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Virgin Atlanticdoc - Virgin Atlantic

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Virgin Atlanticdoc - Virgin Atlantic ...

College of Business and Economics

    CALIFORNIA STATE UNIVERSITY, LOS ANGELES

    MKT 500, Dr. Kim

    Dayao, Gina; Kuszta, Paulina; Rodtadtan, Ken Akkadech; Bishnoi, Virat

    VIRGIN ATLANTIC

    Since its foundation in 1984, Virgin Atlantic has become Britain‟s second largest carrier. Virgin Atlantic airline belongs to the “Virgin” group, the third most recognized brand in

    Britain. It operates long haul services to thirty destinations worldwide ranging from

    Shanghai to Las Vegas. Virgin Atlantic has been a trendsetter, innovating new standards

    of service. It has won top business and customer awards from around the world. Virgin

    Atlantic has served some 53 million passengers and currently employees over 9000

    people.

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    VIRGIN ATLANTIC 1

    VIRGIN ATLANTIC BACKGROUND AND HISTORY

     In 1982, Randolph Fields and Alan Hellary set out to start a new airline, named

    British Atlantic Airways (BAA), as a direct successor of Laker Airways. The intent was

    to fly from London to Falkland Islands, as the service was needed when the Falklands

    War had ended. But due to the short runway at Port Stanley, Fields decided to plan a

    flight from London, Gatwick to New York, JFK airport instead. The proposal was

    rejected in 1983, when both British Caledonian and the BAA objected. This time Hellary

    and Fields planned on flying a DC10 carrier to Newark. Fields met Richard Branson to

    secure funds for getting the airline off the ground. Thereafter, Branson became the

    president and the airline was renamed Virgin Atlantic (Fields agreed to become Virgin

    Atlantic‟s first chairman with a stake of 25%). On June 22, 1984, Virgin Atlantic

    operated its inaugural scheduled air service between London Gatwick and Newark

    Liberty using a single, leased Boeing 747-200. In the coming years, additional aircrafts

    were acquired and further routes were launched from Gatwick to Miami, New York,

    Tokyo, Los Angeles, Boston and Orlando. In 1991, UK government decided to abolish

    the "London Air Traffic Distribution Rules", thus allowing Virgin to operate from

    London Heathrow Airport. The airline‟s aim was: “To provide the highest quality

    innovative service at excellent value for money for all classes of air travelers”. [1]

    Almost all Virgin aircrafts are divided into three classes: Economy, Premium

    economy (introduced in 1992) and Business class cabins. In 1997, Virgin Atlantic started

    its Frequent Flyer program known as Flying Club. In 1999, Singapore Airlines bought

    49% shares leaving Richard Branson‟s Virgin group with 51% majority share. In 2001,

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    VIRGIN ATLANTIC 2

Virgin Atlantic Airlines was voted the OAG Airline of the year.[2] On September 27,

    2006, Richard Branson, on behalf of Virgin Atlantic, announced plans to reduce

    greenhouse gas emissions by cutting down on aircraft weight and fuel consumption.

     Virgin Atlantic is the second largest British Long Haul international airline. The

    company holds a United Kingdom Civil Aviation Authority Type A Operating License,

    which permits it to carry passengers, cargo, and mail on aircraft with 20 or more seats [3].

    Its headquarters are located in Crawley, England, United Kingdom. Virgin Atlantic

    operates a fleet of 38 aircrafts: 13 Boeing 747s and 25 Airbus A340, with 6 orders of

    Airbus A380 and 23 orders of Boeing 787 to be delivered in 2013 and 2011

    respectively[4]. Currently over 9000 employees work for Virgin Airlines. Virgin Atlantic

    has used the following famous slogans in past: “Mine‟s bugger than yours,” “4 Engines 4

    Long haul,” “Avoid the Q,” “Keep Discovering – Until You Find The Best,” “No way

    BA/AA.” [5]

    Recent Finances [6]:

Y/E April 2003 2004 2005 2006 2007

TURNOVER ?1401m ?1272m ?1630m ?1912m ?2140m

PROFIT ?15.7m ?20.9m ?20.1m ?41.6 ?46.8

    THE AIRLINE INDUSTRY

     The airline industry is classified into four categories by the Department of

    Transportation (DOT): International - 130+ seat planes that have the ability to take

    passengers just about anywhere in the world and that typically have an annual revenue of

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    VIRGIN ATLANTIC 3

    $1 Billion or more; National - airlines that usually seat 100-150 people and have revenues between $100 million and $1 billion; Regional - airlines with revenues of less than $100

    million and that focus on short-haul flights; and Cargo - airlines whose main purpose is to transport goods.

