Low-Cost Airlines' Product and Labor Market Strategies in Australia

This report delves into the product and labor market strategies of low-cost carriers (LCCs) in Australia, focusing on Virgin Blue (VB) and Jetstar (JS). It examines how these airlines have adapted their strategies, drawing comparisons with LCCs in the United States and Europe. The report highlights the influence of product market choices on labor market strategies, including recruitment, training, and labor relations. It analyzes the competitive landscape, including the impact of Qantas's strategies, and discusses the evolution of these LCCs toward product market characteristics similar to those of legacy carriers. The study covers aspects like selection and recruitment, labor relations, and work organization, offering a comprehensive overview of the Australian domestic airline sector. The conclusion suggests implications for the future recruitment and training of frontline staff.

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
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 Australia
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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
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 brand
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 pub
recognition of the Virgin brand. However, after its first couple of years, VB ha
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 h
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 custome
partly because of Qantas’s excellent reputation for safety. However, the con-
nection may also have disadvantages. For instance, JS operates in the shado
of the work practices and high-wage costs associated with the forty-eig
enterprise bargains (labor contracts) between Qantas and the sixteen unions
with which it negotiates. Furthermore, while VB was set up almost as
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 Qant
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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Although VB primarily used SWA as a model, for JS Qantas sought to
select the best features from leading LCCs around the world and apply them
to the Australian market. It aimed to adopt the efficiency of Ryanair, the
branding of easyJet, the innovation of JetBlue, and the customer service of
SWA (Joyce 2004).
Both carriers introduced features used by LCCs in the United States and
Europe, including no interlining of passengers’ baggage. JS introduced a
twenty-five-minute flight turnaround. It also adopted “freestyle” seating
(although subsequently introduced staggered boarding). In contrast, VB
allocates seats in advance, which is more popular with passengers. Both
LCCs try to implement a thirty-minute flight “close out” notion, though VB
is more flexible about its application. During the early phase of its opera-
tions, JS’s stricter policy caused irritation among passengers, which led to
some negative publicity and prompted JS to soften its stance in this context.
Labor Market Policies and Practices
As a stand-alone LCC, VB was freer to establish labor-market strategies
that complemented its business model, whereas JS was more constrained by
its carrier-within-a-carrier association with its FSA parent. These differences
may be illustrated by examining the LCCs’ behavior in terms of selection and
recruitment, labor relations and unions, and work organization.
Selection and Recruitment
As a “greenfield” stand-alone business, VB used its recruitment process
to select a particular type of employee and to cultivate a distinctive organiza-
tional culture. VB looks “for team members who display achievement drive,
guest service orientation, integrity, team work, and a desire to create memo-
rable, positive and fun experience for all” (Virgin Blue 2005). Emphasis on
the “Virgin Flair” reflects SWA’s strategy to select employees with a particu-
lar attitude. The VB culture is reinforced by training programs, perform-
ance-based compensation policies, and the promotion of its corporate values
and goals, which include “safety, on time performance, lowest possible cost
base, great place to work, great service” (Highfield 2005, 2). Qantas also
wanted to establish a distinctive organizational culture for its new subsidiary
and was aware of the potential disadvantages of JS being too closely associ-
ated with its parent. To help distinguish JS as an LCC, Qantas used the
Impulse entity as “a ready made airline” with “a low-cost culture” (Joyce
2004). More than 400 former Impulse employees joined JS, mainly pilots,
cabin crew, and engineers. To supplement this workforce, JS recruited man-
agers and staff from within the Qantas Group, as well as new employees (Jet-
star 2004). JS was also inspired by SWA to establish a selection process to
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recruit employees with a customer service “attitude” and then “train for skill
(Joyce 2004). Although JS aims to emulate Ryanair’s efficiency in terms of
work organization, its rhetoric at least emphasizes excellence in custom
service and a highly committed workforce, like SWA.
