Strategic Management on Qantas Airway

1 January 2017

This report is going to provide a fundamental analysis inboth external and internal factors that influence Qantas Airway in competing in the aviation industry. The PESTEL framework is applied to identify how issues in the political, economic, social,technological, environmental and legal environment may affect the industry within which Qantas operates. Moreover, Porter’s five forces model also helps identify the attractiveness of the airline and aviation industry related to five competitive forces: the threat of entry, the threat of substitutes, the power of buyers, the power of suppliers and the intensity of rivalry among competitors in the existing industry (Johnson, Whittington & Scholes 2011).

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The external analysis is essential to determine Qantas’ opportunities and threats. Whereas the internal analysis includes understanding Qantas’ resources and competences that are likely to provide sustainable competitive advantage, identifying Qantas’ competitive position using VRIN model (value, rarity, inimitability and non-substitutability), examining Qantas value chain analysis by evaluating the primary and support activities that the company performs and analysing its weakness and strengths. Finally, Qantas’ generic business strategies are also going to be examined by analysing it strategic statement and objective. Background Information

Qantas (Queensland and Northern Territory Aerial Services Limited) is Australia’s largest domestic and international airline. It employs 37,000 staff and provides services across a network that covers 145 destinations in 37 countries (Qantas Airways Limited 2007. It is known as the world’s leading long distance airline, providing pioneered services from Australia to North America and Europe. It was established in the Queensland outback in 1920 by William Hudson Fysh and Paul McGuinnes. The business started with small biplanes carrying one or two passengers. It the first airline that invented business class travel in 1979 which now becoming a global standard (Qantas 2009).

Moreover, the airline has served through war and peace to protect and support the nation therefore Qantas has been recognized as ‘Spirit of Australia’ with the red kangaroo logo that gives a strong brand image. Today, Qantas is widely regarded as one of Australia’s strongest brands with a proud history of reliability, excellent customer service and safety. It provides international as well as domestic connectivity and offers premium services including high quality in-flight services, convenient check in, Qantas club, holiday packages and car rental facilities. Its main target market is business travellers. SWOT Analysis Strengths * Extensive network / member of the One World Alliance * Globally recognised brand name and logo * Impressive safety record *

Excellent airport locations and facilities| Weaknesses * No plans for expansion * Customer’s quality perception decreased * Higher operating costs than its competitors| Opportunities * Gain strategic position using E-commerce * Increase number of business travellers due to boom in international trade| Threats * Questionable reliability (delays, cancellations, etc. ) * Strong competitors, such as Singapore Airlines (international) and Virgin Blue (domestic) * Rising fuel costs * Increase in government regulations to protect smaller competitors| The above table helps to illustrate the internal (strengths and weaknesses) and external (opportunities and threats) analyses of Qantas airway.

Overall, Qantas Airway is a strongly established airline company in the world; however it will need strategic planning in order to tackle potential threats. Further analyses will be conducted for the internal (Porter’s Five Forces) and external (PESTEL model) factors affecting both Qantas Airway and the aviation industry. PESTEL Analysis Using the PESTEL framework, a macro-environment analysis will be conducted for the aviation industry within which Qantas operates. Political In 1990, price and entry restrictions were eradicated due to deregulation of the Australian market. Since then, the Australian government has not directly interfered in the domestic market.

However, there are still several political restrictions, such as the foreign ownership levels in Australian airlines. As for the international market, it is still deeply regulated as the access to individual routes is based on over 3,500 bilateral agreements between governments (Dixon 2008). As a result, politicians are able to apply this policy as a barrier to entry for new competitors in the industry. Hence, this gives national airlines a competitive edge. Nevertheless, governments are starting to loosen access restrictions to individual routes. Economic The greatest concern in the aviation industry is oil prices. As fluctuation of oil prices is extremely difficult to predict, airlines are having a hard time controlling fuel costs.

Also, in recent years, oil prices have been steadily increasing, which causes a rise in airline operation costs to a critical level. As a result, commercial airlines would be obliged to increase the prices of tickets in order to maintain a sustainable profit margin. Social People are now traveling so much more as compared to during the 20th century as a direct consequence of globalisation. In fact, the aviation industry has contributed to the integration of different cultures by making traveling more affordable, simpler and less time consuming. Technological Due to rapid technological advancement and intense competition among aerospace manufacturers, commercial airlines are now able to use more efficient aircrafts.

Airbus has recently created the A-380 which boasts to be a highly efficient plane that can hold 525 passengers and that the use of this plane will increase the returns of the airline by 35% (Airbus 2008). On the other hand, Boeing has created the 787 Dreamliner which is said to save 20% more fuel than a place with similar specifications (Boeing 2008). Qantas has placed an order for 20 A-380 aircrafts, 115 Boeing aircrafts which include the 787 Dreamliner aircraft. With the internet so widely used in today’s society, customers can now purchase tickets using Qantas website or telesales. These new options help to significantly lower airlines operation costs, since companies are required to spend substantial resources in opening new ticket offices.

