeing 787 as the foundation of its fleet renewal programme at both the domestic and international services. The firm has placed an order of 50 Boeing 787 cars and the Dreamliner would be delivered around June 2013. The Boeing 787 series are a high technology machines that will make Qantas to be able to fly to far destinations without flight connection. This will boost point-point travels across the globe.
The aircraft’s body is made if composite and light materials and due to light weight, the aircraft travels faster than ordinary aircraft of similar size. It is fuel efficient and able to reach further destinations on full load and is easy and cheap to maintain.
The investment in Boeing 787 series is in line with Qantas belief of providing air transport safely, high quality services, and innovative business ideas that have been the company’s ethos since 1922 (Qantas, 2012k).
To maintain the high level of technology of the Boeing 787 series, Qantas has chosen GE GEnx Engines to maintain the fleet. GEnx meets the requirements to maintain the cars at low cost while paying keen attention to environmental safety standards.
Boeing 787 has the ability to increase fuel efficiency by 20%, make a 20% carbon emission cut, 40% nitrous oxide emission cut, and reduce noise footprint by 50% at airports. This table below shows the technical specifications of Boeing 787:
Source: Qantas, (2012d)
World’s first technology entertainment
The Qantas’ Q Streaming pilot and its passenger were among the first in the world to experience WIFI entertainment technology. In addition, passengers using the technology entertainment car within the airlines of Australia are first to practically try the In-Flight Entertainment technique, (IFE).
Travellers will also be allowed to use WIFI enabled gadgets like laptops. As of February this year, Qantas passengers travelling can now download Q Streaming app available from the iTunes database while passengers who own laptops can easily download the MS Silverlight before plane takes off. The new technology entertainments are making customers to really appreciate services at Qantas.
Great choice is offered for to the customers and their feedback so far has been amazing. As a result, the company will continue to develop its Q Streaming utilities by taking advantage of the new emerging edge wireless technology.
According to Qantas (2012e) “Qantas will continue to enable customers access the Q Streaming content via their own WIFI enabled devices on the dedicated B767-300 whilst finalising plans to extend its application to wider fleet.”
Internal Economic Environment
International corporations like Qantas should undertake SWOT analysis to establish its internal position as an organisation against the external environment. This is critical as it makes it possible to adjust to environment needs of business; for instance, opportunity created through open borders that make it easy to access overseas market, (Hitt, Ireland, & Hoskisson 2008).
It allows managers to review the internal and external business environment with the aim of setting up obligatory roles of a company geared towards company’s mission and vision statements. SWOT analysis helps to restore the glory of an underperforming business to new economic heights.
A firm’s strength is fundamental in maintaining competitiveness, which consumers value most. Competitiveness makes products imitation by other industrial players difficult. Belk and Sherry (2007) note that value is creation is motivated by the satisfying the needs of both producers and consumers according to co-production assessment.
Leveraging in short refers to the harmonisation of internal strength against external opportunities. Planning in management should expect operation constraints when internal weaknesses prevail as it is likely to limit a company’s competitive advantages and opportunities. On the other hand, internal weaknesses are a threat to organizational strengths as they make a firm susceptible to the external economic environment.
Strengths
A business organisation can have a number of possible strengths to boost performance these may include: a pull of skilled manpower, sound book values or financial health, brand name like Qantas that is popular across the globe and adjustment in equipment purchase or installation, inadequate competition, and own premises among. A pull of a skilled manpower helps in the cutting training cost; hence, reduced annual overheads.
A good financial position means that an organisation can service its financial commitment and access more funds like loans. Own premises reduces the amount of recurrent costs.
All these strengths can lead to cost reduction that may be needed to adjust to a short term market need; for instance, sudden rise in jet fuel prices that will automatically affect normal running of the business. Strength therefore can be used to sustain competitiveness.
Product diversity
The core business line of Qantas Airline Ltd is passenger transport and air freight. To this effect, the firm has delivered top quality even in the most trying economic times. Product diversity is equally important to boost critical operations when the main business is faced with fiscal challenges or any other challenges. As such, Qantas runs a series of subsidiaries listed below:
- QantasLink
- Q Catering
- Qantas Freight
- Express Ground Handling
- Qantas Holidays
- JetStar
- Qantas Defence Services
The Qantas Freight operates the freight services with its own fleet that of cars of the Boeing 747-400F and B767-300F. The subsidiary also carries ground handling services in 7 locations in Australia and abroad for its own airlines and other carriers.
