Q3: What makes the Australian Airline Industry different? Why do Qantas and Virgin Blue earn high profits when many airlines worldwide operate at a loss? Introduction The airline industry is extremely volatile, with events such as the September 11 attacks and recently the global financial crisis having adverse effects on the profitability of airlines worldwide. Only in 2007 has the international airline industry been able to post a profit since 2001 (Clark 2007), and since more losses have been made, with IATA forecasting overall losses for 2009 of $US11 billion (AFP 2009).
With substantial increases in fuel costs over the past 5 years and the constant need to purchase new and maintain existing aircraft, it is rare to find airlines posting large profits for sustained periods of time. Two such airlines however are Qantas and Virgin Blue and it is no coincidence that these airlines operate in the Australian airline industry. This report will investigate the differences between the Australian and international airline industries, particularly the US, and examine the factors into why they have been able to buck the trend of continued financial losses.
What makes the Australian Airline Industry different? Over the past several decades many international airline industries have undertaken deregulation, resulting in a massive surge in demand for air-travel and an influx of new entrants. In the US, deregulation brought on a range of low-cost airlines including JetBlue, Skybus Airlines, and one of the most successful low-cost airlines, Southwest Airlines. Their success initiated a widespread shift in the approach to airline services, with many Southwest ‘copycats’ emerging and adopting their low-cost model.
This however has led to unsustainable pricing wars and consequently the “US aviation industry as a whole has failed to deliver a net pro? t for ? ve consecutive years” (Fojt 2006, pg 7). In Australia post-deregulation meanwhile, there have been considerably fewer new entrants, with the first, Compass Airlines, collapsing in its first few years of operation and the next low-cost airline Impulse eventually being bought out by Qantas (Galvin & Tywonials 2006, pg 5). Their existence however led to a sharp drop in fares, and coupled with their already aging fleet, Ansett folded in 2001.
Ansett’s demise meant that the airline industry was occupied by the two remaining airlines, Qantas and the new entrant Virgin Blue, with these two being the only major airlines operating domestically in Australia until fairly recently with the advent of Tiger Airways and Qantas’s own incarnation Jetstar. This is in stark contrast to the US airline industry post-deregulation, with the US having a multitude of airlines, with its legacy carriers including United Airlines and American Airlines and its range of low-cost carriers.
The duopoly in the Australian airline industry with Qantas and Virgin Blue has meant that both airlines hold a significantly greater share of the market than their US counterparts, with “Qantas [controlling] about 65% of its domestic market. In contrast, the U. S. market is highly fragmented. The largest player, American Airlines, has a 17% market share” (Johnsson 2007). With the increasing costs of fuel and falling airfare prices, airlines with smaller market shares will find it increasingly difficult to earn reasonable revenues to return a profit.
The Australian airline industry is also unique in that the continent of Australia is so large, with the large distances between Australian capital cities making air travel often the only viable option for interstate travel. Additionally, on a broader scale Australia is distanced far from most other nations, especially its major trading partners in the US, UK and even Asia. The sheer distances involved means air-travel is the only practical method and, with growing globalisation, international flights have become higher in demand.
Other markets however do not face many of these issues, with European and Asian capital cities and countries being located much closer such that travel via methods such as train, car or boat are much more practical. In regards to the US airline industry, some blame for the widespread losses is attributed to the US bankruptcy laws which have allowed for airlines to be “artificially protected from creditors” (Wikipedia 2009) whilst still competing with ‘healthy’ airlines who have not declared bankruptcy.
This significantly protects airlines from complete collapse, and with all the US legacy carriers bar American Airlines filing for bankruptcy at one point, some argue it is necessary to tighten these laws to reduce competition to a point which may be more sustainable. The Australian industry on the other hand does not employ the same bankruptcy laws, with firms who are unable to pay their debts left to perish much like Compass Airlines and Ansett. Why do Qantas and Virgin Blue earn high profits when many airlines worldwide operate at a loss?
Although some of the success of Qantas and Virgin Blue does arise from the industrial factors raised above, their ability to regularly produce high-levels of profit over sustained periods can be attributed as much to their strategic implementations, in particular expanding and venturing into new areas which other international airlines are less willing. The fall of Ansett, the largest competitor to Qantas at the time, not only allowed for Qantas to gain an even greater dominance in the market but was the catalyst for Qantas to initiate a whole new approach in order to avoid a similar fate.
Qantas began to cut costs where possible, eventually able to save $1 billion in operational costs. However, the main strategic initiative undertaken by Qantas was the launch of Jetstar, its own low-cost carrier utilising the methods that were successful for Southwest. Their ability to successfully negotiate wages with unions such that Jetstar’s cost structure was “40 percent to 45 percent lower than Qantas’ mainline service” (Johnsson 2007) was another crucial factor into its success, allowing it to effectively operate with low fares.
Despite producing modest profit figures in its early years, Jetstar has began to become a major profitable venture for Qantas, having an operating profit of $75. 9 million for the 2007 financial year (Johnsson 2007). Although the foray of major carriers into the low-cost market is not unique, with most US carriers entering their own low-cost carriers into the market at one point, Qantas was the first to produce a profitable offshoot.
The desire to operate Jetstar completely separately to Qantas with its own staff and newer, more efficient aircraft was one of the significant factors, and the effectiveness can be seen when compared to United Airlines low-cost airline Ted, which operated concurrently with its main division, employing similar cost structures and it’s older aircraft which are more expensive to operate and maintain, and has proven to be unprofitable- folding in early 2009.
Along with its Jetstar venture, Qantas has been undertaking a massive diversification strategy, covering a variety of aspects involved in travel and aircraft including Qantas Holidays, Qantas Engineering Technical Operations and Maintenance Services and Qantas Freight. These entities, although not regarded as within the mainstream business of Qantas, are all vital in both promoting the Qantas image and generating its share of profits. Like Qantas, Virgin Blue has had to adapt to new challenges, in this case Qantas’s Jetstar, a direct competitor to Virgin Blue in the low-cost airline market.
In reverse to Qantas’ actions however, Virgin Blue has looked at exploring the business travellers market, that in which Qantas has been firmly established. Their introduction of flight lounges, live television, internet bookings and self check ins is all part of this strategy, and with Virgin Blue’s 2007 “half year net profit of $124 million up 80 per cent – the highest in the airline’s history” (Ryan 2007), it looks to have been successful. Conclusion
The successes achieved in the Australian airline industry is evidence that international airline industries, such as the US, must endeavour to reduce the number of competitors to a sustainable amount through mergers or the complete wind-up of airlines. Qantas and Virgin Blue’s ability to adapt to adverse conditions and develop evolving strategies and new ventures meanwhile has led to their long-term profitability, and their struggling US counterparts should look to do the same. Reference List
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