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AIRLINE INDUSTRY AND VIRGIN ATLANTIC AIRWAYS: A CRITICAL
ANALYSIS 2
Abstract
The following assignment has discussed in detail the airline industry along with a detailed description of the various factors affecting its operational activities. The airline bilateral agreements and regulatory authorities have also been taken into consideration. Moreover, the external and internal business environment of British Airline company Virgin Atlantic has also been discussed in detail.
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Table of Contents Question: 1 ...... 4
1.1 Background ...... 4
1.2 Factors Affecting Competition in Airline Industry ...... 6
1.3 Examination of the Demand and Changes in Market Concentration ...... 7
1.4 The Need for Bilateral Agreements ...... 9
1.5 Role of Regulatory Authorities ...... 11
1.6 Development of Alliances, Strategies and Political Factors ...... 12
Question 2: ...... 14
2.0 Introduction ...... 14
2.1 Organisational Background ...... 14
2.2 Internal Structure and Operations ...... 15
Supply Chain of Virgin Atlantic: ...... 18
2.3 Mission and Vision Statement ...... 20
2.4 Key Drivers of Virgin Airways...... 21
2.5 External Environment ...... 22
2.6 Financial Performance ...... 26
2.7 Outcome of Critical Analysis of Virgin Airways ...... 27
2.8 Conclusion ...... 28
Reference List ...... 29
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Question: 1
1.1 Background
There have been some life changing inventions and invention of airplane was one of them. At times of World War, vast improvement in techniques for the construction and design of airplanes took place due to government subsidies and growing demand for new airplanes.
After the World War II, the first commercial airplane routes were established in Europe
(Cento, 2008). Overtime, air travel has become an integral part of a commuter’s life and it is hard to imagine life without air travel facility. This hints at the progress report of the airline industry. It has facilitated the way of living of people by reducing the travel time thereby altering people’s concept of distance and making it possible for people to conduct business and visit places which were once considered remote.
The industry incurs high fixed cost and earns low profit margin. This is due to various factors such as aircraft fuel; aircraft lease rentals, debt service and personnel (Doganis, 2002). The expenses of an aircraft flight are not much related to the number of passengers in the sense that they do not significantly vary with the number of passengers. The operations and financial outcomes of the industry are disproportionately affected by the pricing strategies.
As a result, a negligible shortfall in expected revenue levels could cause harm to the business.
The industry is vulnerable to price discounting since only nominal costs are incurred by airlines. This nominal cost is attributed to the service offered to the passengers occupying otherwise unsold seats (Doganis, 2006).
An astute investor can make profit in this sector inspite of rising fuel prices and many external risks that are associated with the industry. Sometimes, fuel surcharge is imposed on the passenger which is a way of passing higher fuel costs on to their customers. However, the 5 most efficient method to mitigate cost of fuel is to buy future contracts that set the fuel supply for a company at a specific price in the coming year. The companies also adopt the policy of hedging. There are some companies who hedge more than others implying the fact that they are better prepared in case of a sudden hike in the oil prices. The fate of an airline company is determined by its ability to make its interest payments and clear all its debts on a timely basis.
By calculating the interest coverage ratio, it is easy to determine whether interest rate is excessive (Agusdinata and de Klein, 2002). The interest rate is reflective of the debt liabilities that companies indulge in. The hubs of airlines play a vital role in the industry. It is described as a centrally located pit stop where aircrafts fly in order to re-fuel, pick up customers and head out to different destination. It has been observed that one of the reasons behind successful airline service is the presence of busiest hubs. Other characteristics involve the employment of unionized labour. These labours are routinely forced to re-negotiate salary contracts holds the possibility of a strike is omnipresent.