The Qantas Defence Service supports the Australian and this began in the WWII era. The subsidiary offers services to the defence forces in Australia and due to the superiority of Qantas the expected level of services needed can be met by the firm’s strength (Qantas 2012c).
By operating subsidiary firms Qantas is in a position to strengthen its asset and revenue base to meet its fleet expansion and renewal programmes. In addition, this strategy is helpful in reducing the dependence level of Qantas passengers’ services that can be affected by political tensions when diplomatic hitches or sanctions occur.
The ground handling services that Qantas Freight offers to even other carriers in far destination like Los Angeles helps the firm in building inter-organisational relations and diplomatic relationship with Australia and America and others.
Number of fleet and types of fleet
The airline since its inception in 1922 has seemed tremendous growth in the domestic and international level. To boost the upward trend, Qantas has been in the forefront to set a number of world records in the airline industry due to its preference for high performance machines. Qantas is the largest airline operator in Australia and this is achieved by fleet development to carry passengers to various destinations across the world.
In the next decade, Qantas has a short term plan of capital investment in the tune of US$23 billion to buy more and high performing aircrafts of the next generation. The fleet capital investment would see the firm buy the more of the Airbus A380s and the most talked about Airbus A320 neo and Boeing 787 Dreamliner (Qantas, 2012f).
The significant point about fleet renewal at Qantas is to facilitate efficient use of fuel in the long run as fuel is a global problem when supply dwindles. Renewal replaces older and more energy intensive machines with low fuel consuming ones. The current fleet of aircrafts at Qantas is Australia’s biggest in domestic aviation industry and one of the world’s best in international airlines.
Qantas won the World Airline Awards for the Best Premium Economy Class. The Trans-Tasman line has a new B737-800 series, superior services of new 747 series that delivers the best Business Class worldwide, among other superior services offered by Qantas. The much talked about Dreamliner is expected to be delivered to Qantas in 2013 and other brand new 50 B787-900 series to arrive by 2016 (Qantas, 2012f).
This kind of fleet superiority in the domestic and global airline industries places Qantas in a strategic position to continue dominating the industry even in the years to come. The company’s prospectus runs for the next 4 years in terms of new airline arrivals only. These kinds of realignments and strategies will ensure that the Qantas remains a strong brand.
Strong corporate governance structure
Corporate governance may be a great strength if properly structured in an organization in order to improve accountability in running activities of the firm. Corporate governance builds formidable relationship between shareholders and business managers. Turner, 2009 observes that’ corporate governance “is used to describe a range of issues relating to the ways in which companies may be directed and controlled” (p. 5).
A broader definition of good governance takes cognizance of the social and business environment, to enhance social functions of a firm in the society. Stakeholders’ roles are critical in the maintenance of competitiveness and long term sustainability of an organisation’s activities (Calder, 2008).
Corporate governance should outline operations with respect to policy structure, its implementation, and other amicable strategies to withhold stakeholders’ preferences.
Qantas in line with the requirements of corporate governance has an elaborate corporate governance structure for its full functionality. The Board of Directors is given the responsibility of ensuring Qantas corporate governance is created or updated, protected, to enhance shareholders’ value. The Board follows the provisions of Australian Securities Exchange Corporate Governance Council’s principles.
Qantas publicly discloses all their policies relating the corporate governance, which builds stakeholders’ trust. Qantas Board of Directors maintains high level corporate governance ethics that are constantly being reviewed to comply with the latest issues that affect the structure. To help in this regard, the Board works on corporate governance structure directed by the following sub-sections:
- The Qantas Constitution
- Corporate Governance Statement
- Qantas’ Executive Remuneration Philosophy
- The Qantas Board
- Board Committee members
- Board Committee Charters
- Qantas Group Business Practices Document
- Qantas Diversity Statement (Qantas, 2012b).