Additionally, the need for intermediaries such as travel agencies can be removed from the equation since customers can now compare ticket prices between airlines online, thus having the ability to organise trips on their own. This direct relationship between customers and airlines help to reduce final ticket prices. Environmental 2% of the total CO2 emissions in the world are contributed by airplanes. Hence, with the development of Air Traffic Management, new fuel efficient routes are being made in an attempt to reduce CO2 emissions by 1. 5 million tons (Eurocontrol 2008). With the invention of more efficient aircrafts, a reduction in CO2 should be possible.

Legal Australian law states that the foreign ownership level in Qantas must always be below 50%. This policy may restrict Qantas to raise new resources (Ryan 2007). Qantas also faced some problems in expanding due to regulatory barriers. In 2003 Qantas tried to acquire Air New Zealand. However, it was unsuccessful as regulators from New Zealand claimed that the national economy would suffer a major negative impact due to the merger (Fifield 2003). Porter’s Five Forces Analysis Threat of new competition -Low threat of competition because of high start-up cost, planes/terminals/training. The threat of new competition in the airline industry is low.

The high cost of the aircraft and other capital need is the major factor. There is also not much that differentiates airlines so a new entrant can’t come in with new technology and quickly increase market-share. Threat of substitute service -High threat from alternative modes of transport. There are plans to build a high-speed railway from Melbourne to Brisbane via Sydney and Canberra (Rood 2011). This could take a large market-share of Qantas’ domestic flights. The cost of a train trip from Melbourne to Sydney could be under $100, while the same trip by plane is around $300. Bargaining power of customers -There is not a lot that is different between competing airlines.

It basically comes down to how good the service is to how much the ticket is. With not much room to maneuver in the aviation industry, Qantas does not have much leverage to retain its user base. The only think Qantas can do is to keep its good image and keep costs as low as possible. The customers can easily go elsewhere and as such have a lot of bargaining power. Bargaining power of suppliers -There are only 2 suppliers capable of producing commercial aircraft that meets Qantas’ needs – Airbus and Boeing. As there are only 2 suppliers that are capable of producing aircraft on the scale that Qantas needs, it does not have much bargaining power over suppliers.

Though the orders are generally for more than 20 planes at a time and therefore Qantas gets the planes for a good price. Threat of New Competition -The aviation industry is a very competitive market. Airlines are always looking at new ways to increase their market-share. There is not much Qantas can do to distinguish itself from its competitors in its role as an airline so Qantas focuses more on service and ticket price. Qantas provides a very high level of service and has a very good safety record. The Economic factors are very important to Qantas’ profit. As fuel prices are very high it drives the price of flights up with it. It also makes alternative forms of transport like trains much more favourable.

With low bargaining power with suppliers, if the suppliers decide to increase prices then Qantas does not have much choice but to increase ticket prices. Qantas also does not have much bargaining power with customers, hence this presents a problem. Qantas’ Strategic Capabilities Strategic Capabilities| Resources| | Competencies| * Strong Brand Image “Spirit of Australia” * Outstanding Airport facilities * Frequent flyer scheme| Physical| * Best safety records * Outstanding Customer Loyalty| * High returns on invested capital * A great amount of capital| Financial| * Cost savings from implementation of the Sustainable Future Program * Successful fuel hedging program| * Skilled employees| Human| * Excellent customer service|

Qantas has several strategic capabilities that assist the company to maintain its position as the market leader in the aviation industry. Firstly, the company has a strong brand image which is regarded as its distinctive resource since it gives Qantas competitive advantage that others cannot imitate. The Qantas brand is associated with ‘Spirit of Australia’, premium in-flight services, on-time schedules and convenient booking system that all are highly valued by the customers. Qantas also has good reputation for safety. The last serious accident suffered by Qantas was in 1951 and only several minor incidents have been reported in 1960, 1999 and 2008 (Qantas 2009).

This is an exceptional safety records considering the number of serious incidents that other airlines have experienced in the last 88 years. Moreover, Qantas has excellent airport facilities including E-ticket and Quick Check-in facilities that are available at domestic airport allowing customers who travel without luggage to save time. Qantas also provides meeting room at Sydney and Melbourne terminal and offers Qantas Club for customers who expect services before flight. This first-rate airport facility might be viewed as Qantas threshold resources required to meet customers’ needs. Qantas Frequent Flyer is the most well-known airline loyalty program in the southern hemisphere.

