MGMT 310 2010 Competitive Advantage

Assignment 1 (15%)
Due: in the drop box #25 RH Mezzanine, by 2:40pm Thursday 19 August 2010 Note: you must also submit a copy of your assignment on Blackboard by Aug. 23 AIR NEW ZEALAND (Air NZ)

Case:

Assignment: Please answer the following three questions. This is an INDIVIDUAL assignment! (see Plagiarism discussion in the Course Outline and University Website)
The contribution of each question to your report grade is given in the margin and provides a rough guide for the length and detail of your answer to each question significant deviations from these percentages are inadvisable. 10% of your mark is based on written communication.

(30%)

1.

Identify the strategies used by Air NZs to compete in the markets it currently serves. Indicate the extent to which the activities it undertakes are complementary and support its strategies. Support your answer with case details. Assess Air NZs strengths and weaknesses. Does its performance suggest that it has any competitive advantages? (provide evidence to support your conclusion). For any advantages identified, assess what the sources of the advantages are and whether the advantages are likely be sustained. What are the major threats to its sustainable advantages. To what extent are Air NZs sustainability initiatives likely to provide it with a sustainable competitive advantage? Comprehensively support your view. Why do you believe that Air New Zealands management have been so motivated to promote sustainability? Does it matter what their motivations are? If you were advising Air New Zealand what would you suggest they do to build on their recent strategic successes?

(30%)

2.

(30%)

3.

Please develop your report with a clear and logical structure, correct grammar, and careful attention to spelling and punctuation (see FCA Written Communication Skills rubric available on Blackboard). These aspects influence the understandability, completeness and persuasiveness of your arguments and so naturally affect your grade. Fully support your analysis with case details and examples. It is expected that your report will reflect an understanding of the concepts presented thus far in class (from readings, discussions, case analyses) as well as appropriate material from other courses (e.g., MGMT205, where the Angwin, Cummings and Smith textbook has a chapter on Sustain Ability). Given the report structure required, restated case details do not need to be referenced (direct quotes should be!) BUT include full references for any other material. Format: Length guide: 1500 words should suffice, so please stick to this word limit (please re-read the Word Limits section in the MGMT310 Course Outline). Double-spacing is preferable. Figures (tables, diagrams or graphs) and appendices should be used to directly support your argument (but not to add new arguments) and do not add to the word count. Please include your name, student ID number, your tutors name, and a word count on the first page of your report.