The elaborate nature of Qantas corporate governance and its transparency conforms to all the requirements of corporate governance outlined above. Therefore, the firm’s shareholders and all other stakeholders see accountability of the highest level. They in turn trust the company’s ideals, which is an endorsement to its operations for the sustainability of Qantas.
Weaknesses
It is important to recognise a company’s weaknesses in order to minimise them in future. Weaknesses can be; rented premises, unskilled or semi-skilled workforce, heavy debts, stock imbalance, and unproductive or inefficient machines.
Even though Qantas owns a number of subsidiaries, the subsidiary firms depend on mainstream Qantas services (passenger transportation) and freight. This means that if the mainstream services are affected, there will be a ripple effect that will trickle down to the subsidiary firms.
Therefore the firms should invest in different lines and industries. According to Reuters (2012) Qantas still faces the challenge of fuel costs and the immediate response at times of high fuel costs is to hike fares. This is a weakness because it can lead to lose of customers.
External Economic Environment
Threats
Existence of strikes
Industrial strike poses a great threat to the company performance. During strikes the airline operations are grounded and that leads to reduction of revenue and subsequently gaining by the company’s rivals such as Virgin Australia.
For instance, Qantas first quarter profit of the year 2012 reduced by 52% (CAPA Centre for Aviation, 2012). The main contributing factor to the reduction of the mentioned profit margin is industrial strikes. The company estimate of the revenue loss as result of strike is AUD 95 million.
Competition from other airways companies
The existence of the competition from other airline also is a great threat to Qantas airways market share. Virgin Australia offers stiff competition to destinations which were earlier seen as Qantas airways natural markets. The completion has made Qantas airways to cut off some of the international routes so as concentrate to the domestic market.
Global economic crises
The effects of global economic crisis in 2008 challenged many global business organizations. The aviation industry was also hard hit because the number of tours reduced as travelling became a lesser priority. Currently, the Euro zone crisis continues to affect member countries in Europe.
The global economic crises are a threat to the airline and frantic efforts must be made to minimize their effects. The end result of global economic crisis is that it increases operation cost, reduces business opportunities which in turn leads to loss of revenue to a company.
Fuel prices
The stability of fuel prices in the global market directly affects the operations of airlines. The stability depends on a number of issues; one being political standoff between one or more countries. To stabilize the fuel prices, Qantas ahs a well developed hedging strategy that intends to cushion the effect of unstable fuel prices.
Under the Capital Management and Treasury, Qantas reserves cash revenue of $3.3 billion to facilitate debt problems. Fuel costs, operating foreign exchange, and aircraft capital expenditure are all hedged to respond the incoming challenges.
Of the three hedged funds, fuels cost takes 86% with an effective hedge price of US$116.05/barrel. According to Qantas (2012g), “Hedging approach mitigates risk whilst maintaining upside potential,” (p. 13).
Opportunities
Product diversity
Needs extension to non-airline services
The Oneworld Alliance
Oneworld Alliance offers great opportunity for Qantas to extend its services to further destinations. Through the alliance, it is possible to integrate critical airline operations with the Qantas’ operations.
Porters Five Forces
Porter’s Five Forces model was initiated by the renowned economic and business strategist Michael E. Porter. Porter identified five pillars that mainly influence organisation and planning of businesses. This model is relevant in modern day given the phase of internet use in business processes that has led to globalization. The five forces are illustrated below:
Source: Porter, (1985)
Bargaining power of Buyers
Customers with substantial bargaining are likely to have a massive take on what should inform a business strategy. The advances in technology and the use of internet ahs significantly increased such of information and for customers. As a result, customers can make fare comparison for the various airlines before booking. The information is available online; for instance, Qantas has its own page for online booking.
Choice is made depending on the desired pack and price for a flight. High bargaining power of customers increases rivalry in the airline industry. Qantas has specialised in the delivery of quality economy and business classes that serve the interest of various categories of customers.
In fact, Qantas has won awards in the provision of superb services. As mentioned earlier, Qantas won the World Airline Awards for the Best Premium Economy Class.
Bargaining power of Suppliers
The number of suppliers who are able to deliver a company’s fleets or any other equipment needed affect suppliers’ bargaining power. In case of supply dominance by one or few entities, the bargaining power of the supplier(s) will be increased as increase in demand for equipment increases.