     Full-service airlines have a high level of fixed and operating costs in order to establish and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, airport handling services, sales distribution, catering, training, aviation insurance and other costs. Thus all but a small percentage of the income from ticket sales is paid out to a wide variety of external providers or internal cost centers. Other significant issues that effect airlines are airport capacity, route structures, weather and labor. Weather is variable and unpredictable. Extreme heat, cold, fog, and snow can shut down airports and cancel flights, which leads to a loss in revenue. Weather is also the second-largest cause of flight accidents. On average, fuel can make up 14-16% of an airline's total costs. The average cost of a gallon of commercial jet fuel

    in the US has more than doubled since 2000, from $0.78 per-gallon in January 2000 to $1.81 per-gallon in January 2006. [7] Short haul airlines typically get lower fuel efficiency because take-offs and landings consume high amounts of jet fuel. Although necessary, it is estimated that approximately 40% of an airline's expenses are used to pay pilots, flight attendants, baggage handlers, dispatchers, customer service, and others.

     Airlines earn revenue from transporting cargo, selling frequent flier miles to other companies and the largest proportion of revenue is derived from regular and business passengers. Airlines assign prices to their services in an attempt to maximize profitability. ______________________________________________________________________________________

    VIRGIN ATLANTIC 4

    The pricing of airline tickets has become increasingly complicated over the years and is now largely determined by computerized yield management systems. Most airlines use differentiated pricing, in order to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the current booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure, and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purposes.

    Business travelers are important to airlines because they are more likely to travel

    several times throughout the year, and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence it is expected for the amount of leisure travelers to decline.

     Between 1990 to 2000, industry growth increased by 7% per year. The

    International Air Transport Association forecasts international air travel to grow by over 5% a year from 2000 to 2010. But in Europe and North America where the air travel market is already highly developed, slower growth of 4%-6% is expected. [7]

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    VIRGIN ATLANTIC 5

SWOT Analysis

Strengths Weaknesses

    -Strong brand image -Declining market share in key markets -Increased passenger and cargo traffic - Lack of scale

    -Strong financial position

Opportunities Threats

    -Expanding passenger traffic in Asia -Cargo price-fixing investigation -Increase in trans-pacific cargo -Rising aviation fuel prices -Partnership with ANA -Terrorist attacks and scares deter passengers

     from flying

     Source: Virgin Atlantic Datamonitor

    Strengths

    Strong brand image

    Virgin Atlantic is a part of the widely recognized Richard Branson‟s Virgin Group, which has strong brand image.

    Increased passenger and cargo traffic

    Virgin Atlantic recorded higher passenger and cargo traffic in 2006, as compared to

    2005. The number of passengers carried by the company rose by 3.7% to 4.5 million.

    The quantity of cargo and mail carried increased by 9.1% to 163,165 tons.

    Strong financial position

    The company has witnessed strong revenue growth in fiscal 2006. It recorded revenues of

    ?1,912 million in fiscal 2006, an increase of 17.3% from 2005. The operating profit of

    the company was ?41.6 million during fiscal year 2006 as compared to ?20.1 million in

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    VIRGIN ATLANTIC 6

    2005. Moreover, the operating margin of the company also increased from 1.2% in 2005 to 2.2% in 2006.

    Weaknesses

    Declining market share in key markets

    Despite strong brand image and improved financial performance, Virgin Atlantic‟s

    market share has declined in most of its markets in 2006. Its market share in New York, East Coast, Caribbean, India and China has declined from 25%, 21%, 59%, 23% and 22% in 2005 to 24%, 17%, 57%, 18% and 8%, respectively, in 2006.

    Lack of scale

    The company operates 27 destinations whereas, its top competitors British Airways and Thai Airways International operates 148 and 600 destinations worldwide. Opportunities

    Expanding passenger traffic in Asia Pacific

    Driven by increased economic activity in emerging Asian countries such as China and India, demand for air travel to the Asia Pacific is rising. Virgin Atlantic already has significant presence in this region and is well positioned to benefit from increasing air travel to Asia.