CASE STUDY: Air New Zealand

By early 2001, with 60 years in aviation, the Air New Zealand Group had grown to be the 17th largest airline in the world, operating both internationally and domestically out of New Zealand and Australia. In New Zealand, Air New Zealand (Air NZ) was the dominant player both domestically and internationally. In Australia, Air NZ operated recently-acquired Ansett Airlines, which was the second largest Australian airline domestically and internationally and provided the platform that management felt would transform Air NZ into a major AsianPacific airline. With well known brands, significant scale, and solid ties to other airlines through the Star Alliance, Air NZ appeared enviably placed to continue its growth. Within 6 months, however, the airline had reported a 97% drop in profits, faced a crisis combining the effects of the groundings of Ansett planes (due to safety / maintenance issues) and a decline in global travel due to the 9/11 terrorist attacks. The share price hit record lows through the period (NZ$0.24), as Air NZ sought government assistance to allow Singapore Airlines to increase its shareholding and provide capital to help it survive financially. With no approval to raise the foreign ownership cap forthcoming, Air NZ explored selling Ansett prior to declaring it bankrupt. Qantas (which had always opposed the Ansett merger) refused to take over Ansetts debts, even though it would reportedly have to pay only $1 to gain control. All of Ansetts 15,000+ workers were made redundant. Having cast Ansett adrift, the NZ Government invested close to NZ$1 billion, becoming Air NZs major shareholder, and providing it with the capital to continue operations and upgrade its fleet of planes. NZ Prime Minister Helen Clark described a future without Air NZ as unthinkable. Without its Australian operation, Air NZ retrenched and focussed on its remaining markets. Detailed analysis of all its operations led to several divestitures of non-core assets and the introduction of a lower cost model of fares and service domestically in New Zealand, which was subsequently rolled out to trans-Tasman flights and then to the South Pacific. This threetier price structure included Smart Saver (a limited number of seats at very low cost but no refunds), Flexi Saver (mid-price with ticketing changes at a fee) and Flexi (highest price, but fully refundable) fares. Air NZ moved to these fares despite facing minimal competition from Origin Pacific and Qantas domestically at the time. Its low cost service shifted to few frills, with simpler meals, snacks and drinks but maintaining inter-flight baggage handling/transfer. While Qantas has maintained a presence in the NZ domestic market for many years, it abruptly cancelled its alliance with Origin Pacific in 2004 (which eventually retrenched to the regional market in NZ and later went into liquidation). Most recently (in 2008), Qantas has switched its NZ operations to JetStar, its low-cost subsidiary. However, JetStar still only competes on the main air routes between Auckland, Wellington, Christchurch, Rotorua and Queenstown. Despite the animosity that seems apparent between Air NZ and Qantas at various times, several mergers/alliances in different forms have been proposed in recent years. These, however, have not managed to gain the approval of the NZ Commerce Commission and its Australian counterpart, the ACCC. Both airlines primary argument is that there is significant overcapacity across the Tasman and that the ability to jointly sell seats on a more restricted flight schedule would not lead to fare increases. Competition increased further with Air Emirates being granted permission to fly passengers across the Tasman, allowing it to extend its service from Dubai to New Zealand by drawing on Australian and New Zealand demand. Such cabotage, where passengers can be picked up and dropped off at intermediate destinations, had traditionally not been permitted by governments as they attempted to protect their national flag carriers through restrictive bilateral landing rights. During this same timeframe Pacific Blue, a subsidiary of the Australian low-cost carrier Virgin Blue, started trans-Tasman services to several NZ locations. Pacific Blue is a pure low-

cost player, with point-to-point flights, limited baggage handling, no meals and limited service. Air NZ altered their trans-Tasman fare structure prior to Pacific Blues entry and deployed its new Airbus A320 aircraft on these routes to reduce the impact of Pacific Blues entry. After several years serving only the trans-Tasman and Pacific Island routes, Pacific Blue entered the NZ domestic market on a restricted basis, with a small number of flights between the major cities. It claims that its fares would remain substantially lower than Air NZs, although this claim is difficult to verify because each airline typically offers a small number of significantly discounted fares. Most recently, however, Air NZ and Pacific Blue have applied for a code-sharing arrangement on a range of flights to be approved, to address the high rivalry from JetStar and Emirates. Comparative details for a variety of Asia-Pacific airlines are given below. Comparative Data across a sample of Asia-Pacific Airlines Revenue Profits Fleet Size (NZ$M) (NZ$M) Airline Air New Zealand 53 4502 99 99 Cathay Pacific 47 15162 -1.6 114 Emirates 99 14982 345 127 Pacific/Virgin Blue 32 2921 123 68 Qantas 127 19125 160 131 Singapore Airlines 67 20873 1206 120 Revenue and profit data are for 2008/09 and converted to NZ$.
(airports served)

Destinations

Fleet Age
(years)

9.3 11.1 5.3 <5 10.8 6.4

Despite generally improving performance since 2002, Air NZ continues to search for new avenues to grow profitably. In 2007, it announced that it would no longer fly to Singapore and instead transfer these planes to offer more service to Hong Kong, Shanghai and Taiwan as well as London (via Hong Kong). Air NZ can still sell tickets to Singapore via its codeshare partner, Singapore Airlines. Long haul aircraft have also been significantly upgraded, with lieflat beds in Business Class, adding Premium Economy with larger seats and extra leg room, and personal inflight entertainment screens throughout these aircraft augmenting its awardwinning full service on international routes. As societal concerns about the impact of air travel on global warming and climate change began to rise, Air NZ launched a broad organizational initiative to address the airlines carbon footprint. Air NZs sustainability report in 2008 stated: For an isolated island destination such as ours, air travel is critical. As a country, we are dependent on tourism and trade. Our future as New Zealands national carrier is also reliant on the protection and enhancement of our unique and treasured environment. This makes effective, sustainable air travel a priority. As the only airline in the world dedicated solely to destinations to, from and within New Zealand, we need to endorse this countrys clean, green reputation. If we dont continue to innovate, New Zealand is in danger of losing its appeal as a place to visit and a country to trade with. Globally, aircraft are viewed to account for about 3 percent of the total CO2 emissions. In response, some individuals have decided to avoid air travel altogether because of the impact they perceive it has on the environment and ozone layer. Concerns about air travel carbon emissions are also affecting fresh produce cargo, as the local food movement encourages shoppers to only purchase locally grown produce. Air NZs initial moves to address its emissions included directly providing the option for travellers to offset their personal emissions from their flight (through the Air NZ