On the other hand, if there are many suppliers are in an industry, their bargaining power will be diminished leading to low costs of machinery and other equipment. In the fleet development industry, there are limited manufacturers that can deliver state of the art aircrafts to meet Qantas market needs.
For instance, Boeing 787 Dreamliner is s superior kind of aircraft that not every manufacturer has the ability to make in the short run. To this effect, the manufacturer enjoys the bargaining power and Qantas has to give in to any demands given by Boeing.
Threat of New Entrants
New entrants are firms that are not currently in market completion in a given industry; but they have the ability to do so if they decide. In international airline industry, it is absolutely unavoidable to eliminate the threat of a new entrant and alleviate any threat of their market share. Many corporations invest in Research and Development, (R&D) to improve services.
However, threat of a new market entrant relies on a number of factors. First, economies of scale enjoyed by a leading company may act as a barrier to a new entrant that is yet to start service delivery in a given market.
According to Hill and Jones, (2009), “Economies of scale arise when unit costs fall as a firm expands its output. Sources of economies of scale include, cost of reductions gained through mass-producing a standardized output and discounts on purchase of raw materials in bulk.”
Another barrier to entry is absolute cost advantages. When initial resource investment is high for an existing company compared to a potential entrant, there would be very hard scenario for a new entrant to get into market. Government policies may also favour market dominance for some companies; for example, if incentives are given to new entrants, barrier to entry would be significantly reduced for a business organisation.
The forth factor that influences this force paradigm is the cost of consumer switching from one service or product to another. If the cost of switching is relatively low, a new entrant captures some part of the market share whereas if the costs are high, dominant firm would are the beneficiaries. Consumer loyalty on a given brand can be a hurdle for a new firm to enter market.
Threats of substitutes
If market situation allows for substitutability of goods and services from other competitor, then the management needs to find alternative measures to limit the threat. This can be done through finding new markets, adopting competitive fares and low cost product, among other measures that will make the company maintain its market share.
If the degree of substitutability of goods and services is low, threat of market share will be low. Qantas prides itself as a trend setter with the new fleet of cars expected in the future. The firm has the financial ground to support all the ambitious plans in the offing.
In May 2012, Qantas withdrew services in the Auckland-Los Angeles and Singapore-Mumbai routes in a aircraft renewal plan. The plan was to set free 4 of the A330 cars that were in turn taken to the Sydney-Bangkok route. The A330s were to replace the 2 Boeing 747-400 series.
This was a reduction in international flight in favour of domestic trunk network. According the CEO of Qantas the strategy is to ensure that Qantas maintains a minimum of 65% of the domestic market (CAPA Centre for Aviation, 2012).
The plan meant that the trans-continental market was limited in service. As such, Virgin Australia saw an opportunity and planned for a three to four year strategy to roll into the market with A330.
Virgin Australia followed the launch into the route with yet another target of the Sydney-Perth route with A330s and A330 flights from Melbourne-Perth twice in a day. These market entries by Virgin Australia offers substitute services to customers in the aforementioned routes, which is a threat to Qantas.
Rivalry among competitors
All the other forces lead to increased rivalry among firms in a given industry. The airline industry has a number of established airline operators that and new entrants who create stiff competition and rivalry. Depending on the type of brand that an organisation creates to the consumers, popularity will come from product pricing, design, and dedicated funds for advertising.
There is a relationship between price of a commodity and costs involved in production and when prices are low and costs are high, the profit margins are decreased. On the other hand, when competition is low profit margins shoot up. Cost is lowered, prices rise, and profit increases.
In a nutshell, Hill and Jones (2009) point out at four factors that affect level of rivalry, “The intensity of rivalry among established companies within an industry is largely a function of four factors:
- industry competitive structure;
- demand conditions;
- cost conditions;
- the height of exit barriers in the industry.”
Industry analysts carry out research to determine the number of firms in a given industry. Industrial structures vary and each segment ought to determine the rivalry levels at its own capacity. For instance, in a progressive industry would behave in a particular manner. According to McGahan, (2004), “Under progressive change, the industry’s stability arises from the links between activities rather than from any single proprietary activity.”