If a company has excess cash reserve or has the ability of taking on more debt, it may adopt the policy of acquisition in order to progress on the path of growth. Currently, some companies have been significantly reducing ticket costs. This has prompted other airlines to trim their prices and issue a variety of different margin-pinching incentives to consumers in order to successfully compete in the market. Although this price competition is not beneficial for the companies since it put high debt pressure and diminishing working capital positions out of business but it is favourable for the consumers (Doganis, 2006). Some part of the industries reveals the existence of monopoly and others tend to be competitive. The monopoly nature is visible in the price discrimination strategy employed in terms of different prices of the air tickets. The industry is also seasonal in nature. During vacations and occasions, the demand rises and so does its revenue. 6
1.2 Factors Affecting Competition in Airline Industry The airline industry is characterised by the presence of intense competition. In the recent period, there have been economic downturns that have adversely affected the airline industry, which economist believe, will possess a strong effect on the trend of the industry towards expansion of international and domestic services. Earlier, the airline industry around the globe was partly owned by government. Although this is still true for many nations but all major airlines in U.S. is privately owned. There are some factors that tend to affect the competition in the industry. Rivalry among sellers is one such factor. It varies from country to country and ranges from moderate to strong. Airlines also compete on frequency and reliability of flights, frequent flier programmes, etc. (Doganis, 2002). Nowadays, this pressure has reduced since well-known companies have started focussing on the enhancing their profits rather than involving in expansion strategy. Potential new entrants and substitute transport system also pose as threats on the industry. Deficient desirable gate access and low traffic levels act as entry barriers along with labour, capital and energy intensive nature of the industry. In relation to air transport, passenger rail lines, personal transportation and bus service also act as substitutes. They are generally low cost and are convenient for shorter distance (Agusdinata and de Klein, 2002).
Middle East carriers are gaining popularity and are considered as threats on international routes. They have advantageous geographic position; incur low fuel costs and arte properly funded. Since, airlines are entering more into Joint Ventures (JV) and anti-trust immunity agreements in order to target international growth (Hanlon, 2007). With a view to capture more traffic, the Lost Cost Carrier (LCC) model is implemented in JVs by Asian airlines.
More airlines are now entering into JVs and more direct flights on international routes are offered by Anti-Trust Immunity agreements (ATI). However, cost pressures still remain an 7 important issue across all markets. The competition is mainly between recognised companies and low cost emerging companies (Barrett, 2000).
1.3 Examination of the Demand and Changes in Market Concentration The recent times have witnessed impressive dynamics exhibited by European airline industry.
The airline industry has gone through an extreme change on both demand and supply side.
Unlike other industries, the recent changes are not dependent solely on technological developments but legal, cultural, institutional factors (Williams, 2003). The structure of the market is highly influenced by institutional and legal aspects and spatial mobility and its features are affected by cultural forces. On the supply side, the European Airline industry has transformed from a long-established system of state-owned carriers which operated in a regulated market into a free market and dynamic market. The procedure of de-regulation and subsequent procedures of privatization have injected vital changes in the structure of airline sector. The choices and preferences of customers are also undergoing change. This directly affects the pricing strategies of the companies (Hanlon, 2007). The industry often faces the consumer choice problem. Many researchers have been done which highlighted that business commuters preferred valued flight frequency and the proximity of airport compared to leisure travellers who tend to be more price sensitive.
This indicates that the companies need to analyse the approaches towards satisfying their consumers. Since this industry is seasonal in nature, the demand structure tends to fluctuate accordingly. It has been observed that time or business sensitive passengers are inelastic in terms of airfares. These passengers are inclined more towards high quality service including frequent and reliable flights, flexibility, comfortable seats, good frequent flier rewards, etc.
(Barrett, 2000). They are ready to pay increasing high prices to avail these features in a flight.
The business market of airline industry reveals price elasticity by a fall in the amount of tickets sold which was evident from the arrival of low cost airlines. This recent development 8 also illustrates that a large percentage of passengers have given more emphasise to prices over service. However, this is more accurate for short haul routes. The passengers now have given up additional comfort of economy class on intra European and domestic flights but are also eager to trade flexibility of ticket in return for low air fares. This situation seems to be a permanent situation which has forced companies to raise the use of low fare airlines
(Belobaba, Odoni and Barnhart, 2009). Similarly, they have increased the use of non- refundable tickets. The reason behind the fall in business class travel is partly demand led and partly supply led. The supply led reasons are high business fares which expanded the segment of inelastic business class passenger and development of low cost airlines. The demand led reasons are economic downturn that has created an active management that aims at reducing costs by minimising travel budget and external demand shocks that ranges from SARS epidemics, Iraq War and terrorist attacks (Williams, 2003). Although, all these do not necessarily mean that passengers are not willing to pay high fares for additional frills and services delivered by business class on long haul flights but they want justification behind premium pricing strategy.
