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Virgin’s Challenge to Airline Business

Airline Industry situation. Virgin Atlantic’s Mission. Entrance Barriers Oligopoly for every route Government Regulation High price & Low profits Initial big Investment Roller Coast Economic Cycle Uncomfortable & Routinely Job Conveyor Belt of Passengers Uncontrollable factors

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Virgin’s Challenge to Airline Business

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  1. Airline Industry situation Virgin Atlantic’s Mission • Entrance Barriers • Oligopoly for everyroute • Government Regulation • High price & Low profits • Initial big Investment • Roller Coast Economic Cycle • Uncomfortable & Routinely Job • Conveyor Belt of Passengers • Uncontrollable factors • War, Epidemic and so forth “ To grow to the most profitable airliner, which makes flying enjoyable and where people love to work” (R. Branson, Chairman of Virgin Group) R. Branson’s Profile • Birth: 18 Jul. 1950 (Surrey, England) • Nationality : Britain • Marital status : married, 2 children • Character: enthusiastic, funny Virgin’s Challenge to Airline Business

  2. Virgin Atlantic • OPPORTUNITIES • Deregulations, new routes • Increase service expectations of customers • Growth in airline travellers • Growth in segment • THREATS • - Global recession • - Vulnarable brand reputation • Imitatable features • Increased competition • New entries (Rynair) • Consolidation in industry Chances Takeable STRENGTHS • Richard Branson • Strong brand equity • Involved motivated staff • Experienced team • Strong image • Creative, innovative • Quality and consistency • publicity WEAKNESSES • Few destinations • Capital • Small feeder networks • Punctuality • Age of fleet • No economies of scope • Unclear Brand positioning Chances Blocked Danger Allayable Danger Imminent

  3. Opportunities Threats Chances Blocked Danger Imminent Weaknesses Danger Allayable Chances Takeable Strengths

  4. Virgin Atlantic • Power of suppliers • Low bargaining power • Dependence of petrol High concentration, • Airport services Price inelastic • Maintatnace services • Threats of entry • Deregulation • Low product differentation • Option of lease to invest • Industry Rivalry • Oligopolies and duaplies in routes • Low product differentition • Capital intensive, high exit barrier • Similar cost components • Charters and scheduled • Threats of substitudes • Increase in telecommnucation • Other ways of transportation • Power of buyers • More and more elastic Price Increase in number of airline tarvellers • Low product differenciation Increase of information (internet) • Travel Agents switching costs (frequent flyers)

  5. Targeted Customers The main targeted group

  6. Recommended Growth Strategy • Acquire Customers by Vertical Integration of • Hotel Chains • Travel Agencies • Short Haul airlines • Increase customers with Virgin experience by • forming Strategic Alliance • increasing Franchise Routes • exporting Virgin management and services Maintain & Improve Core Valued Services • Expand physical capacity by • increasing Load Factor • increasing Fleet & Routes • More and better time slots • Gain access to additional international ports of England, • Gain access to more populated cities and holiday spots of the world • Retain royalty of customers by • focusing on customer relationship • keeping a high degree of interaction with customers

  7. Recommended Distribution Strategy Maintain Direct Mailing Expanding Virgin Holidays Closely Monitor of appointed travel agencies Research into new channels and technologies such as internet Vertical Integration with more travel agencies

  8. Implication for Growth Strategy • People • about 25% increase in staff size • Require to maintain quality • Require to ensure high motivation factor • Distribution and Strategy Partnership Requirement • Additional Sales channels to source for new customers • Invest in new technology and research for new channels • forming strategic partnership with new distribution channels or international airlines. • Organisation • Difficulty in maintaining flat structure in the current growth requirement • Change management to acquire additional routes • Invest in publicity and government relationship management departments • Corporate services & finance • Capital requirement for sourcing additional aircraft is about £190million per year* beside increase in depreciation and maintenance costs • Additional Capital requirement for additional staff force • IT infrastructure adjustment *Projecting 1.5 aircraft per year using 4 unit of 340 Airbus at £300m for base of calculation

  9. VA VS BA

  10. GENERAL STRATEGY • Maintain good quality • Strong customer relationship • Advanced services and conveniences through technology • Innovation • Motivated staff-Unique flying experience • Expand • Long route focus • New base • Short flights subdivision • Franchising

  11. MARKET SEGMENTATION • Market Segmentation • Upper Class main focus • Corporate contracts • New brand image away from Branson • Future clientele • Advertising Strategy • Low advertising cost • Innovation-Extreme Ideas • Global reach • Virgin Group promotion means Upper Class Revenues per passenger Mid Class Economy Class 14% 75% 11% Passengers breakdown

  12. PRICING STRATEGY • UPPER CLASS • Revise their pricing policy. Research on price elasticity. Increase gradually price. • MIDDLE CLASS • maintain price level • ECONOMY CLASS • Sensitive to price changes • Increase price in selected destinations

  13. Risk analysis high 1. Positioning dilemma A global Long haul business or regional low cost carrier ? 2. Financial crisis Expansion requires capital and only good ROI can guarantee more cash injection 3. “R.B” Phenomenon Microsoft, Versage 4. Core value superiority Innovation, entertainment 1. Positioning dilemma 2. Financial crisis Likelihood 3.“Richard Branson” phenomenon 4. Core value superiority low low Impact high

  14. What has happened to Virgin Atlantic since 1994 ? 1. What has happened to Airline Industry since 1994? • 1995- 2000, a booming industry • 2001- present 9/11, SARS, Iraq war, leads to an overall loss • Virgin Atlantic’s major approach? • 1995- 2000 , heavy expansion, alliance in USA & Asia, Virgin Express , numerous innovations • 2001- present solid security measurement, still heavy expansion. Launched customer for airbus A340-600 and new upper class suite. 3. What’s VA now? • Revenue : 507.0 in 1995 to 1401. 2 in 2003 ( £m ) • Fleet & coverage: 27 aircrafts, covering 22 destinations • Airline alliance: Six strategic alliance worldwide Source: Airways, GBTA Conference, Madrid 10th May 2003, IATA, Roland Berger Strategy Consultants, Virgin press kit 2003

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