The demands of a given industry also influence the intensity of rivalry and for an increase in demand for services and products there will be reduced rivalry between firms. Alternatively, when there is low demand the rivalry between firms increase and the profit margins reduce. This is due to the cost factor.
Reduced demand implies that firms must review prices to have competitive fares. While this happens, there are costs that must be met, for instance, recurrent costs must be taken care of despite the gains made in the sales department.
Qantas has responded to alleviate insignificant rivalry within the airline industry by forming the Oneworld Alliance. The alliance brings together top 12 most successful airlines at the international level to coordinate the running of more than 700 destinations in over 130 countries.
The other airlines in the alliance are: Air Berlin, American Airline, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, LAN, Royal Jordian, and S7 Airlines. The intent of the alliance is to bring on board airline firms and make them share the resources they have to boost customer experience; for instance, the 500 airport departure lounges that the alliance members can access across the world (Qantas, 2012h).
Pestle Analysis
Political
The Qantas Group enjoys cordial relationship with the government of Australia since its assistance in the government engagement in the WWII. The firm assisted in airlifting soldiers from the threat of advancing Japanese forces while at the same time dropping foodstuff in tree-tops.
Since then, the Qantas firm continues to serve the defence force by forming the subsidiary, Qantas Defence Service that airlifts soldiers to their destinations with defence jets. Fleet development in the Qantas Defence Services is convincing and hopefully, the relationship with the government will continue to build in the future.
In addition, Qantas is the biggest airline firm in Australia in both domestic and international flights. As such, it is a source of revenue for the government through taxation as a fully tax complaint firm. The government must therefore build policies that favour the firms for the good relationship to continue. Political engagements between government and Qantas employees are guided by policies.
It promotes collaborative relationship with the Australian regime and complies with all legislations that promote corporate ethical standards.
For instance, Qantas does not allow its employees to make political donations in money value or in-kind to any political officer, political parties or officials. When any worker attends a political party meeting, then the firm states that such activities should be seen as personal and not sponsored.
Economic
Qantas group economic performance between 2010 and 2011 are as indicated below:
Qantas Group Segment Performance Summary: 2010-2011
Source: CAPA Centre for Aviation, (2012)
Economic indicators of Qantas financial position are mainly positive. For instance, there has been a steady growth of ancillary revenue since 2010 for Jetstar. In addition, the unit cost performance show that Qantas has succeed in reducing the cost as from 2010 to 2012 going by the first quarter results. These two scenarios are shown in the charts below:
Jetstar Ancillary Revenue and Unit Cost Performance: 1H2011-1H2012
Source: Qantas, (2012g)
Qantas had to retrench 500 engineers at Victoria base in response to economic needs of the firm. After the announcement of the job cuts, it again announced that it would separate its international operations from domestic ones. Moreover, each business is to have its own CEO and report its own financial results.
This move can be interpreted that Qantas wants to streamline individual sectors by reducing losses and increasing profits where necessary.
According to Bamber (2011), “Qantas’ domestic airline made an underlying profit before tax of $552 million in 2010/2011FY, while the international business lost $216 million.” By separating the two, each sector can concentrate on addressing its own issues. In addition, bureaucracy will be made easy as they work as separate entities.
Socio-cultural Factors
CSR policies are important in building the socio-cultural relationship between a firm and the community around it. A good CSR structure addresses both the external and internal affairs of a business organization. External CSR policies focus on the social contract between an organization and the society. Qantas has programmes that enhance harmony between its operations and the community.
For instance, the high technology planes will reduce noise level to people living around airports. Customer reward schemes also build social relationship with customers. Qantas has sponsorship programmes for qualified students who want to pursue further education. There are other socio-cultural programmes that are outlined under the firm’s CSR port.
Technological
The use of technology has been elaborated in the paper before. The main technologies that Qantas has adopted of late are the use of technology in entertainment and flight renewal plans that will bring modern planes to its fleet. The Boeing 787 Dreamliner is a high technology car that has significant impacts on economic, environment, and customer experience.
Legal
As said earlier, Qantas in line with the requirements of corporate governance has an elaborate corporate governance structure operations. The Board of Directors is given the responsibility of ensuring Qantas corporate governance is created or updated, protected, to enhance shareholders’ value. The company complies with all guidelines that are provided by the ASX Corporate Governance Council’s principles.