The airline industry has under significant changes in its market structure due to variety of reasons. Some of them can be cited out as the bankruptcy of some of the largest airlines.
Mergers among the rival companies are another example. Other companies have significantly changed their networks. Market structure changes overtime due to mergers, entry and exits of different companies which tend to have an influence on price structure. The entry and exit of firms have a strong impact on the functioning of the industry. New entrants usually offer low prices but its impact differs across markets. They induce competitiveness in the market by offering low cost fares thereby reducing the overall fare prices in the market (Bergantino and
Capozza, 2015). Conversely, the exiting firms have no clear effect on the pricing behaviour of their former rivals. 9
The market powers of the companies entering into merger are enhanced. It was noted that market where a merging company was present construct a control group. This group is devoid of presence of any merger. The fare was increased significantly during the post- merger situation. There are still significant price rise along the routes where one of the merging companies was a potential entrant. Mergers tend to reduce market competition and increasing the fares market-wise (Belobaba, Odoni and Barnhart, 2009). However, it was also observed that in some mergers, the firm-level price affect is negative mainly due to efficiency gains. The consequence of merger in some cases is the formation of consolidated market where the merged firms offer lower fares since the rise in their efficiency level due to merger
(Williams, 2003).
1.4 The Need for Bilateral Agreements International Aviation Organisation (ICAO) is an inter-governmental agency which governs and coordinates the world operational and worldwide technical standards. Bilateral air transport agreement, also known as bilateral air service agreement or ASA or ATA, is an agreement signed by two countries in order to permit international commercial air transport services between geographical territories (Bergantino and Capozza, 2015). The traffic rights for each operating carriers, number of carriers, the number of airports in which airplanes will operate and frequencies of flights between the fixed airports are specified by the bilateral agreements. With the development of airline sector, flying became very popular necessitating the expansion of their service. This popularity prompted countries and their related airlines around the world to develop service agreements in order to make easy the provisions of international air service, to build opportunities for the same airlines serving outside the home country’s borders and to protect the airlines against unfair foreign competition. These agreements are basically needed to build an efficient airline sector of any country by promoting fair competition practices and by inviting global opportunities. The agreement is a 10 contract formulated so that aviation services of commercial civil aviation can be liberalised between contracting parties. This is important since it allows the airplanes of both the participating states to launch their commercial flights which cover the transport of cargoes and passengers of both the nations (Bilotkach, Gaggero and Piga, 2015). The agreement may also involve the transport of military personnel of the contracting nations. According to the agreement, the airplanes of the participating nations also bring cargoes and passengers to a third nation or pick up cargoes and passengers from the host nation to the home nation of the airplane or to a third nation in which the participating countries have existing open skies agreement.
The liberalised form of ASA can be called an open sky agreements. Open skies is a global policy notion of the international aviation sector that requires liberalisation of the regulations and rules of especially commercial aviation (Kawaura, 2015). This is done with the aim of creating a free-market scenario for the airline industry. This agreement is also essential keeping in mind the objectives that it aims to achieve. The main objectives of the agreement include:
To liberalise the rules that govern global aviation markets and reduce government intervention that is applicable for passengers, scheduled and charter service, combined air transportation and all-cargo.
To adjust in such a way so that other state based and military flights can be permitted.
It has been noticed that the open skies can become effective if bilateral agreements are concluded between two or more countries. Liberalisation of international airline industry is necessary in order to generate major extra opportunities for customers, carriers, direct and indirect entities and shippers (Bilotkach, Gaggero and Piga, 2015). 11
1.5 Role of Regulatory Authorities Any industry that is functioning to serve the society and maximise its profit needs a governing body that will monitor the operations of the industry and formulates policies so that the companies do not indulge into unfair trade practices and to enhance the efficiency of the concerned sector (Wensveen, 2010). The role of regulatory authorities in airline industry includes the creation of transparent and less complex structure that offers highest safety level for air transport services. The responsibilities include providing fair access to adequate infrastructure and to commercial prospects. The framework of the regulatory authorities should reveal legitimate environmental and military concerns. The regulatory body aims at ensuring consistency, cost-effectiveness, effective application both for the airlines and for the governing body (Lelieur, 2003). It is also accountable for all the decisions taken. The body also encompasses the global dimensions of aviation and targets to provide the industry with safe, cost-efficient and fair access to other places of the world.
