The current battle for hearts and mind shows the weakness of running any business as a commodity where the only differentiator is price. As the business guru Michael Porter says, “there can be only one low cost provider”. Commodity businesses such as sugar, cotton, minerals, telecommunications and steel are all exposed to economic variation.
Essentially this only leads an “all market” or “niche provider” as the only profitable business positioning strategies. The low cost provider typically makes a small margin on a large number of sales. As a senior manger at
VB told me last year, “we make $10 a ticket; imagine if we could make $20?” Unfortunately for him with JetStar’s cost base the question is what if you had to discount $11?
Virgin are now “stuck in the middle”; no way to differentiate and no way to reduce their cost base. So far this hasn’t hurt Virgin, as often they have not had cheaper tickets than QF, but still retain the low cost position in the minds of the average consumer. Generally consumers are becoming smarter, so how long will this last?
By the way, this pricing policy is fair enough (dispite what PPRUNers argue) as the have high LFs (84%); why should they discount seats on a full aircraft. This year
VB is adding capacity and J* will reduce thier passenger demand, so only now will get to see low cost tactics (for the first time in the Oz market) when demand is less than capacity and the revenue managers will have to create demand. And their world record operating profit margin of 16 percent will definately reduce.
The question now is where to for Virgin?
JetStar’s cost base of 7.8 cents per ASK is very low. I read two things into this: Qantas is providing a large number of in-house services and they will use the aircraft on longer routes (less labour input per kilometer). I fail to see how a low cost airline can justify 40-50 million USD on new aircraft when second hand are so cheap (A320: 14m USD; 767: 3m USD). It just points to Geoff Dixon’s biggest problem when producing a 600 m AUD profit: If I give it back to the shareholder (which is what he should do) he’ll never see it again so he has to spend it which will give marginally cheaper running costs. Still if I was a shareholder I would want to ask the question-where’s my money?
With Dixon selling tickets for an unsustainable $29 ($1 of revenue) and Richard offering to give them away, the ACCC should investigate what constitutes predatory pricing in the aviation market and in all businesses which sell perishable products and use revenue management. This type of behaviour is certainly a barrier to entry of new airlines and is therefore anti-competitive. The ACCC should clarify their position.
Geoff says that JetStar won’t cannibalise Qantas, so why doesn’t QF match
VB? After all Qantas only 5% of its seats are business seats, and most of those are given away to staff and frequent fliers (as upgrades), the rest of his products are comodity ecconomy seats which are narrower than JetStar's and personaly the four dollar box is not a valued product differentiator. If
VB sold 50,000 tickets last night and JetStar sold 30,000 this morning, how many did QF sell? I guess that’s why the downgrade from A330 to 767 which means less seats on City Flier.
Interestingly Qantas travel is now selling packages which fly JetStar to destinations to QF ports. The plot thickens...
So many questions?
Yawn