Low-Cost Airlines’ Product and Labor Market Strategic Choices: Australian Perspectives

Low-Cost Airlines’ Product and
Labor Market Strategic Choices:
Australian Perspectives
Gregory J. Bamber
Griffith University, Brisbane
Russell D. Lansbury
University of Sydney
Kate Rainthorpe
Griffith University, Brisbane
Clare Yazbeck
University of Sydney
Abstract
This paper examines the domestic airline sector in Australia. It
discusses the product and labor market strategies of the main Aus-
tralian low-cost carriers (LCCs). It considers how labor-market
strategies in these LCCs have been influenced by the strategic
choices that they have adopted in the product market. It also makes
some comparisons with LCCs in the United States and Europe. It
concludes that these Australian LCCs are moving to adopt some
product market characteristics similar to those of legacy carriers.
This may have implications for the future recruitment and training
of frontline staff, who would be required to provide services to a
wider market than previously.
Introduction
From an airline industry perspective, Australia comprises about a dozen
key cities, most of which are separated by long distances and near the coast of
a large island continent. There are about another sixty towns, some of which
are inland and remote. For most of the post-1945 period, the Australian
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Author’s address: Griffith Business School, Griffith University, Nathan, Queensland,
Australia, 4111
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government had a “two-airline” policy, which was, in effect, a cozy duopoly
whereby the domestic market was shared between Qantas and Ansett.
Qantas was founded in 1920 and is Australia’s dominant legacy carrier.
Since it was privatized in the 1990s it has operated profitably in international
and domestic air services and a range of related businesses. Ansett was
founded in 1936, mainly as a domestic carrier.
Following several short-lived attempts since the 1980s to start a third
domestic airline, Impulse and Virgin Blue (VB) were launched in 2000.
Their launch reduced fares to historically low levels. Qantas and Ansett
dropped their fares to match start-up deals. As Ansett and Qantas had higher
overheads, the fare reductions challenged Qantas and induced losses for
Ansett. Against the background of this price war, Qantas took over Impulse,
which was later relaunched as Jetstar (JS), and Ansett collapsed in Septem-
ber 2001. This paper examines the product and labor market strategies of VB
and JS—the two main low-cost carriers (LCCs) in Australia.
Product Market Strategies
Richard Branson initiated the Virgin brand in 1973, and it has since
grown into an international brand and a conglomerate. Virgin purchased
EuroBelgian Airlines in 1994, then renamed it Virgin Express. In 1999 Brett
Godfrey, an Australian executive of Virgin Express, and another Australian,
Rob Sherrard, proposed to Branson the establishment of a “Virgin branded,
low cost, low fare carrier operating in the Australian domestic market” (Vir-
gin Blue 2003, 52). The LCC model that Godfrey proposed was similar to
Southwest Airlines (SWA): a “no frills” airline. Godfrey said “the airlines that
are clearly succeeding are those that have stuck to the consumer friendly
Southwest low fare model” (CAPA 2002, 34).
The Virgin Group invested approximately US $7.5 million for start-up
costs. Godfrey became the CEO. VB initially used second-hand planes,
endeavoring to be low cost, but offering reasonable customer service. Its
start-up strategy was influenced by the prevailing market domination by
Qantas and Ansett, which were full-service airlines (FSA). The collapse of
Ansett in 2001 left a large gap in the market, which VB and Qantas moved
quickly to fill. After Ansett’s collapse, Qantas held more than an 80 percent
market share but had concerns about VB’s aggressive expansion based on
lower costs, which were 30–40 percent less than Qantas’s. This helped VB to
win about one third of the domestic market within three years.
To respond to the competitive threat of VB, Qantas CEO Geoff Dixon
drew a “line in the sand” by creating JS, to restrict VB and other carriers from
taking more than 35 percent of the domestic market (Harcourt 2004). Qantas
adopted a “pincer-movement” strategy: it established an LCC to compete with
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VB on price, especially in growing leisure markets, whilst using Qantas as an
FSA to concentrate on business markets. Qantas intended to force VB to
respond either by reducing costs to compete with JS or by increasing costs to
compete with Qantas in the corporate market. This strategy, using two brands
to target different markets, aimed to close the gap at the lower end of the
domestic market and also to reduce the risk of “cannibalization” of the main-
line carrier. (Such cannibalization had occurred between British Airways and
its low-cost carrier, GO.) The parent companies of JS and VB played different
roles. From its inception, VB’s competitive position was assisted by public
recognition of the Virgin brand. However, after its first couple of years, VB had
relatively little direct association with the Virgin Group other than in branding
(Virgin Blue 2003). The Virgin Group is no longer the primary shareholder in
VB, but it still holds two seats on VB’s board. Nonetheless, Branson has said he
wishes to buy back enough shares in VB to regain control of the airline.
Whereas VB is a stand-alone carrier (it operates as an autonomous
Australian-owned company), JS is a wholly owned subsidiary of Qantas and
so is a carrier-within-a-carrier. JS has the advantage of guidance and finan-
cial support from Qantas, including buying planes, lobbying governments,
fuel hedging, and treasury advice. Nevertheless, JS tries to differentiate itself
in branding and its labor market strategies. Similarly to VB’s association with
Virgin, JS’s relationship with Qantas seems to be attractive to customers,
partly because of Qantas’s excellent reputation for safety. However, the con-
nection may also have disadvantages. For instance, JS operates in the shadow
of the work practices and high-wage costs associated with the forty-eight
enterprise bargains (labor contracts) between Qantas and the sixteen unions
with which it negotiates. Furthermore, while VB was set up almost as a
greenfield venture, JS was effectively the rebranding of another airline that
Qantas had taken over: Impulse, which had been a quasi-LCC.
Both Qantas and Impulse, then, provided foundations for JS’s start up.
Qantas used the Impulse entity because it provided fourteen aircraft; an Air
Operators’ Certificate; a maintenance base; and a workforce whose employ-
ment contracts could be taken over by JS. Such use of Impulse helped Qan-
tas to provide JS with a degree of autonomy, learning from the experience of
airlines such as Delta’s Song (Song failed to achieve lowest costs because it
was too closely associated with its legacy carrier parent). To foster independ-
ence, JS organized its own commercial and airport operations. It outsourced
certain services (for example, call centers) to entities outside the Qantas
Group. By contrast, VB supplies its own customer and ground handling serv-
ices at its busiest airports but outsources these functions at other airports. It
also outsources catering at all airports, some maintenance services, and the
overflow from its call centers (Virgin Blue 2003).
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