There are various functions of the regulatory body, such as:
Rule Preparation: structuring regulatory material by a company that avails the technical competence to do so. In order to prepare the material, the company needs to follow appropriate procedures to ensure that inputs are coming from those who are also affected by the regulations.
Rule-setting: the spread of binding requirements in a specific context that permits for effective enforcement of these rules and policies for political and legal accountability for the choices that have been made.
Operational approval or licensing or certification: the body is solely responsible for providing licenses to airlines, procedures, etc. so that authorisation can be provided to the conduct of specific activities. 12
Inspection/ monitoring: this process is ex post evaluation of continuing compliance with the requirements of the body and the beginning of corrective measures and actions where needed.
Enforcement: in order to guarantee compliance with the requirements of the regulatory, the formal powers are exercised which include imposition of proportionate sanctions.
Implementation support: it comprises of a wide range of activities that aims at assisting the companies which are given the responsibility related to the application of regulatory needs like certification, monitoring, etc.
The main area of concern of the regulatory body is to maintain security and safety of the passengers and crew members, protect nature by reducing the emission of harmful pollutants, organisation markets, sustain international cooperation and coordination, optimal allocation of scarce resources such as slots, airspace, maintain control over price structure so that welfare of the customers are not jeopardise (Lelieur, 2003).
1.6 Development of Alliances, Strategies and Political Factors The cooperative arrangements between airlines which vary extremely in breadth, scope and depth are referred to as airline alliances. Airlines may engage into a wide range of cooperation agreements that ranges from those with restricted cooperation like marketing arrangements or interline agreements, to highly integrated structures of cooperation like metal-neutral revenue sharing joint ventures (Mahoney, 2014). The vital benefit associated with the alliance is accesses to traffic that are restricted due to bilateral agreements. With the help of the alliances, the airline can overcome the entry barriers and engage in the process of expanding their networks into large geographic regions by code-sharing with other airline.
The alliance partner identifies the reciprocal code sharing advantages in the home boundary of its new partner. Both airlines together combine their networks and deliver many more itinerary combinations than either airline could provide on its own (Wensveen, 2010). 13
The alliances can be broadly categorised into two main groups, namely, strategic and tactical alliances. Tactical alliances comprise of two or more carriers which are designed to address particular gaps in the networks of individual carrier by offering connectivity between the networks of the carriers. This is in contrast to the strategic alliances which are more comprehensive and broader structures of cooperation between numerous carriers. This strategy aims at building large international joint networks. Rather than closing gaps, this strategy tries to optimise networks thereby influencing the carriers and their routes and capacities. There are three main alliances such as Skyteam, Oneworld and Star Alliance
(Bilotkach, Gaggero and Piga, 2015). Integrated alliance that includes coordinated pricing, yield and inventory management are usually governed by designated alliance committee. The representatives of the partner carriers are the members of the committee. It has given the responsibility to monitor and administer cooperative activities. After the re-optimisation of the joint networks, schedules and pricing by the committee, dissolving the alliance causes substantial costs to the partner carriers. As a result of the substantial costs, carriers usually look for anti-trust immunity.
The political environment is highly regulated favouring the passengers more than airlines. It is because the safety of the passengers is of utmost importance. The political environment has become crucial due to earlier tendencies towards monopolistic behaviour of the sector. This has necessitated the implementation of tighter regulation of the functions of airlines (Taylor, et al., 2006). There have also been instances where deregulation has been recognised in the supply side implying stiff competition among airlines and regulation of demand side implying that passengers are in charge of lowering prices and demand for more amenities. 14
Question 2:
2.0 Introduction
With the increase in competition, business management is also getting complex (Bergantino and Capozza, 2015). The corporate sector is one of the most dominant economic forces in the international sphere today and has successfully raised the bar for quality and productivity.
