Strategic Management
Cutting Costs Strategically
February 12, 2025
Introduction
To introduce the article, it would suffice to say that each of the five forces that are discussed subsequently differ in their impact on Virgin Atlantic as the dynamics underlying them vary and the strategy employed by the airline is subject to the fluid and the changing external environment. Virgin Atlantic is a pioneer in the low cost business model though in recent years, many of its competitors have successfully incorporated its strategies in their operations.
Entry and Exit Barriers
The entry and the exit barriers for the aviation industry are quite high as can be seen from the fact that it takes a lot of capital to enter the sector. Further, airlines cannot exit the sector when they choose as the regulators often insist that they fulfill their contractual obligations towards their stakeholders in case they want to exit the venture.
Apart from this, the airline industry is characterized by tight regulation and many rules, which means that the regulators have to be satisfied about the safety aspect in addition to the airworthiness and the financial stability of the carriers. This means that the entry barriers are formidable and hence, Virgin Atlantic faces an external environment that is relatively tough for newer entrants to entrench themselves.
Having said that, it must be remembered that once a carrier enters the industry, the situation is different as it can then engage in all out price wars and a race to the bottom.
Industry Rivalry
It is a known fact that the airline industry is saturated with more and more carriers entering the sector in search of profits. Though it is a separate matter that most airlines do not manage to make profits consistently, this has not deterred the carriers from setting shop and entering the industry. Therefore, it can be said that the industry rivalry is quite high and something that affects Virgin Atlantic very much.
Further, as far as the global aviation industry is concerned, there is a race to the bottom as ever-increasing carriers vie for a shrinking passenger pie leading to fare wars and cutthroat competition. Apart from this, the rivalry between airlines is leading to more consolidation as the mantra of bigger is better and lack of profitability is driving the airlines towards mega mergers.
Power of Suppliers
The suppliers for carriers like Virgin Atlantic are the aircraft makers like Boeing and Airbus in addition to the aviation fuel companies and the ground support and handling vendors. Further, the suppliers also include those who make spare parts to the airlines.
Considering the fact that the airline industry is characterized by the presence of a few carriers and many suppliers vying for business, it comes as no surprise that the power of the suppliers is low and the airlines have the upper hand in their interactions with the suppliers.
Further, even in cases such as the supply of jet fuel, the carriers like Virgin Atlantic have a distinct advantage, as this fuel is expensive and a premium product meaning that there are not too many buyers for it making Virgin Atlantic a favored customer for the aviation fuel companies.
Power of Buyers
If there is one force that has the maximum amount of impact on Virgin Atlantic, it is the power of buyers because the airline industry is essentially a buyers’ market because of a plethora of choices, intense fare wars, and the ever looming threat of low cost carriers eating into the market share of established rivals.
Of course, Virgin Atlantic is itself a low cost carrier though the fact that in recent years, many airlines have successfully imitated its business model means that they are taking away fliers from it.
Further, with regulators choosing to lean on the side of the buyers rather than the airlines, Virgin Atlantic has to kowtow to the fliers and defer to them as otherwise it would lose out on market share. Apart from this, the increase in the distribution channels through which fliers can buy tickets and the removal of the intermediary layer with the proliferation of online booking direct from the airlines means that the buyers are spoilt for choice.
Threat of Substitutes
People in the West most often travel by air and hence, the threat of substitutes is not that high for Virgin Atlantic. Having said that, it must be remembered that due to the ongoing recession, many business fliers who hitherto used to fly are now considering other options like Teleconferencing, virtual meetings, and such things to reduce the need to fly down to the customer and the partner locations for business meetings.
Apart from this, another noticeable trend in recent years has been the paring down of leisure travel and substituting it with cheaper options like budget cruises and slow tourism that entail less dependency on air travel.
Conclusion
The preceding discussion has highlighted the impact of each of the five forces as detailed in the Porters framework on Virgin Atlantic. The clear implications that one can draw from this is that Virgin Atlantic faces a competitive and a challenging external environment that directly affects its operations as it has to innovate and be lean and mean in its operational capacities and capabilities if it has to survive the onslaught of competition.
Before concluding this article, it would be pertinent to point that the global airline industry is in a death spiral and hence, Virgin Atlantic has to be ahead of the curve if it has to remain profitable.