Qantas publicly discloses all their policies relating the corporate governance. Qantas Board of Directors maintains high level corporate governance ethics that are constantly being reviewed to comply with the latest issues. Most importantly, the Board has its own Constitution that directs all ethics issues and governance structure.
Environmental
Qantas is committed to environmental sustainability other than the economic and social commitments. The firm’s objective is to be top in environmental performance through the implementation of required environment policies geared towards the protection of the current and future generations.
Environmental engagements
Qantas engage all stakeholders in ensuring the community has a variety of environmental programmes that run year in year out. Some of the plans include the firm’s Green Team, which is a group of volunteers who raise environmental awareness campaigns.
In addition, through the Great Barrier Reef Foundation ZooX Ambassadors, Qantas informs its employees on the relationship between climatic changes, the coral reefs, and how these two have an impact in the sustainability of the firm’s operations. The other engagement is eXcel Environment Ward, which awards the most focused employee in the implementation of environmental projects in the Qantas businesses.
The climate challenge
Since global climatic changes are a concern to the whole global community, Qantas prides itself in the development of programmes that cut down on emissions address climate issues. Qantas has set its own emission targets in a bid to reduce the effects of climatic challenges.
As the company core business is airline transport, 95% of Qantas global carbon emissions are due to jet fuel use. A possible avenue of reducing the emission is through use of efficient machines that will cut on the consumption. The figure below illustrates the set goals in reducing emissions at Qantas:
Source: Qantas (2012i)
Reducing aircraft noise
Qantas has the plan of reducing aircraft noise among the communities that live close to the airport by considering the purchase of aircrafts with that ability. The fleets on order including the Boeing 787 Dreamliner have the ability to reduce the noise.
This is why Qantas (2012j) makes firm statement, “Seeking better ways of managing aircraft noise is one of the many ways we continue to develop strong relationships with our communities. We believe that the best solutions emerge through collaboration.” There are also many other strategies put in place to reduce the environmental impact of the firm’s operations.
Impact Of External Environment On Qantas
A firm’s external environment is a three-piece component: the industry, the business and operation environment, and its remote. The three components of external environment can change and affect the operations at international and local levels.
The PESTLE analysis above helps in the definition of remote environment. The industry on the other hand is defined by the Porter’s five forces. The two models of analysis therefore help in the identification of the external business environment and its impact on Qantas.
International travels are characterised by regulatory impediments, which prevent carriers from inflowing to a new destination. Barrier to entry into a new destination is an obstacle to expansion programmes of a carrier. Network alliances open avenues for expansion and gives right to enter into a restricted territory. Network alliance also opens base for resource sharing.
Limited runways for take offs and landings may be a challenge to individual carriers. Finally, network alliances eases competition pressures, leading to a reduction in pricing and can earn supernormal profits.
Alliance members should be weary of threat of new entrants and formulate stringent measures to counter the threats. One way of achieving this is through imposition of regulatory restrictions and initiating frequent flyer programmes.
External business environment is also defined by the entry of other airlines into the market. Incumbency in the airline industry is a great barrier to entry into the industry. However, disruptive technology is a threat to this barrier and an opportunity for a new entrant.
Foster supported by Christensen as quoted by Vlaar et al., (2005) assert that, “disruptive technological change brings about new value propositions and strategic options that may have a devastating effect on established firms and industry structure.” (p. 155). Incumbents are unable to establish radical technological inventions due to protocol issues and conventional organisation structures that take long time to make critical decisions.
Since new entrants face operation difficulties through service imitation and high investment costs in R&D, disruptive technology is a scope towards market breakthrough. Emirates Airline is a new entrant into the market that defied the odds to break into airline industry with great success after short period of time.
According to Shikoh (2005), research by Skytrax in 2005, Emirates was third after Cathay Pacific and Qantas Airways and in front of global brands like British Airways and Singapore Airlines. As mentioned, Emirates instilled a sense of ‘business unusual’ in the industry with more operation strategies that appealed to majority.