According to Hanlon (2007), corporate houses face many challenges in context of their internal and external management processes and have to continuously improve and design new strategies for overcoming them. In this report, the focus is on analysis of British Airlines
Company, Virgin Atlantic Airways. The aviation segment is one of the most popular and dominating segments in the luxury as well as travel and tourism industry. With rapid new entrants in this industry, firms are trying to create long-term competitive advantage for overcoming the economic and managerial challenges. The succeeding sections of the study will focus on analysing the internal and external environment of Virgin Atlantic in comparison to its performance.
2.1 Organisational Background
Virgin Atlantic Airways began its journey in the year 1984 when entrepreneur Sir Richard
Branson decided to launch a value-added airlines services. In the first year of its launch,
Virgin Airways had flown over 1 million passengers with the help of their exceptional and high-profile service structure (Virgin-Atlantic, 2015a). By the end of the eighties, Sir Richard
Branson sold Virgin Music and invested the gains in Virgin Atlantic and also launched the much appreciated economy service structure of Virgin Airways (Virgin-Atlantic, 2015a). In the year 1999, 49% stake of the company was sold to Singapore Airlines valuing at £1.225 billion. Since the beginning of the 21st century, Virgin Airways started expanding their services into the global market and added numerous new features to their services such as the
Upper Class Suite and Virgin Clubhouses (Virgin-Atlantic, 2015a). Virgin Airways has 15 continuously remained in the customer focus because of their many awards such as the
Online Retail Awards including ORA Prix d’OR, Best Leisure & Travel Website, World
Travel Awards, BIMA Awards, Digital Impact Awards, APEX Passenger Choice Awards etc.
(Virgin-Atlantic, 2015a). The company is currently operating with a fleet size of 39 aircrafts travelling between 31 destinations. The employee base of the firm is formed of 9,231 people.
According to the annual report of 2014, the revenue of Virgin Atlantic was £2.93 billion and the operating income was £14.4 million (Virgin-Atlantic, 2015a).
2.2 Internal Structure and Operations
The organisational structure of Virgin Airways has been formed in two parts; the top and middle management have a flat structure, whereas, the operational structure is in matrix form.
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Figure 1: Organisational Structure, Virgin Atlantic Airways
(Source: TheOfficialBoard, 2014) 17
The above given figure shows the flat hierarchy of the top management of Virgin Airways.
The hierarchy represents the detailed segmentation of every functional departments of the organisation and can be the reason behind the clarity in the operational processes of the company. However, as noted, there is no separate group for Human Resource Management in the given structure. The HRM activities of Virgin Airways are carried by the operations head and the HR managers have been designated in the middle level management of the organisation. This has allowed the company to create individual space for monitoring the actvities of each department and develop a closely knitted relationship with the customers
(Barwise and Meehan, 2010). On the other hand, Aguirregabiria and Ho (2012) criticised that absence of human resource management in the top level management can reduce the ability of the organisation to attend to the problems faced by the workforce. Apart from this, the gap in communication between the operational level employees and the top managers can hamper the present organisational structure of Virgin Airways.
The operational structure of the company however has been designed in a matrix structure for ensuring better communication among the middle level managers and the line managers.
According to Stacey (2011), matrix structure helps an organisation in ensuring optimal resource utilisation by creating a multi-tasking work culture.
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Production Finance Marketing HR
Team 1 Staff Staff Staff Staff
Staff Staff Team 2 Staff Staff
Staff Staff Team 3 Staff Staff
Figure 2: Operational Level Structure, Virgin Atlantic Airways
(Source: Papatheodorou and Forsyth, 2010, p.364)
The given framework of matrix structure reflects that each team operates under different functional heads simultaneously which increases the productivity and reduces the time of working for the company. Gilbert, Child and Bennett (2001) stated that matrix structure often creates job clashes among the work processes of a firm because of multi-tasking processes.
However, Tsai and Hsu (2008) and Nolan (2010) maintained that matrix structures creates flexibility and team work within the employee base of a firm allowing them to shift through the transition period of a firm and also managing the changes in the internal structure without hampering the productivity.
