Business Environment And Strategic Aspects Of Virgin Atlantic

Virgin Atlantic: Overview

Virgin Atlantic is one of the most renowned private sector organizations of United Kingdom. The British Airlines Company was established in the year 1984 and has its head office in Crawley, United Kingdom. The airlines company along with Virgin Holidays is totally controlled by the holding company with 51% shares lying with the Virgin Group and the other 49% with the Delta Air Lines. The Company carried a record breaking 5.4 million passengers in the year the year 2012 and became the seventh largest airline in terms of the volume of passengers it carried. Though the company had a loss in the subsequent financial year but drastic strategic steps helped it to gain a healthy amount of profit in the following year. The research will deal with the mentioned company’s business environment and the different strategic aspects.

The following research is aimed to identify the different macro environmental factors in which the company operates and also the different changes that the company has to make to successfully sustain in the near future.

PESTLE Analysis

Figure No 1- PESTEL Diagram

Source- (Pisano 2017)

1. Political- Virgin Atlantic faced a huge challenge as they operated in a tensed environment in the backdrop of several terrorist attacks in popular flying destinations like Paris, Nice and Brussels. These terrorist attacks led to a sharp fall in the occupancy rates of the airlines. There were times when the Airlines had to operate the flight with just 40% occupancy. However the most lethal challenge to the Airlines came when they had to face the challenge of the BREXIT aftershock. The decision of United Kingdom to sever ties with the European Union. The company had to face the challenges that arose because of the political uncertainty of Britain.  The political aspects of the following decision were key as because UK had to formulate its own set of aviation regulations after the separation which is a very complex process.

However in spite of the gloomy situation there was some light in the end of the tunnel as the government of UK decided to increase the passenger volume of Heathrow and thus the plans for constructing a third runway was accepted. This was surely a welcome boost for the organization as because the construction will allow them to operate more flights and decongest some routes while on the other hand it will also help to add new routes to its business (Pisano 2017).

1. Economical- As mentioned in the earlier point BREXIT has also a huge impact on the economic aspect of the mentioned Airlines Company in UK (Min and Joo 2016). The sudden downfall of the value of pound invited new fears for the organization which reflected in its annual general revenue. The Airlines Company however benefitted from the fall in the prices of the crude oil by a considerable amount during the first half of the year 2016.
2. Social-The social factors created problems for the organization during the first half of 2016 as ATC Strikes and other problems led to some operational glitches from the part of the Airlines Management. The company especially had a setback in France where most of the Unions called for a strike due to social unrest as a result of labor reforms. A joint resolution has been handed over to the EU to develop an action plan to minimize the impact of such strikes on the movement of the aircrafts.
3. Technological- The modern day globalization has had an impact on every sectors of business including Airlines (Douglas and Tan 2017). The digital revolution that has been ushered as a result of the internet has facilitated the swift movement of the aircrafts as well as a proper communication procedure and many in flight and off flight features. The development of mobile based apps has enabled the smooth function of online ticketing, tracking the flight and getting latest updates on flight timings, possible delays and many more as such.
4. Legal- The legal environment is one of the potential factors that determine the success of the Airlines Company. Virgin Atlantic pilots had a row with the management on the case of their recognition in the Union. These rows can create a major damage to the operational efficiency of Virgin Atlantic Company.
5. Environmental- Global Warming, climate change are the most lethal issues that needs to be addressed by the organization. The world is now much more aware and sensitive to the effects of global warming and abrupt rise in the pollution levels. The Adverse weather conditions in Europe and Asia has had a very negative impact on the operational efficiency of the organization. The management of the company has undertaken a green action plan which is to be implemented in the coming years as a part of their corporate social responsibility.

 

Figure No 2- Profit Maximization Model

Source- (Douglas and Tan 2017)

The profit maximization theory can be best described as the short run or a long run process by which a firm determines the price and the output levels that helps to determine the greatest profit. The financial management team as well as the operations department of the mentioned Airlines has formulated an efficient profit maximization theory for the organization (Douglas and Tan 2017). Virgin Atlantic has a large number of flights at its disposal with one of the largest fleet of Boeing airplanes. Virgin Atlantic’s optimal discount seat allocation in their 737-800 flight from Heathrow to Belfast International is in order to maximize the revenue generated from the following flight. The mentioned model has a maximum seating capacity of 166 passengers with only an economy class. The researcher created a model of the relationship between revenue, behaviors and demand of business and leisure class of travelers. The information regarding all the following considerations and calculations was gathered from the Website of Virgin Atlantic (Douglas and Tan 2017).

Macro Environmental Factors and Strategies

The company has fixed two types of fares for the flight one at $160 and the other at $ 320. The discounted tickets are only for the regular travelers in the mentioned route. However the management also provides some discounted tickets for the leisure travelers lest they book within an advanced date. The date is totally according to the discretion of the organization (Roy 2015).

Some of the assumptions that are considered while calculating the revenue generation process of the organization are;

1. The cost of the flight is totally fixed
2. Around 25% of the business class travelers would be purchasing the full fare tickets
3. The management of the mentioned Airlines company can by no means increase the cost of the discounted fare seats once all the available discounted tickets are sold out

As mentioned earlier the profit maximization model has some input variables which are fixed by the management of Virgin Airlines Company.

The input variables are as follows;

1. The number of total business travelers
2. Total demand
3. Capacity of the Airplane
4. Percentage of discounted seats bought by the business class travelers

The calculation of the model is totally based on the following models which help the company to get the approx idea of the amount of revenue generated on the total travel.

