Pestle Analysis Report Sample
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VIRGIN AIRLINE'S REPORT
Virgin Airline's Report
Founded in the eighties by Sir Richard Branson, Virgin Airlines include a group of companies activating in the aviation, flight – career industry. The company was launched in a spontaneous manner, when its owner, Branson, decided to offer the customers more than the other companies did, treating them respectfully and providing higher comfort and amenities. Virgin Airlines include Virgin Atlantic, the second largest and performing UK airline, Virgin America, targeting to go public, and Virgin Australia Holdings, also second leading aviation player on their markets (virgin official website). Nowadays, the three airline companies combined (Virgin Atlantic, Virgin America and Virgin Australia) provide their services to around 32 million passengers year round, having estimated annual revenues of approximately $9 billion (virgin official website).
Along the way of their existence, Branson had modernized and improved the services of his airline companies, investing in both customer service quality, but also in technology, sophistication and distances of the flights. As such, new routes to worldwide destinations were included to serve the growing global traveling needs (Dubai, India, Japan, China or Africa) (Virgin Atlantic official website). In addition, the modernized services such as the launching of the cutting edge Upper Class Suite or Virgin Clubhouse, the chic lounge at Heathrow for Virgin Atlantic spurred up the flight experience, gradually increasing the passengers’ number from one financial year to another (Virgin Atlantic official website). Virgin America has won prestigious awards such as “Best Domestic Airline” (Conde Nast Traveler’s from 2008 to 2013), Best U.S. Airline (Consumer Report 2013), Best Passenger Service (Air Transport World 2011) (Virgin America official website).
For understanding Virgin Airlines’ business environment, there needs to be addressed its external environment, meaning the political, economic, social, technological, legal and environmental (PESTLE) aspects, which affect the industry as a whole.
For the political factors, there should be considered aspects such as the consumer protection laws, environmental and taxation regulations, and trade restrictions or reforms (Team FME, 2013) when analyzing the aviation industry’s external context. The political aspects in the airline industry refer mostly to passengers’ safety in the political context (terrorism, avoidance of the monopolistic behavior) and to the regulation of the aviation business, which implies certain burdens on companies. As such, as the passengers’ safety and services’ quality increase, the aviation companies’ profits decrease (“A Concise PEST Analysis”, 2014). The terrorist threats increase the security requirements for the aviation companies and jeopardize their business in times of conflict such as the revolution wave within the Arab Spring events.
Regarding the economic environment, the aviation industry is mostly influenced by taxes and the fuel price, but the airlines’ activity can also be affected by the cost of living, inflation or level of globalization (Team FME; “A Concise PEST Analysis”, 2014). The economic crisis of the first decade and the current instabilities that are still characterizing the Eurozone, plus the rising prices of the oil are challenging the companies activating in this industry. Several companies such as American Airlines, Northwest, Continental, Delta Air Lines or AirTran merged or filed for bankruptcy due to un-sustained business under current economic conditions (CNN Money, 2013).
Virgin Atlantic joint ventured with the bankrupt Delta Air Lines, consolidating the competition on the transatlantic area after signing the code share agreement (Virgin Atlantic 2014 Annual Report). The level of globalization has a positive effect on Virgin’s business, enhancing its international operations, but a decline characterizes its operations in the domestic markets, due to over saturation of the market (Virgin Australia Annual Report 2014).
The increased customer demands and sophistication is challenging Virgin Atlantic to reinvent itself and its customer service. For this reason, it increased its customer service through training programs for its staff, it provided customers increased in-flight experience with technological improvements and it upgraded the uniforms based on Vivian Westwood’s model, to delight the passengers (“Virgin Atlantic 2014 Financial Report”).
On the social level, the living standard is the condition that mostly influences the airline industry, along with consumer trends and the increasing quality demands that shape transportation choices (“A Concise PEST Analysis”, 2014). The customer sophistication is pressurizing the airline companies to permanently improve their services, for answering the increased demands of the passengers, for the same or lower budgets.
In the Australian market, the social aspects are characterized by a tendency of over-capacity I the domestic market, which has a strong impact on Virgin Australia’s operations, positioning it in an economic uncertain environment, which caused a loss of $355.6 million in the financial year 2014 (Virgin Australia, Annual Report 2014).
Virgin Atlantic was the first company to include individual TV screens for its passengers, regardless of their class, since 1991 (Virgin official website). Virgin Atlantic also integrated wifi on its flights and it pioneered the Google Glass wearable technology (“Virgin Atlantic 2014 Financial Report”). Virgin America offers customers a range of 20 on-demand movies, 24 television channels, video games, MP3 library, seat-to-seat chat, and other modern amenities, all in a low-cost flight (Virgin America official website).