Supply Chain of Virgin Atlantic:
The supply chain actvities of Virgin Atlantic highlights their operational processes and the aspects that add value to their services. The following value chain model explains the strategy and actvities used for designing the internal actvities of Virgin Atlantic Airways: 19
Firm Financial Policies: Accounting Regulations and Policies: Community Affairs Infrastructu re Flight route Pilot and Baggage Agent In-flight HRM and yield Safety Handling training Training analyst training training
Product Technology Computer In-flight Yield Baggage Margin Developmen Reservatio Scheduling Manageme Developmen Tracking t n System System nt System t Market System Research
Procureme Information and Communications Technology nt
Route Ticket Baggage Promotion Lost Baggage Selection Counter System Advertising Service Passenger Operations Advantages Service Gate Flight Program Complaint System Operations Connection Travel Follow-up
Pricing Aircraft s Agent Fuel Flight Operations Program Scheduling On-Board Rental Car Group and Hotel
Crew Service Sales Margin Reservatio Manageme Baggage nt System Handling n System Facilities Ticket Planning Offices Aircraft Acquisition
Inbound Operations Outbound Marketing Service Logistics Logistics & Sales
Figure 3: Value Chain Analysis of Airline Company
(Source: Clausen et al., 2010, p.816)
The value chain analysis of the airline segment is different from that of manufacturing
organisations. The different actvities being performed within the operational scope of the
firm has been added in the analysis based on their contribution towards the overall value
added. It can be observed that Information and Communications Technology is the core
process that supports all other actvities of the firms. The regulatory policies and bodies form
the infrastructure of the organisations. Virgin Airways in this regard has ensured that all the 20 air route rules and policies associated with their operations are being fulfilled (Clausen et al.,
2010). The supporting actvities and primary actvities are connected with the ICT system of the firm. Additional services such as Rental Car and Hotel Reservations form the outbound services which also contribute towards revenue generation. The primary operations and monitoring processes such as ticket counters, gate operations etc. are essential for ensuring appropriate service delivery. Relating the given value chain analysis to the service structure of Virgin Airways, additional services of in-flight and in waiting areas help the company in increasing the value proposition of their services for the customers.
2.3 Mission and Vision Statement
The mission statement of Virgin Atlantic Airways has been designed based on the core values of the organisation. Scheelhaase and Grimme (2007) observed that Virgin Airways has focused on developing an emotional connection with their stakeholders. The mission statement of the company is
“To embrace the human spirit and let it fly” (Virgin-Atlantic, 2015a)
Virgin Atlantic has always been known for its ability to introduce innovative service aspects which attract and engage the customers. The mission statement highlights the basic contents of human nature i.e. freedom. Terms such as “human spirit” have been used in order to connect with a diverse customer base irrespective of the differences in their needs and expectations. Relating the mission with their service structure, Virgin Airways has developed premium economy flights for lower income customers, whereas, their executive level customers have been provided with premium level Upper Class Suites and Virgin
Clubhouses. This shows that Virgin Airways has an in-built customer centric approach that meets the needs of individual customers. 21
2.4 Key Drivers of Virgin Airways
According to Doganis (2006), in the existing scenario, innovation is the key driver for growth and development of business houses. Virgin Atlantic’s innovation is focused on improving their operational efficacy for ensuring a better service structure for their customers. They have continuously designed and developed their services for Upper class as well as economy customers. Virgin Airways’ service structure does not categorise their customers in terms of lower and business class, they have economy, premium economy class and upper class levels.
Apart from this, customers can spend their miles (received when they purchase a ticket of
Virgin Atlantic Airways) for paying instead of money (Gössling and Peeters, 2007). These minute additions in customer service help Virgin Airways in generating a steadily increase revenue curve. Another driver for Virgin Atlantic is their pricing processes, although the charges of the company are higher in comparison to other big competitors such as British
Airways or Jet Airways, the differences between the different levels of services are minimal.
This allows the customers to easily shift from economy level to premium level creating psychological satisfaction (Van Dender, 2007).
