Virgin Blue Holdings Limited was set up in 2000 and operates domestic and international airlines as well as other services such as freight in Australia. In this report, it evaluates Virgin Blue's strategies from different perspectives. First it describes the companies' profile and the situation in the market. Then it analysis Virgin Blue's business strategy, and it finds out Virgin Blue uses cost leadership since 2000. But after Tiger and Jetstar entered the market, Virgin Blue should modify its strategy because the cost leadership strategy led Virgin Blue in a position of dilemma in the market. After that, it analyses the how Virgin Blue segments the market. And it finds out that's Virgin Blue segments its market based on geography to help allocate revenue and cost. But it also can segment its marketing based on customers need for marketing purpose. And different segmentation markets can use different business strategies. Then, frequency marketing is applied, and finds out Virgin Blue adopts frequency marketing well. But compared with its main competitor- Qantas, Virgin Blue still need to work hard. At the end of report, other marketing strategy- sponsorship is analysed.
After several analyses and evaluations, it finds that Virgin Blue did well in overall level from financial perspective, but it still can work hard to achieve higher target.
Virgin Blue Holdings Limited was formed in 2000 which is wholly owned by the Virgin Group. It is headquartered in Bowen Hills, Queensland. It was listed on the Australian Securities Exchange (ASX code VBA) on December 2003. Virgin Blue Holdings Limited owns and operates four airlines: Virgin Australia (previously known as Virgin Blue), Polynesian Blue, Pacific Blue and V Australia. Its business runs in four areas- domestic airlines, international airlines, tourism and freight. It operates over 2,100 domestic flights and eight international destinations (IBISWorld, 2011).
In the market of domestic airlines of Australia, Virgin Blue Holdings Limited has 18.40% market share. The biggest competitor which holds 73.50% market share is Qantas Airways Limited. In the international airlines in Australian market, Virgin Blue has 9.30% market share, meanwhile Qantas has 27.6%. In the tourism of Australian market, Qantas still has more market share than Virgin Blue. Qantas has 20.80% market share, but Virgin Blue only has 3.30% (IBISWorld, 2011).
In this report, it will analysis Virgin Blue's performance in domestic airlines industry and international airlines industry. This report will focus on revaluating the marketing strategies of Virgin Blue in these two industries. Besides that, the marketing strategies of Virgin Blue's main competitor- Qantas Airways Limited will be compared. Also, the results of Virgin Blue's marketing strategies will be provided. And at the end of this report, the conclusion will be given.
Business strategy, also sometimes called competitive strategy, defines how a firm or entity within the firm chooses to compete in its industry and tries to achieve a competitive advantage relative to its competitors. Generally, there are two types of competitive strategies: cost leadership and differentiation. A cost leadership strategy involves offerings of relatively standardized, undifferentiated products. A differentiation strategy involves the creation of a product or service that customers perceive as uniquely differentiated from competitors' offerings (Merchant & Stede, 2007). According to the features of airline industry, the products of each company are very similar. They all are offering the customers travelling from one place to another in a relatively fast way. As IBISWorld states, Virgin Blue operated in Australia as a low-cost domestic airline since August 2000, it is clearly that Virgin Blue's business strategy is cost leadership. Moreover, Virgin Blue uses low price airfare to attractive customers then achieve competitive advantage.
Next, this report will evaluate how this strategy performed in Virgin Blue. If a customer wants to flight from Melbourne to Sydney on 1st June 2011, and the prices of each company are shown as below (the listed prices are checked on 20th May 2011):
Also, after checking after flight routes and dates, it can be concluded that the airfare of Virgin Blue is not cheap.
Tiger operated in Australia since 2007, and Jetstar offered low-cost airfare since 2003 (IBISWorld, 2011). These two companies are new-comer of Australian market compared with Virgin Blue. So after these two companies enter Australia, Virgin Blue should change its pricing strategy or business strategy to keep the market share. But in fact, Virgin Blue did not change, so it led to a position of dilemma for Virgin Blue. For the price aspect, Virgin Blue is more expensive than Tiger or Jetstar. And for service aspect, Virgin Blue is not good as Qantas, because Qantas provides meal for passengers which included in the airfare.
So Virgin Blue should adjust its business strategy to achieve competitive advantage. More details are shown on next part.
Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a company divides into distinct groups which have distinct needs, wants, behaviour or which might want different products and services.
