PESTEL and Porter’s Five Force Analysis of QANTAS Essay

Executive Summary The following paper provides an analysis and evaluation of the current market position of Qantas and the airline industry. By assessing the company both internally and externally by applying PESTLE and Porter’s Five Force frameworks, this report will assess Qantas’ opportunities and strengths within the aviation industry. In addition to this, the report will focus on the specific resources and capabilities that enable Qantas to obtain a competitive advantage over its competitors through the use of the VRIO framework. A final analysis will be conducted to identify issues Qantas face and recommendations of how they can rectify these issues. 1. Background Qantas began in the Queensland outback during 1920. It was first registered as the Queensland and Northern Territory Aerial Services (QANTAS) and has since grown to be Australia’s largest domestic and international airline, as well as one of the strongest brands in Australia, employing close to 35,000 personnel worldwide (Qantas, 2010). Based out of Sydney, Qantas currently operates close to 5000 weekly flights across Australia, New Zealand, Africa, North America, South America, Europe and Asia, flying close to 50 global destinations (Qantas, 2010). There a four major domestic airliners that have the majority of the market share in Australia; Qantas, Virgin Blue, Tiger Airways and Jetstar (Dixon, 2006). Nicknamed ‘The flying Kangaroo’, Qantas is the largest Australian global airlines and is a charter member of the â€Å"One world Alliance†. Qantas operates domestically under ‘QantasLink’, which carries out 2000 regional flights weekly. They also operate their low fare airline ‘Jetstar’, and Qantas Freight (Qantas Airways, 2012). 2. PESTLE ANALYSIS Applying the PESTLE analysis on the aviation industry will help to identify the environmental influences by arranging them into six categories; Political, Economic, Social, Technological, Legal and Environmental (Issa, 2010). Future trends and requirements for change based on these trends can be identified through this analytical tool (Johnson, et al, 2008). 2.1 Political Terrorism has had a major affect the aviation industry. It is still a very  real possibility of airplanes being hijacked or blown up in mid air and this has put a negative impact upon the industry. The recent Malaysia Airlines tragedies are evidence of this, as is September 11. 2.2 Economic Oil prices have a significant impact on the airline industry. Due to recent developments in the oil markets, airlines have to employ non-monetary methods; techniques include hedging or airline alliances, in order to increase fuel-buying power. This will allow airlines to buy fuel in larger quantities and create contractual agreements with oil suppliers (Thompson and Gamble, 2012). The most recent and economically crippling factor that has influenced the airline industry is the Global Financial Crisis (GFC)(Nuguid, 2011). This presents a potential weakness or threat for Qantas who may come to feel that their premium price for quality service is not enough to get the customers to fly with them. 2.3 Social The number of people using airlines to fly to holiday destinations has increased due to economic growth. Therefore, the market has expanded and new opportunities for tourism have opened in previously frequented countries. How society is observed as it transmits to air travel has a great deal to do with September 11, 2001. As a result of this tragic event, the judgments of the world have become increasingly profound to the background of passengers traveling on planes. It has shaped something of a undesirable perception for particular cultures and beliefs. This discourages people to travel with other passengers or airline, directly affects the airline industry (Reilly.N.J, 2010) 2.4 Technological Technological developments have both created new opportunities as well as threats for the aviation industry. Development in information and communication technologies has enabled strong communication and has  consequently provided customers with an alternative for frequent travelling, for example; Qantas Frequent Flyer programs. Airlines are now able to expand their outreach directly to consumers through e-commerce. For example, airlines like Qantas are able to introduce ticketless travel through the use of technology (Thompson and Gamble, 2012). 2.5 Legal The implementation of the carbon tax had a negative affect on the aviation industry, as the airlines could not absorb the higher cost of fuel. This meant to offset costs travelers would pay extra in ticket prices (Herald, 2011). Some governments provide subsidies that provide an unfair advantage and prices lower than market conditions which affects the functioning of airline industries directly and Global environmental policies regarding emissions and international route deregulation may affect airline operations in present as well as in future (Fulton.J, 2010). 