Considering their marketing actvities, the individual relationship of Virgin Airways with their customers is one of the main drivers for their growth. As per the study of Sutcliffe (2002), knowing the needs of the customers, their complaints, their conditions and the existing marketing condition in relation to competitor strategies ensures better service structure for firms. It can be mentioned that Virgin Airways has won several awards for their website support and marketing processes such as Online Retail Awards, Digital Impact Awards,
Travel Agent Choice Award, etc (Virgin-Atlantic, 2015a). This shows the ability of the firm to continuously improve on their services and accommodate the growing needs and expectations of the customers. 22
2.5 External Environment
The external environment of Virgin Atlantic Airways will be analysed with the help of
PESTLE analysis and also in a comparative manner with their competitors with the help of perceptual mapping process:
PESTLE Analysis
Figure 4: PESTLE Analysis of Virgin Atlantic Airways
(Source: Scheelhaase and Grimme, 2007, p.253)
Political: One of the major political influences on Virgin Atlantic Airways took place when the UK Government abolished the London Air Traffic Distribution rules in the year 1991 and allowed Virgin Airways to operate from the Heathrow Airport (Ciliberto and Tamer, 2009).
This move helped Virgin Airways expand their services globally and reach new destinations mainly in the Asian and African segments. However, regulations and restrictions of international bodies such as Civil Aviation Authority create some barriers for Virgin Airways 23 in context of the environmental regulations. Other than this, the changes in the taxation policies of the government also hamper the revenue level of the organisation. Another political factor is the relationship of the UK government with Russia and their dispute over the fuel prices that in turn fluctuates the cost of operations of the airline companies (Gerardi and Shapiro, 2009).
Economical: The economical conditions are among the primary factors that influence the operations of a firm (Wensveen, 2010). The global financial crisis of 2007-08 had created a major manipulation in the operations of the luxury services such as that of Virgin Airways.
Mainly, in nations such as UK, USA, Japan, Italy, Germany, etc where customers started ploughing back their money from the market and created a shortfall in the national economies, airline sector faced difficulties in operations. Furthermore, the reduction in
Government subsidies also hampered the operations of the business processes. On the other hand, instability in the exchange rate increased the fuel prices and reduced the deregulation in the airline industry (Ciliberto and Tamer, 2009). However, Virgin Airlines had reduced the price of their tickets for retaining their customer base and also provided discount plans.
Social: The social influence on Virgin Airlines is largely associated with the customer and employee management systems. Being one of the largest multination airlines of the world, diversity is a natural occurrence in their customer and employee base. The ability to manage the cultural diversity ensures effective service delivery and customer response for the company. Gössling and Peeters (2007) noted that owner Richard Branson wanted to certify an exceptional service and experience for their customers that required the staff to know and acknowledge the various cultural factors. The in-flight crew of the company provides elegant services related to the individual needs of the customers such as Virgin Airlines has a minimum of 4-6 cuisines in their flights at any given point of time to meet the needs of the customers (Van Dender, 2007). 24
Technological: It was observed in the value chain analysis that all the operational actvities of
Virgin Airways have been linked with their information and communications technology.
This highlights the importance of technological support for the Airlines service. Virgin
Airways has always concentrated on guarantying technological superiority for better service design. The fleet of 39 aircrafts have been remodelled regularly to keep them updated with the industry trends. Virgin Airways added 9 Boeing 787 jumbos in their fleet in the year 2014 which are expected to replace the Airbus A330 soon (Virgin-Atlantic, 2015b). Services such as individual television sets for each passenger are an example of technological usage in
Virgin Airways. In context of the operational necessities, the fleet of Virgin Atlantic has installed the latest radar systems (AirNav RadarBox) with ADS-B radar systems (Van
Dender, 2007).
Legal: One of the most prominent legal issues faced by Virgin Atlantic is related to their domestic service provider Little Red. The domestic air traffic of the UK has been consistently falling; the launch of Little Red generated huge controversy among the stakeholders of the organisation (Bilotkach, Gaggero and Piga, 2015). Furthermore, failure to acquire British
Midland had further reduced the scope of recovering from the losses encountered by Little
Red division of Virgin Atlantic Airways. In case of long-haul flights also, Virgin Airways is trying to merge with Delta Airlines but the foreign ownership rules is proving to be a challenge for both the concerned firms (Economist, 2014).
