Friday, April 5, 2013

Virgin from inertia to the space... What actually it changes?


In a cyclical industry with tiny margins, such airlines companies are, a minor mistake can find themselves outside the competition (partnership and counter party risk). Virgin knows firsthand that if wastes more time on trying to find new networks to join there is a marginalization risk reflected in diminishing seating capacity, no code-sharing and less flight options in comparison to the competition. Even though the acquisition of a competitor (Virgin agreed on 11 December 2012 to purchase Singapore Airlines' stake), allows the entrance in a new and challenging market, a lot more have to be done for Virgin’s market position and segmentation improvement  in an airline’s shrinking margins.  


Virgin has dealt with manifold problems, because it could not find a suitor and it was also vacillating whether to join a global network to obtain synergies. It was a time (in 2010), where Branson was ready to relinquish as the major shareholder, due to the multiple challenges that Virgin faced (2).  In fact, even though Virgin Atlantic carried 5.3 million passengers just only in 2011, making it the eighth largest UK airline in terms of passenger volume, only in February 2012, had an annual operating loss of £80.2 million on a turnover of £2,740 million.

By making a retrospect, even though Virgin’s director recognized the seriousness of the strategic threats to Virgin the last years, this stance was surprisingly very passive. Although there are people supporting that Mr. Branson is a conscious leader, who associates his name with the Virgin brand, and consequently wants the best for his investment, there is a majority that believes that Virgin’s resistance to change culture and the fact that is not adaptable to the new scenery, would result in bigger losses.  The  "stay as you are" Virgin's  option by remaining focused on its loyalty advantage, without trying new schemes, waiting for the valuation rise to start reflecting its real price it is indicative of Virgin’s strategy policy, proved to be too costly and in-competitive thus far.

In contrast with the previous, and based on Virgin’s confirmation that this year Virgin Galactic is ready to launch its first flight in the space (1), it comes apparent that an amazing progress in the Virgin’s way of thinking and operating takes place. As a result of Virgin's galactic venture announcement, we may agree that this strategy development decision is really surprising for such a conservative leader. Usually, when we see a dramatic swift in a company's strategy, we think that there is a potential change of the leader or the management team. In that case, the leader is the same, but the strategy turns out to be an innovation-oriented. 

Decisions as this one may indicate that someone wants to create a new market by being the first that invest on it and consequently be ahead of the competitors that in a later point will need to jump in and struggle to catch up Virgin’s market presence.  Regarding the size of the “pie”, and the chances that a space market may have it seems that this change follows the marketing tools of promotion and reputation. That is supported from the fact that thus far, all the unique characteristics that distinguish Virgin were its eccentric brand and a positive reputation.

Another case in point is that there is a paradox in Virgin's pricing policy between the conventional flights and space flight. In conventional flights, Virgin offers high-end services at a lower price compared with the competitors (3) and that was the primary reason that created financial woes to Virgin officials. By investing in space may result to be the company more profitable (4), if the projection that a space flight will cost 200.000 (1), comes true. Based on that apparent differentiation in conventional and space pricing tariff, we may interpret that announcement as an upcoming in change of pricing policy in the current flights. That may be based on the “potential” company’s high-edge quality and services that goes hand to hand with the operations to space.  

Nothing can enable us to make solid forecasts for the company’s future, and still there are a lot that could enhance the company’s ability to rediscover its revenue present sources. The lessons we learned is that retaining customers is more important and less costly than “acquiring” new ones. There are certain proposals that seem more logical, to pursue towards this volatile environment and could add to the Virgin profit margins. One of these proposals that airlines have to further develop their cross-selling platform and customize their services to take full advantage of the wide range of the customer expectations and income levels. Moreover airlines, need to look for synergies in order to close agreements with suppliers, unions, petroleum dealers and other stakeholders, and make them become part of their problematic situation.

Recognizing this ambivalence in the way Virgin made that decision and also the company's strategic inconsistency, we may conclude that even if there is room for further discussion about Virgin's space flights viability, its strategy plan it's at least aggressive and unique compared with its past actions. 

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