2.6 Environmental The aircraft’s emissions have a significantly high impact to the environment as they travel several kilometers above the surface of the earth. Aircraft emissions cause significant damage to the atmosphere (Penner et al. 2001). Noise polution is another major environmental concern (â€Å"Aircraft Noise is Unhealthy†, 2008). 3. Porter’s five forces In order to analyse the industrial environment of Qantas Airlines and evaluate the nature of the competition faced by the company, the following analysis was carried out using Porter’s Five Force framework (Porter, 2008). 3.1 Competitive Rivalry The competitive rivalry in airline industry has been increasing, especially through mergers, acquisitions and subsidiaries. Qantas established it’s low-cost airline Jetstar in 2003 creating a two-brand strategy. By having these â€Å"two brands† the Qantas Group is able to assess different market opportunities and deploy the best product to suit the opportunity and  specific market conditions this also creates a competitive advantage. New rivals have emerged following the footsteps of Qantas, such as Singapore Airlines and British Airways, and are threatening Qantas’ market share in the no-frill, low-price trade by offering lower costs and attending customer service (Mouawad, 2010). 3.2 Entry Barriers There are high barriers to enter this industry, as it requires a large initial capital investment. In conjunction with the price wars and low profit margins, it has become difficult to make substantial profit. It is very common for airlines to project losses in their financial statements. Therefore a new entrant must be able to handle losses at the beginning. Another barrier to entry is the limited availability of landing slots in Australian airports. The slots are already reserved by established airlines and are difficult to obtain especially in airports with high passenger demand (Czemy 2008). 3.3 Threat of Substitutes There are many substitutes in terms of long distance travel such as; cars, trains and cruise boats and these are generally cheaper. However, air travel has the absolute advantage in terms of time. Thus, the threat of substitute is relatively low. 3.4 Bargaining power of suppliers Boeing and Airbus are the main aircraft suppliers for large airlines like Qantas. Qantas plans to spend capital investment worth around US$17 billion in more fuel efficient, next generation aircraft, such as the Airbus A380, Boeing 787 Dreamliner and Airbus A320 neo (Qantas, 2014). Qantas is heavily dependent on the price of oil for its profit margins, which implies high bargaining power of oil suppliers. Price hedging is limited and high rises in prices can manipulate Qantas’ fuel costs. Due to the limited number of aircraft suppliers, and the continuous need for fuel, it can be said that the bargaining power of suppliers is quite high. (Thompson and Gamble, 2012). 3.5 Bargaining power of buyers Consumers have high bargaining power with Qantas, which is mainly attributed to their price based preference. Receiving the same service, the consumers will select the airline that offers them best value for their money. Due to  the widely available information technology tools, such as Flight Center and SkyScanner, consumers have the ability to compare flight services and prices before making their final selection. Since the switching costs for customer is very low, the bargaining power of buyers is high. 3.6 Analysis Qantas gains its competitive advantage through its strategic capabilities that are gained from its resources and capabilities. It is through these, that the company can respond to its external environment and succeed. The airline industry is very competitive and as a result, profit margins are usually low. Also, the bargaining of the supplier is very high which undermines companies in the airline industry to exercise control over their supplier. With high entry cost, new competition into the international airline market is very low. Qantas can continue to dominate this market while still competing with domestic market using the Frequent Flyer program to increase loyal customers. 