View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Lincoln University Research Archive Lincoln University Digital Dissertation Copyright Statement The digital copy of this dissertation is protected by the Copyright Act 1994 (New Zealand). This dissertation may be consulted by you, provided you comply with the provisions of the Act and the following conditions of use: you will use the copy only for the purposes of research or private study you will recognise the author's right to be identified as the author of the dissertation and due acknowledgement will be made to the author where appropriate you will obtain the author's permission before publishing any material from the dissertation. A Comparative and Competitive Analysis of the Virgin Blue Business Model A dissertation submitted in partial fulfilment of the requirements for the Degree of Master of Professional Studies in Transport Management At Lincoln University by R. West Lincoln University 2009 Richard West. Dissertation Master of Professional Studies in Transport Management ABSTRACT Abstract of a Dissertation submitted in partial fulfilment of the requirements for the Degree of M. Prof. Studs in Transport Management A Comparative and Competitive Analysis of the Virgin Blue Business Model by R. West Many papers have been written which investigate and compare individual specific airline performance measurement criteria. Few, if any, combine a number of these criteria simultaneously across a number of airlines. Such an approach is required of the management teams and Board members when making important strategic decisions which directly effect the airline’s success in the future. The author has a specific interest in developing a long term resource based competitive strategy for Virgin Blue. Such an undertaking is a huge task and it is very difficult to capture an instant snap shot across a number of airlines simultaneously. Each airline’s operations are continuously changing in order to react to changes in the market place. The author has attempted to limit the depth of investigation across the various measurement criteria due to the size of the task. Resulting from this approach is a possible framework from which further investigation and comparative analysis can be staged in a controlled manner. Due to the time taken to investigate the various criteria, not all of the dates align with each other but they are considered to be satisfactory to be used as a high level comparison. The airline industry moves and changes so quickly. Air New Zealand and Qantas have been selected because they are both in direct competition with Virgin Blue. Easy Jet, otherwise known and registered under the trade name ‘easyJet’, has been selected because it is a very successful low cost airline and its website gives the perception that it operates the complete door to door supply chain. The successful Easy Jet low cost business model serves as a good baseline from which to measure the performance of the Virgin Blue airline. The four airlines have been evaluated using select criteria and then compared with each other. The hope was that both successful and unsuccessful strategic trends would appear during the comparative process. The comparative analysis has highlighted significant trends in the airline networks, financial management and business strategies. Virgin Blue can use these trends to help develop its long term resource based competitive strategy. The two national airlines, Air New Zealand and Qantas, have ageing average fleet ages which could prove to have a book value which is somewhat higher than the actual market value. Virgin Blue has a younger average fleet age but needs to plan to replace its older aircraft if it wishes to maintain its current winning image. Page ii Richard West. Dissertation Master of Professional Studies in Transport Management Unlike Air New Zealand and Qantas, Virgin Blue competes on the majority of its point to point sectors whilst Air New Zealand remains relatively unchallenged in the New Zealand domestic sectors. If Virgin Blue was to compete in the domestic market with smaller aircraft then the effect on Air New Zealand and the New Zealand economy could be devastating as the frequent services, previously offered by the national carrier, could be lost. The New Zealand Government may feel obliged to step in and protect the frequent services which support the national businesses. Virgin Blue could be left in an over committed position. There is no single financial tool which measures the potential success of an airline. What is clear is that share