Virgin is one of the most established brands in Britain and also now becoming the first global brand name of the 21st century. Virgin began in the 1970’s with a student magazine and small mail order record company. From then on Virgin kept on evolving years after years. This organisation has many products and services it offers from planes, trains, finance, soft drinks, music, mobile phones, holidays, cars, wines and many more. They have formed 200 companies worldwide, employing over 25,000 people. The particular product that I’m going into is Virgin Atlantic, which operates in the airline industry.
Industry Structure Analysis To examine the competition in this industry, the best model for this is Michael Porter’s Five Forces Model. Porter describes that there are five forces that determine industry attractiveness and long-run industry profitability. These five competitive forces are: – The threat of entry of new competitors (new entrants) – The threat of substitutes – The bargaining power of buyers – The bargaining power of suppliers – The degree of rivalry between existing competitors The threat of new entrants- New entrants to an industry can increase the level of competition and the barrier to entry is key.
In the airline industry new airplanes require extremely high investments accompanied with great risk and the inability to get a positive return on that investment for many years. If borrowing is cheap, then the likelihood of more airliners entering the industry is higher. The more new airlines that enter the market, the more saturated it becomes for everyone. An airline such as Virgin Atlantic with a strong brand name and incentives can usually be enough to lure a customer. Which will make it hard for new entrants.
The aerospace industry’s economies of scale, where global sales are required to recover the huge investments, prevent entry to the industry by forcing the entrant to come in at a very large scale in order to succeed. The threat of substitutes- the presence of substitute products can lower industry attractiveness and profitability because they limit price levels. Prime contractors like manufactures, in the commercial aerospace industry face almost no threats of substitute products because of an airplane’s uniqueness in speed and ability to travel over water.
For short distances over land, airplanes may sometimes compete against automobiles and trains. The only threat of substitutes for Virgin Atlantic would be in the making process of the industries in parts and components level of the industry, this is due to new material technology. The bargaining power of buyers- Buyers are the people / organizations who create demand in an industry. The bargaining power of buyers is greater when there are few dominant buyers and many sellers in the industry products are standardized. Airline companies often force competitive competition between the aircraft manufacturers.
In terms of the buyers or customers the bargaining power of buyers in the airline industry is quite low, this is affected by brand power, the relative volume of purchases, standardization of the product, and elasticity of demand (where demand increases as prices fall, and vice versa). The switching costs for aircraft and engines are very low, which increases the buyer’s power. For Virgin Atlantic they have the bargaining power when it comes to purchasing products such as from their manufactures or suppliers as they are well-established company.
The bargaining power of suppliers- The cost of items bought from suppliers (e. g. raw materials, components) can have a significant impact on a company’s profitability. If suppliers have high bargaining power over a company, then in theory the company’s industry is less attractive. The bargaining power of airline suppliers is not that strong. Boeing and Airbus mainly dominate the airline supply business. For this reason, there isn’t a lot of cutthroat competition among suppliers. However there are exceptions where a supplier may possess key technologies.
In general, the prime contractors in the airline industry have several suppliers from which to choose. The degree of rivalry between existing competitors- Highly competitive industries normally earn low returns because the cost of competition is high. This can mean disaster when times get tough in the economy. Aspects that affect competitive rivalry include industry growth, fixed costs, brand identity, and barriers to exit. The airline industry is intensely competitive. Industry growth is moderate, and carriers are struggling to take away share from each other.
Barriers to exit are substantial in the airline industry. Virgin has always been a competitor and rival of British Airways. It competes on all of its routes with most of the industry’s major national carriers. These include British Airways, BMI British midland, American Airlines, Continental, Delta and United on transatlantic. Customer loyalty is more important than ever to the airline industry. A more competitive marketplace means that established airlines are not just under pressure to secure new business, but also face stiff competition for their existing customer base.
With these challenges, managing customer contact information effectively is vital. Virgin Atlantic, a brand leader in the airline industry, recognized that it needed to manage sales data more effectively. Role of Government – Industrial Policy In the highly competitive airline industry, carriers struggle with regulations and bilateral agreements that restrict international airline ownership and full access to global capital markets. The main issue facing the Government in relation to airlines is what they should do to facilitate the further, sustainable development of the UKs successful airline industry.