According to the annual report of Virgin Blue (2010) and IBISWorld report (2011), Virgin Blue has two segments marketing- Short haul operations and long haul operations. Short haul operations means using the short haul fleet of Boeing 737 aircraft and Embraer 170 and 190 aircraft. This comprises Australian domestic, New Zealand domestic, Trans-Tasman and Pacific Island flying. Long haul operations using the Boeing 777 aircraft. This comprises Trans-Pacific flying. Basically, the Short Haul Operations mean the domestic airlines and the flights to New Zealand. The Long Haul Operations mean the international flights exclude Australia to New Zealang. When the costs associated with the centralised management and governance of Virgin Blue, together with certain items which are not allocated to business segments, are reported in Corporate/Unallocated. In 2010, the financial results of each segment are shown as below:
From the figure and table, it is clearly that the Short Haul contributes a lot to the total revenue. As sales of tickets contribute over 90% of the total revenue, so it can be calculated that the Short Haul Operations made up over 75% of total revenue (90% times 85.2%). Next table shows the profitability of each segment.
From the above table, it is more clearly that the Long Haul Operations segment did not make any profit in 2010. In the other words, the revenue from Long Haul Operations cannot cover the cost relates to this segment. That's make perfect sense, on one hand the demand of international flights are much less than domestic flights. On the other hand, the airfare is decreased due to the high competition in international airlines.
Clearly, Virgin Blue segments the marketing basically according to geography (inside and outside Australia). For financial purpose, this segmenting method can help Virgin Blue to allocate revenue and cost to each segment, and then find out the most profitability segment. But for marketing and pricing purpose, Virgin Blue can also segment the marketing base on the customer needs.
Generally, the airfare can be classified as "first class" and "economic class". It cost much more money to buy a first class ticket than economic class. For the people who buy first class tickets generally care less about airfare, they care about the service such as delicious meal and comfortable seat more. For the people who buy economic class ticket will generally care the airfare. When other airline companies offer cheaper airfare, this kind of customer may choose the cheaper ticket.
As analysis above, Virgin Blue should consider segment the market according to the customer needs. One segment is the customers who buy first class airfare. Virgin Blue provides these customers highest standard of service and charges them at a reasonable high price to achieve more revenue and more profit. In another word, for this segment, Virgin Blue could use differentiation strategy. The other segment is normal fliers. For these customers, Virgin Blue offers low price tickets to attract more customers. Also Virgin Blue should provide reasonable service to keep the customers. Clearly, this can be called cost leadership strategy.
Frequency marketing is reinforcing regular purchasers by giving them rewards with values that increase along with the amount purchased (Solomon, 2009). As other companies, Virgin Blue has its own frequency flyer program called Velocity Rewards. It is Virgin Blue's loyalty program that allows points to be used to purchase airline travel, hotel nights, car hire, online shopping and charitable donations (IBISWorld, 2011). It is free to join this program, and very easy to earn Velocity Points and bonus Points on international flights, shopping, everyday credit card spend and more (Virgin Blue, 2011). This program has different levels meanings for the company. From financial perspective, Virgin Blue receives revenue from the sale to third parties of rights to have Velocity reward points allocated to members of the Velocity Program (Virgin Blue, 2010). So the company can get financial benefits from launching this program directly. More important, this program can let the company get more loyalty customers. As the competition in both domestic and international airlines market are very high and the production different becomes smaller, customers will easily switch from one company to another. For example, a customer wants to fight from Melbourne to Sydney. Qantas charges him $100, Jetstar needs $80, and Virgin Blue costs $90, and the customer has no special need for flighting. If all the flights take off at same period, the customer may choose Jetstar, because there are slight service differences between these companies. Under this situation, the company who has the cheaper fight fare may get the competitive advantage. But if this customer has joined the Velocity Rewards program, or he is a loyalty customer of Virgin Blue, he may buy Virgin Blue fly ticket despite Jetstar's is $10 cheaper. Under this situation, the customer may cost extra $10 if he buys Virgin Blue's ticket instead of Jetstar, but he may get other benefits from Velocity Rewards program. For Virgin Blue, it needs to pay extra money if the customer redeems his points, but this rewards program brings $90 for the company. And this is a win-win situation. The third level of the benefit of launching rewards program is let more people know Virgin Blue. And potentially, it will increase the customer number of Virgin Blue, and then increase the revenue and profit of the company.
