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

Abstract

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. 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.