 

Figure No 3- Impact of High Oil Prices

Source- (Wang Kao and Ngamsiriudom 2017)

The rise in the crude oil prices has been a major concern for all the Airline Companies all around the globe. Virgin Atlantic has been no exception and the crisis has taken a toll in their operational efficiency. The increase in the price of the crude oil has forced the management of the company to increase the prices of the tickets which on the other hand has reflected a fall in the traffic movement and passenger occupancy rates (Wang Kao and Ngamsiriudom 2017). The paradigm shift of the population towards opting out for a large number of latest low cost airlines has also been one of the major factors for such a dismal run in the market for the company. The price trends of the tickets in Virgin Atlantic is totally seasonal in nature as the company has identified some peak seasons of the year as well as some lean seasons. The peak season sees an occupancy rate of around 85% to 95% in the different flights of the mentioned organization whereas the rates drastically fall to below 60% in lean seasons (Roy 2015). The highest occupancy rates are at the end of the year due to Christmas and the New Year. Some of the factors which determine the demand and supply curve of Virgin Atlantic are;

1. Basic Facilities and the Aircraft
2. Time of Travel
3. Passenger Traffic movement
4. Competitors Pricing Analysis
5. Special pricing of some specific Seats
6. Special routes

The analysis of the total report will reveal different new facts related to the macroeconomic environment in which Virgin Airlines operates. The latest transformation phase through which UK has been going poses great challenge for the organization to sustain itself in the market (Ortiz and Bansal 2016). The government needs to formulate a totally new aviation policy and negotiate with the European Union to ensure free skies for all the UK carriers (Carter 2013). The challenge however lies on the other way round as low cost carriers have been a constant threat to Virgin and they have been losing many customers to these airlines as a result of such low fares. The mentioned airlines company will be unable to maximize the profits if the current situation continues. According to experts it will be best to adopt a special strategy to counter the low cost airlines. A sustainable and efficient strategy is the key to the success of the organization (Coleman 2015).

Profit Maximization Theory

Some of the major changes that can be done are;

1. Providing discounts to regular passengers on busy routes
2. Increasing the number of services to the most profitable routes
3. Maintaining an efficient structure for the organization
4. There should be a constant communication between the management and all the employees of the organization
5. The management must ensure a proper training program for the employees
6. Proper communication and response towards the customer
7. Keeping a regular tab on the strategies of the competitors

Conclusion

The Airlines business is one of the toughest businesses to carry on over a prolonged period of time. Though it may sound easy to earn profits easily within a short period of time it is very tough for the organization to sustain itself, given the huge pressure from the external environment in which the organization operates. The profit margins are basically thin, capital expenditures are large, huge taxation and unlawful government regulations make it tough for Virgin Airlines management to efficiently manage the business (Soyk Ringbeck and Spinler 2017. As mentioned earlier BREXIT has made the situation worse as the management is eagerly waiting for the government of United Kingdom to formulate a totally different aviation policy. There are also fears about the freedom of air space within the neighboring EU countries which can hamper their business. In spite of such negativities the efficient organizing capabilities of the organization and strategic capabilities has been the winner in the long run. The efficient use of the economic and socio cultural model has also helped the business to establish them as the 2^nd largest carrier of UK.

References

Pisano, G.P., 2017. Toward a prescriptive theory of dynamic capabilities: connecting strategic choice, learning, and competition. Industrial and Corporate Change, 26(5), pp.747-762.

Min, H. and Joo, S.J., 2016. A comparative performance analysis of airline strategic alliances using data envelopment analysis. Journal of Air Transport Management, 52, pp.99-110.

Douglas, I. and Tan, D., 2017. Global airline alliances and profitability: A difference-in-difference analysis. Transportation Research Part A: Policy and Practice.

Wang, S.W., Kao, G.H.Y. and Ngamsiriudom, W., 2017. Consumers’ attitude of endorser credibility, brand and intention with respect to celebrity endorsement of the airline sector. Journal of Air Transport Management, 60, pp.10-17.

Roy, A., 2015. What determines airline profitability: industry conditions or firm level capabilities?. Academy of Taiwan business management review, 11(2), pp.17-23.

Carter, J., 2013. Marketing Plan Example: Virgin Atlantic Little Red.

Coleman, M., 2015. Regulatory Responses to the Challenges Facing Large European Carriers in the New Global Market. The Air and Space Lawyer, 28(1), p.1.

Soyk, C., Ringbeck, J. and Spinler, S., 2017. Long-haul low cost airlines: Characteristics of the business model and sustainability of its cost advantages. Transportation Research Part A: Policy and Practice, 106, pp.215-234.

Scott, J.T., 2017. The Sustainable Business: A Practitioner’s Guide to Achieving Long-term Profitability and Competitiveness. Routledge.

Noh, H., Alonso, G., Nair, S. and Dahdi, Y., 2015, March. Biofuels: their emergence and implications for sustainability in aviation. In 5th International Conference on Energy and Sustainability, Putrajaya, MALAYSIA, Dec 16-18, 2014. (pp. 103-111). WIT Press.

Roy, A., 2015. What determines airline profitability: industry conditions or firm level capabilities?. Academy of Taiwan business management review, 11(2), pp.17-23.

Ortiz?de?Mandojana, N. and Bansal, P., 2016. The long?term benefits of organizational resilience through sustainable business practices. Strategic Management Journal, 37(8), pp.1615-1631.