The legal aspects affect the airline industry because companies activating in this domain are increasingly exposed to civil or union lawsuits, which hinder the players within this industry to refine their services to both customers and employees (“PESTLE Analysis of the Global Aviation Industry”). Similarly, the passenger safety and delaying regulations are more intense, forcing the airline companies to better their services.
The airline industry is among the most targeted economic activities regarding the environmental concerns. Through their high consumption of biofuel, airplanes are contributing to the global warming and to the general atmospheric pollution, hence the environmentalists’ focus to determine the airlines to adopt the “green flying” policy (“PESTLE Analysis of the Global Aviation Industry”).
Virgin Atlantic operates with 10 twin-engine A330 fleet meant to generate fuel savings (“Virgin Atlantic 2014 Financial Results”). Virgin America operates with Airbus A320 fleet, which is 25% more CO2 effective than other domestic fleets and it also incorporates other footprint reducing practices: “minimizing use of auxiliary power units, single engine taxiing, idle reverse landings” (“Vault Guide to Green Programs”, 2009, p. 257), etc.
Porter 5 Forces
Describing the industry environment, Porter’s 5 forces refer to the bargaining power of consumer, the bargaining power of suppliers, the threat of substitute products, the new entrants and the existent industry rivalry (Porter, 2008). Depending on the dynamics of each market in which it operates, all these forces can influence the activity of Virgin Airlines (Atlantic, Australia and America), each force having a certain degree of influence upon Branson’s companies.
In the aviation industry the bargaining power of consumers is very high, as many years of continuous quality, customer service and technological improvements have demonstrated. Virgin Atlantic has pioneered many customer services, such as the in-seat television and the wearable Google Glass technology, polishing its services for the economic class, lifting them to economic premium and reducing its fares to correspond to the consumers’ needs for cheaper flights (Virgin Atlantic official website). Virgin Australia’s priorities also include delivering enhanced customer service experience for less costly programs (Virgin Australia Annual Report 2014), while Virgin America focuses on delivering premium services for economic, low-fare flights (Virgin America official website).
Therefore, while the quality increases the prices decrease for Virgin Airlines’ customers, market conditions that generating lower growth rates for the company than in the past, but constant business, with steady market share, meant to produce stability and long term performances.
The suppliers in the airline industry are the airplane constructors such as Boeing or Airbus, the fuel operators, the spare parts constructors or the catering providers. Considering that there are numerous offers from the suppliers’ side, the bargaining power of suppliers in relation to Virgin Airlines is low. However, considering the fact that the company is targeting low fuel consumption and limited CO2 impact, using fleets that are more sustainable, such as the A330 or Airbus A320 fleets increase the suppliers’ bargaining power.
The threat of substitute products in Virgin Airlines’ case cannot refer to low-fare carriers, because it was consolidated itself as a low cost airline actor. However, the substitute can refer to the high speed rail (HSR), which is popular transportation mean in the areas wherein Virgin Atlantic, America and Australia operates: United Kingdom, United States, Australia, China, Japan, etc. In addition, the waiting time for boarding to Virgin Atlantic planes is much higher than the time needed to embark on the high speed trains. An OECD (2010) report evaluates that high speed rail might be a justified traveling selection but not an alternative to air travel for long-distance connections, but more likely they are in a symbiotic relation, as HSR deliver passengers to international airports. While for the international or inter-continental transportation the power of substitute products is low for Virgin Airlines, for the domestic markets this force is quite high, influencing the carrier to lower its fees for maintaining its market share and not losing it to the substitutes.
The power of new entry refers to the potential threat that new companies can impose to the settled industry players (Porter, 2008). The capital requirement, product differentiation, switching costs, access to distribution channels, the intangible brand assets and the economies of scale indicate how easy or difficult is to enter and exit certain industries (Porter, 2008). Aviation industry is not characterized by an economy of scale, because its production does not decreases dramatically with increased production, as the prices for the airplane and the fuel are quite high and fix (Anandalingam, 2002). This is a barrier of entry, as well as the intangible assets for the companies that are not reputable or capital requirement, which is very high for the airline industry. The product differentiation is also high, because new entries have to invest considerably in their name (Porter, 2008) and the airline industry has high marketing costs. All in one, the entry barriers are high, which makes the threat of new entries low for Virgin Airlines.