values are not a good measure of a young low cost airline. Financial leverage figures for the larger mature flagship airlines can be misleading. Dividends paid, capital reinvestment and the issue of new shares to raise capital can create a misleading perception of an airline’s health. The airline industry is a high investment and high risk business in which the maximum returns are made by flying aircraft as effectively and efficiently as possible. The concept of owning and operating a complete door to door supply chain could be perceived as a less efficient use of resources. Like the mature flagship airlines, a low cost airline which has almost exhausted its growth options can look to operate its own support services. An airline would need to own and operate its own stable main hub airport facility if it was to have a sensible chance of owning and managing the entire door to door supply chain. Both Ryanair and Richard Branson have shown interest in this area of potential growth. Page iii Richard West. Dissertation Master of Professional Studies in Transport Management CONTENTS Page No. LIST OF FIGURES VII LIST OF TABLES VII LIST OF APPENDICES VIII LIST OF ABBREVIATIONS X 1. INTRODUCTION 1 1.1 Acknowledgements 1 1.2 An Overview 2 1.3 Objectives 3 1.4 Structure 3 1.5 Selection of Airlines 3 1.6 Selected Airlines 4 2. AIRLINE EVALUATION METHODOLOGY 5 2.1 Business and Operations 5 2.2 Network Analysis 5 2.3 Financial Management 5 2.3.1 Risk and Return Analysis 6 2.3.2 Cost of Capital 9 2.3.3 Analysing the Capital Structure – Current Financing 10 2.3.4 Analysing the Dividend Policy 11 2.4 Airline Strategy and Competitive position 11 3. COMPARATIVE ANALYSIS 12 3.1 Comparison of Business and Operations 12 3.1.1 Comparison of Companies and Associate Companies 13 3.1.2 Comparison of Operating Fleets 13 3.2 Comparison of Airline Networks 15 3.2.1 Comparing Capacity 15 3.2.2 Comparing Alliance Networks 16 3.2.3 Comparing Network Sectors 17 3.3 Comparison of Airline Financial Management 18 3.3.1 Comparison of Airline Risk and Return Analysis 21 3.3.2 Comparison of Airline Cost of Capital 29 3.3.3 Comparison of Airline Capital Structure 30 3.3.4 Comparison of Airline Dividend Policies 32 4. STRATEGY AND COMPETITIVE POSITION 34 4.1 The Vision and Guiding Principles 35 Page iv Richard West. Dissertation Master of Professional Studies in Transport Management 4.2 Oh for a ‘Clean Slate’! 37 4.3 Industry Analysis 37 4.3.1 Market Analysis 37 4.3.2 Competitor Analysis 40 4.3.3 Strategic Group Analysis 43 4.3.4 Sizeable and Sustainable Competitive Advantage 49 4.3.5 Differentiation 51 5. CONCLUSIONS – COMPARATIVE DISCUSSION 54 5.1 Objective No.1 - Conclusions 54 5.1.1 Business and Operations 54 5.1.2 Airline Network 54 5.1.3 Financial Management 55 5.1.4 Strategy and Competitive Position 56 5.2 Objective No.2 - Conclusions 58 6. EVALUATING AIR NEW ZEALAND 59 6.1 Air New Zealand’s Business and Operations 60 6.1.1 Companies and Associate Companies 60 6.1.2 Operating Fleets 61 6.2 Air New Zealand’s Financial Management 62 6.2.1 Air New Zealand’s Risk and Return Analysis 64 6.2.2 Air New Zealand’s Cost of Capital – 2007 69 6.2.3 Analysing Air New Zealand’s Capital structure 70 6.2.4 Analysing Air New Zealand’s Dividend Policy 72 7. EVALUATING EASY JET 74 7.1 Easy Jet’s Business and Operations 75 7.1.1 Companies and Associate Companies 76 7.1.2 Operating Fleets 76 7.2 Easy Jet’s Financial Management 78 7.2.1 Easy Jet’s Risk and Return Analysis 79 7.2.2 Easy Jet’s Cost of Capital 83 7.2.3 Analysing Easy Jet’s Capital structure 85 7.2.4 Analysing Easy Jet’s Dividend Policy 86 8. EVALUATING QANTAS 88 8.1 Qantas’s Business and Operations 90 8.1.1 Qantas’s Companies and Associate Companies 90 8.1.2 Operating Fleets 91 8.2 Qantas’s Financial Management 93 8.2.1 Qantas’s Risk and Return Analysis 96 8.2.2 Qantas’s Cost of Capital 100 8.2.3 Analysing Qantas’s Capital Structure 101 8.2.4 Analysing Qantas’s Dividend Policy 103 Page v Richard West. Dissertation Master of Professional Studies in Transport Management 9. EVALUATING VIRGIN BLUE 104 9.1 Virgin Blue’s Business and Operations 105 9.1.1 Companies and Associate Companies 106 9.1.2 Operating Fleets 107 9.2 Virgin Blue’s Financial Management 108 9.2.1 Virgin Blue’s Risk and Return Analysis 111 9.2.2 Virgin Blue’s Cost of Capital 115 9.2.3 Analysing Virgin Blue’s Capital structure 118 9.2.4 Analysing Virgin Blue’s Dividend Policy 120 10. GLOSSARY OF TERMS 124 11. REFERENCES 128 12. APPENDICES 132 Page vi Richard West. Dissertation Master of Professional Studies in Transport Management LIST OF FIGURES Figure 1.