The airline industry is a multi billion investment venture that is mainly funded by national governments. Due to this, there is expansion rigidity brought about by legal restriction on routes usage. Network alliances, therefore, involve both liberal bilateral agreements between two government and agreement between partners.
The geopolitics of airline industry is main source of barrier to entry by a new firm and the cause of incumbency by national carriers. This paper has established that other than privatisation, network alliance is one of the ways, through which industry players can expand their operations to new destination.
However, the case of Emirates Airline is unique as the firm defied the barriers to enter into the industry and become a global brand. Disruptive technologies and organisational rigidity are a challenge to the incumbent but give rare opportunities to new entrants. Structural rigidity can also be eliminated by privatisation.
In the airline industry, customer service is important as there is a direct relationship between customers and the employees. Before the management thinks of any effort to improve customer services, there is need of focussing on employee issues for them to respond with exemplary services to customers. In an airline where staffs are discontented, they are likely to replicate poor services to the customers.
Eventually there could be lost business as customers will seek better services elsewhere because there are options. Southwest Airline is among the world leaders in customer service at relatively low price. The firm considers its staff as the selling point. Southwest airline pays remunerates its workforce well and but remains a profit making organisation that has never retrenched its staffs (Bamber, 2011).
Virgin too is following in the footsteps of Southwest airline and in the same line; Qantas should take some strategies from Southwest airline to rejuvenate its economic hitches and the 500 retrenchment of workers in its Victoria base.
According to Bamber (2011) lesson from Southwest airline should be favoured instead of the bid to resorting to private equity funds to purchase Stakes at Qantas. Since the attempt, the share price has steadily fallen.
Impact Of Qantas On External Economic Environment
Qantas being one of the Oneworld Alliance means that the firm is a major player in Australian domestic and international airline industries. Its operations affect those of other carriers. The interrelationship among the world carriers tells the nature of the airline industry. The airline industry is very dynamic and sources of economic rent are diversified.
Due to heavy investment needed in the airline industry, the industry operates either as government owned ventures or by a particular entity. However, global wave of privatization and private business entities entered the industry in the mid 1990s, revolutionising the sector. There are limited cases of merger of firms in the airline industry due to rigid international air agreements that domestic firms adhere to.
Strategic alliances; and alliances between carriers is now the norm in the industry. Alliances between big network carriers are common if compared with those between low cost carrier (LLC), and charter airlines.
According to Forsyth et al., (2011), “This type of airline differ in that the first operate integrated route networks centred around one or multiple hubs, offering passengers a dense network of flight connections, while low cost and charter airlines typically focus on point-to-point networks.” (p. 49).
This paper discusses how various airline operations and activities affect economic rent of firms, engaged in the industry at the global, regional, and domestic level.
Consolidation of the industry is a major source of economic rent as it presents rationales, upon which networks integration would yield benefits. To begin with, working together brings in economies of scale for individual firms to improve technical efficiency. This is because firms in an alliance can share codes, which increases passenger flight rates.
According to risk diversification theory, creating many routes manages adverse effects of depending on a single airline destination. Another reason to form network alliance is that it reduces transaction costs that are passed on to customers. Forsyth et al., (2011) pose that, “Airlines that offer connecting services to passengers and flight forwarders may increase profits by joint marketing of their services on the basis of one stop shopping.”
Shopping at one point saves on transaction costs as passengers don’t need to connect flights but instead buy products and services from a partner in an alliance. In order to make this a reality, firms in an alliance should carry out joint branding and tender seamless travel plans to passengers.
Network alliances is the commonest practice in the world and as Ramón-Rodriguez et al., (2010) posit, “The success of this strategy has led to the creation of one world, Sky-Team and Star Alliance that are now responsible for about 75% of global passengers and 90% of long-haul flights.” (p. 111).
Network alliances eliminate market imperfections, which majorly affect airline operations. Airlines do serve a particular route, and when there is an alliance, interests of passengers who demand flight connection and complementary services will be served. Individual carriers face market imperfection due to uncoordinated price-setting mechanism because of numerous price mark-ups, set by individual carriers.
This reduces marginal costs (MC), leading to decrease in profit margins. Network alliance minimises price mark-ups due to coordination of a joint pricing model that offers complementary services to travellers. Customer also benefit from low prices, set by network alliances.
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