airline industry economic stage

Virgin America Lands in the United States (Case #13, Notes) Overview/Objectives 1. Analyze the U.S. airline industry economic stage, its forecast, market segments, favorable conditions and challenges that new entrants, such as Virgin America Airlines, could face. 2. Describe competition that Virgin America experiences by characterizing some of its competitors, such as Southwest Airlines, Skybus, JetBlue, and AirTran Airways, and explain Virgin’s competitive strategy. 3. Characterize airline consumers in the U.S. and discuss how Virgin America caters to their expectations. 4. Discuss how Virgin America’s strategy may or may not be successful based on information about the competitive landscape of the airline industry and the preferences of American consumers. Why Enter the U.S.? Virgin America entered the U.S. airline market in August 2007. The U.S. airline industry is characterized by deregulation, fragmentation, high competition, and maturity. This market was attractive to Branson – who already has experienced great success with Virgin Atlantic airline in Europe – for several reasons, including: • The U.S. airline market is the largest in the world. It has an expected annual growth rate of 3.4% • Cost controlling models that depend mostly on efficient operations and favorable fuel prices for profitability are becoming industry standards; therefore, there is an opportunity to grab market share with new, innovative business models. • Deregulation of the airline industry made the market attractive for new entrants, lowering fares and expanding routes and services to more cities. • The industry is poised for profitability in 2007-2011 due to improved financial footing, new cost conscious business models, and the growing revenue trend. • Studies have shown that American consumer flying satisfaction is low. Virgin America’s Challenge Virgin America will have to compete with much bigger and more established companies in the U.S., such as Southwest Airlines, American Airlines, JetBlue, etc. Will it be able to survive in this complex market? Virgin America seems to be making attempts to win its own consumers and targets not only key passengers (35-44 year-olds) but also younger ones. It positions itself as an airline that is affordable to anyone and presents flying as an unforgettable experience accompanied by extraordinary amenities and services. Market The U.S. Airline industry is dependent on the health of the U.S. economy to generate profits. Companies depend on efficient operations and favorable fuel costs for profitability. The U.S. airline industry faces many challenges including weather instability, unforeseen catastrophes, such as terrorist attacks, unionized labor and soaring fuel prices in an intensely competitive market. Customer expectations have increased and safety and security have been called to attention. The changing market has spawned development of new business models aimed at controlling costs. Segmentation There are basically three market segments with low cost carriers at one extreme and legacy airlines operating at a premium at the other extreme. Virgin America has structured itself as an intermediate cost carrier, but is in close competition with both low and intermediate cost carriers. Some characteristics of these segments are: • Low cost carriers have adopted simplified business models that operate a point-to-point network with one fleet type. • Legacy airlines, such as American Airlines, have a more complex business model that operate a hub and spoke network with multiple fleet types. • Intermediate cost carriers blend aspects of the two extremes, such as a point-to-point network with multiple fleet types to become competitive in the market. Consumers In order to determine whether Virgin America has an appropriate strategy, it is important to understand the flying habits of American consumers. Some key characteristics of this group are: • Americans take at least one flight a year. • Motivations for flying: Vacation (58%) and Personal (30%) travel both inside and outside the U.S. • Most frequent flyers are from the 35 to 44-year-old demographic group. • U.S. consumers are price sensitive. • The majority of travelers book flights online rather than using travel agents. • Gender has no significant impact on how often Americans fly. Surveys have shown that most Americans base their airline choices on the following key factors, in order from most important to least important: • #1 – Low fares; 65% of passengers almost always or occasionally choose or change the dates of their travel based on the availability of cheaper fares. • #2 – Convenience • #3 – Safety • #4 – Good value and comfort This indicates that passengers are price sensitive usually choosing air travel for its convenience, and are resigned to the fact that air travel in general is not particularly comfortable experience. This attitude is something that Virgin America will have to change to become successful in the U.S. market. Advertising and Promotion Virgin America with its low prices, targets tech-savvy travelers who want to save money without sacrificing service. At the same time, the airline is youth-oriented and appeals to young travelers. The primary source of advertisement for the company is the internet. Virgin America focuses on advertising its aircraft amenities and comfort features that differentiate it from its competitors, such as mood lighting, leather seats, built-in message function, and entertainment systems with movies, games and chat rooms. Competition This section highlights Virgin America’s chief competitors among other low and intermediate cost carriers in the airline industry. The following is a brief overview of the competition: Southwest – Southwest has been both the low cost founder in U.S. and the industry leader on providing high quality service at reasonable prices. They are the dominant force in the market and even hold over 12% market share in the U.S. aviation industry as a whole. JetBlue – JetBlue was started by former Southwest personnel. It is managed using the Southwest model and operated using the same operational and marketing systems that made Southwest so enviable. The model that has worked so well for CEO David Neeleman, the founder and of JetBlue, may be challenged as the airline grows in size via expansion into new markets and infrastructure improvements at JFK. AirTran – AirTran continues is the fastest growing low cost airline in the U.S. The airline set records for revenue and passengers in the second quarter of 2007, serving over 6.3 million people. The airline was founded in 1992 as ValuJet, but was forced to restructure after one of its planes crashed into the Everglades, killing everyone aboard. Since 1995, AirTran has grown from serving 24 cities in the eastern and southern U.S. to over 56 cities coast-to-coast on over 700 flights per day. The airline has had eight consecutive profitable years. Skybus – Skybus, a Columbus, Ohio based airline, plans to stay competitive by controlling costs such as moving bags between flights, flying in and out of less congested airports, and other measures, which would allow it to consistently offer low fares. The company is attempting to become an American version of the European carrier RyanAir. The airline currently offers direct flights from Columbus to a limited number of cities, but expects to fly to over 14 cities between the east and west coasts by the end of 2007. Competitive Strategy The case shows how Virgin America contrasts its competitors based on two key competitive factors – destination options (e.g. number/attractiveness of destinations) and flying experience (i.e. focus on enjoyment of the actual flight). These factors were chosen since prices are very similar in this market segment, making it difficult to differentiate between airlines based solely on price. Virgin America’s main competitive strategy is to improve the flying experience for each customer by adding several in-flight amenities, such as mood lighting, large selection of in flight movies an mp3’s, and touch-screen food ordering. These amenities fit in with Virgin’s positioning strategy to market itself to more tech-savvy flyers. Discussion Questions 1. Does Virgin America offer the right mix of amenities and low cost to become competitive and profitable in the fragmented airline industry? 2. Will VA’s strategy of enhancing the flying experience ultimately be successful in the U.S.? Why or why not? 3. Virgin America is a part of the Virgin Group, which resides in the UK – a higher context culture than the U.S. Do Virgin America’s marketing strategies demonstrate awareness of the cultural context differences?