4. Opportunities and Threats By conducting both the PESTLE and Five Force analyses for the macro-environment we are able to determine a number of opportunities and threats that the aviation industry possess. Opportunities Threats Offers continual expansion opportunities for both leisure and business destinations Technology advances can result in cost savings, from more fuel efficient aircraft to more automated processes on the ground Technology can also result in increased revenue due to customer-friendly service enhancements like inflight internet access and other value-added products for which a customer will pay extra A global economic downturn negatively affects leisure, optional travel, and business travel The price of fuel is not the greatest cost for many airlines. An upward spike can destabilise the business model Terrorist attacks anywhere in the world could negatively affect air travel Government intervention could result in new costly rules or new international competition 5. Resources and Capabilities The following is an evaluation of Qantas internal resources and capabilities. Resources Capabilities Airport locations/hangers Engineering facilities Trained personnel In-flight food (Neil Perry’s involvement) Qantas lounges/restaurants Storage facilities for inventory, ranging from machinery to uniforms Training facilities for flight attendants and pilots New IT systems to promote more efficient operations including the evolution of e-tickets New development in cost effective service (e.g. with food, cutting costs on ingredients) New developments for the ‘frequent flyer’ scheme to adapt to competitors’ similar concepts including the Chairman’s Lounge Fleet development: â€Å"The airline has been constantly growing since its inception as a result of increasing fleets. Qantas has been purchasing Boeing aircraft makes like the 747-400. The availability of more aircrafts meant that the company can maintain schedules and meet maintenance needs of the old aircrafts (Qantas, 2014). By applying the VRIO framework to Qantas we can observe that not all resources sustain a competitive advantage. Jetstar, QantasLink and the Qantas brand in general are all strong resources that allow Qantas to sustain their competitive advantage. However, from the aforementioned  resources this competitive advantage for the Qantas Group as a whole is unsustainable. From the analysis, Qantas’ core competencies can be identified as their two-brand strategy, their diverse services and their reputation. 6. Issues The following is a list of weaknesses/ issues as identified by the SWOT framework: 1. Competitors 2. Higher labor and other operating costs than its competitors 3. The current strategies Qantas include their low-cost carrier and the Frequent Flyer Program (Jones, 2009) 4. Ongoing disputes between Qantas management and militant unions 5. Speculation that British airways will quit its $1.3 billion stake in Qantas (Qantas, Working Towards Our Vision, 2013) 6. Outdated IT systems. Recommendations To help reduce the affect of the aforementioned weaknesses Qantas could: Attract customers through improved customer service Advertise in social media  Engage employees and establish a better employee management system Adopt a corporate level strategy, which is the long-term direction of an organisation (Porter, Smith, Fagg), for Qantas this will focus on cost reduction. Develop a business level strategy that focuses on the need for differentiation (Michael A. Hitt, 2006). Focus should also be on the increased use of IT, to increase operational efficiency ie. Cloud Computing (Harrison, 2005). 7. Conclusion The Qantas Group has adopted potential alliances and partnership strategies to expand in the aviation business. However, there are some threats that will always affect them such as fuel costs, low cost airlines and alternative transportation. Qantas has remained strong by applying their core competencies like their two-brand strategy and their service diversity. To survive in both the global and domestic markets, the Qantas Group need to  establish efficient strategies to maintain the firm position in aviation industry as well as preparing for the unexpected. 8. References: â€Å"Aircraft Noise is Unhealthy†, (2008) Health Hype.Com. Available from http://www.healthhype.com/aircraft-noise-is-unhealthy.html (cited on 20th, March, 2013) Czemy, A (2008). Airport Slots: International Experiences and Options for Reform. Ashgate Publishing, Ltd. Dixon, G. (2006, February 23). Qantas not afraid of competition. The Age . G.G. Dess, G.T. Lumpkin, M.L. Taylor, A.A. Thompson, and A.J. Strickland III, Strategic Management (Boston, McGraw Hill, 2004) pp. 141-148. Harrison, M. A. (2005). The Blackwell Handbook of Strategic Management. Wiley-Blackwell. Herald, S. M. (2011, July). Airlines count the costs of carbon tax. Business Day , 1-2. Issa, Tomayess and Chang, Vanessa and Issa, Theodora. 2010. Sustainable business strategies and PESTEL framework. 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