Strategic Management – Air NZ external analysis

External Analysis
An external analysis will be done for Air New Zealand using the strategic tools such as PEST analysis and Porter’s Five Forces aiming to identify key strategic issues which will affect the profitability of the company. The analysis will be based on these two categories: the General environment which centralise on the company’s future among other competitors and the Industry environment which centralise on situations and circumstances which will affect the operation of Air New Zealand in the industry. PEST Analysis
Political/Legal

Government support plays a significant role in the success of Air New Zealand as a leading airline company representing New Zealand. This support can be seen in 2001, major losses created by Ansett Australia (Air NZ owns 50%); massive amount of capital was injected to Air New Zealand by the New Zealand Government. Also, the New Zealand Government is currently the largest shareholder of Air New Zealand (73.13% – see figure 1 in appendices). However, the Government proposed to drop current shareholding to 51% until end of 2013 or early of 2014. According to analysis, because of this proposal, Air New Zealand’s shares prices have not fully reflected its current company value (Matthew Goodson from Salt Funds Management). Less shareholding means less support in difficult times. Economical
All airline companies are directly influenced by the economy of the country. The numbers of passages are quite tightly connected with economic performance. Also the fuel cost is the other essential element to impact on company’s profit (need to find some reference). The reduction of flight prices between Gisborne and Auckland is a good example. An average of 11% price cut was able to be introduced because of direct increase (12%) in the demand for the services since October 2012 (Media Releases 2013 – Air New Zealand cuts fares between Gisborne and Auckland, 2013). Even there was 100% increase in the landing fees since December 2012 at Gisborne Airport; the increased demand enabled them to save some costs by operating in a larger fleet. Sociocultural
Rising concern for the environment has been an issue for airline industry and Air New Zealand has made it a goal to maintain their green image worldwide. The commitment to minimise the impact of aviation on the environment was done using two ways: Carbon Offset Programme (Carbon Offset) or making donation towards Air New Zealand Environment Trust (Environment). Technological
Airline industry is an extremely technical industry, therefore, new innovation in technological side will only benefit and enhance the airline ability to provide their services. Air New Zealand domestic service was transformed dramatically in 2002 (History). Online booking and check-in support reflect simplified booking rules and net based sales strategies, substantially low fares with an improved frequent flyer benefits and more seat availability show the operating efficiencies of the airline (History). Porter’s Five Forces Analysis
Threats of New Entrants
This is considered low as it requires large amount of capital to enter the industry, not very much product differentiation and strong brand identity is needed. This strong brand identity can be seen in Air New Zealand company profile. Supplier Bargaining Power
This can be considered as medium – high. Reasons: high volatility in fuel prices, strong union backing up labour workers’ and limited supply of aircraft. Customer Power
This can be considered as medium. Airline tickets are not bought in bulk; therefore, customers can only have certain flexibility from a range of suppliers. Good customer service can be one of the reasons why customer chooses an airline. Threats of Substitutes
This is considered medium. There is no actual short time period substitute to distance. Domestic travel can be substituted by road trips and train, however, further distance becomes time consuming. Video conference can also be another alternative for business trips. Rivalry among Competitors
This is considered medium. Not very much product differentiation, high fixed storage costs, high exit barrier, slow growth and diverse competition can be those reasons. For more information, please look at appendices figure 2.
Appendices
Figure 1
Major shareholders
Shareholders
Ordinary Shares
Percentage
New Zealand Government*
804,191,058
73.13%
Other Investors
295,516,116
26.87%
Total Ordinary Shares on Issue
1,099,707,174
100.00%
Retrieved September 26, 2013, from Air New Zealand: http://www.airnewzealand.co.nz/shares-on-issue Figure 2
Porter’s Five Forces for Air New Zealand Ltd
Forces
Description
Level
Threats of New Entrants:
Low
Capital requirement
Large amount of capital is required to lease the aircraft, heavy regulated security and safety measures can be burdensome, expensive costs to employ experience pilots and stewardess. Low
Product differentiation
Limited routes provided for travel purposes and limited availability in airport slot. Low
Brand identity
Frequent flyer programmes has successfully earned most of customers’ trust in the company like Air New Zealand Low
Supplier Bargaining Power:
High
Fuel prices
The volatility of fuel prices is directly influenced by OPEC which owns 40% of the world’s oil supply. High
Labour force
Strong union back up the labour force which makes it difficult to cut down cost by making some idle labour worker redundant. High
Limited supplier of aircraft
There is only limited supplier which supplies large aircraft which makes it impossible to bargain. High
Customer Bargaining Power:
Medium
Buying in bulk
Airline tickets are normally not bought in bulk. However, improved technology enables the customer to search for the cheapest fares. Therefore, companies such as Air New Zealand have to compete with Jet Star (competitor) as they provide daily cheap deals for customers. Medium
Customer service
Some customers are willing to pay more for good customer service such as Air New Zealand but most of them only care about the price. Medium
Threats of Substitutes:
Medium
Short distance
Trains and road trips can be a quick fix for short distance travel (domestic), however, can be time consuming. Medium
Video conference
Using Skype for video conference can be an alternative for long hour business trips, however, for some important meetings; businessman has to be physically there. Medium
Rivalry among Competitors:
High
Product differentiation
Limited routes provided for travel purposes and limited availability in airport slot. High
Fixed costs
High storage costs to store the aircraft, landing fees and maintenance fees High
Exit barrier
High exit barrier as it is expensive to enter the industry (large amount of capital has been invested) High
Slow growth
As high barrier of entry, the growth of the industry is fairly slow High
Diverse competitions
Airline industry competes domestically and internationally. For Air New Zealand, its main competitors are Jet Star for domestic flights. For international flights, depending on its routes: Australia (Qantas, Virgin Australia, Jet Star, Etihad Airways); Fiji (Fiji Airways); Indonesia (Asiana Airlines, Singapore Airlines, Malaysia Airlines, Qantas); Japan (Aircalin, All Nippon Airways); Hong Kong and China (China Airlines, Cathay Pacific,
Air China); United States and Canada (Air Canada, United Airlines, US Airways); United Kingdom (Virgin Atlantic Airways); Cook Islands (Air Rarotonga); Vanuatu (Air Vanuatu); French Polynesia (Air Tahiti Nui). High

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