The existent rivalry refers to the players already activating within the market, with which a company competes for the market share (Porter, 2008). Virgin Airlines is the second largest carrier in United Kingdom and Australia and has a strong domestic positioning in United States. However, the existing competitors are reputable players, with well established brand names and loyal customers. This situation affects Virgin Atlantic, Virgin America and Virgin Australia, because due to the market saturation, they cannot register the envisioned profits, running at loss at times, as it is the case of Virgin Australia in 2014 (Virgin Australia 2014 Annual Report).
What can Branson industries do more to tap the increasing demands of its customers which are affecting the general economic conditions throughout the airline industry generating continuous lower profits? Where diversification, loyalty, extra something for each flight, high quality are just normal assets, Virgin Airlines should approach a new strategy, such as the switching costs - creating services for the privileged customers, for higher rates, generating the need for other customers to achieve those services. One of its domestic U.S. competitors, Southeast Airlines is approaching the increasingly demanding customer issue with fun, proposing engaging and fun activities during the flight for its passengers. V.A. has other capabilities that it could emphasize, such as Sir Branson’s unique business experience. Selling new business strategies with every new miles taken would position the company as a “coaching” airline industry, for which the customers would pay extra.
For the pollution and environmental concerns, the company should approach the matter by signing environmental protection agreements with its competitors, for using new fuel, which is also more expensive, but less impactful for the environment. With such agreements at hand, the airline industry would have the power to bargain with the consumers, having the legislations, environmental and political factors on its side for optimizing the costs in order to protect the environment and the passengers.
These two strategies also address the high bargaining power of suppliers. However, V.A. has another major threat, which is the saturation of the market due to very high existent rivalry. The solution for gaining competitive advantage over the existent rivals would be to apply the vertical integration strategy, which would assure an increased market share and lower production costs (Hussey, 1998).
Finally, for tackling the increased threat of the substitute products (HSR), Virgin Airlines should develop strategic partnerships, proposing bundle packages for both transportation services for a non-linear pricing, decreasing the general cost of both transportation means, but increasing the request (Venkatesh and Mahajan, 2009).
The dynamics of the external context (political, economic, social, technological, legal and environmental factors) affect the airline industry and implicitly Virgin Airlines’ activity, influencing the entities activating under this brand to shape their activities and strategies for continuing to satisfy customers. In a continuously improving airline industry, Virgin Atlantic, Virgin Australia and Virgin America are multi-awarded companies in terms of customer service, reliability, quality and modernization, offering high value for low cost fares. In fact, the company is a substitute threat for the high cost airlines and a reputable player on the low-cost market. The company’s main threats are the saturation of the market, the increased bargaining power of the consumers and the stringent legal and environmental regulations. The company also has opportunities for tackling the identified threats and challenges to its business. There can be applied switching costs for gaining increased bargaining power when dealing with consumers. For handling the increased customer demands, the company can develop strategic partnerships for utilizing less pollutant fuel, developing alliances within the industry for optimizing the fares up, in order to afford the higher prices of the friendly fuel, under the legal, environmental and political protection. Vertical integration would be the key for gaining increased competitive advantage, lower production costs and higher market share, while bundling strategy would tackle the threat of substitute products.
Virgin Airlines have a steady grow, playing safe on the market in which it activates, pursuing high customer value, which is deemed to generate long-term performances, financial stability and new business opportunities for the three brands – Virgin Atlantic, Virgin Australia and Virgin America.
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Vault Guide to Green Programs. 2010. [online] Available at < http://www.vault.com/images/pdf/3041/53066.pdf >. [Accessed 26 January 2015].
Venkatesh, R and Mahajan, V, 2009. “The design and pricing of bundles: A review of normative guidelines and practical approaches”. Handbook of Pricing Research in Marketing. Pp. 232 – 257.
Virgin Atlantic official website. N.d. [online] Available at < http://www.virgin-atlantic.com/en/gb/allaboutus/pressoffice/pressreleases/news/upperclass.jsp>. [Accessed 26 January 2015].
Virgin Atlantic 2014 financial results. 2014. [online] Available at < http://www.virgin-atlantic.com/gb/en/footer/media-centre/press-releases/financial-results.html>. [Accessed 26 January 2015].
Virgin America official website, n.d. [online] Available at < https://www.virginamerica.com/cms/about-our-airline/corporate-facts.html>. [Accessed 26 January 2015].
Virgin Australia official website, n.d. [online] Available at < http://www.virginaustralia.com/au/en/>. [Accessed 26 January 2015].
Virgin Australia 2014 Annual Report. 2014. [online] Available at < http://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/annual-report-2014.pdf>. [Accessed 26 January 2015].
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