Labor Relations and Unions
There is generally a high union density in the Australian aviation indus-
try. This has developed against the background of a centrally regulated
industrial-relations regime and the concentration of employment in a few
workplaces (that is, large airports). In Australian aviation, unions are mostly
organized along occupational lines (on the Australian context for emplo
ment relations, see Bamber, Lansbury, and Wailes 2004, chap. 5). VB and JS
have taken different approaches to labor relations compared both to each
other and to Qantas, which is highly unionized.
From its inception,VB invitedunion involvement.In doing so it
attempted to legitimize the employment contracts it was offering to employ-
ees; foster trust between the airline, employees, and their unions; and avoid
union recognition conflicts that may have arisen if union representation had
been denied. Unlike Qantas, VB limits its industrial relationships to three
unions. It wanted to deal with unions that would support flexible work prac-
tices and broader job classifications and would not seek to enforce the occu-
pational demarcations that prevail in legacy carriers. Consequently, the
Flight Attendants’Associationof Australia–Domestic/RegionalDivision
(FAAA) represents cabin crew, while the Australian Federation of Air Pilots
(AFAP) represents pilots. The Transport Workers Union (TWU) covers the
largest proportion of eligible VB employees, including pit crew, engineering,
and “guest services.” This broad coverage has caused some friction between
the TWU and the Australian Services Union (ASU), which VB does not rec-
ognize, even though the ASU represents ground staff at Qantas, JS, and most
other airlines in Australia. Nevertheless, the TWU views its relationship with
VB as generally positive and has been able to settle most grievances and dis
putes at the enterprise level through negotiation.
JS established different labor relations foundations to its parent by using
former Impulse arrangements, several of which were non-union agreements.
JS has since negotiated new agreements with most occupational groups, but
they are broadly similar to the former Impulse contracts. Qantas hoped that
the lower-cost culture of Impulse would make it easier to negotiate low-cost
agreements with employees and unions than at Qantas, where they ar
accustomed to more generous benefits in terms of working hours, wages, an
conditions.
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Since JS was developed from Impulse, it has unionized and non-union-
ized occupational groups. The only unionized employees are cabin crew, 85
percent of whom are members of the FAAA, and ground staff, who are rep-
resented by the ASU. Ramp and baggage handling workers are represented
by the TWU, but JS outsources these processes to a Qantas subsidiary. For
non-unionized employees JS maintains “works councils” inherited from
Impulse to facilitate consultation. For example, for engineers there is an
Engineering Consultative Committee, which comprises elected employee
representatives and management representatives. It oversees the operation
of the agreement, assists with dispute settlement, and is part of a broader
communication and consultation process to help JS cope with challenges
that may arise.
Work Organization
Both LCCs highlight “efficiency” and “functional flexibility” as key compo-
nents of their low-cost strategies. VB employees are trained in a wide range of
skills and have flexible job classifications. This is particularly the case for
ground crew under the TWU agreement, whose duties may include handling
aircraft and auxiliary equipment, freight, and passengers and their property;
making and changing reservations; issuing boarding passes; cleaning aircraft;
flight operations and/or ground crew administration; load control; notifying
passengers of changes and cancellations; handling queries, emails, and survey
reception, guest lounge, and administrative duties; and supervisory duties. At
VB ground crew can become flight attendants and vice versa, which is unusual
in legacy carriers because they tend to have strong demarcation and seniority
lines. VB is introducing a “unit crewing” process to coordinate rosters, which
enables cabin crew and their supervisors to fly in the same teams as often as
possible. This is intended to enhance the role of supervisors, to increase
employee commitment by building teams, and to foster consistent and high-
quality customer service. JS takes advantage of broad job classifications for its
own employees and the companies to which it outsources processes. It also
relies heavily on minimizing costs through operational efficiency by adhering
to typical LCC policies such as freestyle seating and a thirty-minute fligh
“close out” in an attempt to maximize the efficiency of aircraft and labor by
increasing check-in and boarding efficiency.