Environmental: The environmental issues have always been in the lime-light for airline organisations based on the pollution generated from flights and the management of the in- flight wastages (Rea and Kerzner, 2012). In this respect, Virgin Airlines is trying to reduce their environmental impact by developing an efficient business service process. The bio fuel demonstration provided by the company has shown potential for reducing the emissions by 25
4% annually (Kawaura, 2015). On the other hand, the increasing number of flights and
destinations of the company is equally contributing to the increase in green house gases.
Perceptual Mapping High Quality
Frontier Lufthansa
Air France Virgin Atlantic British Airways
Continental Delta
High Cost High Airlines airTrar
Japan Airlines
Low Cost
Ryan Air Air Asia US Airways
Thai
Air Canada Sky Airline
Low Quality
Figure 5: Perceptual Mapping Virgin Atlantic Airways
(Source: Created by Author)
The above performed perceptual mapping has been derived on the basis of two criteria
namely quality and cost. It can be noted that the most suitably positioned airlines group is the
Delta Airlines, whereas, big brands such as Lufthansa, Virgin Airways, British Airways, etc.
are positioned near high cost and high quality factors. Evaluating from the given perceptual
map, the primary competitor of Virgin Airlines can be noted as Lufthansa, British Airways, 26
Continental Airways, Air France and Delta Airlines. Virgin Airways has always been known for their premium service category (Gössling and Peeters, 2007). They have tried to provide the best of services to their customers such as Clubhouses and in-flight bars and television that have positioned Virgin Airways near the high quality quadrant of the map. Although price is an important factor for customers in their purchase decisions, Virgin Airways is trying to nullify the cost difference by adding more services and add-ons to create a halo effect and engage the customers with their service delivery process.
2.6 Financial Performance
The financial performance of the company has been analysed from the annual report and the stock performance of Virgin Atlantic Airways. Virgin Airways served over 6 million customers across 33 destinations in the year 2014 which resulted in operating cash flow of
£121 million (Virgin-Atlantic. 2014). The firm experienced an increase in the unit revenue per airline passenger by 4.8%, whereas, the operating cost increased by 0.3% from that of
2013 (Virgin-Atlantic. 2014). The profit before tax and exceptional items of Virgin Airlines increased by £65 million from 2013 to £14 million in 2014 on, year on year basis. However, the stock performance of Virgin Airways has fallen since the year 2014 from a point of 43.81 to 38.23 in 2015. The stock curve of the company has been consistently decreasing in 2015 since the sale of 49% stock to Delta Group of Airlines (Finance.Yahoo, 2015). 27
Figure 6: Stock Performance of Virgin Atlantic Airways, 2014-2015
(Source: Finance.Yahoo, 2015)
2.7 Outcome of Critical Analysis of Virgin Airways
Based on the above given internal and external analysis of Virgin Atlantic Airways, it can be considered that Virgin Airways has been growing significantly with their service structure.
However, there has been a decrease in their revenue generation process as Little Red segment failed to perform in the shot-haul domestic flights and the long-haul flights are also facing steep competition from other big brands such as British Airways, Emirates and Lufthansa. In context of their organisational structure, the top management body does not have a spot for the human resource management department and has implanted the HR systems within the middle level management. The top management has been structured with a flat hierarchical structure; whereas, the operational level of the company reflects a matrix structure for smooth functioning. 28
The marketing processes of Virgin Airways are the key to their customer relationship process. The company has an interactive website and efficient customer communication methods for connecting the customers with the organisation. Apart from this, the service structure of the company is continuously upgraded with innovative technology in order to engage the customers with the firm. Although the pricing of the company is higher in comparison to their competitors, individual focus towards customer needs and expectations helps them in managing their business growth and development.
2.8 Conclusion
Being a luxury service provider and one of the top brands of the international aviation industry, Virgin Atlantic Airlines has generated huge brand value in their respective industry.
Virgin Airways has always followed an unconventional route for designing their business strategies and tried to capture their target markets with exceptional and innovative service structures. While the company progresses in terms of their operational and managerial efficacies, the financial performance of the firm has suffered in the domestic short-haul flight segment. The long-haul flights have also shown a gradual decrease that lead to the selling of
49% of stock to Delta Airlines. Based on the analysis performed, it can be suggested that
Virgin Atlantic Airways needs to innovate new strategies for reducing their operational expenses and also expanding their services to more destinations across the world. 29
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