Environmental trust). These have since been expanded to a company-wide Environmental Management System, based on the ISO14001 international standards. More than 2500 employees are now part of Air NZs green team, which since 2006 has launched a number of other initiatives. First, Air NZ has committed up to $2 billion to enhance its fleet of aircraft in 2008, reducing the average age to about 6.5 years by 2013 (8.2 in 2010). These newer planes are up to 20% more fuel efficient than older planes. In addition, existing planes are being refurbished with aerodynamic packages that include being an early adopter of special wing tips that reduce drag and fuel usage significantly. These actions are complemented by other moves to more accurately match fuel loads to plane weight, reducing plane weights by removing onboard humidity from insulation, adjusting pilot flight operating techniques and flight routes, using ground-based energy sources (rather than less efficient on-board auxiliary generators) while at the gates, and just-in-time refuelling. Air NZ aims to be a world leader in examining every aspect of flight operations to reduce CO2 emissions by saving fuel. It has instigated more than 40 projects in the past four years, reduced emissions by over 90,000 tonnes per year and now has one of the lowest fuel burn rates in the Star Alliance network. The airline also intends to source 10 percent of its total annual fuel needs from sustainable fuel by 2013. In taking a leadership role in searching for alternative jet fuels, Air NZ has partnered with Boeing, Rolls-Royce and Honeywell UOP. One promising option appears to be producing biofuels from jatropha seeds, with sustainable fuels potentially reducing CO2 emissions by 50% on a life cycle basis in comparison to other biofuels sourced from crops such as corn or soybeans. Jatropha meets social, technical and commercial criteria for an environmentally sustainable fuel, because it doesnt compete with existing food stocks; the fuel looks like it will be at least as good as the product we use today; and finally, it has the potential to be cheaper than existing fuel supplies and is readily available. A test flight using one engine of a 747 flight was completed in 2008. Its Environmental Management System has also generated initiatives to reduce energy use throughout the organization and to reduce waste associated with air travel (both on the ground and during flights). The company is also contributing to its environmental trust to offset the travel incurred by its business executives as they travel during their work. Air NZs pursuit of environmental initiatives is not alone in the airline industry, with most of its direct full-service international competitors also offering carbon offsetting programmes (typically through partner organizations), publishing sustainability reports, and pursuing fuel efficiency programmes such as special wingtips on selected aircraft. While its environmental initiatives have been a clear focus, Air NZ has continued to push forward in others areas as well. In recent years, it has been recognized for these through awards for IT and its website, for its loyalty programme and passenger service, Enviro-Gold accreditation (the highest rating under the Qualmark Green responsible tourism criteria), an Air Transport World Public Relations Award, being named 2009 Readers Digest Most Trusted Airline Brand as well as Top Airline for Innovation 2009 (The World Traveller China), Best Transpacific Airline at the 26th OAG Airline Industry Awards, and voted Best Airline by Vacation.com in the USA and Best Value Long Haul (Conde Nast Traveller Awards 2007, UK). It has also received several awards for its advertising, marketing and sponsorship, including an MTV award in 2007. 2010 saw it soar even further by winning four best airline awards from Air Transport World, Skytrax and UK-based Which? (ahead of Singapore Airlines and Emirates). Overall, Air NZs vision is to strive to be number one in every market we serve by creating a workplace where teams are committed to our customers in a distinctively New Zealand way, resulting in superior industry returns. Sustainability initiatives are seen as matching this.