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The Australian airline industry and the case of OzJet

A strategic analysis report

Seminar Paper 2007 24 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of contents

Executive Summary

1. Introduction and Overview
1.1 Structure Outline – Main Task and Procedure
1.2 OzJet and the Airline Industry

2. The External Environment
2.1 The General Environment
2.1.1 Demographic Changes
2.1.2 Socio-Cultural Forces
2.1.3 Political/Legal
2.1.4 Technological
2.1.5 Economic
2.1.6 Global Factors and Other Issues
2.1.7 Conclusion – General Environment
2.2 The Competitive Environment – The Airline Industry
2.2.1 Analysing the Industry’s Structure using Porter’s Five Forces
2.3 Competitor Analysis
2.3.1 Qantas
2.3.2 Jetstar
2.3.3 Virgin Blue
2.3.4 Conclusion Competitor Analysis
2.4 Conclusion – Opportunities and Threats

3. The Internal Environment
3.1 Tangible Resources
3.1.1 Physical and Technological
3.1.2 Financial
3.2 Intangible Resources
3.2.1 Reputation Assets - Brand
3.2.2 Innovation and creativity
3.2.3 Human
3.3 Capabilities
3.4 Conclusion – Strength and Weaknesses

4. Summary of SWOT Analysis
4.1 Conclusion – Why OzJet failed
4.2 Evaluation of the likelihood that a third carrier can make a successful entry

5. Appendix
5.1.1 Qantas Details
5.1.2 Jetstar Details
5.1.3 Virgin Blue Details

6. References

Executive Summary

OzJet started its business in November 2005 with the strategy to enter the Australian business traveller market on the Sydney-Melbourne trunk route. It had to compete with three other airlines: Qantas, Jetstar and Virgin Blue. OzJet’s core capability was to provide a top-notch service at a fully flexible economy price. However, the focus on customer service was not able to meet the needs of the targeted market. Business-class travellers were loyal to Qantas, offering a much higher flight frequency and loyalty program for this not so price sensitive market segment. In the end, OzJet had neither the cost structure (using old plains) nor the reputation and financial background to consist against its strong competitors.

As a result, despite the high quality of its services, the airline OzJet couldn't find its niche and made a double digit million $ loss (about 10 million $) after 4 months. It ceased all scheduled operations on 12th March 2006 and now operates as a private charter company.

1. Introduction and Overview

1.1 Structure Outline – Main Task and Procedure

This case study provides an overview of the airline industry and its competitors with a focus on the question why OzJet failed.

The first chapter will give an insight on the main task and on the case study structure, concentrating on a brief outline of OzJet and the Australian airline industry.

In chapter two, the external environment OzJet had to face is examined, including the analysis of the main trends and its competitive intelligence through scanning and monitoring. Furthermore, it presents a survey of the environment using Porters five forces, completing with a brief conclusion of the threats and opportunities in the airline industry.

Chapter three gives information of OzJet’s internal environment from a resource based view that examines the collection of its tangible and intangible resources, as well as its organizational capabilities shaping OzJet’s competitive position. This chapter ends with a short conclusion about OzJet’s strengths and weaknesses.

Finally, it is discussed why OzJet failed and a strategic recommendation is given, about the likelihood of a third airline being successful in the Australian airline industry.

1.2 OzJet and the Airline Industry

On November 29 in 2005, Formula One millionaire and Minardi racing team owner Paul Stoddart started to operate a budget airline in Australia called OzJet. It had scheduled service between secondary airports on the Sydney-Melbourne air route using six BAe146 (Boeing 737-200) aircrafts. The airline had a low cost structure, which was based on the hugely successful European Ryan-Air[1] and was focussed on top-notch services (Peter Morley, 9 March 2004).

OzJet's motto was "You're in Business". The company wanted to acquire 10% of the business travellers market from competitors like Qantas (full-service two-class CityFlyer service), Virgin Blue (all-economy low-cost carrier), and Jetstar, in an already-crowded airline sector (Luisa Saccotelli, 4th December 2005).

On Sunday 12th March 2006, chairman of OzJet Paul Stoddart announced that OzJet would cease all scheduled operations. In this short period of time, it made a double digit million $ loss (about 10 million $) and investors weren’t willing to go on (Kirsty Needham and Scott Rochfort, 2006).

OzJet now operates as a private charter company and offers flights from Norfolk Island to Sydney and Brisbane for Norfolk Air, working with a heavily reduced staff and a smaller fleet (John Stensholt, 1 March 2007).

2. The External Environment

2.1 The General Environment

The factors of the general environment can have dramatic effects on a firm and its strategy. We will now take a closer look at the most important forces that have the capacity to positively or negatively affect a new competitor in the airline industry, and what OzJet had to deal with.

2.1.1 Demographic Changes

Momentarily, there is a growing, but also aging population in Australia. The Generation Y represents about 4.5 million of the 20 million people living in Australia. This group is reported to be setting and influencing spending pattern trends (Ben Wyld, 2005).

In this environment, OzJet aimed at gaining business people as customers by offering its service on the Sydney-Melbourne route (Scott Rochfort, 14th March 2006; Knibb David, 2005). This meant that their audience consisted mainly of young business professionals, the so- called Generation Y, as well as business people ages 35 to 54, which represent a large part of the Australian population.