The LCCs’ different approaches may be illustrated by VB’s comments on
some of JS’s practices. For example, VB has declared that it would not match
JS’s twenty-five-minute flight turnaround because “we focus on 30 (minutes)
to allow a reasonable amount of time to look after the wellbeing of our staff
and guests” (Creedy 2004). It has also been skeptical of JS’s ability to match
VB’s costs and achieve the same level of staff flexibility: “Our efficiencies are
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gained not by hurrying, but by multiskilling people to ensure the most effec-
tive operation” (Creedy 2004). As a stand-alone carrier, VB may have
advantage over JS in that, apart from pilots and other specialist techni
occupations, many VB employees are working in the airline industry for the
first time. As such, VB had a “clean slate” from which to establish flexible
work practices and less traditional labor relations. On the other hand,
could be argued that previous airline experience may mean that employees
will be more skilled and experienced in airline operations.
Conclusions
A common feature of the two Australian LCCs is that they were both cre-
ated by wealthy parents. However, they can be distinguished by the way in
which they were created, how they maintained their relationship with their
parent, and their product and labor market policies. Qantas was more closely
involved in the strategic planning of JS’s start up and continues to be involve
as it retains 100 percent ownership of JS. For Qantas the establishment of JS
reflected an attempt to try alternative strategies in the product and la
market arenas that would differ from its own legacy-carrier strategies. How-
ever, JS also built on the foundation it inherited from Impulse and tried to
learn from the experiences of successful but contrasting LCC models (for
example, SWA and Ryanair) as well as trying to avoid the problems experi-
enced by other legacy carriers and their LCC offshoots.
In contrast, the Virgin Group was a much less interventionist parent. This
is understandable since it is led from the UK, on the other side of the world.
Within a few years, it had floated VB on the Australian stock exchange as an
independent company. Branson’s flamboyant style influenced VB’s product
market strategies, but VB had autonomy to devise its own labor market prac
tices as a “greenfield” enterprise. In these circumstances VB’s labor market
policies were inspired less by those of the Virgin Group and more by those of
SWA and of other exemplars of best practice human resource management
in Australia and overseas.
The rhetoric of both LCCs emphasizes customer service and employee
engagement, reflecting the approach taken by SWA. However, the extent to
which the reality for their employees and customers matches the rhetoric is
mixed and is subject to various contingencies and management styles.
aims to adopt the best strategies of successful LCCs, particularly Ryanair and
SWA. However, since Ryanair and SWA have contrasting strategies to
achieve low-cost competitiveness (compare the “low-road” and “high-road”
paradigms), it will be interesting to see how well JS can marry successfully
the two models over the longer term. To what extent were the new LCCs’
labor market strategies influenced by the strategic choices they adopted in
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the product market arena? While both companies initially focused on pro-
viding cheap fares for leisure travelers, they have gradually shifted to a more
diversified approach and are beginning to adopt some of the product market
characteristics of FSAs. This may have implications for the future recruit-
ment and training of cabin crew and other frontline customer service staff
who will be required to provide services to a wider range of customers than
when these LCCs were focusing mainly on leisure travelers.
These LCCs recognize unions and negotiate collective agreements for at
least certain sections of their workforce, but both also have forms of works
councils for consultation with employees. They have so far avoided the overt
industrial conflict that has sometimes characterized the airline industry. But
given changes in labor market legislation implemented by the Australian
government in 2006, these new airlines might seek to take advantage of
opportunities to replace collective labor contracts with more individual ones.
Such a development would probably meet strong resistance from unions.
Both LCCs have recently begun international expansion, which affords them
cost advantages over legacy airlines and opens up new markets. However,
this move may exacerbate tensions between Qantas and its unions, which
fear that Qantas may use JS to “offshore” and to undermine wages and work-
ing conditions of employees in the legacy carrier. Historically, it has proved
difficult for three airlines to survive in the relatively small Australian domes-
tic sector. It remains to be seen whether two LCCs can survive for long in the
same market, alongside Qantas.
Acknowledgements
We thank the Australian Research Council. We are also grateful to Jet-
star, Qantas, Virgin Blue, and the unions, who provided information and
allowed us to interview them in 2005. We also appreciate the help and
encouragement from academic colleagues, including Michael Barry, Jody
Hoffer Gittell, Tom Kochan, and others in the Airline Industry Council of
the Labor and Employment Relations Association.
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