Development should aim, as far as possible, to meet the needs of consumers, bring wider economic benefits to the UK and protect the environment. Many policy and regulatory aspects of the aviation industry are therefore governed by the outcome of negotiations between several countries. It is the responsibility of governments to deliver their obligations under these agreements and to work within that framework to achieve their national goals. The Government is also keen to encourage the growth of regional airports to meet local demand, provided that expansion is consistent with sustainable development principles.
It is also the role of the UK Government to establish and ensure implementation of an effective UK aviation policy framework. This includes establishing an effective planning system, negotiating bilateral air services agreements outside the EEA, and setting and enforcing security and local environmental standards. Virgin Atlantic has to comply with the government’s legislations, as they are a well established company all the policies set out in the industry are minimal and most are made from the airline companies.
Government Macroeconomic Policies Policy by government, they include rate of inflation, interest rate, unemployment level, economic growth, exchange rate and more. On inflation rates this is when the prices increases of goods or services which then brings down the spending power of customers. The current inflations rates are down so it meant that prices for tickets on airlines such as Virgin Atlantic would be not so high due to this, if inflation was high the prices would be high so customers would go to cheaper airlines.
Interest rate, the monthly effective rate paid (or received if you are a creditor) on borrowed money. expressed as a percentage of the sum borrowed. The current interest rates are at 4. 5%, when interest rates are high people are more likely to save money then spend meaning that the customers won’t be buying tickets to go on holiday. Unemployment rate has gone up in the last three years it has reached up to 1. 49 million people being unemployed it mainly came from the age group of 18-24.
The airline industry is also an important employer, supporting a large number of jobs, both directly in airport-related activities and indirectly in other activities. Economic growth increased to 0. 4 % in the third quarter of 2005 this was the rise of service sector, with force shown within the business services and finance, government and other, and transport and communication sectors. For exchange rates it wouldn’t affect the UK as they have the strongest currency in the world, then come the Euro and then the US dollar.
This gives the UK customers the advantage of going to other countries and spending due to the exchange rate, this then makes the airline industry a profit such as Virgin Atlantic as people want to travel due to the price exchange rate. The aim of an economy is to run the economy in the most stable way possible, and to achieve a high level of economic growth. High economic growth creates higher levels of income and therefore higher living standards for the people in the economy. This makes running the economy sound very simple, but, in practice, achieving high economic growth is full with problems.
If the economy experiences a downturn, so do the airlines, particularly the main carriers operating the transatlantic route. European Dimension The European Single Currency, also referred to as the Euro or the EMU, (economic and monetary union) was launched on the 1st of January 1999. Eleven of the Fifteen member states of the European Union have already joined the Euro, but the UK along with Denmark, Sweden and Greece has made the decision to opt out of the single currency, or at least to hold back until they are able to make a more informed decision.
The single currency wouldn’t affect Virgin Atlantic as they don’t operate in the Euro regions as there destinations are more far destinations. If the UK were to join the single currency the costs for UK businesses of put an end to the pound and substituting the euro would be massive, notes and coins would need to be replaced, along with cash registers, cash dispensing machines and accounting systems. The costs of this changeover would affect all businesses in the UK, whether or not they trade with Europe and whether or not they will benefit.
Consumers and businesses would have to pay for these costs through higher prices and taxes. There would be a lot of impacts on Virgin Atlantic if the single currency was to be taken on by the UK. As then being the strongest currency would go down to being equal with other European countries which of some are not so high level of standards as they have a lower economy to the UK. Recommendations & Conclusion
For Virgin Atlantic being such a brand power and well established organisation it will always remain competitive in the global market. As this airline does not operate in European destinations I think that it should enter the europe market of airlines as it can compete all the little airlines that operate in europe. Why I think that they should implement to this recommendation is that for one Virgin Atlantic’s mission statement states that “To grow a profitable airline, that people love to fly and where people love to work. Having seen there profits they have some what achieved their mission statement, so it’ll be a no problem in competing to a new market. For being in the intensely competitive market Virgin Atlantic has achieved a lot of its goals, it’ll always be a healthy business organisation even if new entrants come in to compete it’ll take huge investments to become well established, loved by the customers making customer loyalty, as Virgin Atlantic will already have this as customers have already experienced this.