2.1.2 Socio-Cultural Forces

Socio-culturally speaking, we can see an ongoing trend for greater environmental concerns. Especially people with a high awareness for global warming try to travel environmental friendly and are looking for suitable travelling substitutes.

Another trend is reflected by an increase in services to leisure destinations (Aviation Statistics 2005-06) to fulfil the needs of the fun and consuming lifestyle of the new generation.

Moreover, in today’s fast-paced global business environment, timetables took precedence over service and for a discerning business traveller, scheduling is critical (Jamie Freed, 16th April 2005).

2.1.3 Political/Legal

There is a deregulation trend in the airline industry, but it is still regulated heavily and has gone through considerable internal changes over the last 10 years.[2]

OzJet was welcomed by some politicians[3], because higher competition decreases fares and boosts tourism. But through political regulations and resistance of resident groups OzJet had problems finding secondary airports to operate from (John Masanauskas, 5th April 2004).[4]

2.1.4 Technological

The internet and rapid technological developments have a high influence on the airline industry. New technologies like online booking, flight software[5] and better planes provide the possibility to reduce costs and satisfy customers.[6] This is an important component in operating efficiently and keeping up with the game by minimizing costs.

2.1.5 Economic

The Australian economy is remaining strong over the last years, the unemployment rate is actually down to 4.5%, the interest rates have been stable at about 5-6% and between the years 1996 and 2005 the GDP was 3.2%[7], which is quite good (Australian Bureau of Statistics).

2.1.6 Global Factors and Other Issues

The intrastate sector has been subdued by the collateral effects of September 11th, the Iraq War and SARS on international tourism flows, especially during the first half of 2003 (Department of Planning and Infrastructure, 2004).

Furthermore, the fuel price has been steadily increasing over the last years, and therefore affects the profits of the airline industry (AirWise News, 2005).

Both major Australian airlines, Qantas and Virgin Blue worry about rising fuel costs and see them as the greatest challenge for the future (Annual Report Qantas 2006).[8]

2.1.7 Conclusion – General Environment

Overall, OzJet operated in the slowing down and heavy regulated Australian airline industry, influenced by rising fuel prices. All these factors lead to cost reductions and increased competition for OzJet.

2.2 The Competitive Environment – The Airline Industry

The regional aviation market in Australia continued to be volatile, characterised by relatively flat growth, low margins and financial pressure, particularly for smaller players, throughout the last 10 years.

However, the last few years have shown a positive trend in the Australian airline industry. In the year ending June 2006, over 42 million passengers were carried on Australian domestic airlines, which is an increase of 5.1% (Aviation Statistics 2005-06).[9]

[...]


[1] This model is based on the European example, where airlines using secondary airports have many customers attracted by the absence of parking and travel fees associated with major ports.

[2] However, the government did not adopt the full “open skies” policy, but instead accepted a proposal by Qantas and Ansett, that foreign airlines should not be allowed to compete with domestic airlines for passengers and cargo inside Australia (Wainwright, R. 1999).

For more information’s see Appendix 2) Changes in the air services policy

[3] e.g. NSW premier Bob Carr

[4] Some residents' groups opposed the idea of secondary airports because of noise exposure and it was believed federal and state governments feared a voter backlash if OzJet was launched. Moorabbin airport was in talks with Ozjet, but final approval rested with federal Transport Minister John Anderson, who said the issue was not on the Government's agenda (John Masanauskas, 2004)

[5] For example the “Open Skies” software from JetBlue, to handle electronic ticketing, internet bookings, and revenue management (Lean Cutcher, 2007)

[6] Offers the possibility to safe fuel, give more comfort, etc.

[7] GDP (Gross Domestic Product) = Average annual growth in Volume (The market value of all final goods and services produced within a country in a given period of time)

[8] For more information’s see Appendix 3) The Cost of Fuel

[9] Passenger numbers are now well ahead of the 34 million carried in the year 2000-01, prior to the collapse of the Ansett airline (Aviation Statistics 2005-06).

Two key factors contributing to substantial growth in air transportation are the economic development/prosperity and the declining real cost of air travel, but the rate of growth has slowed down as the industry became larger and more mature (Trotman and Simnett, 2001). However, the sector across Australia is not necessarily highly profitable and remains subject to rapid and unpredictable shiftings in costs, associated with changes in fuel prices, in the USA/Australian dollar exchange rates and in airline/airport security measurements, which add to airline costs (Department of Planning and Infrastructure 2004).

Melbourne – Sydney remains Australia’s busiest domestic route with more than 6.2 million passengers, and the Melbourne–Sydney–Brisbane triangle represents almost one third of Australia’s total passenger traffic. Total traffic on these three routes fell by 1.3% during the year. This reflects an increase in services to leisure destinations and more direct services which bypass the main hubs (Aviation Statistics 2005-06).

Details

Pages
24
Year
2007
ISBN (eBook)
9783638805612
ISBN (Book)
9783638824569
File size
655 KB
Language
English
Catalog Number
v76304
Institution / College
The University of Sydney
Grade
1,3 (86%)
Tags
Australian OzJet Airline Industry Strategic Analysis SWOT Porter Five Forces

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Title: The Australian airline industry and the case of OzJet