It is estimated that 11,000 new members join the loyalty program every week and it has 7. 2 million members and 500 partners (Chandler & Tubman 2012). Qantas Frequent Flyer is one of the dynamic capabilities as this may be imitated by competitors and become standard practice in the aviation industry over time, hence Qantas needs to renew and recreate the scheme to cope with the ever changing environment. Importantly, Qantas has carried on the Sustainable Future Program and fuel hedging to deal with cost pressure. Through this program, Qantas has managed to save $3 billion over a five year period (2003 – 2008) with savings of $747 million during the year 2008 (Qantas Airways Limited 2008).

Additionally, Qantas has strong financial management since it has managed to be one of the few profitable airlines worldwide without government assistance. Qantas’ management also successfully maximize return to shareholder after the privatisation in 1995 (Qantas 2010). Finally, Qantas has spent over $300 million in the last 5 years in staff training since Qantas believes that employees are the foundation of the company and motivating them to provide greater service might assist the company achieve its objective of gaining sustainable competitive advantage (Joyce 2012). VRIN Model Analysis Using the Venn diagram to further illustrate the VRIN model Physical Resources

A – Qantas brand (Valuable, Rare, Inimitable, and Non-substitutable) B – Airport locations and facilities (Valuable, Rare, and Non-substitutable) C – Frequent flyer scheme (Valuable) Financial Resource D – Financial management system (Valuable, Rare, and Inimitable) Human Resource E – Skilled Workforce (Valuable, Rare, and Non-substitutable) VRIN Data Analysis From the above Venn diagram, it can be concluded that Qantas Airway is in a sustainable competitive position due to its many invaluable resources. Qantas’s Value Chain By using the Value chain analysis it is easy to determine that Qantas implements a premium service with high quality staff, airplanes and service.

Qantas relies on being an Australian company with people knowing and trusting its name in regards to quality and safety. It also uses reward programs like frequent flyer points to gain the loyalty of its customers by providing rewards if they can accumulate a certain amount. Qantas has a commanding 65% of all domestic flights in Australia, but loses money on its international flights (Hedges 2011). As pricing is one of the most important factors to differentiate your business from another, reducing costs are very important to Qantas. By procuring new more efficient airplanes like the Airbus A380 Qantas can fly more people for similar fuel costs and therefor increasing efficiency of its fleet.

Newer planes also have designs improvements which increase the planes aerodynamics thereby also increasing its fuel efficiency. By training its staff well, Qantas ensures a high level of quality on all its flights. By having proficient staff who can deal with any situation it gives consumers confidence in the company and helps ticket sales. By using a differentiating strategy, Qantas has retained its title of Australia’s largest airline. However it needs to differentiate itself more in the future to compete with other airlines internationally. Qantas’ Generic Strategies Qantas’ services are open to a broad range of customers. The flight routes are many and widespread with no limitations on who can and can’t use them. The competitive scope is therefore broad.

Qantas is also a non-budget airline so its costs are relatively higher than some other airlines. Using these two determiners Qantas falls into the differentiation strategy. With airlines, there is not much you can do to differentiate your company from others in the industry. The main differential factors are service and cost. Qantas provides a top-of-line quality service with an amazing safety record of no deaths in over 42 years (Airsafe 2007). Qantas is an Australian icon. As the longest continuously running airline in the world it is a symbol of Australia’s strength and unity. Qantas uses this in its ads featuring choirs singing “I still call Australia home” all around the world.

With the collapse of Ansett in 2001, a large percentage of Ansett’s business went to Qantas and Virgin Blue (now Virgin Australia). With Virgin Blue a new company only founded in 2000, Qantas had a strong position in domestic flights in Australia. Qantas has failed to differentiate itself in the international airline industry as it is losing money on long half flights (Hedges 2011). The domestic sector is the only thing keeping Qantas afloat. Due to Australia’s high labour costs it is hard for Qantas to compete without outsourcing to cheaper Asian maintenance companies. In 2011 there was an incident where all Qantas planes were grounded with “a daily financial impact of about 20 million Australian dollars” (Spark, Williams & Joseph 2011).

The workers wanted more pay and job security but the two sides are yet to come to a unanimous decision. Conclusion In conclusion, it is necessary for Qantas to analyse its external and internal factors in determining its business strategy and brand position since understanding external environment such as political, economic, social, technological, environment and legal environment may assist Qantas to understand threats and opportunites. In addition, in order to successfully overcome threats and seize opportuninties, Qantas needs to look into its strengths and weaknesses through analysing its strategic capabilities, value chain activities and competitive advantage.

It is believed that having sustainable competitive advantages such as globally recognised brand image, superior reputation, strong financial management, outstanding airport facilities and excellent customer service may significantly assist Qantas to compete and survive in the aviation industry.

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