This marketing strategy sounds good, but in fact, this program did not bring so much benefit to Virgin Blue directly. According to Virgin Blue 2010 Annual report, more than 90% revenue of the company from tickets sales. And other activities such as holiday booking, freight, fees and rewards program contributed the rest of companies' revenue. Although this rewards program cannot bring the financial benefit directly to Virgin Blue, it is still important for Virgin Blue. As analysis above, it is not only brings the financial benefits directly, but also indirectly. And it is believed that the indirect financial benefit will bring more benefits in the future.
Compare with Virgin Blue, Qantas has received financial benefits from its own frequency flier program called Qantas Frequent Flier. This program brought $1.1 billion revenue and more than $300 million profit in 2010. Next, it will describe the rewards program of Qantas.
The program model of Qantas is basically the same as Virgin Blue. The customer can get points from flights, online shopping and other particular activities. And these points can be used at flight tickets purchase or some other activities. But if a customer joins Qantas Frequent Flier program, he can get points from wider range. According to Qantas (2011), when customers fly with Qantas and any of other 25 airline partners to over 750 destinations worldwide, customers could earn and use points on eligible fares and flights. Moreover, people can earn points when they shop at Woolworths if they join Qantas Frequent Flier program. This is easier to get the points because people buy groceries more frequent than buy flight tickets. Also, when customers get points from Qantas, it can be used to buy groceries from Woolworths.
As mentioned above, it is clearly that, Qantas Frequent Flier is much better than Velocity Rewards. Virgin Blue should enhance the rewards benefits to attract more people join Velocity Rewards. But at overall level, Virgin Blue did well at frequency marketing.
A good news for Vrigin Blue in 18th November 2010, AFL (Australian Football League) has turned to Virgin Blue after a nine-year association with the flying Qantas (Sheahan, 2010). Virgin Blue is believed to have promised to refrain from any arrangement with any other football code in return for the business of Australia's biggest sport. Virgin Blue sees sport as a powerful marketing tool and will gain huge exposure flying the AFL's 17 clubs round the country for seven months a year from February 2011 (Sheahan, 2011). This contract means a lot for Virgin Blue. From financial perspective, this contract may bring a lot of benefits for the company such as expending the customer size. For the strategy perspective, it indicates Virgin Blue becomes stronger as AFL signed this contract with Virgin Blue instead of Qantas. Also, it will help Virgin Blue to build up a better positioning in the market. Positioning is developing a unique image for product or service in the mind of the customer. As AFL is very popular in Australia, and customers may change their mind of Virgin Blue.
To sum up, although this sponsorship may cost some money for Virgin Blue, it will bring a lot benefits from different aspects. And it will help Virgin runs better in the future.
This report evaluates Virgin Blue's marketing strategy from four aspect- business strategy, segmenting, frequency marketing and sponsorship. The business strategy can be classified as cost leadership strategy and differentiation strategy. Clearly, Virgin Blue uses cost leadership strategy which means provide low-cost airfare to customers. But after Tiger and Jetstar entered Australian market, Virgin Blue loss its advantage on price as Tiger and Jetstar can offer cheaper tickets.
Virgin Blue segments the markets according to geography- short haul and long haul. This strategy can help Virgin Blue allocate cost and revenue. And from marketing aspect, the market can also be segmented by customer needs- first class and economic class. Virgin Blue can use differentiation strategy on first class customers and cost leadership strategy on economic class customers.
About frequency marketing, Virgin Blue has Velocity Rewards Program make normal customers become loyalty customers. This program works well, but it still needs to be improved compared with Qantas Frequent Flier.
Virgin Blue, 2011, Velocity Rewards- how it works, https://www.velocityrewards.com.au/content/ProgramBenefits/HowItWorks/index.htm
Qantas, 2011, Airlines Partners, http://www.qantas.com.au/fflyer/dyn/partners/airline?int_cam=ff:promo:earnairlinepartners:lang:en
Sheahan, M 2010, "AFL dumps Qantas as its official carrier, set to sign deal with" Virgin, Herald Sun, http://www.heraldsun.com.au/news/victoria/afl-dumps-qantas-as-its-official-carrier-set-to-sign-deal-with-virgin/story-e6frf7kx-1225955673452
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