Jetstar, Qantas and market segmentation

Instructions

Read the case below on Jetstar and Qantas, and answer the following questions based on further research.

Imagine that you are engaged as a consultant by a foreign airline that is planning to enter the domestic budget airline industry in Australia. Write a report of the target market that you will recommend to the company. In your report, describe the market positions of existing budget airlines in Australia.

Your report should address, as a minimum, the following questions:

• The bases of market segmentation you would employ when analyzing the industry.
• Why you have chosen these bases.
• The market share and positioning strategies of Jetstar, Virgin Blue and Tiger Airways
• The future of the domestic budget airline industry in Australia

See the “Individual Assessment Marking Criteria” below:

Flying cheap: budget airlines soar up to the skies

By Jeaney Yip, University of Sydney

The skies have never really been the same since the arrival of budget airlines in an industry once dominated by national carriers and major airlines. Even though the history of these airlines is not really new with the introduction of Southwest Airlines in 1972 in the USA, it is a recent phenomenon in other parts of the world. The likes of Virgin Blue and Jetstar in Australia, Malaysian based Air Asia, Singapore based Tiger Airways, ValuAir and Jetstar Asia have opened up the skies to cheap airfares and brought about some of the fiercest price competition the market has seen in recent years. Cheap fares (one-way Sydney to Melbourne from $A19, one-way Singapore to Hong Kong from $SIN48, return airfare from Singapore to Perth for $SIN350), internet booking, “ticketless” travel, “classless” seating, which is sometimes unallocated, charged beverages and food on board, and other limited services characterize the budget airlines’ offering.

The business model of these budget airlines is intentionally set up as low cost, incorporating practices such as using a low cost web based booking engine rather than traditional booking engines, one type of aero plane (the demand of which is outstripping supply according to Airbus), and operating out of smaller and cheaper landing fields.

The Australian airline industry

The arrival of budget airlines Virgin Blue accompanied the short-lived Impulse Airlines (bought over by Qantas in 2001) in 2000 marked the beginning of price wars and turmoil in the Australian airline industry. This was escalated by the final collapse of Ansett in 2002, after some attempts to rescue the ailing airline. The long stronghold of the Qantas and Ansett duopoly as fully serviced airlines that had long dominated the Australian skies was no more. An attempt by Compass Airlines in the 1990s to challenge this stronghold was not successful. The domestic sky was suddenly bright for Virgin Blue’s timely entry to the industry. This of course led to a battle between Qantas, the “old timer” vs Virgin Blue, the “young, new comer.”

The battle, coupled with frequent price wars, continued until Qantas’s decision to launch Jetstar in 2004 to directly compete with Virgin Blue as a budget or low-cost carrier. This strategy is one which other fully serviced airlines (Air New Zealand and Freedom Air, Singapore Airlines and Tiger Airways, Lufthansa and Germanwings, Thai Airways and Nok Air etc.) have taken on recently, although some on an impartial basis. The differentiated marketing strategy taken by Qantas was preceded by its launch of Australian Airlines, a full-service international airline focusing primarily on Asian leisure destinations in 2002. There is history of mixed past successes in employing such a downward stretch strategy by other airlines such as British Airways, KLM, Continental, Delta, and Air Canada. In fact some analysts argue that the sky is already being saturated by budget airlines. This is the case in Europe, for example, with nine budget airlines based in Germany alone.

The budget segment

Budget airlines target a segment in the airline market which some argue have been previously ignored or not specially catered to by major airlines. This leads to a clear positioning strategy that is explicitly based on price, which is against current competition. The budget segment may be comprised of customers who meet one or more of the following criteria:

1. Have never flown before, and are therefore first-time fliers.
2. Would not fly previously due to the price.
3. Would take alternate forms of transportation other than flying.
4. Small business owners who need to travel but do not have a large enough corporate budget to do so frequently.
5. Young travelers and/or retirees/pensioners.
6. Would like to travel more often.

These characteristics are certainly very different to those of customers in other segments of the airline market, namely business and first-class fliers. While

Airlines offer more and more services to these segments (for examplesky beds, frequent flier lounges, preferred seating, preferred boarding, priority check-in, increased baggage allowance, etc.), these are being stripped off in the budget segment to leave only the basic core of satisfying the need for transporting a passenger from one destination to another. Arguably, it is an offering that satisfies the core need for transportation without much augmentation at all.

In Australia the current situation is only the start of what could be a highly competitive exercise for players in the airline industry that leads to exciting options for consumers. Price wars such as Jetstar offering $9 fares followed by Virgin Blue’s ‘Happy Hour” $1 fares continues to escalate. How long this will last or how long it takes to stabilise is the question. Budget airlines seem to be here to stay, although this presence will always be clouded by the threat from fully serviced airlines.

Sources:Bajkowski, J. ‘Cheap seats choke budget airlines sites’, Computerworld, 4 January 2005; Clark A, ‘Budget fares fills sky with problems’, The Age, 18 May 2004; Creedy, S. ‘Budget airlines sets up forty goals’, The Australian, 16 December 2004; Durie, J. ‘Virgin flies into a headwind’, Australian Financial review, 18 May 2004; Evans, C. &Dabkowski, S. ‘Budget airline to fly from Avalon’, The Age, 25 February 2004; Kaur, K. “SIA: We’re not anti-competitive’, The Straits Times, 13 December 2004; Kaur,K. ‘Round trip to Perth for $350’, The Straits Times, 29 October 2004.