The airline business is an industry that is competitive and unique, focussing on consumer choice and the responsiveness of airlines to changes in the external business environment. For any airline, this environment can be very complex as it is ‘hard for them to fully understand and impossible for them to fully control’ (The Times, n.d. p1). Virgin Atlantic is an international airline that is based in the UK. It was started by the entrepreneur Richard Branson in 1982 and now flies to 30 destinations around the world (Virgin Atlantic Airways Ltd, 2011). By looking at the PEST forces of Virgin’s external environment, the aim is to see how these influence the airline and how Virgin can use this information to their advantage.
Two main political factors in Virgin’s external business environment are deregulation and infrastructure. Before the 1980s airlines were typically controlled by the government, now due to deregulation, governments do not dictate airfares or routes etc and thus leave an open market for new competitors. As there is more competition for market share, airlines are forced to become efficient and competitive therefore driving prices down. Deregulation is said to have caused an estimated 20% in air fares (Dayao, et al., 2009). In 1979 the “open skies” act was introduced. This refers to an international deregulation policy to ‘liberalize the rules and regulations and minimize government intervention’ (USLegal, n.d.) One recent act is the open skies policy between the US and Europe, ‘allowing airlines based in the United States and Europe to fly across the Atlantic between any two airports in each region’ (New York Times, 2008). Although airline deregulation is not a recent concept, ‘its effects are still being felt today’ (Smith and Cox, n.d.) through the emergence of threatening low cost carriers such as Easyjet in the UK.
However, although deregulation exists, it is not as simple as it sounds. Infrastructure is a factor that almost counteracts the deregulation movement as governments still have a control over airports for example. Due to the demand of travel to and from the UK, Heathrow airport was expected to build a third runway, yet due to the threat of losing vital political marginal seats in the surroundings of Heathrow, the UK government made a naked political decision to not pursue this venture, therefore limiting the potential for more flights. Virgin Atlantic has tried to overcome this issue by expanding its services from Gatwick and Manchester, and is active members in the slot trading market. Virgin aim to tackle this is by buying British airline BMI as it ‘has 8.5% of the landing slots at Heathrow, the UK's busiest airport, which are seen as the main attraction of a purchase.’(BBC, 2011) If successful, this will not only increase flight capacity, but also create a more efficient service.
There are three key economic factors that affect the airline industry these are competition, rising fuel prices and the business cycle. In order to analyse competition affecting Virgin Atlantic, Porter’s 5 force model can be used (Diagram 1).
Diagram 1: Porter’s 5 forces (Investopedia, n.d., edited by Boulter, 2011)
With such a high level of competition and pricing freedom due to deregulation, the airline industry went from a moderately oligopolistic market, with around 9 major airlines, to a much more competitive market. Due to the now lower barriers to entry new airlines, especially low cost carriers (e.g. Ryanair and Easyjet) are entering the market and taking market share. Because of these new entrants being able to offer much lower prices for travel, established carriers such as Virgin experience a constraint on profitability and are therefore disadvantaged (Dayao,...