    Increase in trans-pacific cargo

    The outlook for trans-pacific cargo market is positive. During 2006-2009, the market is expected to increase by an average of 7%, an increase from a 4.3% average annual growth recorded during 1999-2004. Because Virgin Atlantic operates Virgin Cargo, a ______________________________________________________________________________________

    VIRGIN ATLANTIC 7

worldwide air cargo business, this will allow opportunity for the company to further

    strengthen its market position in cargo.

    Partnership with ANA

    In September 2006, Virgin Atlantic announced that it has teamed up with one of the

    world‟s ten largest airlines, All Nippon Airways (ANA), which allows Virgin Atlantic

    passengers to fly to Japan on ANA‟s domestic services. This new arrangement with ANA

    would enable the company to offer better service to its customers.

    Threats

    Cargo price-fixing investigation

    The US Justice Department and the executive body of the European Union have launched

    an investigation into allegations of price-fixing in the air cargo industry in February 2006

    and one of the company‟s investigated was Virgin Atlantic. If the company is found to have participated in price-fixing, it may have to pay a significant fine and investor

    confidence could also be impacted.

    Rising aviation fuel prices

    Due to the rising oil prices globally, the prices of aviation fuel have increased

    substantially. This could impact Virgin Atlantic‟s margins as it is mostly reliant on air freight business.

    Terrorist attacks and scares can deter passengers from flying

    When terrorist attacks occur, it places fear in potential customers, and can deter

    individuals from flying.

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    VIRGIN ATLANTIC 8

    ENVIRONMENTAL ANALYSIS

     The major environmental factors that affect Virgin Atlantic are economic,

    regulatory and competitive factors, although social factors, such as terrorist fears, also

    affect the growth of market share.

    Recently, an economic slowdown in the UK, US and Eurozone has been observed. This greatly affects Virgin Atlantic because its targeted customers reside in these

    countries. In fiscal 2006, the company derived more than 50% of its total revenues from

    the routes that fall in the US and Eurozone. According to the British Chambers of

    Commerce, the GDP growth in the UK is expected to decline from 2.6% in 2006 to 2.3%

    in 2007. Additionally, according to the Organization for Economic Cooperation and

    Development (OECD), GDP growth of the US economy is forecasted to slow down from

    an estimated 3.6% in 2006 to 3.1% in 2007, and the GDP growth in the Eurozone is

    forecasted to decline from an estimated 2.2% in 2006 to 2.1% in 2007. A weak economic

    outlook for the UK, Eurozone and the US would put pressure on the revenues of Virgin

    Atlantic. [7]

    Private airlines are subject to a great deal of government regulation for economic, political, and safety concerns. The government often intervenes to halt airline labor

    actions in order to protect the free flow of people, communications, and goods between

    different regions without compromising safety. The International Civil Aviation

    Organization establishes worldwide standards for safety and other vital concerns.

    International air traffic is primarily regulated by bilateral agreements between countries, which designate specific carriers to operate on specific routes. Bilateral

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    VIRGIN ATLANTIC 9

agreements are based on a group of generalized traffic rights ranging from the freedom to

    overfly a country to the freedom to provide domestic flights within a country. In the

    1990s, open skies agreements became more common. These agreements take many of the

    regulatory powers from state governments and open up international routes for further

    competition. [4]

    Additionally, airlines are responsible for enforcing government regulations. If airlines carry passengers without proper documentation on an international flight, they

    are responsible for returning them back to the originating country.

    VIRGIN ATLANTIC COMPETITION

    The airlines industry is very competitive, although the barriers of entry for new airlines are lower in a deregulated market. A deregulated market occurs when a

    government does not dictate airfares, route networks, and other operational requirements

    for airlines. Deregulation has produced far greater competition and because of this,

    average fares tend to drop 20% or more. [4] The added competition, together with pricing

    freedom, signifies that new entrants often take market share with highly reduced rates

    that, to a limited degree, full service airlines must match. This is a major constraint on

    profitability for established carriers, which tend to have a higher cost base.

    As a result, profitability in a deregulated market is uneven for most airlines. These forces have caused some major airlines to go out of business, in addition to most of the

    poorly established new entrants. The following airlines have all declared Chapter 11

    bankruptcy: United Airlines, US Airways (twice), Delta Air Lines, and Northwest

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    VIRGIN ATLANTIC 10

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